Life just isn’t fair, is it? We know our birth date, just look at your driver’s license, but we don’t know our expiration date, that is, our last day on earth. It would be so much easier when we left the hospital as a baby that our wristband said: “expiration date is July 22, 2029.
Boy that would make life’s planning so much easier and make financial spending forecasts even easier. But alas we’re all facing a roulette wheel, unknowingly we could die tomorrow or 50 years from now and that’s why there is a multi-trillion business called life insurance.
But, along with our remaining life expectancy, the amount of life insurance we need will vary in accordance with our age, wealth and status of dependents.
Life’s Natural Progression
There are way too many variables to discuss every permutation. But it’s safe to say that in your early twenties, you can’t even spell “life insurance”, the world is all about you. O.K. your employer may give you a policy as a bennie, so you’ll name your parents as your beneficiaries. If and when you get married, you’ll shift it to your spouse, otherwise not a lot of mental energy is wasted thinking about life insurance.
Baby Changes Everything
A cusp in life happens with the birth of your first born. Suddenly, you’re responsible for a life. “That’s O.K.”, you say, “I’ll straighten out my act, do good at work, not take chances, maybe give up bungee jumping.”
That’s all well and good provided you live until they’re emancipated, but what if you unexpectedly get hit by the proverbial beer truck? Two small kids that the surviving spouse has to raise alone, can he/she work and still raise the kids properly? Finance their education? Finance their special needs?
When you lie awake one night thinking about that eventuality, that’s when you start doing the math: 2 kids, 4 years of college each, possible orthodontists, sports, ballet lessons, etc., etc. Oh, and we bought that McMansion and there’s a heavy mortgage.
At this early life stage, your net worth is only 4 digits.
That meager policy you currently have through your employer won’t last 5 years after you’re gone. Good news, you’re still young and your company’s plan allows you to add more than enough coverage but on your nickel.
Income and Wealth Producing Years
Hopefully in your thirties and forties your career is moving along swimmingly, you’re getting promotions and periodic raises. The kids are growing up, your salary has grown, you’ve never missed a mortgage payment and you met the max for 401(k) matching by your employer. Your wealth is growing, life is good.
You’re healthy and that group life insurance policy at your age is still affordable.
Barring any calamities in detrimental health or job loss you’re in a period of wealth accumulation between growing retirement savings and home equity.
The Kids are Alright
One day you’ll just came back from the college graduation of your youngest, she landed a great job in corporate America. Both your kids are now grown, gainfully employed and out of the nest. Your child rearing costs just plummeted.
With your spouse also now working full time, the earnings after-burners are on. You’re rapidly building assets and wealth.
If you had a term life insurance policy for your children’s education trust fund, you can now allow that to lapse. You now just have to have enough insurance coverage for your spouse to survive and to bury you.
Retirement Changes Everything
Another cusp in life occurs at retirement. Some magical date when you’ve reached nirvana. A couple of financial factors occur on that day.
- Job salary has come to a hard stop.
- Job bennies like employer supplied life insurance stops.
- 401(k) contributions stop – cash is no longer going into your retirement fund.
In essence there’s a seismic shift in income sources. Earnings from work are gone to be replaced by:
- Social security
- Retirement savings withdrawals
We’re purposely not including pensions in this example since, other than for government workers, pensions are going out with the buggy whip.
In parallel, your expenses should be dramatically reduced:
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- Your home mortgage is paid off and the entire home equity you built up is all yours.
- Those student loans you co-signed are paid off.
- Child rearing costs are a thing of the past.
Hmm, expenses are down and passive income is up, you’re now living in a state of eudaimonic bliss. All your worries are over, right? Well, not quite.
What do you Want to Happen after you’re Dead?
There is a stoic practice called “premeditatio malorum” which in a nutshell is thinking about horrible things that could occur before they actually do. It’s an exercise that prepares you in advance for any number of life’s outcomes.
When considering whether you need life insurance in your seventies and eighties, you need to ponder a couple of outcomes.
One is that you and your spouse have been enjoying spending down your investment savings on world travel and those 3-month winter escapes to the Sunbelt. The balance is dwindling.
What if you drop dead tomorrow and your spouse goes on to live another 20 years? Is there enough money for him/her to live on? What about not just “live” but maintain the same “standard of living”? That may be a horse of a different color.
Should your monthly social security benefit be larger than your surviving spouse’s, then, due to an allowed100% survivor’s benefit after the age of retirement, they will now receive it. But the smaller one does drop off and there’s a net loss of steady income to the household. The gap has to be made up via retirement savings withdrawals. Will there be enough.
Self-Insure in Your Later Years?
In the case where it’s just you and your spouse, no other dependents, the house if fully paid for and there is no debt, you have social security and your retirement account is in seven figures. It means you don’t need to take out life insurance at this late stage in life. But maybe you want to.
In your early seventies you can get a 10-year $100K term policy for around $120 per month. The total outlay will be $120 /month x 12 = $1,440. a year. Seems like a worthy investment.
This of course is dependent on you passing a medical exam. You may, or may not, qualify depending upon any pre-existing conditions you may have and, in the later years, there are many: high cholesterol, high blood pressure, Type 2 diabetes are the common conditions.
Assuming you qualify, that extra insurance money can go into end of life costs which can be short or prolonged. It’s best to plan for the worst scenario.
Don’t Outlive your Money in Retirement
The Unknowns
The hardest part of savings withdrawal budgeting is dealing with the unknowns. Can the stock market crash in a 2008 style? Will we have a calamity to our house that’s not covered by insurance? Our grandchild contracts a rare disease and needs $500,000 for an experimental treatment not covered by medical insurance, etc.
Then there are “unknown unknowns”, risks that we’ve never thought about, nobody has because they never occurred. How about a revolution where you lose everything? It’s a low probability but with a cataclysmic effect – labeled a “black swan”.
End of Life Costs to Consider
“The best you can hope for is to die in your sleep”
— Kenny Rogers in “The Gambler”
In addition to knowing our expiration date, wouldn’t it be great to die quickly. No drawn out affair, no hospitals, no nursing homes, and no hospice, just bam, drop dead. Other than a burial, that is the least strain on retirement finances.
Are you concerned that if you die, and your spouse contracts dementia, will there be enough money for his/her long term care?
Hospice terms vary but the median is about 24 days. Medicare will pay for medical services but not occupancy. The average room and board fee is around $320 a day that you’ll need above what Medicare will pay. Therefore a 90 day stay will most likely cost in excess of $30,000.
Adding it all up to fund a terminal illness, hospice, burial, and estate settlement, you should have a minimum of $60,000 remaining in your savings when you check out. Your spouse will need the same.
Alzheimer’s Makes it Worse
At age 85 about 50% of the population has Alzheimer’s. Medicare will only pay for up to 100 days of skilled nursing home care under limited circumstances. However, custodial long-term nursing home care is not covered. And the national average cost for nursing home care is about $86,000 a year. .
The average life expectancy after diagnosis of Alzheimer’s is 8-10 years. If you budget for 6 years, it’ll cost $516,000 to get to end of life. And, Medicare’s 100 days of coverage won’t amount to a row of beans.
The Reverse Mortgage Safety Net
If the above worst case scenario plays out. Your spouse and family are sitting
on a huge asset – your house. Normally we don’t recommend a reverse mortgage to fund lifestyle. But as you can see if the above unanticipated event occurs, it’s a card that can be played.