Do You Need Life Insurance After You Retire?

You've most likely had life insurance for the majority of your adult life. If it was part of your employer's benefits package, you might not have given it a second thought. You were aware of its presence but didn't know much about it. Or you may have purchased a policy to protect your family in the event that something happened to you

But you're about to retire, or maybe you're already there. You no longer have access to employer-provided life insurance, and you must decide whether to purchase a new policy or continue paying premiums on one you've had for years. What is the best option?

Unsurprisingly, there is no one-size-fits-all solution. However, we will assist you in considering the various variables that impact your situation in order to determine what is best for you.

How Life Insurance Fits In

Prior to retirement, most families use the majority or all of their household income to support their lifestyle as well as household services such as childcare. If both parents work, both incomes are generally required to maintain the family's standard of living. If only one person works, the other is usually responsible for childcare and household duties. If either person died, the household could find itself in a financial crisis at the worst possible time.

Types of Life Insurance

Life insurance is a popular tool for hedging against potential income and other losses. However, life insurance, like any other insurance product, comes in a variety of forms. Term life insurance provides protection for a set period of time, typically 10 to 30 years. Permanent life insurance, also known as cash-value life insurance, is a policy that lasts a lifetime and is frequently used in estate planning. It is available in two varieties: whole life and universal life. Here are some questions to consider when deciding whether to get or keep a life insurance policy in retirement.

Do You Still Earn Outside Income?

Given the fundamental purpose of life insurance, you may have a good idea of your need for ongoing coverage. If you retire and no longer need to work to make ends meet, you probably don't need it, unless you anticipate having to pay estate taxes, in which case life insurance can be a good solution. Otherwise, you may want to consider purchasing life insurance to leave a tax-free sum to your beneficiaries or a charity.

When you die, your family is usually entitled to inherit and receive payments from your existing sources of income. Your retirement accounts will be distributed to your designated beneficiaries, but inheriting an IRA may result in tax consequences for family members, depending on who inherits it and the type of retirement account. And, while Social Security pays a survivor benefit, the amount varies depending on your specific situation, and it will be less than what Social Security paid while you were alive. Before making a decision, make sure you understand the benefits your family will receive, any tax implications, and their income requirements.

Are You in Debt?

Ideally, you will be debt-free when you reach retirement age, but this is not always the case. In fact, according to a 2018 report, 46% of homeowners aged 65 and up still had a mortgage, and 32% of people aged 70 and up were still making mortgage payments in 2019.

Student loan debt is expected to be an issue for a growing number of retirees in the future. Senior citizens' student loan debt has risen by 71.5% in the last five years, either as a result of remaining loans or co-signing loans for children or grandchildren.

If you're still paying off debt, continuing life insurance coverage may be advised, according to experts. Take the "better safe than sorry" approach unless your debt payments are so small a percentage of your net worth that there is no risk of financial difficulty.

Are Your Children and Spouse Self-Sufficient?

When you reach retirement age, your children are likely to be out of the house and supporting their own families, and your spouse is likely to be self-sufficient. If you have special needs children or children who are still living in your home, you should consider keeping what you have or purchasing coverage if you don't already have one. In addition, if your spouse would lose a significant portion of your pension income or other monthly payment if you died, life insurance can fill that void.

Would It Help Your Estate?

Some people with significant assets can use life insurance strategically, such as to pay estate taxes. It could be used to pay down business debt, fund buy-sell agreements for your company or estate, or even fund retirement plans.

As you might expect, using life insurance as a tax-efficient part of your estate plan is extremely complicated. You'll need the assistance of an estate planning attorney. Keep in mind that unless you have an estate worth millions of dollars, estate tax considerations are unlikely to apply. As a result, you may not require life insurance for this purpose. However, to be certain, consult with a qualified expert.

Cash Value Life Insurance

If you have accumulated a significant cash value in a permanent life insurance policy but are still paying premiums on it, carefully consider your options. If you want to stop paying premiums but keep the policy, contact the life insurance company to discuss how this can be done. For example, you could accept a lower amount of paid-up life insurance with no premiums due.

Surrendering your policy is one option if you no longer require life insurance and want the cash value. However, it may have significant tax implications. The difference between the cash surrender value and the policy basis (the amount of premiums paid) is taxable. Speak with your life insurance company to determine the taxable amount in your situation, then consult with a CPA to determine how much you'd owe.

Remember that permanent life insurance policies have a surrender period that can range from a few to twenty years. If you surrender the policy during this time, you will be penalized.

The Bottom Line

Giving up life insurance after so many years may seem counterproductive, but the truth is that you may no longer require it. If you have no income to replace, very little debt, a self-sufficient family, and no expensive concerns about settling your estate, you may be able to cancel that policy. In terms of estate planning, you may need a different type of policy or make significant changes to your current one.

This is an excellent question for a financial planner or fee-only insurance consultant to answer. Be wary of simply inquiring with your insurance agent. Because they are frequently paid on commission, they may have an incentive to keep you on the policy even if you don't need it or to have you exchange it for another.