Many people are surprised to hear that they may not need life insurance in retirement. Life insurance is something that most have purchased all of their working lives and it has become a security blanket of sorts. And yet, once you have reached the point of self-sufficiency it may actually be time to let the life insurance go and 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. However, retirement implies that you are no longer working and that you have sufficient assets to provide for your needs.
This fact changes the equation, making the financial impact of a death during your retirement years much less dramatic. With appropriate planning, the assets simply pass to the surviving spouse, providing for the needs of the survivor. If the assets will be sufficient to provide for the survivor then life insurance is often not needed.
So when might you need insurance during retirement? There are many instances, 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 exclusion amount for a married couple now at $10.9 million, this applies to few.
Before you write that check to 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 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.
*a version of this article first appeared here on November 23, 2015.