If you're saving money regularly now, will you still need your life insurance policy when you retire? And will the same policy you have today meet your needs after you leave your job? It's better to answer these questions sooner than later.
"This is not something to be thinking about the day before you retire," says Bruno Graziano, a senior analyst with CCH, a tax consulting firm in Riverwoods, Ill. Before you can figure out the future of your policy, it's important to understand the assets you have today.
7 tips to determine your life insurance needs:
Understanding these points will help you determine whether life insurance is necessary during retirement.
- Term insurance: cheap until you get older
- Permanent insurance: a costly alternative
- Understand federal estate tax rules
- Shop around
- Look beyond employer insurance
- Don't expect insurance to replace retirement savings
- Consider your settlement options
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1. Term insurance: cheap until you get older
Life insurance is generally defined as either term or permanent, and there are several flavors of the latter, including universal, whole life and variable life. It's important to understand the basics of each type of product as well as their advantages and disadvantages.
With term insurance, a policyholder purchases insurance and pays premiums for a set period, typically 10 to 20 years. If the policyholder dies within that period of time, a death benefit is paid to the policy's beneficiary. When the policy ends, it can usually be renewed for another term. However, as the policyholder gets older, the rates for term insurance usually increase and may become cost-prohibitive.
Bruce Udell, author of "Advanced Estate Planning, Simple Solutions to Complex Problems," says 65-year-olds who want to buy policies with 20-year terms should expect to pay about three to four times more for coverage than if they were 50 years old. The advantage of term insurance is that even though premiums increase with the age of the policyholder, they are still cheaper than permanent life insurance.
A term policy purchased during the working years could be timed to expire when the insured is ready to retire. Once the term is over, however, there's no death benefit, and your beneficiaries don't receive any payout.
"One of the things you always have to look at with term insurance is what happens when the clock stops," says Ben Jacoby, a senior financial adviser with Brinton Eaton Wealth Advisors in Morristown, N.J. If you have enough money saved to fund your own expenses and your children are grown and aren't dependent on your income, then you probably don't need another policy.