Steve Coker, CFP
Do you need life insurance in retirement?
Many people are surprised to learn that they may not need life insurance in retirement. Life insurance is sold as something that ‘everyone needs’ and it has become a security blanket of sorts. And yet, once you have reached the point of financial independence, life insurance may not be needed, and it may be a better investment decision to save the money on those premiums.
The key to determining whether you need life insurance (or any insurance for that matter) is to ask the question “What am I insuring?” Life insurance is most often purchased to replace the wage income of a deceased spouse. Thus, it is very important for the breadwinners of a family to have sufficient life insurance while working. I have worked with many widows and widowers who were blessed by the forethought of this type of insurance. It is important!
However, retirement implies that you are no longer working and that you have sufficient assets to provide for the needs of you and your spouse for your lifetimes. Reaching this point of financial independence changes the equation, making the financial impact of a death during your retirement years much critical. With appropriate planning, the retirement assets you have saved simply pass to the surviving spouse, providing for the needs of the survivor for his or her lifetime. If the assets are sufficient to provide for the survivor, then life insurance is often not needed.
Sometimes, individuals purchase insurance to provide an inheritance to children. In my experience this is often a poor investment. While there is a small probability of an early death of the insured, the most likely scenario is that the insured will pay large premiums for many years that could have simply been invested to provide the beneficiaries with the same or even larger inheritance. Remember that insurance companies are very good at math and are making money on these policies. On average, the sum of the insurance premiums, along with the earnings on the insurance premiums, exceed the death benefit. If they didn’t the insurance company wouldn’t be making a profit.
So, when might you need insurance during retirement? There are many, but here are a few of the most common. First, insurance is important if there will be a significant change in income to the survivor. This can happen if, for example, one spouse has a pension or annuity that will end upon death. Insurance can help replace the income that would be lost. Second, insurance can be important if assets pass to someone other than the spouse. For example, if assets will pass directly to children rather than first to the spouse, then insurance can replace those assets. Third, insurance might be needed if there are estate tax issues, but with the Federal Estate and Gift Tax Exemption amount at $11.4 million per individual, this applies to few.
Before you write that check for the insurance company, consider what you are insuring. Yes, there are many good reasons to buy life insurance, but they are not nearly as common as people assume. Many retirees are fine to simply rely on the assets that they have accumulated. If you would like us to review your situation, please let us know.