USA TODAY personal finance reporter Hadley Malcolm interviews USA TODAY retirement columnist Robert Powell about how to get your finances in order for the new year. (USA MONEY, USA TODAY)
I have always been good with money, and my wife of 50 yearsÂ and I have zero debt. Taxes on our home are about $8,000 a year. We have about $700,000 in savings, and are both 70 years old. Our home is worth about $450,000. I am 10 years into a 20-year term policy of $300,000 which costs us $3,600/year. Our pensions and Social Security are about $66,000 annually. Would it be a poor choice to drop our life insurance policy?
Answer: The day after the factor warranty on my car expired, I opened my car door only to see the rearview mirror had fallen off, hit the gear shifter, and shattered all over the driverâ€™s seat.
How does that happen? How does a protected period of time pass, and the instant the protection disappears, so does the peace?
Kenny, Iâ€™m not suggesting the second you let your life insurance policy lapse, you”ll die, but that is your fear, isnâ€™t it? It would be mine.Â
You have paid $36,000 for your policy so far, and in order to secure a chance at a payout of $300,000 over the next 10Â years, youâ€™d need to part with up to another $36,000. But if you’re still alive 120 months from now, youâ€™re out $72,000, with only peace of mind and an unknown number of sunrises as your consolation prize. This is a classic case of escalation of commitment. Do you keep pumping money into this thing?Â
The question youâ€™ve undoubtedly already asked yourself is, “Does your wife actually even need the $300,000 when you die?” That answer depends on what survivor option you chose for your pension. If the pension payments die when you die, then Mrs. Kenny will likely need your parting gift of life insurance. If the pension payment doesnâ€™t change much, or at all, when you die, then you might not need to continue the policy. This is the primary means of making this decision, given that you are currently renting your insurance.Â
Your life insurance is not guaranteed to pay off. Thatâ€™s because it will eventually expire or will become too expensive to handle. That means thereâ€™s a pretty good chance you die without coverage. If your life insurance was some form of a permanent policy, then youâ€™d be virtually guaranteed a payout as long as the premiums are paid. Iâ€™m not suggesting you should have permanent coverage, but if you do have permanent need for life insurance, permanent life insurance is the way to go.Â
Itâ€™s also important to note that a change is upon you. The year you reach 70 1/2 years old, you’ll be introduced to the world of Required Minimum Distributions (RMDs). Whatever portion of your $700,000 nest egg is tied-up in qualified retirement accounts, youâ€™ll be required to make withdrawals and pay taxes on that money. Why? Because your uncle, Uncle Sam, has not gotten his piece of the pie yet. You contributed money to your qualified plans pre-tax, they grew tax-deferred, and now your not-so-silent partner is coming to collect.Â
For instance, if $600,000 of your $700,000 is in a traditional IRA, 401k, or other like vehicle, you will be forced to withdrawal roughly $22,000 in the year in which you turn 70 1/2. You’llÂ have to pay taxes on that money, but you can do whatever you like with the rest. That means you can easily afford the $300/month your life insurance premium costs you. In fact, your RMD will likely increase every year until you reach your nineties. This is all to say that affording the premium isnâ€™t the issue.Â
However, if your $700,000 isnâ€™t in qualified retirement accounts, you wonâ€™t have the sudden influx of income I just described.Â
If youâ€™re concerned about any potential medical expenses or other final expenses associated with your passing, then life insurance can certainly help defray those costs. And if you want to pass wealth on to someone or some other entity upon both of your deaths, then life insurance is an effective way to accomplish that.Â
You should strongly consider converting your term life insurance into permanent coverage, especially if your insurance provider has extended you a conversion provision. If you do in fact have a need for life insurance at this point in your life, your need is permanent, not temporary. Nothing is going to be different ten years from now that would affect your current decision. You donâ€™t necessarily need $300,000 of life insurance, if you need any coverage at all. You may be able to convert a portion of the term coverage to a permanent policy, say $50,000 or so. This would certainly make the new permanent policy more affordable.Â
Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at [email protected] The views and opinions expressed in this column are the authorâ€™s and do not necessarily reflect those of USA TODAY.
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