For most of your adult life you’ve probably had life insurance. If it was offered by your employer as part of your benefits package, you may not have given it a second thought. You knew it was there but didn’t know much about it. Or you might have taken out a policy as part of good financial planning, especially if you have children.
But now you’re about to enter retirement – or maybe you’re already there. Your employer isn’t paying for life insurance anymore, and you have to decide whether to take out a new policy or enter your later years without one. What’s the right choice?
Don’t you get tired of hearing that there’s no easy answer? That’s because your bank and investment accounts – and your needs – are different from your neighbor’s or friend’s. What’s appropriate for them may or may not be appropriate for you.
Prior to retirement, most families use most or all of their household income to support their lifestyle. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If just one person works, the same holds true. If one of those income earners were to pass away, the household could find itself in a financial emergency at one of the worst possible times.
The function of life insurance is to protect family members from the loss of income if you or another primary wage earner were to pass away.
Like any insurance product, there are multiple types of life insurance. Term life insurance offers coverage for a set period of time – normally 10 to 30 years. Permanent life, also called cash-value, is a lifetime policy that’s often used in estate planning. It comes in two flavors: whole life and universal life. For more, see Intro to Insurance: Types of Life Insurance and Permanent Life Policies: Whole vs. Universal.
Here are some questions that may help you decide what you need.
Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. In the most basic sense, if you retire and no longer work to make ends meet, you probably don’t need it. If you’re living off Social Security along with your retirement savings, there’s no income to replace.
When you die, your family will continue to receive payouts from your retirement accounts, and Social Security pays a survivor benefit. However, that survivor benefit varies based on your unique situation and it won't be as much as Social Security paid while you were alive. Make sure you know your benefit before making a decision on life insurance.
Ideally, you will arrive at retirement age debt free, but that’s not always the case. In fact, in 2013, 30% of homeowners age 65 and older still carried a mortgage; 21% of retirees age 75 and over were still making house payments in 2011.
Student loan debt is forecast to be a problem for an increasing number of retirees in the future. As of 2013, more than 700,000 retirees held student loan debt – either the remnants of their own loans or because of cosigning loans for children or grandchildren.
Experts say that continuing life insurance coverage might be well-advised if you’re still paying off debt. Take a “better safe than sorry” approach unless those debt payments are such a small part of your net worth that there would be no risk of financial difficulty.
If you reach retirement and your children are out of your home, providing for their own families, and your spouse is self-sufficient, you probably don’t need life insurance. On the other hand, if you have children with special needs or kids who ae still living in your home, you might want to keep it. Also, if your spouse would lose a substantial amount of your pension income or other monthly payment, life insurance can fill that gap.
Some people with considerable assets can use life insurance strategically – for instance, as a way to take care of estate taxes. It could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans.
As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is very complicated. You’ll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably don’t apply. You therefore may not need life insurance for this purpose, but to be sure, it’s a good idea to ask a qualified expert. For more, read Estate Planning: Life Insurance in Estate Planning and Is Life Insurance a Smart Investment After You Retire?
It may seem counterproductive to give up having life insurance after so long, but the truth may be that you no longer need it. If you have no income to replace, very little debt, a self-sufficient family and no pricey concerns around settling your estate, there’s a good chance that you can say goodbye to that policy. As far as estate planning goes, you could well need a different type of policy or major changes to your current one anyway.
This is the perfect question for a financial planner or a fee-only insurance consultant. (See How to Select a Financial Advisor for guidance.) Be careful about simply asking your insurance agent. Because they are often paid by commission, they might have an interest in keeping you on the policy even when you don’t need it.