Will You Still Need Life Insurance When You Retire?
November 16, 2015Many important decisions must be made as you approach retirement. How much income will you need?Are you on track to retire? How much will your health care cost? What are the best investment options?
These are just some of the common questions that retirement planners help guide people with. Remember that planning for retirement is a process not a one time event. I received a question last week that isn’t as simple as it seems: Should I cancel my existing life insurance policies when I retire? Here is a brief summary of how this couple in their mid-60’s and I analyzed this question together:
Start by re-evaluating your need for life insurance. Before you start looking at making an individual policy decision, assess whether or not you still need coverage. One of the primary reasons people get insured is to replace lost income. This is a major concern during our working years but becomes less significant as retirement nears and children leave the nest.
Think about other possible uses for insurance beyond income replacement. Other potential purposes for life insurance must be taken into account when assessing your life goals, needs, and desires. Charitable giving, paying off debt, providing for final expenses, or leaving a family legacy are other factors involved in the life insurance decision. The life insurance calculator from LifeHappens.org provides a simple and effective tool to re-evaluate your recommended level of coverage. It is not uncommon to reach retirement and realize that there are more than sufficient assets to provide for family members and loved ones.
Do you have pension income? If you have a spouse or another dependent relying on your pension income, you need to factor this into your income replacement planning. This is especially important for single life or joint and survivor 50% pension options that do not leave survivors with 100% income replacement. This can also affect children, grandchildren, or other dependents who may still be relying on your income.
Dust off those old policies and take an inventory of important information such as your coverage amount, the type of policy (term vs. permanent), and premium costs. While you’re at it, don’t forget to verify that your beneficiary information is up to date if you decide to keep your policy. If you have group life insurance through your employer, check to see if you are eligible for some type of retiree life insurance. However, even if provided, these retiree policies are often offered with minimal coverage.
In most cases, you will leave with an option to continue at individual rates. It is advisable to maintain individual and group life insurance to avoid the risk of increased insurance costs or losing coverage altogether when leaving a company. The downside is that these policies usually renew on an annual basis with increasing premiums. Prior to retirement, go ahead and compare the cost of continuation of an existing policy with the cost of an individual one to determine which is the most cost effective and which will offer the greatest benefits at this time in your life. You can use sites like Term4Sale.com to conduct a free comparison.
Do you have permanent insurance? If you purchased a cash value policy during your working years, you may have built up substantial cash value. The investment growth in a cash value policy grows tax-deferred, and some of the value may be accessed tax-free.
As you transition to retirement, consider allowing your policy to continue growing until you need the money for income. You may also be allowed to surrender your policy and convert it to a life annuity. Check with your insurance agent to make sure this does not trigger a tax liability.
Are your term life insurance premiums increasing? Life insurance pays off at the time of death, and it’s probably no surprise that the older you get, the greater the likelihood of dying. As a result, insurance companies charge higher premiums the older you are, and premiums in your 60’s and 70’s can get really expensive. You may be better off investing the money you would pay in premiums. Since term policies provide level (fixed) or rising premiums during the time period specified by the policy (usually 10 to 30 years), it is possible that your term life insurance will get more expensive if you have an annually renewable policy.
Will your survivors be able to pay for expenses associated with your death, including probate fees, estate taxes, healthcare costs, and burial expenses, without being forced to sell illiquid assets? For wealthy families with a high net worth, insurance can be an effective estate planning tool to pay estate taxes and transfer wealth without having to sell assets. Maintaining a sufficient amount of life insurance to pay for these final expenses can prove beneficial for loved ones. Life insurance may also be used for charitable giving. Permanent insurance is usually the best fit for these types of advanced estate planning strategies.
If you no longer have a significant income replacement need during retirement and do not have any debts to pay off or concerns about liquidity, consider allowing your term life policies to simply expire but do so cautiously unless you are confident that your spouse can use other retirement assets for income protection. If you fall into some of those other scenarios and have debt obligations you would like paid off or want to provide income continuation, consider purchasing level term insurance. Cash-value life insurance policies that accumulate value over the policyholder’s lifetime are another consideration but mainly for advanced estate planning purposes and with the unbiased guidance of a CFP® practitioner who is not compensated for selling products.