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Over 50? Why you still need life insurance

Looking back, purchasing your first life insurance policy made a lot of sense. You may have had a young family depending on you and that home you bought likely came with a sizeable mortgage that was going to be with you for years to come.

Now, your kids may be finishing off university and that mortgage is significantly reduced or even gone. You and your spouse are in your peak earning years and your retirement savings are in place. All this might leave you asking "Why do I still need life insurance?"

You might be surprised, but there's still a lot to protect now that you're over 50.

There are still people who depend on you

Decisions about insuring your income at this point in your life aren't as simple as they were for your parents' generation. These days you may still have someone relying on you financially for some time to come.

First there are your children. Don't be shocked if they stay in the nest longer than you did, or leave only to return. Statistics Canada reports that nearly 51% of those aged 20 to 29 in Metro Vancouver live with their parents, well above the national average. A major reason is that high real estate prices and a rising cost of living have made it difficult for young people to get out of their parents' house and into a home of their own.

On the other hand, if you're eager to help get your children started by dipping into your own home equity to fund a down payment or chip in on their mortgage, you might wind up taking on extra debt. That debt is a financial risk you'll need to insure.

If you're over 50 it's possible that you have elderly parents who count on you financially as well. Or, perhaps there's an ex-spouse you're supporting. Life insurance can still play an important role in protecting those around you, even as you age.

Dealing with a shifting economy

As of the recent recession, job security isn't something the average worker takes for granted. That recession showed just how quickly an economy's fortunes can take a turn for the worse.

Losing a job when you're older can be especially difficult. Not only do you lose a steady income, but if your only insurance coverage is through your employer you can suddenly be left without adequate health and life insurance coverage. If you're over 50, research suggests it will take you a lot longer to find new work and re-establish your benefits.

Having an individual life insurance policy can help you supplement your employer's group insurance coverage and protect yourself in uncertain times. It belongs to you, not the company, so your coverage won't be dependent on where you work and won't stop if you lose your job.

With an individual policy you can lock in your premiums for 10 or 20 years or more and know the coverage will be there. Group plans are subject to regular premium increases, and coverage can even be cancelled outright by your employer or by the insurer if claims get too high. If you're in excellent health, you can enjoy preferred rates with an individual plan. Plus individual plans offer a broader choice of enhanced coverage and optional benefits.

Hedging your investments

Many investments carry some degree of risk. There's always a chance that market forces will reduce the value of your assets at any time.

If you're young with many years of investing ahead of you, you can wait out market downswings and even use the volatility to "buy low". But recovering from a bear market when you're older isn't as easy. Time now works against you, reducing the opportunity to recoup your losses.

Life insurance can be an effective means of shielding your wealth when real estate or investment markets tumble. By purchasing a policy large enough to cover the fair market value of your assets today, you can insure your estate against the risk of market losses tomorrow. You can be confident about leaving your legacy intact for your family or favourite charity.

Keeping more wealth to pass on

On top of market risk there's another foe you face in leaving a legacy: taxes.

If you're over 50, there's a good chance that you've started building some serious wealth that will grow through the rest of your working years and into retirement. But here's the problem. When you pass away your assets are generally deemed to be disposed of at market value. If you've held a stock portfolio or investment properties for years, the capital gains – and the tax hit – can be substantial.

For example, if you had accumulated $1 million in capital gains at the time of your death, using BC's top marginal tax rate of approximately 44%, your estate would owe more than $200,000 in taxes. If your beneficiaries were unable to cover this expense, they may be left little choice but to sell the assets, even those with emotional ties like a family cottage, in order to pay the bills. With life insurance you can insure not only the potential tax liability, but additional estate-related expenses like funeral costs, probate and legal fees. This will better preserve your assets and save additional worry and stress for your family at a difficult time.

Are you planning to pass some of your wealth on to a charity? If so, you're not alone. A survey on giving intentions found that one in two Canadians age 55 and older plan to leave as much as half of their financial assets to charitable and non-profit organizations.

Charitable giving through life insurance offers some key advantages. You can create a substantial gift with a modest investment. Because policy proceeds can go directly to your chosen charity, your donation can avoid the administrative expenses and potential disputes that come with settling an estate. Your life coverage can be structured so that not only will your estate reap tax benefits from your gift, but also from the premiums paid.

Covering risks to your business

If you own a business, life insurance should be a serious consideration in helping you protect the value of the enterprise you've worked so hard to build.

For many businesses succession planning is a top concern. You as a co-owner may have an agreement in place to buy out the interests of a deceased colleague, but where will the funds come from? That's where life insurance can help. Proceeds from a life policy can help finance the purchase and provide for surviving family members. Life insurance can also take care of any capital gains taxes owing on an owner's estate.

Smaller companies often depend on one or two key people for the leadership and expertise that make the business thrive. Insuring these individuals can be critical, not only to the business' prospects but even its survival. Should the unexpected happen, life insurance can support the business with the working capital it needs to make it through the immediate term. Most importantly the benefit can pay to recruit a replacement with comparable experience and skills.

Another road to tax-smart savings

Life insurance isn't just for protection; it can also be used as a tax-efficient way to grow your wealth. If you are in a high tax bracket or are maximizing your RRSP contributions, options like universal life can shelter more of the income you're earning now, while building the foundation for tax-efficient retirement income in the future.

If you're unfamiliar with the tax benefits of universal life insurance, you might simply funnel extra money into non-registered savings or other unsheltered investments.

But for high income earners this isn't always the best approach. Income from these investments creates an ongoing tax burden. If you rebalance your portfolio regularly to maintain your risk tolerance, you could trigger taxable capital gains each time you do. If you accumulate capital gains, taxes again become an issue upon your death or that of your spouse, not to mention the costs and potential difficulties of probate and estate settlement.

With a universal life policy, part of your premium goes to insurance coverage and the remainder is invested. You have flexibility to adjust your premiums (within prescribed limits) and decide how the funds are invested. And unlike a Registered Retirement Income Fund (RRIF), there is no minimum withdrawal each year. When it's time to enjoy your retirement income, withdraw as much or as little as you need and leave the rest sheltered in your policy.

In the end, your beneficiaries will receive the accumulated value of your policy tax-free, and it won't have to pass through your estate.

While your reasons for having it may have changed, if you're over 50, life insurance can remain an important part of your financial toolkit. But getting the proper coverage takes careful planning and the right advice.

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† Insurance services provided by BlueShore Wealth.

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