Do You Really Need Life Insurance?

What to do about life insurance when you get older? No single answer works for everyone. Personally, I quit buying coverage in my late 50s when my last term policy ran out. My husband and grown children don't depend on my income, so they'll be all right (financially, anyway) if I die. Instead of paying insurance premiums, I put the money into investment accounts.

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But many of you might have dependents who will need help if you die. Or you might have a cash value policy you no longer need, and wonder whether to keep it or monetize it in some way. It's impossible to cover all the tricky corners of life insurance in one short column. But I can offer some ideas to start with:

If you need more insurance, you can still buy 10- or 20-year term coverage, as long as you're in reasonable health. For a look at the range of premiums, go to Term4Sale.com. Remember, you need less coverage now than you did 20 years ago, because your life span is shorter. If you're uninsurable because your health is poor, you might be able to convert your current term policy to cash value coverage without a health exam. It will be expensive, but worth it if you don't expect to live for many more years (sorry to be this blunt, but death is what life insurance is about).

If you think you'll need coverage for more than 20 years, you might look at no-lapse universal life. The premiums are lower than those on traditional cash value policies, which accumulate savings over time. The guaranteed death benefit can last for as many years as you want. The downside: There's not much flexibility. If you cancel the policy, you'll get little or nothing back. No-lapse doesn't accumulate cash value.

If you can't afford the premiums on your current cash value policy but you still need life insurance, consider turning it into a smaller, paid-up policy that lasts for life, or use your dividends (if any) to cover future premiums. Certain forms of universal life policies might be losing cash value and will automatically terminate if you don't restructure.

If you have a cash value policy you don't need anymore, consider these five options.

1. Cancel it. Use the cash value and the money you were paying in premiums to add to investments or pay your bills. Warning: You might owe a surrender charge. You might also owe taxes, if you took a loan against the policy.
2. Keep the policy as an investment, if it's paying well. A few older policies, from top companies, are paying interest on cash values in the 3 to 5 percent range, after taxes and expenses — far more than you'd earn in a bank account. You can let the investment build and tap it for cash in the future.
3. Sell the policy for more than its cash surrender value. Investors generally buy policies from people whose health is poor. You get a lump-sum payment. The investor pays the premiums and collects the payout when you die. But it's hard to know if you're getting a fair price. If your expected life span is short, your heirs might prefer to pay the premiums themselves rather than let the policy go to a stranger, says fee-only insurance adviser Scott Witt in New Berlin, Wis.
4. Pour your cash values into an annuity, tax-free. The process is called a "1035 exchange." You can buy an immediate annuity for current income, or a tax-deferred annuity for investment. The deferred annuity has advantages if your insurance policy shows an investment loss. You can use the loss to tax-shelter the annuity's future gains.
5. Use the cash value to acquire a long-term care policy. This is also done through a tax-free 1035 exchange.

Where can you get good advice? This is the toughest question of all. Insurance agents aren't paid to service old policies, they're paid to sell new ones. Here are the only sources I know for independent advice on what to do with your current policy:

The low-cost service EvaluateLifeInsurance.org, run by retired actuary James Hunt for the Consumer Federation of America.

Fee-only insurance advisers, who charge perhaps $300 an hour, or fee-only financial planning firms that consult with expert insurance advisers.

GlennDaily.com, which links to eight other fee-only advisers, as well as to organizations of fee-only planners.

In the murky insurance world, independent advice is well worth paying for.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW. She writes regularly for the Bulletin.