Lynn Brenner's Family Finance

There Are Only Three Reasons to Own Life Insurance

Q: Does it make sense for me to keep paying for a life insurance policy now that I'm 67 years old, my kids are grown and my mortgage is paid off? --OR, via email

A: Maybe not. At the very least, it's sensible to reassess your insurance needs at this stage of life, especially if you own a permanent policy -- a combination of a death benefit and a tax-deferred investment.

There are three basic reasons to own life insurance:

A) To replace your salary for your dependents when you die.

This is crucial when you're a breadwinner with a young family. If this is your reason to own life insurance, your best purchase is a term policy -- insurance with no investment component -- because it provides the biggest death benefit at the smallest cost. Permanent policies are much more expensive. The cost of term insurance rises as you age, but even in your 50s it's often the cheapest coverage available.

B) To make sure your heirs have cash to pay your estate taxes. 

Few people have to worry about how their survivors will pay estate taxes, because most people don't leave taxable estates. There is no estate tax on the assets you leave to your spouse. And under current law, what you leave to everyone else isn't subject to federal estate tax unless its value exceeds $5 million. True, the current law expires in 2013. And some states impose a tax on smaller estates. New York's estate tax law applies to estates worth more than $1 million, for example.

But even if your estate is taxable, buying life insurance to pay the taxes isn't a no-brainer. If the estate includes liquid assets, you might decide to let your heirs pay the taxes out of their inheritance. On the other hand, you may want to consider a life insurance policy if your survivors would be unable to pay the estate taxes without selling your business or taking taxable withdrawals from your IRA. 

(One caveat: If you want life insurance to pay your estate taxes, you must not own the policy yourself. A policy intended to pay your estate taxes should be transferred to another person or to an irrevocable life insurance trust -- after you've consulted a tax professional to make sure the transfer won't inadvertently trigger gift or income taxes.)

C) To invest on a tax-deferred basis.

If your kids are grown and your other assets are sufficient to provide for your surviving spouse, this is the main reason for still owning life insurance. 

So how good an investment is it?

That depends on your policy, says Richard Freeman, a fee-only financial planner at Round Table Services in Westport, Connecticut.

When you bought it, you saw a policy illustration showing how your investment (or cash value) would grow. But the illustration was a marketing tool, not a guarantee. Here's Freeman's explanation of how permanent insurance works:

Your premiums go into an investment box, from which the cost of insurance and expenses is deducted every month.

If things go worse than expected -- if the cost of insurance and expenses rises more than anticipated, for example, or if the investments underperform because, say, the financial markets crashed -- one of three things will happen: You'll have to pay higher premiums, or take a lower death benefit, or you won't be able to pull as much cash out of the policy as you expected.

If things go better than expected, you'll have the option to pay smaller premiums, or to increase your death benefit, or you'll have more cash to tap.

To find out how your policy is performing as an investment, you need an objective appraisal by someone who understands insurance but isn't paid to sell it -- i.e., not an agent. If your policy represents a substantial investment, it's worth paying a fee-only adviser like Richard Freeman or Glenn Daily for an in-depth analysis and assessment of your options. (One choice that sometimes makes sense, for example, is to exchange your life insurance policy for an annuity.) Fee-only advisers typically charge $200 to $300 per hour. If your policy isn't big enough to justify that expense, a much simpler but equally objective assessment from the Consumer Federation of America (CFA) will cost you only $85.  

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Social Security: Postponing Your Benefit Helps Your Surviving Spouse

Q: My wife and I used the strategy of her taking early Social Security benefits when she turned 64 based on her own earnings record, while I completely deferred my benefit from my own earnings record, which is significantly higher than my wife's benefit. I'm four years older than she is, so I was over 66 when she applied for her benefit and able to apply for 50% of her benefit as her spouse. This strategy has been recommended by several financial planners.

Now that I'm turning 70, I've applied for my own benefit. The Social Security Administration is telling us that although I will benefit from the deferral, my wife will not. It seems her benefit as my spouse is 50% of the amount I would receive at age 66, but only about 35% of my benefit at 70.  Is that correct? --WG via email

 

A: Yes. Nevertheless, your wife definitely stands to gain as a result of your strategy -- and not just because it has boosted your household income.

It's true that your bigger benefit won't increase her spousal benefit during your lifetime. Your benefit gains 8% a year for each of the four years you postpone taking it between the time you turn 66 and the time you turn 70 -- but her maximum spousal benefit is 50% of what you would have received at your full retirement age of 66.

However, she will certainly benefit if she survives you: her maximum widow's benefit is 100% of what you were entitled to when you died. That will be a much larger amount as a result of your deferral.

People who are contemplating the strategy you've used sometimes ask me if it isn't a gamble. 'What if I decide to postpone my Social Security application at 66, and then die before I turn 70?'' they ask. 'Won't it all have been for nothing?'

From your viewpoint, perhaps, since you personally will never reap the extra benefit. But it will make a big difference to your surviving spouse. He or she will receive 100% of the amount you were entitled to get at the time you died, regardless of whether you had actually applied for it. An example: Your benefit at 66 is $2,000 a month; but you defer your application. Unhappily, you die at 68. Your survivor will receive $2,320 a month -- 16% more than if you had taken Social Security at age 66. 

And of course, annual inflation adjustments in that survivor's benefit will be based on a bigger initial amount. Over time, that too will make a substantial difference in his or her monthly income.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Life Insurance Is Always Paid to the Named Beneficiary

Q: My ex died in a car crash. Does my fifteen year-old daughter have a right to his life insurance, even though his same sex partner of nine years is the beneficiary? We are in Ohio, and I'm not sure what my rights might be. --RW via email

A: Bad news, I'm afraid. Children have no legal right to inherit from their parents.

Your ex-husband's life insurance policy goes the beneficiary he named. This would be true regardless of his beneficiary's gender, or age, or of their relationship. In fact, the named beneficiary of a life insurance policy doesn't even have to be a human being -- it could be a charitable institution, for example.

A life insurance policy is a contract between the insurance company and the person who pays the premium. It's protected by contract law -- and there is no stronger legal protection.

Whether or not your daughter gets anything is going to depend on whether or not her father left a will. If he did, and it doesn't name her, she gets nothing. It often shocks people to learn that the law lets you disinherit your children, but it's true -- and not just in Ohio.

The law doesn't let you disinherit your spouse -- but a former spouse has no inheritance rights.

It's a different story if there is no will. When a person dies without a will and without a surviving spouse, the state's intestacy law determines how his assets are divided. Most state intestacy laws -- including Ohio's -- would divide his assets among his surviving children.

But intestacy law only applies to property that can be left through a will -- and that doesn't include jointly owned property and accounts with named beneficiaries. An asset with a named beneficiary goes directly to that person. A jointly-owned asset automatically goes to the surviving owner.

You won't have trouble finding out if your ex left a will because a will is a public document. Besides, when a will is presented for probate, the decedent's next of kin must be notified. (Probate is the legal procedure in which a court validates a will.) If there's a will, your daughter will have to receive probate notification; and since she is a minor, you will be notified as her guardian.

If there isn't a will, and you have reason to believe that your ex owned assets in his name alone -- i.e., he owned assets that were not jointly owned and didn't have named beneficiaries -- your daughter has a legal claim to those assets. You can pursue that claim by asking the probate court in your county for an intestacy proceeding. That's the legal process in which an estate is distributed when there is no will. 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Do I Really Need A Life Insurance Policy?

Q: I'm a 56 year-old single parent with a 13-year old daughter. I was recently laid-off, and my life insurance through my job expires 31 days after termination. I have the opportunity to convert the policy to individual coverage. I have my house and my 401(k) as investments. Am I right in thinking that I don't need this life insurance? -- AB via email

 

A: As the single parent of a minor child, you do need life insurance -- not as not an investment for yourself, but as an emergency fund for her. It's the best way to make sure that if you're hit by a bus next week, there will be money to finish raising her and pay for her education.

For a parent who needs a policy to replace his or her income in the event of premature death, it makes sense to buy the biggest possible amount of coverage for the smallest possible premium. That would be term insurance. And I have good news for you: This is the only type of life insurance that's simple and easy to understand!

A term policy is cheap because it has no savings or investment component. It's like fire insurance: You pay the premium every year; and if you die, the policy pays your beneficiary. If you don't die, it pays nothing.

For young people, term insurance has always been much less expensive than cash value life insurance. (With cash value coverage like whole life, variable life, and universal life, your premium must fund an investment account in addition to insuring you.) But even for people in their 50s and 60s, the cost of term insurance has fallen substantially over the past couple of decades, for two reasons. One is that people are living longer. The other is that medical technology makes it easier for insurers to predict life expectancy. The result: Insurers can lower their prices because it's a good bet that you'll outlive your policy.

The standard term policy is level-premium term, on which you pay a fixed annual premium for the duration of coverage, which can be 10, 15, 20, or even 30 years. You should comparison-shop for a policy that lasts until your daughter will be self-supporting -- perhaps a 15-year term policy.

Okay -- so what about your employer-paid coverage? You can convert it to an individual policy without undergoing a physical exam. But if you're healthy, you can almost certainly find a bigger policy for substantially less money elsewhere. (Employers typically offer a policy for one and a half to two times your salary, but only up to a dollar limit that's often quite low.)

People often mistakenly assume that group life insurance is less expensive than an individual policy. But unlike the premiums for a level term individual policy, the premiums for group coverage rise every few years. And because group coverage is guaranteed to all employees, it's priced to cover people in poor health. If you're in good health, an individual term policy may be a far better deal -- especially if you're a woman in a state that requires unisex rating in group policies, says Mark Cortazzo, senior partner at Macro Consulting Group, a Parsipanny, New Jersey financial adviser. (A woman's life expectancy on average is longer than a man's; so with gender-based rating, she pays less for the same amount of coverage.)

You can easily comparison shop for term insurance online at sites like AccuQuote and Term4Sale. These firms earn a commission if you buy a policy from them; but the quotes are free. You can also get quotes on the telephone directly from highly-rated, low-cost insurers like USAA Life Insurance Co. (800 531 8722), and Ameritas Life Insurance (800 745 6665). In all cases, the preliminary quote won't be final until you've had a medical examination. Any reputable life insurer will make an appointment for you to have the underwriting examination free of charge; if you prefer, this can be done at your home or office.

 Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved