When you reach your later years, your children are likely independent and you’ve probably repaid non-deductible debt like your mortgage. If you’re also widowed, you mainly need to take care of yourself. At this stage, the role of life insurance changes from estate creation to estate preservation.
If you already have life insurance, should you cancel it? If you don’t have life insurance, should you buy some?
Preserving your estate
Building assets takes a lifetime. As the surviving spouse, a large portion can get taxed at the time of your death. Your RRSP is an example. Life insurance can be a cheaper way to get tax-free cash just when those expenses are due. There’s then no need for your executor to rush to sell assets in what could potentially be a bad market.
The life insurance proceeds leave more of your estate for your heirs and the causes you support. If you have term life insurance, you may be able to be able to convert it to permanent coverage regardless of your health.
If your life insurance has a cash value, you have a source of money for unexpected costs such as home care if you’re unable to look after yourself. This isn’t quite as good as having actual long-term care insurance, but it doesn’t hurt to have some extra money.
Making a donation
You can donate life insurance you no longer need to a charity. In exchange, you receive tax savings for the actuarial fair market value of your gift. If premiums are still required to keep the coverage in place, you can help the charity by making donations to pay them and you’ll now get more tax deductions. Life insurance can also be donated when you die to offset the taxes that are due.
If you’re financially independent, you have an advantage. You can pay premiums from assets you’ve saved rather than from your monthly cash flow. You’re reallocating savings you’re unlikely to spend to life insurance—a different kind of asset.
Selling your insurance
Depending on your age and health, new life insurance may be expensive. That’s a sign that the coverage you currently own has grown in value.
If you conclude that you no longer need your life insurance, you can cancel your coverage. With whole life or universal life insurance you may get a cash value. With term 100, you won’t. Either way, your insurance may be worth something if you sell rather than cancel. This option (a life settlement) is available in the United States and several Canadian provinces but currently not in Ontario.
The bottom line
Life insurance offers creative ways to help with your specific goals. Your advisor can help you explore them.
- How do Your Life Insurance Needs Change After Getting Married?
- How Does Buying Life Insurance Change When You’re a Senior?
- A Primer on the Different Types of Life Insurance
Flickr: David Hilowitz