Society of Certified Senior Advisors: Do Retired Adults Need Life Insurance?

You may think that because the kids are out of the nest, there’s no more need for life insurance. But there are several ways it could benefit you in retirement.

Most people understand the need for life insurance when a breadwinner is supporting children and perhaps a spouse, especially if their home is mortgaged. But what about the need for life insurance when your working days are over? You might jump to the conclusion that you should cancel life insurance policies. But there are several situations where life insurance can be quite useful, even in your golden years.

• Paying for surprise expenses. If you have a cash value policy, you can make a withdrawal or take out a loan against the policy to cover unexpected expenses, although it will reduce your death benefit.

• Pension replacement. Some pensions are not transferrable to a spouse or other dependent upon death, so life insurance can cover that gap.

What Other Insurance Do Retirees Need?

As long as you are evaluating your need for life insurance, let’s consider what other types of insurance you will need in retirement.

Homeowners or renters insurance. You may be tempted not to carry homeowners insurance if your house is paid off, and who really needs renters insurance? But these can be costly mistakes from which you can’t recover. Keep your property insurance current.
Travel insurance. If you travel a lot, you may want to buy a product that provides emergency medical services, as well as trip delay or cancellation insurance. Another way to get these benefits is by signing up for certain travel-oriented credit cards, so check if you’re already covered.
Car insurance. Whether or not you get complete coverage for your new Tesla, or just the state-mandated minimum to take care of your beater car, don’t overlook vehicle insurance.
Umbrella policy. If you have frequent visitors to your home, a renter under your roof, or assets someone might like to go after, an umbrella policy provides substantially increased liability coverage at an affordable price.

• Estate planning tool. Your heirs can use the payout from your life insurance policy to pay estate taxes, rather than selling assets during a market downturn.

• Covering funeral costs. Insurance payouts are available quickly so family members can pay for your burial expenses.

• Protect against stock market drops. Cash value life insurance can afford you some protection when other assets fall. You could also borrow from a life insurance policy to avoid selling assets to maintain your lifestyle in a down economy.

• Smooth asset distribution to heirs. Perhaps you’re leaving the house to your firstborn, your IRA to the second child, and your third child will inherit your life insurance policy. However you split it, life insurance can help even out inherited assets.

• Cover debt. Nearly half of homeowners 65 and older are still paying down a mortgage, and many are in debt for student loans for themselves or from co-signing a loan for a grandchild. Continuing life insurance can be a good idea to cover those debts after you’re gone.

• Provide for special needs children or spouse. Covering loved ones can be a big incentive to continue paying for life insurance in retirement.

• Covering business debt. If a business you own has borrowed a large sum, the bank may require you to carry life insurance. Likewise, business partners often each carry their own policy to aid in succession planning.

You can see that there are a wide variety of reasons for starting or continuing life insurance in your senior years. But let’s look at some reasons for not having life insurance as an older adult.

• High cost. Since life insurance pays upon death, it’s going to be more expensive the older you are. You may do better to invest the money you would have paid in premiums in the stock market, bonds, or another asset.

• Cash value fees. Life insurance has more than one component (insurance plus investment). Commissions and fees can be high.

• Other assets provide for you. If most of your retirement income is produced by IRAs and other retirement sources invested in stocks, bonds, mutual funds, and bank savings, and/or you own real estate, they are transferable to heirs through a will or trust.

If you already have life insurance policies in place, here are a couple of things to consider:

You can probably let your term policies expire as long as any dependents have access to other sources of plentiful income.

Cash value policies (whole life or permanent life rather than a term policy) purchased a number of years ago may have considerable value, and it grows tax deferred. You may be able to pull out some of the value tax-free for any needs. Consider letting your policy grow until a time when the money is needed. It may be possible to surrender your policy in order to convert it to a life annuity for lifetime income. Just make sure this will not trigger a tax consequence.

As you can see, answering the question of whether you need life insurance after retirement can be a complicated proposition. This is where you’ll want to bring in your financial advisor and perhaps a tax professional to help you come up with the right answer. They can help you make the best decision for your own unique situation.