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Life insurance and retirement

By Jennie L. Phipps · Bankrate.com
Monday, August 30, 2010
Posted: 5 pm ET

This morning's headlines about the insurance industry read: "Ownership of Individual Life Insurance Falls to 50-Year Low."

This particular report, released by insurance research and consulting firm LIMRA, says that 30 percent of households (35 million) have no life insurance coverage, compared to 22 percent of households in 2004. That sounds like a big number, but part of it is a demographic change. U.S. Census Bureau statistics predict that by this year -- 2010 --  married couples with children will account for only 20 percent of all households. This may not mean that there's less overall need for life insurance, but it certainly has an impact on the number of households that require it.

So if you are one of these childless households, is buying life insurance a smart part of your retirement planning? The answer is maybe -- maybe not.

Here are some cases where life insurance for retirees, or those close to retirement, can make sense:

As a substitute for taking the joint and survivor option on a retirement plan. You'll have to do the math, but some pension plans have big discrepancies between the single retiree option and a plan that also provides income for a surviving spouse. It could be substantially cheaper to take the single plan and buy enough term life insurance to afford a single premium annuity for the surviving spouse who isn't covered by the plan. But don't just guess that this will work out. Get expert help because it isn't always the right choice.

When there is a dependent family member who can't be self supporting. These kinds of special needs situations really require an expert to make sure that they are set up in a way that doesn't preclude the beneficiary getting Social Security or other kinds of government benefits.

When there is a family business. Life insurance can help a family settle business interests after the primary business owner dies. This is another case that demands expertise.

People with a substantial mortgage or other big debts. Having the cash to be debt-free can be a very welcome gift for a surviving spouse.

If you expect to owe estate taxes. Wealthy families often buy life insurance policies that cover the "second to die," which relieves the family of the need to sell something to settle up with the government.

Otherwise, life insurance is meant to provide an income to dependents. If you have no one other than a surviving spouse whose income won't be greatly affected by your death, then it may be time to cancel your term life insurance or look hard at your permanent life insurance policy to make sure you're deploying its benefits in the most advantageous way.

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