More than a check when you check out

ByDavidRodeck

Kiplinger’s Personal Finance

Many retirees drop their life insurance once their kids have grown up, but a policymay stillmake sense for them. Consider:

Therearedifferenttypes. Life insurance policies all followthe same general approach: You pay a premium and then, if you pass away while covered, your heirs receive the listed death benefit.

Term policies have a set expiration date. You may be able to renew, but the premiums get more expensive. Permanent life insurance doesn’t expire if you keep paying the premiums. Premiums start out higher than for term policies, but many permanent policies charge the same premium the entire time.

Lifeinsurancecanbuild savings. Permanent life insurance can build cash value fromyour premiums. This is money you could take out while alive, either as a withdrawal or as a loan that can be repaid. The cash value earns a return based on the type of permanent policy.

Taxlawsarefavorableforgrowth. If you keep the cash value in your life insurance policy, you delay taxes on your gains. If you withdrawyour cash value, you owe income tax on your gains. Alternatively, if you takemoneyout as a loan, you don’t owe income tax. As long as you have an outstanding loan, the insurer charges interest and adds that to your outstanding loan balance. Theoutstanding loan could reduce your cash value growth because you have lessmoneyin the policy, though this depends on the insurer. Takingmoney out of your policy via withdrawal or loan reduces the death benefit for your heirs.

Investmentfeescanbehigh. Fees are a drawback to saving through life insurance cash value, especially on market-based variable products. Not only do you pay for life insurance premiums, but the insurer could also deduct annual fees up to3% a year for the underlying investments.

Youcancombinelifeinsurancewithlongtermcare coverage. Some life insurance policies allowyou to spend part or all the death benefit on long-term care. Caveat: If you need prolonged care, traditional long-term care insurance likelywould pay out more.

It’samoreeffectiveinheritancethan otherassets. Whenyour heirs inherit pre-tax money in a retirement account, like a 401(k) or traditional IRA, they’ll owe income tax when they take out the money.

Most non-spouse heirs must withdraw everything within 10 years of the inheritance.

As an alternative, you can use some of your retirement money to fund a life insurance policy, says PaulLaPiana, head of product forMassMutual. "Your heirs receive the death benefit income and capital gains tax-free."

Youneedtoqualifybasedonhealth, but it’sgotteneasier. Most policies require you to passmedical underwriting before you can buy. Based on your current health and medical history, the insurer decides if you qualify and at what price.

"Peoplewhohad serious issues in years past, like heart problems or cancer, can still qualify, assuming the conditions are managed the rightway," LaPiana says.

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