A New Lease on Life Insurance

You're 53 or 56 or 61, the kids are out of the house, the mortgage is nearly paid off, and before long you'll be eligible to retire and take your pension -- and so will your better half. Life insurance? At 60, you can expect to live another 20 to 25 years, if you're in good health.

You'll have more than enough money, or at least your house will be worth a million. So surely you won't need to pay insurance premiums for much longer, right? Dropping your policy would be like getting a bonus worth hundreds or thousands of dollars a year.

Nice try. After the real estate collapse and the stock-market crash, the finances of preretirees are far more challenging. Your mortgage payments may now be more of a burden, you can't borrow against home equity, and your retirement accounts have shrunk so much that you hope to hang on to your job and continue to contribute until you're old enough to collect your full Social Security benefit. That's crucial because your pension isn't getting any bigger -- and it may in fact shrink if your company can't keep the plan solvent or the investments perform poorly.

Here's the unpleasant dilemma if you have a term-life-insurance policy that is about to expire: Renew the coverage and your premiums are almost certain to soar. Drop all coverage and your family could be in a financial bind if you die prematurely.

If you own permanent, or cash-value, life insurance, you have other decisions to make. Premiums may be level but high. You may be tempted to take out money to compensate for a smaller pension or a tighter budget, especially if you are forced into early retirement. Or you might cash it in altogether to be done with premiums. That could make sense or it could be a major financial-planning error.

Term-life policies

Millions of Americans bought low-cost, multiyear term policies ten to 20 years ago when their kids were young, and they expected to drop the coverage when the term -- and low rates -- expired. But if you go without now, you could be missing some special opportunities to extend your coverage for less than you think and retain tax-free death benefits that will make up for the damage to your retirement funds and pension.

Dane and Susan Swenson of Gainesville, Va., both 58, thought they'd be finished with life insurance by now. Dane retired from the Army in 1998 and currently works as a civilian for the U.S. Department of Defense. He has life insurance through work until he retires, which he plans to do in the next few years. He has a military pension and will qualify for a small federal-employee pension. But if he were to die and Susan collected only reduced survivor's benefits, she'd be short of money to live on.

The couple originally thought their retirement savings would allow Susan to go without life-insurance benefits. "I planned to be self-insured, but then the market dropped," says Dane. His retirement accounts fell by as much as 40%, so he started to reconsider the idea of going without insurance.

Early in 2009, Dane bought a $200,000, 15-year term policy from Genworth for $600 a year. "The policy covers the difference between being self-insured and the decrease in our portfolio," he says.

That may sound like a low price for a policy that will cover Dane until he turns 73, but it's hardly unusual. Term-insurance rates have plummeted over the past 15 years because of intense competition and longer life expectancies. So you may actually pay less now for the same coverage even though you're older, or lock in a longer rate guarantee with little impact on your premiums.

In 1994, a healthy 40-year-old man would have paid at least $995 per year for a 20-year, fixed-rate term policy with a $500,000 death benefit. Today, the same man -- now age 55 -- could buy ten more years of comparable coverage for $880 a year, as long as he's still physically fit. (In most cases you'll be asked to answer a few questions about your health, provide the insurer with doctors' references, and agree to a brief physical exam at home.)