General rule of thumb regarding how much you should have may not apply to seniors, but there is still a need.
Brenda Major, who said she had a pre-existing condition that made it impossible to find insurance that would cover her until the Affordable Care Act, is examined by Dr. Fernanda Mercade during a routine checkup at the Jessie Trice Center for Community Health clinic in Miami.(Photo: Joe Raedle, Getty Images file)
Older Americans are working longer or least plan to work longer than ever before.
The reasons, of course, vary. Some need to work, while others want to keep working, and some do so out of want and need. No matter the reason, experts say older workers should re-evaluate whether they have enough life insurance while they are employed and plug any gaps in their risk-management plan.
"If seniors are planning to continue working because they need the income, and not just to stay active, then they should be protecting against the possible loss of that income during this time period," says Walter Zultowski, a principal of WZ Research + Consulting, a market research and consulting firm specializing in the life insurance and financial services industries based in West Granby, Conn. "This is especially true if these seniors primarily owned term which may now be expiring, and/or have reduced group life benefits due to a job change or reduced benefits from their employer."
The general rule of thumb that you need to five to seven times your annual income in life insurance, likely doesn't apply to older workers says Kenn Tacchino, professor of taxation and financial planning at Widener University and editor of the Journal of Financial Service Professionals.
Back-of-the-napkin
Instead, Zultowski says those looking for a back-of-the-napkin number might consider multiplying their compensation by the number of years they plan to work. So, if you plan to earn $50,000 over five years consider buying a five-year term life insurance policy with a death benefit of $250,000.
As you contemplate buying life insurance to plug any gaps, don't forget to factor in any life insurance already provided as an employee benefit. Odds are high that you'll have a group-term life insurance policy at work that pays one times your annual compensation. Nearly nine in 10 (86%) of employers offered employer-paid group-term life insurance, according to 2013 Society for Human Resource Management (SHRM) survey. Plus, as part of your employee benefit package, you might have the chance to buy a life insurance policy that covers up to five or more times your salary.
When calculating your life insurance needs, remember this too: Under the Age Discrimination in Employment Act of 1967 your employer-provided life insurance death benefit after reaching age 65 can be reduced and often is. Experts says that reduction must be based on the estimated increased cost to provide the coverage for older workers.
Now if you decide to purchase life insurance outside your employee benefit plan, don't fret about costs in the private market. Buying a policy with a relatively small death benefit for a short period of time isn't that expensive, according to Marv Feldman, the president and CEO of the Life and Health Insurance Foundation for Education (LIFE), a nonprofit group promoting the use of life insurance. For instance, a 65-year-old male who is in good health and doesn't smoke would pay about $160 per month for 10 years for a policy with a $250,000 death benefit.
Capital needs analysis
Rules of thumb and back-of-the-napkin calculation serve a purpose. But to determine the precise amount of life insurance you'll need in your older years, experts suggest completing what's called a capital needs analysis.
Doing this analysis does require some work, but it's a worthwhile exercise. To do a capital needs analysis, you'll need to calculate:
1. How much money will be needed at your death to meet immediate obligations, and
2. How much, though this can be a bit complicated, future income is needed to sustain your household, according to the LIFE Foundation.
The first amount takes into account all final expenses: uncovered medical bills, funeral and estate-settling costs, possible federal and state estate taxes, outstanding debts including credit cards and auto loans, mortgage balance, and college costs to name a few, according to the LIFE Foundation.
Feldman also says it's wise to factor into this first amount any financial bequests you might have. In the wake of the 2008 economic crisis, many Americans were unable to fulfill their legacy desires because they had depleted their assets, he says.
The second amount, meanwhile, ought to factor not only income from Social Security, pension plans, income annuities, required minimum distributions, and the like, but it should include the surviving spouse's reduced living expenses, if that's the case, and the possibility the surviving spouse will live a long time.
As part of this calculation, consider any lost Social Security income after a beneficiary dies. Typically, the surviving spouse's Social Security benefit is reduced, though it varies, anywhere from one-third to one-half that of the primary wage earner. "That could be a substantial loss of income and benefits that needs to be replaced," says Feldman.
Plus, estimate how much income a surviving spouse might need over the course of his or her lifetime. Life expectancy tables suggest that a couple, both age 65, have a "last-to-die" life expectancy of 27 years, according to a blog by Ernest Valliere, the owner of EPV Marketing Consultants, Providence-based consulting firm. That means the surviving spouse might, on average, live to age 92.
Of note, the LIFE Foundation has a capital needs calculator on its website, lifehappens.org.
Another factor to consider: Savvy insurance professionals can help you determine whether it makes sense to purchase a whole life insurance policy and then choose a single life pension payout instead of a joint-and-survivor pension payout. According to Tacchino, this strategy can be better economically than choosing a joint-and-survivor pension and not buying a life insurance policy. Of course, you have to crunch the numbers to be sure.
Robert Powell is editor of Retirement Weekly, a service of MarketWatch.com. Email him at rpowell@allthingsretirement.com.
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