Some are keeping their traditional policies for surprising reasons, but financial pros are keen on a combo plan with long-term care benefits.
by Kerry Hannon, Next Avenue
My question of the day is this: Do women over 50 need life insurance?
The topic was recently batted around on Consuelo Mack WealthTrack, the personal finance and investing program that airs on public television stations around the country.
Mack’s discussion with InvestmentNews contributing editor Mary Beth Franklin and certified financial planner Erin Botsford, chief executive of the Botsford Group, began by covering familiar territory.
The show noted, for example, that 50 percent of women fear becoming a bag lady and that 18 percent of divorced women over 65 are living below the poverty level.
2 Intriguing Points From Money Pros
But Franklin grabbed my attention when she said there’s been an uptick in life insurance purchases by women over 50. “The old idea of life insurance was you had it when your kids were little, so if anything happened, your survivors could pay off the mortgage and send the kids to college,” she said. “So, traditionally, once you got into your mid-50s, a lot of people gave up their life insurance.”
But, Franklin added, “I’m starting to see more 50-plus people either keeping their life insurance or buying it because they look at their kids who have lived through this recession and say, ‘They will never have what we had and I want to be able to provide for my adult children.’”
Some planners call this the “leaving a legacy” rationale for owning life insurance in midlife. “It’s the next stage of helicopter parenting,” Lisa A.K. Kirchenbauer, a certified financial planner with Omega Wealth Management in Arlington, Va., told me.
I was also struck by Botsford’s comments on why older women might want their husbands to keep holding onto their life insurance policies where the wives are beneficiaries – to compensate for the possibility that the men’s health woes might sap the couples’ savings.
“Keeping a life insurance policy on your husband is very important,” she said. “If you do exhaust some of the family resources because he gets sick or goes into a nursing home, then you’ll have the life insurance to help with the longevity risk that women have.”
After her program aired, Mack told Next Avenue: “Anecdotally I have known several women where their spouses’ life insurance has made the difference between a secure and insecure financial future.”
One friend’s husband, Mack said, a “healthy” 70-year-old was going to stop paying the premiums on his policy because the couple’s children were grown and he thought he had enough saved for retirement. When he died unexpectedly and his wife lost her regular paycheck, “his insurance policy, which she had insisted they maintain, enabled her to keep her home and live comfortably.”
The Basics About Life Insurance
This discussion piqued my curiosity.
So I decided to delve into the topic by following up with Franklin and Botsford and speaking with a few other planners. Below, I’ll tell you what I heard and offer my advice to women in their 50s or 60s about owning and buying life insurance.
But first, a quick life insurance primer:
Life insurance generally comes in two forms. It’s either whole or universal life (sometimes called “permanent” insurance) where you get a death benefit and an investment buildup known as cash value, or it’s term insurance, where the policy lasts for a certain period, typically 20 or 30 years, and has a death benefit but no cash value.
Term usually is far less expensive, say $1,200 annually for a $500,000, 20-year term policy for a 52-year old nonsmoking woman in good health. By comparison, a permanent policy could run $13,000 or more a year.
My View on Life Insurance
Generally speaking, I tend to agree with what financial writer Larry Light said in a recent Forbes blog about life insurance: “In circumstances like the following, you may no longer need life insurance: First, when you and your spouse have accumulated enough assets and income streams to independently care for yourselves. Second, when your children are self-sufficient adults. Third, when your estate is too small to owe estate taxes or liquid enough to pay the estate taxes.”
I understand the need for term insurance when you have kids or a big mortgage whose payments will still be due after you die. But my husband and I have neither, so we’ve never owned a life insurance policy other than the ones our employers have provided as benefits.
What the Experts Say
Financial Planner Botsford recommends life insurance particularly for married women in midlife – to provide a useful death benefit for them if their husbands die before they do, which is, statistically speaking, a good possibility.
When I called Franklin to ask about the trend of purchasing life insurance to assist your grown kids, she noted that this is really an estate-planning move to save them from getting stuck owing estate taxes. Given the expense, Franklin added, this is a financial move those who are better heeled are more apt to pursue.
I spoke with a few other sharp planners for their thoughts on whether women in their 50s and 60s need to keep shelling out for life insurance and their overall response was: Pony up instead for long-term care insurance or shop for a combination life insurance/long-term care policy, which I’ll explain below.
Deena Katz, a certified financial planner and associate professor at Texas Tech University, said she isn’t a fan of buying or keeping life insurance to leave a death benefit to your adult kids. Life insurance for the sake of leaving a legacy is, in her word, “ridiculous.”
“If you want to do your grown children a favor, buy long-term care insurance so they will not have the burden of taking care of you when you can’t live by yourself,” Katz said. “That’s a real gift.”
Katz makes a good point. The biggest worry my female friends in their 50s and 60s have is that their future health care or long-term care costs will deplete household savings and might be a huge expense for their kids.
A Hybrid Policy That’s Worth a Look
There’s a relatively new product on the block, however, that’s gaining steam and may be the answer, if you can afford it: a hybrid life insurance policy with long-term care benefits. It’s sometimes known as life insurance with “living benefits” or “accelerated benefits.”
You pay for the policy (typically permanent insurance, but sometimes term insurance) through annual premiums or by putting down a lump sum of cash – often $50,000 to $75,000.
The upside is that the hybrid will provide a death benefit that’s generally around double the amount of such an upfront payment and will reimburse future long-term care bills of up to roughly six times the policy’s cost. Any money spent on long-term care is usually deducted from the policy’s death benefit. Some insurers offer a guaranteed minimum death benefit, no matter what.
Kirchenbauer said buying a hybrid policy is “often an easier way to get long-term care coverage for women over 50” than purchasing a traditional long-term care policy. Underwriting for a hybrid tends to be less stringent, she noted. In other words, there’s less of a chance that you’ll be turned down.
The downsides of a hybrid policy: a somewhat daunting cost (the long-term care benefits can add up to 20 percent to the life insurance premium); your long-term care needs might not be fully covered; and there may be waiting periods before any long-term costs are reimbursed.
If you get cold feet after purchasing a combination policy, however, some insurers will return your premium payments minus the amount of any loans, withdrawals or benefits paid. But you will probably pay a surrender charge.
Professional Help Might Be in Order
One final word: Life insurance is baffling for most people, so I strongly advise you turn to a pro to help you decide whether you should keep or purchase a policy.
A financial planner with insurance expertise could be a huge help. If you don’t have one, search the databases of the National Association of Personal Financial Advisors, the Financial Planning Association and the Certified Financial Planner Board of Standards.
If your estate is worth more than roughly $5 million, it’ll likely be taxable upon your death. In that case, you might also want to consult with an estate attorney about having life insurance since a death benefit could help cover that bill. To find an estate lawyer, visit the website of the American College of Trust and Estate Counsel.
Kerry Hannon has spent more than 25 years covering personal finance for Forbes, Money, U.S. News & World Report and USA Today. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.