Do You Need Life Insurance in Retirement?

In a recent Gallup survey, 64% of Americans said that they worry about having enough money for a comfortable retirement, and this fear has many re-examining their budgets to find additional ways to save for their golden years. But maybe you are part of the group that feels pretty good about their retirement planning. Even still, you certainly don’t want to spend money on things you don’t need, when that money could be saved and allow you to reach financial independence just a little bit sooner, right?

One way to boost retirement savings is by dropping an expensive life insurance policy that you no longer need. The premiums you would potentially save from such a move could be added to a tax-advantaged retirement plan, such as a 401k, IRA, or Roth IRA. So the question in many Baby Boomers’ minds is “do I really need life insurance in retirement, or is it just a waste of money?”

Why Life Insurance?

The first question to ask when it comes to life insurance in retirement–or really at any age for that matter–is “if I die, would my spouse or family be struggling financially?” Life insurance can be a great way to protect your family if they are reliant on your income, but as you are about to embark on retirement, you may want to reconsider whether they still need the same protection. After all, it’s likely that fewer people will depend on your income after you retire. If you have children, they are hopefully independent at that point in time. In addition, ideally you also have secured a comfortable retirement income, either from assets you can draw from, or from secure income streams such as pensions or Social Security. Or, at the very least, hopefully you are getting close to doing so.

Therefore, you may no longer need as much life insurance to protect your loved ones.

The Cost of Life Insurance

Life insurance companies are for-profit enterprises, which means like every business they intend to make a profit. To do that, they have to charge enough in premiums to cover their marketing, administrative and claims costs each year. Using statistics on life expectancy, they have a pretty good idea how many people are going to pass away in each age bracket, and therefore price their policies accordingly. Obviously, more people pass away in older age brackets than younger, so they have to charge more in premiums to cover their expenses for these age groups. For instance, a 10-year term life insurance policy for a 65-year-old in good health is roughly 6-8x more expensive than an equivalent policy for a 45-year old.*

Whole life, universal life, and variable universal life also have internal costs for the life insurance coverage, but if you’ve had the policy for a long time, it may be that enough cash value has been accumulated in the policy to pay the insurance costs from the policy itself, without having to come “out-of-pocket” to pay the premiums. In these cases, it’s important to recognize that you are still paying for this coverage, even though it might not be out of your checking account. Instead, you are paying in terms of lost investment gains that could have been used for retirement instead.

At the end of the day, every dollar in expenses that can be eliminated before retirement is a dollar that can be saved and invested towards retirement. Conversely, every dollar in expenses that can be eliminated after retirement, is one less dollar that the retirement nest egg must support.

Some Exceptions (or, Reasons to Keep Life Insurance in Retirement)

But there are some exceptions to the general rule that seniors don’t need life insurance after retirement. Some retirees have pension income that forms a substantial part of their retirement income, and in some cases, the pensioners’ spouse could lose some or all of that income at death. Or, if you have a child with disabilities still at home, you might want to keep your policy for their special needs. Life insurance can also be useful if you have substantial assets and need a funding source to take care of estate taxes. Or, it can be helpful in providing a cash infusion at death to pay off business debt or fund a buy-sell agreement.

Also, some long-held permanent life insurance policies have potential taxable gains that would be triggered if the policy is surrendered. For all these reasons, it’s important to work with a qualified fee-only advisor to fully understand your options in any of these types of cases.

Conclusion

Life insurance costs good money. That’s why it’s important that you only buy it (and keep it) if you need it. It may seem strange to give up a policy that you’ve had for so long, but in reality, you may no longer need it if you are financially independent, have self-sufficient children, and no costly worries around settling your estate. Maybe it’s time to say goodbye to your policy as retirement is approaching, but as always, talk to your Personal CFO before making this (and other) important financial decisions.

 

*based on a $1M ten-year term life insurance policy for a healthy male ages 45 and 65 respectively.