This is not always an easy question to answer. Probably, a majority of people do not need new life insurance as they head into retirement, but some do, and others may benefit from keeping insurance they already have.
The most common reason for owning life insurance is to make up for your lost income if you die prematurely, so your family will not be thrown into poverty. If you are retired, you no longer have to worry about lost income – at least not from your career. But you might have other sources of income that would be lost or diminished if you died, or there might be other consequences you want to stave off.
Here are the main reasons why some retirees do still need life insurance in retirement:
- If you or your partner would be left in serious financial jeopardy if the other died first. In many retiree households, income belongs mainly to one person, and there might not be enough left if that person dies first. Pensions, annuities, employment income, and Social Security may all work in that fashion (though sometimes they do not, which is one reason why this question is complicated). There might also be differences in expenses: one spouse is frugal, and the other isn’t, or one has big medical bills. If there is a disparity in how financially well off the survivor will be, depending on which person dies first, life insurance can make up the difference.
- If there is the need or desire to leave someone a big bequest at death, or to cover taxes, debts, or other expenses at death, insurance can assure that these goals are met. For example, you might have debts that are due at death, and coming up with the cash would be a hardship for your surviving spouse or other heirs.
- If you have a child with special needs or another dependent whom you want taken care of after you are gone.
- If you have business interests or other situations that call for cash when you die.
There are many flavors of these situations. One common one involves a concept called “pension maximization.” In most traditional pension plans, the employee earns a certain retirement benefit that lasts as long as he or she lives, but if it also needs to last as long as the either the employee or his/her spouse lives, then the benefit is reduced. This is only fair, but one way around it is, if you already own some life insurance and are willing to keep it in force, or if you are willing and healthy enough to buy new life insurance, you can opt for the higher benefit, and use the life insurance to cover your spouse or partner’s needs if you die first. Some financial experts criticize this as a bad idea, but the truth is that sometimes it’s a good idea and sometimes it’s a bad one – it depends on several factors, including how much of a reduction you would have to take in your pension to cover your spouse (assuming you even have a pension).
If you don’t have any of these needs, you probably don’t have to even think about buying new life insurance. But should you terminate existing policies?
If you have term insurance policies (i.e., policies with no cash value), and you no longer have a particular need for a cash payoff at death, then you are almost always best off getting rid of such policies, unless you are ill enough so that you expect to die fairly soon. Most term insurance policies either will expire before you die anyway, or the premiums will go up by leaps and bounds as you age into your 60s and 70s and beyond, or both. It’s not worth paying this way for something you don’t really need.
But if you have life insurance policies that do possess cash value, you might do well to hold onto them, even if you don’t need the death benefits. The cash values provide tax-sheltered (sometimes even tax-free) growth, and so unless you pay little or nothing in income taxes, that could be an important benefit. Since you can often make partial withdrawals, and can almost always borrow against life insurance cash values, such policies can supplement your income, and/or help you meet unexpected cash needs. Most insurance companies will also advance you money to pay for end-of-life care, if you need help with that. All of these are good things.
But what if you have life insurance you just don’t need or want any more? There are several ways to get rid of it. With term policies, you can just stop paying for them, and they will lapse. With cash value policies you should not do that, but instead just surrender them, so you can get whatever value they have.
Another possibility, though, is to sell the policies to a life settlement company, who will pay you a lump sum amount and then keep the policy themselves, paying any premiums necessary while you are still alive, and then keeping the death benefit for themselves when you aren’t. This can be a somewhat dicey proposition, and there have been some abuses reported. But it can also be a way to get paid for something you no longer need or want, so it can be worth checking out.
Naturally, all of these things are more complex than can be described in this small space, but you can talk with a professional if you need more detailed advice.
Chuck Yanikoski is a retirement adviser who lives and works in Harvard. For more about him, or to contact him directly, visit www.ChuckYRetirement.com.