If you follow the common wisdom that life insurance protects your loved ones against the loss of your income, it may seem like a good time to let your policy lapse when you retire. You may even think about turning it in for its cash value. Before you decide to get rid of your life insurance when you retire, you should think about it as more than just a way to replace your income, says Stephanie McCullough, financial planner and CEO of Sofia Financial.
- Keeping your life insurance after you retire can help ensure that your loved ones do not have to worry about your debts after your death.
- Life insurance allows you to choose beneficiaries who will receive a tax-free death benefit that won't be subject to probate laws.
- Permanent life insurance can also provide you with income during your life. This could be crucial if you need medical or nursing home care.
- If you receive a pension or other income that is solely yours when you retire, life insurance can maintain that income for your spouse.
“Retirees may consider carrying life insurance if it’s important to them to leave a financial legacy,” McCullough explains, “or if they need an asset whose value is not tied to the stock market, which they can pull from during times of market downturns.”
If you’re thinking about getting or keeping life insurance after you retire, ask yourself these questions to help you decide.
Do You Have a Lot of Debt?
Many people look at life insurance as a way to replace their income when they die so their loved ones will be cared for. It may also be used to pay the debts left behind by the insured.
More and more people carry debt through their golden years, the National Council on Aging reports. As of 2016, 60% of households led by people aged 65 or older had debt. This is an increase from 41.5% in 1992 and 51.9% in 2010. The median debt level carried by these households was $31,300. Having this kind of debt when you are no longer working may feel like your burden to bear alone. Dying before you’ve paid off those debts could create a financial hardship for your loved ones, too.
Debts in your name will be paid through your estate when you die. If you have any loans or debts with a co-signer, the co-signer will be left to pay them back alone. This means life insurance can help ensure your family or co-signers are not financially hurt by your death.
Do You Want to Leave Your Loved Ones in Good Financial Shape?
Finding the best way to leave money to your heirs can be hard. But with life insurance, you can make it so your heirs receive a tax-free death benefit when you die. Money from life insurance is usually not subject to probate laws. Probate is the legal process of settling who gets what from your estate.
McCullough describes life insurance as a license to spend as you wish or need to during your lifetime. You don't have to save every dime for your loved ones to receive when you die. You can use your money for your bills and living costs. “If you want to be 100% certain to leave money to your kids, the cleanest way to do it is with life insurance,” she notes. “[Instead of] being frugal during retirement and worrying about spending too much, you can rest easy.”
McCullough points out that “life insurance is a unilateral contract. Once the policy is in place, as long as you pay your premiums, the insurance company cannot change it.” That means the death benefit is a way to ensure that the money you want to go to your loved ones when you die does just that. Other money you intend to leave for them may end up being used in a way you did not intend.
Do You Have a Permanent Policy Now?
The death benefit is the main reason to have life insurance. Still, permanent life insurance can also provide the insured person with income before death.
For instance, some permanent policies offer an “accelerated death benefit.” This allows the insured person to access policy proceeds when certain things happen, such as getting a terminal illness, needing extreme medical care, or needing nursing home care. Having a policy with an accelerated death benefit rider may help lower your long-term care and other health care costs.
Permanent life insurance has a cash value amount that you may be able to access. In short, the cash value is the amount of money that you have paid into the policy above the amount that would provide you with the agreed-upon death benefit, plus interest. This cash value can be another source of income you can tap into when you retire if you need it.
Cash value builds up over time. You can't get it in the early years of having a policy because there are penalties for taking it out. If you want to have a permanent policy from which to draw income when you retire, you should purchase that policy well before you retire.
Do You Want to Replace Your Retirement Income?
Making the choice to carry life insurance when you retire can also depend on your financial situation. For instance, if you expect to receive a pension or other retirement income that is solely yours, life insurance can maintain that income for your spouse if you die first. In that same vein, life insurance may be needed for a surviving spouse to supplement Social Security. This is even more crucial if you pass away prior to your spouse reaching the age of being able to receive Social Security payments.
Other Factors to Think About
Think through any major costs or events you may want life insurance to cover. For instance, if you carry a home loan when you retire, you may decide to keep your life insurance. You could do this so that your loved ones will not be in danger of losing their home after your death. They can keep paying for the house even after you're gone with the proceeds of your policy. Also, if you want to ensure that your children’s or grandchildren’s schooling is paid for even if you’re not around, life insurance is one way to do so.
The Bottom Line
When you retire, you may no longer earn an income through a job, but it’s not the end of your need for a life policy. Whether you decide to keep your life insurance after you retire or give it up depends on your financial security. Not only that, but it depends on if you want to leave your loved ones with money when you die. You should also think about the income needs you expect to have when you retire. Thinking about these factors before you retire can help you decide the best course for your life insurance needs when you are no longer going to work every day.