Does Life Insurance Make Sense When You Retire?
When you first start your professional life and have no one depending on you and no real assets or debts, life insurance is often not on the radar screen. The purpose of life insurance is to pay your debts and put your dependents in at least, as solid a financial position as if you were alive. Once you are married and have children and a mortgage, life insurance becomes a critical part of protecting the biggest asset you have - you!
TUTORIAL: Intro To Insurance
By the time you're retired, though, it is likely that your children are grown and have left the nest. You may have more assets and have paid down your debt. There is a possibility that you no longer need to carry life insurance. Here's a rundown on factors to consider when deciding to either buy or drop life insurance.
Your Debts and Assets
If you own your own home, in retirement, you likely have paid down a significant portion (if not all) of your mortgage. Your net worth may have risen substantially above its level when you were working. If your net assets and future pension entitlements will be enough to leave your spouse comfortable if you were to die, you may not need life insurance to carry out your estate's wishes. (For related reading, see What's Your Net Worth Telling You?)
Estate Planning Issues
Life insurance is often used as an estate planning tool to ensure that both the estate and the beneficiaries have enough cash to pay the final income tax bill and any transfer or estate taxes. If real property is being transferred, this can be an issue for some executors or beneficiaries who find themselves having to sell the property to pay the taxes.
Life insurance can also be used to create a legacy gift. If you want to provide a substantial financial gift on your death to an organization or foundation, you can make them the beneficiaries of your policy. In certain situations, the premiums paid on the policy can be deducted as charitable contributions. (For related reading, see Using Life Insurance To Make Charitable Donations.)
Your Existing Insurance
Life insurance premiums rise the older you are when you first take it out. Term life allows you to be insured for a set length of time (usually between five and 20 years), and then a new premium is set to renew the policy. If you have to renew after you are 60, the premiums are likely to be astronomical. A whole life policy, on the other hand, insures you until you die. Often, the premiums do not change over the course of the policy and it builds an investment portion that you can withdraw or borrow against in later years. The premiums are often much higher than term life. The type of insurance you already have makes a difference because, if you have to purchase new insurance in your retirement, the premiums may not be affordable. However, if you still have several years left on your term policy or, if you have an existing whole life policy, keeping up with the premiums can pay benefits down the road.
Premiums for life insurance are high when you are in retirement, but you may not even be able to get a new policy if you are ill or have ongoing health problems. If you did not obtain life insurance while you were still healthy, it may be too late when you are sick. In that situation, it is important to use your income to ensure that you can pay for health care and that any extra goes to pay down debt. (There are many benefits to owning a life insurance policy. For more, see Life Insurance: How To Get The Most Out Of Your Policy.)
The Bottom Line
Whether you need life insurance in your retirement depends on your existing insurance and your goals for passing on your net wealth to your beneficiaries. Many retirees no longer have a need for life insurance.