Key Takeaways:
- While life insurance needs often change for empty nesters, it’s still a critical tool for estate planning, replacing income, covering necessary bills and funeral costs, and supporting surviving dependents.
- When assessing your current coverage, review your current salary, debt, life stage, and number of people depending on your income. Your financial advisor or insurance professional can outline various options such as choosing a term or permanent policy and how to supplement employer-provided benefits.
- It’s important to review your life insurance within the context of retirement timelines, survivor needs, and estate planning so your financial life is fully coordinated and aligned.
As children grow up and move away, newly “empty nesters” may wonder how their finances, priorities, and goals may change. Some may even consider whether expenses like life insurance are still necessary or could be reduced. We often help empty nesters navigate this transition and explain how life insurance remains an essential tool for protecting their family’s financial security. If you’re near or entering the empty nest stage, we’ll explain what you can discuss with your team of financial advisors or insurance professionals to ensure your family and wealth are protected.
Do Empty Nesters Need Life Insurance?
While your children may be living independently, there are still financial areas life insurance can help protect. It can help cover end-of-life and memorial services, pay estate taxes, and provide your loved ones with financial security and peace of mind after you pass.
Financial Security for Your Spouse
Whether you and your spouse have dual incomes or rely on one income, a passing can cause financial strain, leading to debt accumulation, missed obligations, and significant lifestyle adjustments. Life insurance can help cover these income gaps, helping ensure the surviving spouse can maintain their payments while they adjust to their new normal.
Covering Final Expenses and Outstanding Debts
Losing a loved one is an emotional time that becomes all the more complex if finances are uncertain. Surviving family members must often manage the final expenses of a funeral and burial, as well as the deceased’s payment obligations and any remaining debt. Life insurance can provide the cash flow necessary to pay monthly bills, medical expenses, and funeral costs while giving surviving family members the breathing room to grieve without financial burdens.
Estate Planning and Leaving a Legacy
Liquidity from life insurance can expedite the settlement of your estate and the distribution of assets to heirs and charities, ensuring your legacy and wishes are carried out as intended. Without a policy, heirs might be forced to liquidate their inheritances to address taxes, reducing what they receive.
Replacing Lost Social Security Survivor Benefits
If both spouses were claiming Social Security benefits, the surviving spouse may keep only the higher benefit, losing the entire second check regardless of their work history. A life insurance payment can help a surviving spouse bridge the gap in lost benefits following a spouse’s death to fulfill essential payments and maintain their lifestyle.
How to Adjust Your Life Insurance as an Empty Nester
It’s important to take an active approach to reevaluating your coverage needs, rather than just keeping or cancelling your existing policy. Here are several areas you can review with your financial advisor or an insurance agent.
Evaluate Your Current Coverage Needs
As empty nesters, your monthly expenses and needs may have shifted. Begin by assessing your current income and financial obligations and calculating how much coverage you actually need.
- Calculating Income Replacement:
- What is your current income?
- What’s your current life stage, e.g., retirees, still paying kids’ college?
- How many people depend on your income, including spouses, aging parents, or older children?
- What assets do you already own, such as investment accounts, existing insurance policies, savings, and more? Note these don’t need to be duplicated but they can reduce the coverage you actually need.
- Total Financial Obligations: Your policy should also consider major obligations, such as a mortgage, auto loan, student loan debt, and funeral expenses, with additional coverage for costs like medical bills and college funding.
- Stress-Test: Refine your targets further with a financial advisor or insurance agent based on various timelines and scenarios. For example, you may ask:
- How much of a life insurance distribution can be invested?
- Are all major expenses, like a mortgage, paid off?
- Will the surviving spouse continue to work?
- Will this allow your spouse to stay in their home?
The idea is to help your loved ones cover financial obligations without burden while they navigate a loss, and to provide security for an appropriate amount of time.
Term vs. Permanent Life Insurance Options
There are various life insurance options to discuss with your financial advisor or insurance agent, each designed to support your family in different ways:
- Term Life: This type of insurance is often used to help replace income for a set period, such as 10, 20, or 30 years, typically, during the years your family relies on your income the most.
- Generally, more cost-effective and suited for young or growing families managing a mortgage, childcare costs, or college expenses.
- Since it’s temporary coverage, the death benefit is only paid if the death occurs during the specified term.
- Permanent Life: This type of insurance provides lifetime coverage, meaning the death benefit doesn’t expire.
- The policy reduces timing risk if you live longer than expected and provides more long-term financial certainty to address estate taxes, business succession, charitable giving, and more.
- The coverage costs more because your heirs are guaranteed a payout upon your death, whenever it occurs.
- Layered Policies: As term and permanent life insurance meet different needs, many families opt to layer policies based on their life stage or time horizon. This approach can help provide income protection when your family needs it and long-term security for legacy and estate planning. A financial advisor or insurance agent can help you explore what’s suitable for your situation.
Review and Update Your Beneficiaries
Verify your beneficiaries to ensure your life insurance policy aligns with your wishes. A good rule of thumb is to review your beneficiaries at least annually or whenever a life change occurs, such as a marriage, birth or adoption, divorce, or new business activity. Beneficiary information tends to override wills; ensuring accuracy is critical so the benefits are distributed as intended. Use this list to help avoid the common beneficiary mistakes:
- Check for outdated names, such as an ex-spouse or business partner.
- Review and update percentages accordingly.
- Name backup designations.
- Coordinate changes with your insurance, estate, and trusts.
- Don’t name a minor directly, as they can’t receive the benefit, and decisions could default to the court. Instead, consult with your insurance agent about the best way to proceed.
Is Your Employer-Provided Life Insurance Enough?
If your employer provides life insurance, it can be a helpful baseline benefit but it may not be sufficient, even for empty nesters. Here’s why:
- Coverage is often one to two times your salary. If your spouse is still in their working years, this amount may not be enough to replace income or provide long-term stability.
- Employer-provided life insurance is designed to provide short-term relief. It can fall short in addressing long-term needs, such as medical care, taxes, or lifestyle maintenance.
- The coverage typically expires when you leave the company. Before transitioning, be sure to discuss portability features or alternatives with your advisors.
It’s helpful to look at employer-provided life insurance as a benefit and not a comprehensive solution, which should be factored into, not entirely relied on, when calculating your life insurance needs.
Get Professional Guidance on Your Life Insurance Decisions
As your children become more independent, your life insurance needs may shift from primarily replacing income to long-term stability, flexibility, and legacy goals. It’s a natural stage to review your policy and make adjustments that fit your overall financial picture with your financial advisor and a trusted insurance partner.
At Blankinship & Foster, we often collaborate with clients and their insurance professionals to assess policies within the context of retirement timelines, survivor needs, and estate planning. This approach helps align your financial planning and asset protection, rather than focusing on a single policy decision.
If you’d like more perspective on your current life insurance policy, please contact us, and we’d be happy to guide you through what to evaluate.
