Pete the Planner: Life insurance is an important financial-planning tool

Dear Pete,

I’ve carried about $2 million in life insurance for the last 20 years, but I don’t think I need it anymore. When I bought it, my retirement nest egg was quite small, and my kids were still in elementary school. Now, my retirement plan is fully funded and both of my kids have graduated from college. Should I renew this term coverage when it comes up for renewal later this summer? I feel like my wife would be fine without it, in the event of my death.

—Michael, Zionsville

I love it when a plan comes together. Twenty years ago, you took action on a major hole in your financial plan and then spent the last 20 years making the best of the time you bought yourself. As a huge proponent of life insurance, I both want people to have it when they need it and want people to put themselves in a position in which they don’t need it.

You’re at the intersection right now.

Most people don’t think of it this way, but life insurance is the ideal way to complete a financial plan when you’re not there to complete the plan yourself. Of course, a person would rather work hard, save diligently and then enjoy the fruits of his or her labor alongside loved ones, but as we’ve all so painfully learned, sometimes death gets in the way of that plan.

Michael, had you died 15 years ago, your college funding strategy might not have been funded, and it’s highly unlikely the retirement plan you and your wife were working on would have been ready to sustain her indefinitely. This is precisely why you needed life insurance.

Things are different now.

You clearly didn’t use life insurance itself as a wealth-building tool, as you carried term insurance instead of a permanent life insurance product that would have produced cash value. And while you could likely convert your term insurance into permanent coverage, pay the higher premiums associated with that type of coverage, and start accumulating cash value going forward, I’m not sure that’s a prudent decision given the value of your current retirement nest egg.

However, if multi-generational wealth-building is appealing to you, you might consider keeping some life insurance in place. It’s a practical way to produce a multiplying effect to create money for your heirs.

There are a couple of additional reasons you might want to keep your coverage in force. First, if your retirement-funding strategy relies on a pension and you’ve selected the “(your) life only” payout option, the life insurance will provide a payout when you and your monthly pension payment leave this Earth.

Additionally, you might want to continue the coverage if any of the other income-generating assets in your portfolio, such as real estate, would be difficult to manage when you pass away. And you might even want to use life insurance to make a massive donation to a charitable organization upon your death.

Just as your financial realities have evolved over the last 20 years, so have your objectives. It’s quite possible your objective for life insurance has evolved from survivor needs to wealth generation. But if creating a giant estate doesn’t appeal to you—and your wife’s retirement-income strategy won’t be compromised by your death—then letting your coverage lapse is a reasonable thing to do.

I know you don’t want to hear this next part, but if you haven’t already, take a look at long-term-care insurance now. Your insurance needs have evolved, and in this case, the type of insurance you need has changed, too. Long-term-care insurance helps protect your nest egg in the event you need any form of long-term care such as nursing-home or assisted-living care.

If you don’t have long-term-care coverage, you must spend down your own assets to pay for care, until you qualify for Medicaid coverage. That creates major financial challenges for the spouse who isn’t receiving care services. Long-term-care insurance products have changed a lot in the last decade, and some options such as asset-based long-term care can be appealing.

The truth is, as much as most people hate buying life insurance, for obvious reasons, it’s an incredibly flexible and vital financial planning tool. Admitting your own mortality and purchasing life insurance isn’t easy, but it protected your family the last 20 years. Congrats on a well-executed plan.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.