Do You Need Life Insurance After You Retire?

February 04, 2015

As part of the financial education we provide on retirement decisions, we suggest a review of your insurance policies as a means of protecting your accumulated wealth. This includes a review of your homeowners coverage, medical benefits, and long-term care insurance, but we also suggest a review of your need for life insurance. I’ve always taken the stance that life insurance protects against at least three types of risk: loss of income, insufficient liquidity, and high income taxes. Let’s examine all three to see whether or not you need life insurance after retirement.

Loss of income

When Carl retired at 55 after 34 years with the same employer, he had a full pension, a full medical plan, a full 401(k) account, and a rather large mortgage. Within several years of retirement, Carl was diagnosed with an aggressive form of cancer and within two months, he was gone. Of the pension, medical plan, 401(k) and mortgage, his widow Betty only kept two: the 401(k) and the mortgage.

Given her inability to work, Betty was unable to maintain the mortgage payments and eventually had to sell the house—which at the time was a short sale because of the depreciation in market value following the real estate bubble. Betty had a high risk of loss of income, but she didn’t realize it until it was too late. It would have been appropriate for Carl to maintain sufficient life insurance to at least pay off the mortgage or replace his pension income, following his death.

Insufficient liquidity

When I met Bill, he had over $3 million worth of real estate that represented the majority of his retirement nest egg. Bill was a big believer in real assets, but with all of the time he spent managing his properties, he failed to put together an estate plan. When he passed away in 2008, he left his children with a rather large estate tax bill, forcing them to sell property at a time when real estate was not easy to offload. Bill’s estate was tied up in illiquid assets, and that made it difficult for his children to preserve the value and legacy of their father’s estate following his death. It would have been appropriate for Bill to maintain enough life insurance to cover the expenses associated with his death—including the probate fees, estate taxes, healthcare costs, and burial expenses—so that his heirs would not have been forced to sell property in a “fire-sale” transaction.

High income taxes

Jane never realized how much of her retirement income would be taxed, but when her pension, investment income, deferred comp benefits, Social Security, and rental property income pushed her into the 39.6% bracket, she wish she had. Now Jane is looking for ways to reduce her taxable income, but with the mortgage paid off and few other deductible expenses, she doesn’t have many options. Had she been aware of this potential risk, Jane may have opted to fund a whole life or similar cash-value insurance policy. With this type of policy, her cash value would have grown tax-deferred, and she could have borrowed from the policy to generate retirement income that would not be subject to income taxes.

So as you plan for retirement, ask yourself these three questions:

Will my survivors have sufficient income to maintain their lifestyle and service debt in the event I pass away?
Will my survivors be able to pay for expenses associated with my death, including probate fees, estate taxes, healthcare costs, and burial expenses, without being forced to sell illiquid assets?
Will I likely be in the same or lower tax bracket when I retire?

If you answered “yes” to all three of these questions, then you probably don’t have a need for life insurance in retirement, but if you answered “no” or “I’m not sure,” then you may want to speak with an unbiased financial professional about your need for life insurance in retirement. You may also use this worksheet to estimate how much life insurance, if any, you may need in retirement.