Ask an Advisor: Do I Need Life Insurance Once My Children Are Grown?
Do I need to carry life insurance after my children have reached adult age? If so, what type makes the most sense?
– Greg
Becoming an empty nester is a prime time to re-evaluate your life insurance needs.
Life insurance is meant to provide for people who rely on you financially. If your adult children no longer do, it can seem unnecessary to keep an emergency raft on standby.
But life insurance can offer more than protection against unexpected death. With forethought, the cash windfall can lessen the sudden financial burden on your loved ones or provide more wealth for your heirs. Below, I'll lay out some of the top reasons to consider life insurance as an empty nester.
But first: If you already have a policy, don't cancel or surrender it without reviewing your current situation and goals with a financial planner. If you don't have a policy and decide to buy one, it's a good idea to get a financial planner's opinion before meeting with an insurance agent. They'll help put your insurance needs in context before a salesperson gets your ear.
Why You Still (Might) Need Life Insurance
So your kids have left the nest and started careers of their own, and you're wondering whether you should cancel your policy. Here's a few reasons to hold off on making that move.
1. Life Insurance Helps With Immediate Expenses
We all reach the end of life at some point, and there are foreseeable costs that often fall on spouses or adult children – funeral and burial expenses, tax bills, outstanding medical debts and the like.
You might assume that your beneficiaries can use the assets they will inherit – an IRA or real estate, for instance – to cover these costs. But accessing that money isn't easy or quick, and doing so can eat into their inheritance.
Depending on the structure of your estate plan and contents of your will, some assets might have to pass through the arduous probate process before they reach a beneficiary's hands. Other assets, such as a brokerage account, may transfer to them quickly, but selling investments at an inopportune time can trigger a hefty tax bill.
A life insurance death benefit would give your beneficiary a near-immediate pot of cash to draw from, should they need it. Plus, the death benefit isn't subject to income tax. What a gift.
2. Life Insurance Boosts Inheritance
Life insurance is a cost-effective way to boost an inheritance for your children or spouse. Depending on your age and the length of a policy's term, the annual cost can range from a few hundred dollars to a few thousands – in other words, vastly less than the death benefit itself. But a $1 million retirement account requires years of diligent saving and smart investing. And your beneficiary will probably have to pay taxes on income they draw from it.
3. Life Insurance Supports Your Surviving Spouse
If you're the breadwinner in your marriage, or part of a dual-income household, a premature death could interrupt any financial goals you are working toward as a couple, such as retirement planning, debt payoff or even financially supporting other family members. Life insurance can provide the funds needed to keep those goals and commitments on track, potentially for years.
Which Type of Life Insurance Do I Need?
As with many financial decisions, the type of life insurance policy that makes the most sense will depend on your goals and your current finances.
If you're looking for simple option, consider a term life insurance policy. Premiums are affordable and you don't have to think about interest rates or the performance of the stock market affecting your investment. You pick a death benefit and a policy duration – typically anywhere from 10 to 40 years – and pay your premiums until you die, at which point your beneficiary gets a tax-free lump sum. If your needs change, you may be able to convert your term policy into a permanent policy.
If you have a higher risk appetite or a need to supplement your retirement savings, it may be better to go with a permanent policy. Your premiums will be more expensive than a term life policy, but there's a cash value portion that grows at a fixed or variable rate. You can access the cash value through a loan or withdrawal, while the death benefit stays intact. Unlike a term policy, a permanent policy – as the name reveals – has no expiration date, so you don't have to worry about outliving it. If you decide on a permanent policy, make sure you understand the various types of permanent policies.
Life Insurance Tips
If you have questions about integrating life insurance into your financial plan, a financial advisor can help. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Our no-cost insurance calculator can help you decide how much life insurance you need, and recommends policies that match your needs.
Here are five mistakes to avoid as you consider buying life insurance.
Tanza Loudenback, CFP® is SmartAsset's financial planning columnist, and answers reader questions on personal finance topics. Got a question you'd like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Tanza is not a participant in the SmartAdvisor Match platform.
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