Life insurance is usually purchased for the main breadwinner in a family, as protection for a spouse and/or kids who depend on the insured’s income. That could apply to almost any age group—from 20s to 60s. But if you’re approaching retirement, the nest is empty, and the mortgage is close to being paid off, should life insurance still be part of your long-term retirement planning and income strategy?
The case FOR life insurance in retirement
Here are a few reasons to consider maintaining life insurance during retirement:
- Pension replacement. If a large part of your retirement income is furnished by your pension, you might need life insurance if your spouse or another dependent cannot receive your pension after your death.
- Estate planning. Wealthy retirees sometimes use life insurance as an estate planning tool. For example, life insurance death benefits could be used to pay estate taxes instead of selling assets at an inopportune time.
- Protect against stock market downturns. If you’re concerned about how a market crash could affect your investments, cash value life insurance could provide a backup plan if your portfolio value goes down so much that it reduces your income stream and impacts your lifestyle.
- Cover unexpected expenses. A cash value policy could help you pay for unexpected expenses either by withdrawing some of the cash value or by taking a loan against the policy. (Note that doing this will reduce your death benefit.) Some people buy a small life insurance policy to pay for funeral expenses because insurance benefits are usually available to heirs immediately.
- Distribute assets equally among heirs. If you want to leave your stock portfolio to child number one, and the house to child number two, you could use your life insurance death benefit to equalize those gifts for child number three.
The case AGAINST life insurance in retirement
If you don’t already have life insurance in place as you approach retirement, here are a few reasons to think twice about buying it:
- High premiums. Life insurance pays off at death, and the older you are, the more likely you are to die. So insurance companies charge higher premiums the older you are, and premiums in your 60s can get really expensive. You may be better off investing the money you would pay in premiums.
- Cash value policy fees. Term life insurance is straightforward, with level premiums and a set death benefit for a specific number of years. But cash value policies, such as whole life or variable life, have more components (insurance plus an investment portfolio), and their commissions and fees, particularly in the first few years, may be higher than term policies.
- Asset transfers to beneficiaries. If most of your retirement income is generated by IRAs and retirement plans invested in assets like stocks, bonds and mutual funds, or bank savings accounts, or you own real estate, you can transfer ownership of these assets to another person or persons through your will or trust, which provides income protection.
What about existing insurance policies?
While purchasing new insurance when you’re over 50 can be expensive, if you already have life insurance policies in place, here are a few options to consider:
- Term policies. Consider allowing your term policies to simply expire as long as your spouse can use your other retirement assets for income protection.
- Cash value policies. If you purchased a cash value policy many years ago, you may have built up substantial value inside the policy. The investment growth in a cash value policy grows tax-deferred, and some of the value may be able to be tapped tax-free. So 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.
The bottom line
Life insurance in retirement can be an expensive proposition unless you’re leveraging existing policies. In either case, life insurance may offer some compelling financial flexibility depending on your income sources and overall estate value. Whether you have existing policies or are considering purchasing a new policy as extra retirement income protection, discuss your options with a financial advisor.