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 to protect your family in case something happened to you.
But now you’re about to enter retirement—or maybe you’re already there. You no longer receive employer-provided life insurance, and you have to decide whether to buy a new life insurance policy or continue paying premiums on a policy you've owned for years. What’s the right choice?
Not surprisingly, there's no one-size-fits-all answer. But we'll help you consider the different variables that impact your situation to determine what's best for you.
- Life insurance is meant to protect families from loss of income or valuable services.
- The two main types of coverage life insurance companies offer are term and permanent life.
- If you retire and don’t have issues paying bills or making ends meet, you may not need life insurance.
- If you retire with debt or have children or a spouse that is dependent on you, keeping life insurance is a good idea.
- Life insurance can also be maintained during retirement to help pay estate taxes.
- If you own cash-value life insurance, you'll want to consider any tax consequences of canceling the policy.
How Life Insurance Fits In
Prior to retirement, most families use most or all of their household income to support their lifestyle, as well as services they provide for the household, such as childcare. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If one person works, the same holds true, while the other is usually responsible for childcare and household duties. If either person were to pass away, the household could find itself in a financial emergency at one of the worst possible times.
Non-wage earners often provide essential household services, such as childcare, that are expensive to replace.
Types of Life Insurance
Life insurance is a commonly used tool to protect against potential income and other losses. But 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 insurance, also called cash-value life insurance, is a lifetime policy that’s good for lifelong needs and is often used in estate planning. It comes in two flavors—whole life and universal life. Here are some questions that may help you decide whether to get a life insurance policy in retirement or to keep one.
Do You Still Earn Outside Income?
Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. If you retire and no longer work to make ends meet, you probably don’t need it, unless you expect to owe estate taxes, in which case, life insurance can be a good solution. Otherwise, you may want life insurance to bequest a tax-free sum to your beneficiaries or charity.
When you die, your family can usually inherit and receive payouts from your existing sources of income. Your named beneficiaries will receive your retirement accounts, but inheriting an IRA can create tax consequences for family members, depending on who inherits it and the type of retirement account it is. And while Social Security pays a survivor benefit, 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 what benefits your family stands to inherit, any tax consequences, and their income needs before making a decision.
Are You in Debt?
Ideally, you will arrive at retirement age debt-free, but that’s not always the case. In fact, a 2018 report stated that 46% of homeowners age 65 and older still carried a mortgage; 32% of people age 70 and over were still making house payments in 2019.
Student loan debt is forecast to be a problem for an increasing number of retirees in the future. Over the past five years, student loan debt held by senior citizens has increased 71.5%—either the remnants of their own loans or because of co-signing loans for children or grandchildren.
Experts say that continuing life insurance coverage might be 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.
Are Your Children and Spouse Self-Sufficient?
If you reach retirement and your children are out of your home and 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 are still living in your home, you should consider keeping what you have or purchasing coverage if you don't already have a policy. Also, if your spouse would lose a substantial amount of your pension income or other monthly payment upon your death, life insurance can fill that gap.
Would It Help Your Estate?
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.
Cash Value Life Insurance
If you've developed a substantial cash value in a permanent life insurance policy but are still paying premiums on it, consider your options carefully. If you want to stop paying premiums but keep the policy, reach out to the life insurance company about how this may be structured. For example, you could settle for a reduced amount of paid-up life insurance on which no premiums are due.
If you no longer have a life insurance need and you want the cash value, surrendering your policy is one way to do that. But it can have significant tax consequences. The amount of cash surrender value you receive minus the policy basis (the amount of premiums you paid) is taxable. Talk to the life insurance company to understand what the taxable amount would be in your situation, then talk to a CPA to understand what you'd owe.
Also bear in mind that permanent life insurance policies have a surrender period that can last anywhere from a few to 20 years. During this time, a penalty is assessed if you surrender the policy.
The Bottom Line
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 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. 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 if you don’t need it, or having you exchange it for another one.