During your primary earning years, it’s prudent to have a life insurance policy. You want to protect your spouse, children, and loved ones in the event of your untimely passing.
But as you near retirement, it’s highly likely that your savings are larger, your debt is smaller, and fewer people rely on your income. If that’s the case, is it still necessary to retain your life insurance policy?
Let’s evaluate whether or not you need life insurance in retirement.
The Evolution of Life Insurance
Life insurance protects your loved ones if you pass away, and proper coverage helps replace your lost income, making it valuable for many families to incorporate into their financial lives.
When does it make sense to obtain life insurance?
Typically, early-career professionals can secure less expensive policies due to the likelihood that they’re both young and healthy, so the risk of premature death is low. The longer you wait to secure a policy, the more likely you will develop health conditions (diabetes, heart disease, high blood pressure, etc.) that drive your premiums higher.
Aside from maximizing your rates, younger families generally have higher debt, fewer assets, and more dependents—all sound reasons for obtaining life insurance.
But the older you get, the more your financial life shifts in the other direction. By the time you’re in your 50s or 60s, you’ve accrued more assets, likely have less debt, and your children are financially independent (at least to some degree).
At this point, what would happen if your family experienced a sudden loss of income? The blow might not be as financially impactful as it was when you were twenty years younger.
Depending on your current financial situation, you might be carrying too much life insurance.
Before Cancelling, Know Your Life Insurance Policy Type
There are two primary types of life insurance: term and permanent life insurance.
Understanding Term Life Insurance Policies
Term life insurance includes a predetermined period of coverage with an expiration date. If you pass away during the coverage period, your beneficiaries will receive a death benefit. If the policy expires while you’re still living, coverage stops. Term life insurance is the more affordable option, making it the better option for most people.
To maximize coverage while minimizing premium costs, some people choose to ladder their term policies. They buy multiple policies with varying expiration dates that will provide continued coverage at a lower cost than if the buyer waited to purchase the additional policies later in life. For example, you could buy three policies now:
- $500,000 for 10 years
- $500,000 for 20 years
- $500,000 for 30 years
With a strategy like this, you’ll have the most coverage ($1.5 million) when you need it most (young family, high debt), and the policies will gradually taper off as the buyer’s need for coverage abate later in life (fewer dependents, higher nest egg). Further, total premiums for laddered policies should be lower than the premium for a single policy with the lengthiest term. So, in the example above, the three policies spaced ten years apart should cost less in total than a single $1.5 million policy with a 30-year term.
Understanding Permanent Life Insurance Policies
Permanent or whole life insurance has no expiration date. Once you obtain the policy, you have it for life. A whole life policy is significantly more expensive than a term life policy, but it grows a cash value over time, which may benefit some people.
A portion of your premiums is put aside into a savings or investment account. This account accrues interest, or investment gains, over time. Eventually, you will have the option to withdraw funds from the account or surrender the policy if you choose to no longer maintain coverage.
If you sell your policy, there are significant tax consequences to consider. If the total cash value of the policy is greater than the amount of the premiums you paid in, that excess value will be taxable. If you find yourself in this situation and confirm that you no longer need the coverage or cash value, you might consider doing a non-taxable exchange into a low-cost annuity. This can be a somewhat complex undertaking, so you might consider working with an advisor to assist you.
What Role Does Your Life Insurance Policy Play In Your Financial Plan?
When determining if it still makes sense to carry coverage, it’s helpful to consider the intended use of the policy.
- Did you envision your life insurance policy as a part of your estate and legacy plan? If so, is the death benefit intended to be an inheritance for your kids?
- Would a dependent need this policy to help pay down debt, like a mortgage?
- Are you primarily focused on helping your surviving spouse stay afloat in your absence with funeral costs, the mortgage, college tuition, childcare costs, etc.?
Understanding what role you want your life insurance to play after your passing can help you determine how much coverage you need. Making a well-informed choice starts with a good sense of all the numbers.
Do You Have Dependents (And Are They Financially Independent)?
Couples in their peak earning years may still have at least one person who relies on them financially. Most parents know that just because a child turns 18 doesn’t mean they’re suddenly independent adults.
In fact, only 24% of young adults are financially independent of their parents by age 22.1 So, while you may be done paying for college and childcare costs, you may still be caring financially for your children in one form or another.
If it’s not a child who relies on you financially, it could be an older relative, like your parents or in-laws.
In either case, you might consider keeping your life insurance policy when there are people who rely on your income. If you’re free from any dependents and have accrued a sizable nest egg, you may not need to maintain your policy – or at the very least, you won’t need to replace your policy once it has reached its term.
Do You Still Have Significant Debt?
Of course, everyone’s financial life looks different. While there are assumptions that younger people accrue more debt, there could be an ample number of reasons why you and your spouse still have considerable debt as you near retirement.
Maybe you took on loans so your college-bound kid could avoid high-interest student loan debt. Or you bought a second home in your favorite vacation destination. Or you’re saddled with unexpected medical costs.
Whatever your situation, it’s essential to consider how much debt you have when determining whether or not to maintain your life insurance policy. If you didn’t come home tomorrow, could your surviving spouse manage the payments on their own?
When managing a significant amount of debt, retaining a policy could help ease the financial burden on your estate and loved ones after your passing.
If You Didn’t Have To Pay Life Insurance Premiums, What Would You Do?
Maintaining more life insurance than necessary puts money in the pockets of insurance companies—money that you could use elsewhere.
Maximizing your money in retirement is crucial. What would you do with that money if you weren’t paying thousands of dollars a year on premiums? You could add to your savings, contribute to a grandchild’s college fund, invest, etc. It might even make sense to funnel that money toward an exciting retirement goal like traveling abroad or starting a business.
Remember to be intentional with your spending. Consider how this extra money in your pocket can help further your feeling of fulfillment in retirement.
Let’s Create a Life Insurance Plan Together
Before altering your current financial situation, consider the change with care. The decision to preserve or cancel your life insurance policy is nuanced, and various factors must be analyzed before coming to a conclusion.
We can help you and your spouse decide whether the right move is to retain, reduce, or remove your life insurance policy as you approach retirement. Feel free to reach out anytime to learn more about how we can help.