The best life insurance for your life stage

Insurance agents regularly approach new moms and dads about buying term life insurance to make sure their children will be cared for until adulthood.

But people's insurance needs shift depending on their stage in life, and their reasons for getting life insurance can vary, as well. Not keeping their policies in sync with their life stage can mean they risk leaving loved ones in the lurch.

"Every five years, you should revisit your life insurance profile—where you are, where your kids are, where your business is," said Elizabeth Scheiderer, a financial advisor with NCA Financial Planners. "Sadly, too many families are underinsured."

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Senior couple looking concerned with paperwork and computer
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Certainly, for young parents, term life insurance is an appealing product. They suddenly have a new financial responsibility, and one with a defined duration: They need to make sure their child will be financially secure until adulthood, even if the parent dies.

"Term life insurance is most appropriate when you have a limited period of time when you need the coverage. Young parents are a classic example of that. They have children and they are responsible for those children until they reach adulthood," said Elaine Tumicki, corporate vice president for insurance research at LIMRA. "That's why the 20-year term is a very popular product."

But there are other life insurance options, notably the various forms of permanent life insurance such as universal life and whole life policies. These typically cost more than term insurance when policyholders are younger, and the terms can be complex. But permanent life insurance is just that: permanent. And that makes it a potentially useful tool when people are nearing, or in, their retirement years.

"The premiums over your lifetime are leveled out," said Tumicki. "You have higher premiums in the early years but lower rates in the later years than with term [insurance]."

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Permanent life insurance policies generally enable a policyholder to build up a cash account; and, in an emergency, that money can be accessed through a loan against its value.

"It can contribute to funding education or any other financial need where you don't have the cash readily available," Tumicki said.

These policies also provide protection for the growing number of older Americans who are entering retirement in debt, and worrying about leaving a spouse saddled with the obligations. According to research by the Employee Benefit Research Institute, 65.4 percent of households 55 and older had some kind of debt in 2013, up from 53.8 percent in 1992. And LIMRA research indicates that for a 65-year-old couple today there is a 74 percent chance that one spouse will outlive the other by at least five years, and a 48 percent chance of one outliving the other by 10 years or more. (Tweet This)

Retirees today are far more likely than their predecessors to be holding mortgages and student loans in their so-called golden years: Student loans represented 15 percent of retirees' nonmortgage debt in 2013, up from less than 1 percent in 1989, according to LIMRA. That means a surviving spouse could be saddled with significant debt obligations, and the cash balance in a permanent life insurance policy could help. (Tweet This)

While those who build up enough wealth to provide for themselves and their spouse in retirement probably do not need life insurance, said Schneider, there are other reasons it may be appealing.

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Wealthy retirees may turn to permanent life insurance to help with estate planning. If they set up a trust to hold a life insurance policy, the money can be used to pay any estate taxes that come due when they die, and money left over can flow to the beneficiaries outside the estate as a nontaxable death benefit.

Older parents may also use permanent life insurance to fund a special needs trust for a child who requires lifetime care. Owners of closely held businesses may find that if they die, the proceeds of a permanent life insurance policy can help their children keep the business going while they determine what to do with it.

The dwindling number of people retiring with defined benefit pensions have another way to use permanent life insurance: It may be cost effective for them to opt for the higher single life pension during their lifetime and then buy a permanent life insurance policy to provide a spouse with assets if the pensioner dies first.

The bottom line with life insurance is that just like life, it's complicated. That's why Tumicki recommends seeking out a professional to help you match your life stage with your life insurance. "Most life insurance is sold by an advisor of some sort," she said. "You need to look at your whole financial picture."