Empty Nesters May Still Need to Purchase Life Insurance

I.I.I. Offers Ten Important Reasons to Own a Policy Even if Your Kids Have Left Home

New York Press Office: (212) 346-5500; media@iii.org
NEW YORK, March 16, 2010Couples who believe they no longer need life insurance after their youngest child “flies the coop” on his or her 18th birthday could leave their family vulnerable to serious financial problems, according to the Insurance Information Institute (I.I.I.). This is especially true in the event the sole income-earning parent dies.
“Term life insurance is a product traditionally purchased to protect the financial future of a surviving spouse and children under the age of 18, and term policies that end might not be replaced as a couple's youngest child reaches that milestone,” said Dr. Steven Weisbart, senior economist at the I.I.I.
Yet even couples with grown children, who have set aside college tuition monies and are close to paying off a mortgage, ought to discuss with their insurance agent or broker the benefits of purchasing a new term life insurance policy when their existing one ends.
Following are 10 good reasons to consider owning life insurance after your kids have left home:
  1. To meet goals
    If your children are in college and/or not completely financially independent, life insurance can help “finish the job.” Although you may have saved enough for tuition, the kids’ living expenses (e.g., room and board, laundry, entertainment/activity costs, etc.) continue, but not Social Security benefit payments for the surviving spouse and children—those stop when the kids leave high school.
  2. To support other dependents
    If you have parents, disabled adult children, or others who depend on you for financial support, life insurance would continue this support if you should die before they do.
  3. To cover the Social Security “blackout period”
    One of the greatest concerns—particularly for women, who survive their husbands in roughly three-fourths of all marriages—is Social Security's so-called “black-out period.” That is the period of time that normally elapses in survivor cases between when the youngest child turns 16 and when the widow or widower turns 60 (assuming that neither the widow(er) nor any child is disabled). Social Security widow(er)'s benefits ordinarily end when the youngest child reaches age 16 and cannot begin again until the widow(er) reaches age 60. Having a life insurance policy in force can help replace Social Security benefits during this period.
  4. To offset reduced Social Security survivor’s benefits
    If a survivor begins receiving Social Security survivor benefits earlier than the full-benefit age (66-67, depending on when the survivor was born), the Social Security benefit amount is permanently reduced. Moreover, because of the deceased’s early death, he or she would not have gotten salary increases that might have boosted Social Security benefits further. A life insurance policy can help offset the effect of these “lost” raises.
  5. To offset other “lost” retirement savings
    Also, because of the deceased’s early death, he or she may not have gotten salary increases that would have boosted employer pension benefits and/or IRA contributions. A life insurance policy can help offset the effect of these reduced retirement savings.
  6. To meet commitments based on two incomes
    Most two-earner couples make financial commitments (e.g., home mortgage, loans, leases, etc.) based on their combined income. Life insurance on each earner enables the survivor to continue to meet those commitments.
  7. To pay unplanned expenses caused by an early death
    Young people don’t generally plan to have savings available to pay for funeral and burial costs, final medical expenses, estate administration and transfer costs, and federal and state income and estate taxes. Life insurance can cover these costs, which can easily reach tens of thousands of dollars.
  8. To create a financial “safety net”
    Conventional wisdom says each household should have an emergency fund equal to about half a year’s income, to meet surprise unavoidable outlays. Following the death of a principal earner, a household without an emergency fund will be even more financially vulnerable. Furthermore, it might be more difficult for the survivors to obtain credit. Life insurance can solve this problem.
  9. To offset lost income if a spouse dies after beginning Social Security retirement benefits
    When a couple retires and begins receiving Social Security retirement benefits, each one receives an income. The earner with the larger pre-retirement income gets a benefit based on that income, and the person with the smaller (or no) pre-retirement income gets either a benefit based on his or her own earnings record or half of the spouse’s Social Security benefit, whichever is greater. When one spouse dies, the larger retirement benefit continues but the second benefit stops—in effect, a 33 percent income reduction. Life insurance can offset this income drop.
  10. To provide bequests to heirs and charities
    If you want to be sure that your heirs and/or favorite charities get money after your death, you can designate some or all of your life insurance benefits to go to them. This is particularly useful if, without the life insurance, your executor would have to liquidate other assets to meet this objective.
“Having life insurance is important for estate planning,” noted Weisbart. “The federal estate tax exemption—the amount you may leave to heirs free of federal tax—has changed often. Last year the estate tax exemption hit $3.5 million in 2009 and was phased out completely for 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 for estates of $1 million or more,” he said. “Besides the federal estate tax, many states levy taxes at death and in some cases the threshold is lower than the federal number. If your estate is large enough to be subject to federal and state estate taxes, life insurance can help provide the money to offset these taxes.” 
In determining how much life insurance to buy, the I.I.I. recommends assessing the need to replace “hidden” income that is lost when an income-earning spouse dies. Hidden income is money an employer contributes to an employee's 401(k) or similar savings plan, or to pay the premiums for a family's health insurance coverage. These savings plan contributions and subsidized insurance premium payments cost the employer thousands of dollars a year, a financial commitment that, in most instances, reverts to the surviving spouse.
For those looking to move away from term life policies, permanent life insurance-such as whole, universal and variable life-or annuities can be an attractive alternative.
More information is available in the Life Insurance section of the I.I.I. Web site.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.

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