Do I Still Need Life Insurance After Retiring?

Ask yourself these questions to decide

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If you follow the common wisdom that life insurance protects your family against the loss of your income, retirement may seem like a natural time to let your policy lapse (or better yet, surrender it for its cash value). But deciding whether to have life insurance during retirement requires that you consider more than just income replacement, according to Stephanie McCullough, financial planner and CEO of Sofia Financial. 

“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 during retirement, ask yourself these questions to help you decide.

Do You Have Substantial Debt?

While life insurance is traditionally marketed as income replacement, an equally important use is to repay the insured’s outstanding debts.

More and more retirees are carrying debt through their golden years, according to the National Council on Aging. As of 2016, 60% of households led by people aged 65 or older had outstanding debt, an increase from 41.5% in 1992 and 51.9% in 2010. The median debt level carried by these households was $31,300. Having such debt in retirement may feel like your burden to bear alone, but dying before you’ve paid off those debts could create a financial hardship for your loved ones.

Your estate is responsible for repaying most debts owed in your name after your death, and many co-signed loans with another party become the responsibility of the co-signer. This means life insurance can help ensure your family or co-signers are not financially overwhelmed by your death.

Do You Want to Leave a Financial Legacy?

Figuring out how to leave money to your heirs can be complicated. But with life insurance, you can designate that your heirs (the policy beneficiaries) receive a tax-free death benefit that is probably not subject to probate laws, or the judicial 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. “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.”

Additionally, 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 guaranteed in a way that other money you intend to leave as an inheritance may not be.

Do You Have a Permanent Policy Already?

The death benefit is the primary reason to have life insurance. However, permanent life insurance policies can also provide the policyholder with income before death.

For instance, some permanent policies offer an “accelerated death benefit.” This benefit allows the insured person to access policy proceeds under certain circumstances, such as being diagnosed with a terminal illness, requiring extreme medical interventions, or needing nursing home care. Carrying a life insurance policy with an accelerated death benefit rider can potentially minimize long-term care and other medical costs.

Permanent life insurance policies also have a cash value account that you may be able to access. The cash value is essentially the amount of money that you have paid into the policy above the amount necessary to provide you with the agreed-upon death benefit, plus interest. This cash value can be another source of retirement income, if you need it. 

Cash value builds up over time and is not easily accessible in the early years of policy ownership due, in part, to surrender penalties for withdrawing it. If you want to have a permanent policy from which to draw income during retirement, you should ideally purchase that policy well before retirement.

Do You Want to Replace Your Retirement Income?

Deciding to carry life insurance in retirement can also depend on your specific financial situation. For instance, if you are entitled to a pension or other retirement income that is solely yours, life insurance can maintain that income for your spouse if you die first. Similarly, life insurance may be necessary for a surviving spouse to supplement Social Security, particularly if you pass away prior to your spouse reaching the age of Social Security eligibility.

Other Factors to Consider

Think through any major costs or purchases you may want life insurance to cover. For instance, if you’re carrying a mortgage in retirement, you may decide to maintain your life insurance policy so that your family will not be in danger of losing their home after your death. Similarly, if you want to ensure that your children’s or grandchildren’s education is paid for even if you’re not around, life insurance is one way to do so.

The Bottom Line

Retirement may be the end of your employment income, but it’s not necessarily the end of your need for life insurance. Figuring out if you need to continue carrying life insurance in retirement depends on your financial security, your intentions for leaving a legacy, and your potential retirement income needs, among other considerations. Answering these questions can help you decide the best course for your life insurance needs after retirement.