Why Keep a Term Policy in Retirement?
There is no subject more burdened by misunderstanding than life insurance. In this newsletter I will attempt to shed some light on this area only as it relates to a specific issue: Why would I keep a term policy in retirement?
20-year Level Term Life Insurance
Assume that you have a term policy, say a so-called
20-year level policy. This policy guarantees the premium for 20 years, after which time the premium can increase, and usually does so dramatically, up to a maximum as defined in a table in the contract.
Say a young family waits to buy such a policy, as is frequently the case, until they have children. So when the 20 years are up and the parents are about 50, the children may be in their teens. Is the coverage still needed? It may be, for at least the following reasons:
1) A college education averages $140K (private college) per child, according to US News and World Report. And what about graduate school?
2) Can the surviving spouse earn enough to support the family? What if he or she cannot because of health reasons or because their chosen field of endeavor is not sufficient for a single-income family?
3) Children, even after they have grown and become gainfully employed in their chosen field (no small hurdle that), still frequently run into trouble in life and need to know that there is a financial cushion back home to help them in times of financial distress. That cushion is gone with the death of the main breadwinner.
After the First Term
So, the 20-year bet didn't turn out. (That's a good thing, of course.) And now the family buys another 20-year policy, if they can get one at a favorable rate, that runs to age 70. Surely by then the coverage is no longer needed, right?
Well, insurance is there to protect a stream of income. If you are no longer producing that stream, the insurance may not be needed. But do you know anyone still earning money past age 70? It's becoming more and more common. Do you know Charlie Munger? He's Warren Buffett's right-hand man and Vice Chairman of Berkshire Hathaway, Buffett's company. Charlie is 94 -- yes, ninety-four years old. Click here for a bio of Mr. M.
Second, as described in #3 above, children may continue to need that parental financial backstop indefinitely.
Third, life insurance makes an excellent gift. A schoolteacher I know bought a policy in her declining years, all for the benefit of her ten grandnieces and grandnephews. She leveraged a small premium outlay of a few thousand dollars into a $1M death benefit that went a long way toward college bills for that generation and the next.
The solution is to somewhere along the line either
1) buy permanent insurance, that is designed to be there when you die, for a predictable, fathomable premium, or 2) convert your term contract to such a policy. The earlier the better: life insurance generally gets more expensive each year as we approach death, and is a very valuable piece of your financial picture as you travel the unpredictable road of life.