Should your empty nester clients get life insurance? Perhaps--if they have a lot of personal and/or business liabilities or concerns about estate taxes. Life insurance also might help those who have lost retirement income or anyone who may be left with an inadequate amount of family income if one spouse dies.

Couples who believe they no longer need life insurance after the youngest child “flies the coop”…could leave the family financially vulnerable, warns Steven Weisbart, Ph.D., financial planner with the Insurance Information Institute, Washington, D.C. “This,” he says, “is especially true in the event the sole income-earning parent dies.”

While LIMRA, Windsor, Conn., lacks data on the number of empty nesters with life insurance, other data indicate empty nesters may be short on coverage.

Married households make up 51 percent of all U.S. households, according to the U.S. Census Bureau. Plus, married households typically have the highest household incomes. This group represents over 80 percent of the top two quintile income groups and 85 percent of the top 5 percent of household incomes.

So there is a better than average chance that your empty nester clients may need some extra life insurance coverage—particularly if their net worth could be hit by pending changes in the estate tax rules in 2011.

Nevertheless, more than half of all married men and women lack life insurance coverage, according to LIMRA. Only 41 percent of married men and 45 percent of married women have permanent life insurance. Just 35 percent of married men and 37 percent of married women have term life insurance.

Adam Sherman, CEO of First Trust Financial Resources, Philadelphia, says the typical empty nester household that buys life insurance has a net worth of at least $500,000. The life insurance may be used to replace lost income in case the husband or wife were to die early. Or, it may be used to provide for their children when they’re gone.

Affluent couples buy life insurance for wealth replacement or to cover future estate taxes. Unless Congress acts in 2010, the federal estate tax was slated to resume on estates valued at just $1 million. But Sherman expects Congress to restore that threshold to between $2 million and $3 million.

The affluent use second-to-die life insurance proceeds to pay estate taxes. The second-to-die policy is put into a life insurance trust to avoid estate taxes. This way, estates pass tax-free to the surviving spouse. But when the second spouse dies, insurance proceeds should cover the estate tax bill.

Using life insurance to cover estate taxes isn’t cheap. Sherman says a 65 year-old in good health would pay annual premiums of about $20,000 per $1 million of permanent insurance coverage.

In addition to high premiums, registered reps need to remind clients that first-year commissions deducted from their premiums can run more than 50 percent. And over the years, trailing commissions and insurance charges also are deducted from the premiums. Plus, state premium taxes are factored into the cost of the life insurance policy.

Sherman says he also sees empty nesters between the ages of 55 and 65 using permanent life insurance as part of their investment portfolios. They can borrow against the cash value tax-free at near-zero interest rates as a source of income.

Shawn Mauser, assistant director of life products at Northwestern Mutual, Milwaukee, says empty nesters in business partnerships often use life insurance in buy-sell agreements.

A buy-sell contract is used for sole proprietorships, partnerships and closed corporations. The business interests of the deceased or disabled are sold via the life insurance proceeds, based on a predetermined formula, to the remaining member or members of the business.

Mauser also says that well-off clients not subject to estate taxes often buy life insurance to replace social security benefits during a so-called “black out period” that occurs when the recipient dies. This generally is the period between when the survivor’s youngest child turns 16 and when the widow or widower turns 60.

He adds that life insurance is often used to offset reduced social security survivor’s benefits. Those benefits may be reduced if the survivor is younger than the 66 to 67-year-old age required to obtain full social security benefits. Further reductions might occur if the social security recipient dies before getting salary increases that might have increased his or her benefits.

Weisbart says advisors may want to conduct an insurance-needs analysis to determine if more coverage is necessary. This examines current and future income and expenses. He recommends term insurance to cover the gaps because it is lower cost than permanent insurance, such as whole life.

“In determining how much life insurance to buy, it is important to determine the need to replace ‘hidden’ income that is lost when an income-earning spouse dies,” he says. “Hidden income is money an employer contributes to an employee's 401(k) or similar savings plan, or to pay the premiums for a family's health insurance coverage. These savings plan contributions and subsidized insurance premium payments cost the employer thousands of dollars a year, a financial commitment that, in most instances, reverts to the surviving spouse.”