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I have a term life insurance plan that will expire when I am 55 years old (~20 years from now). My insurance salesman wants me to convert part or all of this into some sort of whole life policy, and their explanation is that it will be harder/more expensive for me to get a term plan at 55.

I have no plans of switching to whole life, but this sales pitch has gotten me thinking. I don't think I will need life insurance at that age based on my assumption of kids being out of college and the mortgage mostly paid off (as well as the advice from the answers in this question).

However, suppose that when I am 55 I find that one or more of these assumptions is incorrect and life insurance may be beneficial. In lieu of purchasing more life insurance, could the money from my 401(k) or IRA be used by my survivors as they might have a life insurance payout? I am mostly curious about how accessible this money will be to survivors, but any other considerations is useful to know.

  • Do you have an emergency fund sufficient to support your spouse and children for a few months? Is it in a jointly owned account accessible to your spouse? Is your spouse the named beneficiary on your retirement accounts? Does your spouse have her own sources of income (if she's not working now, could she go back to work and earn a significant income?) – Brian Borchers Aug 4 at 4:19
  • @BrianBorchers Yes to all of those. – SethMMorton Aug 4 at 4:20
  • Your spouse would have immediate access to your jointly owned accounts and pretty quick access to money from your 401(K). It doesn't appear that access to funds in the short term would be a problem. Whether this would be sufficient for her to live on in the long run is a very different question. – Brian Borchers Aug 4 at 4:26
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    Another way to think of this is to ask whether you (as a couple) be financially ready to retire when you reach the age of 55. If not, then you'll probably want some life insurance past that age. – Brian Borchers Aug 4 at 4:29
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I congratulate you on thinking outside of the box. Another reason to eschew debt, in this life, is it eliminates the need for life insurance which becomes costly in later years. Term life is a great buy, when you and your children are young and the loss of one parent would be devastating to both the surviving spouse and children.

So where will you be in 20 years? If your house is paid off, you drive paid for cars, the kids are out of college, you have a healthy retirement account, healthy emergency fund, and a couple of hundred thousand in a taxable investment account, then what is your life insurance need? Minimal to nothing. The small group life insurance policy that many employers provide may be more than sufficient.

However, if you just freshly refi'd your house, you have two massive car payments, and your retirement is underfunded then your need for insurance will be great. Whole life may make sense for such a person because they are goofing up their fiances anyway.

The choice of which of these is you in the future lies within the financial decisions you make today.

To answer your question, yes heirs have a right to choose how inherited tax deferred money is passed to them. They could choose for it to remain tax deferred adding to their own retirement accounts, or, they take it as cash to be spent. Taxes are due if the cash is to be spent. You may want to read up on inherited IRAs.

However, lets consider a different possibility. You are 50, your income has increased, but your mortgage payment has remained the same. While you are subject to inflation, some of your costs have decreased as well. You find it easy to pay off your mortgage earlier than expected. What do you do with the money you were paying toward the mortgage? Sure you can spend some of it, but the bulk of it will go into a taxable brokerage account. Your heirs can spend that in the intervening years between your untimely death and retirement age.

Hopefully you will live to a ripe old age, but it sounds like you are on a good track to provide both yourself and your heirs in the years to come.

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