Reassessing Your Financial Needs in Retirement
For many, life insurance is initially purchased to protect dependents from financial hardship, such as covering a mortgage or replacing lost income. In retirement, this financial picture changes drastically. You may no longer have young children to support, and a paid-off mortgage may mean less debt to cover. This shift is the primary reason to reassess your need for life insurance.
The Case for Continuing Coverage
Despite the change in circumstances, several scenarios justify keeping your life insurance policy in retirement:
- Covering Final Expenses: Funeral and burial costs can be a significant burden on surviving family members. A smaller final expense or whole life policy can provide peace of mind that these costs won't fall to your loved ones.
- Providing for a Dependent: If you have a dependent spouse, a child with special needs, or grandchildren relying on your income, maintaining coverage may be necessary to ensure their ongoing financial security.
- Legacy and Estate Planning: For those with a desire to leave an inheritance, a permanent life insurance policy can be a tax-efficient way to transfer wealth. The death benefit is generally paid out tax-free to beneficiaries.
- Protecting a Spouse's Pension: Some pensions offer single-life payments, meaning payments stop upon the retiree's death. A life insurance policy can replace that lost income for the surviving spouse.
- Providing Liquidity for a Business or Estate: If your estate includes illiquid assets like a family business or investment properties, life insurance can provide the necessary cash for heirs to pay estate taxes or other expenses.
Reasons to Consider Cancelling
On the other hand, cancelling a policy might be the most financially prudent decision in certain situations:
- Self-Insured: If you've accumulated enough assets and savings to cover all potential final expenses and provide for your beneficiaries, you may be considered "self-insured." In this case, the ongoing premium payments may outweigh the policy's benefits.
- High Premium Costs: Premiums for life insurance, particularly term life policies, can become prohibitively expensive as you age. For those on a fixed income, eliminating this cost could significantly free up cash flow.
- Outlived the Need: If your initial reasons for getting life insurance are no longer relevant—for example, the mortgage is paid, and children are financially independent—the policy may have outlived its purpose.
Navigating Different Policy Types
Understanding the type of policy you hold is crucial to making an informed decision. Your options will differ significantly depending on whether you have a term or permanent policy.
- Term Life Insurance: This type of policy covers a fixed period and often expires by a certain age, such as 80 or 90. If you outlive the term, the policy ends, and there is no payout. For healthy seniors, renewing a term policy can be expensive, and a new term may not even be available past a certain age.
- Whole Life Insurance: A permanent policy that provides lifelong coverage and includes a cash value component. The premiums are fixed and never increase, which can be an advantage for budgeting on a fixed income. The cash value can be borrowed against or withdrawn if needed.
- Universal Life Insurance: A more flexible type of permanent policy, allowing you to adjust premiums and death benefits within certain limits. This flexibility also requires more active management to ensure the cash value doesn't drop too low, which could cause the policy to lapse.
- Final Expense Insurance: A small, whole life policy designed specifically to cover funeral, burial, or cremation costs. These policies often have guaranteed acceptance for older applicants with fewer health restrictions and lower coverage amounts.
Alternatives to Cancelling Outright
If you're considering dropping your policy but want to explore other options, consider these alternatives:
- Sell Your Policy (Life Settlement): If you have a permanent policy and are in poor health, you may be able to sell it to a third party for a cash payout. This amount would be more than the cash surrender value but less than the death benefit. The buyer takes over premium payments and becomes the beneficiary.
- Reduced Paid-Up Option: For whole life policies with a cash value, you may be able to use the accumulated cash value to purchase a smaller, fully paid-up policy. This option eliminates future premiums while still providing a death benefit.
- Borrow Against Cash Value: You can take a loan from the cash value of your permanent policy to cover expenses. Keep in mind that any outstanding loan balance will reduce the death benefit.
- Adjusting Coverage: You can often reduce the coverage amount on a permanent policy to lower your premium payments. This allows you to retain some level of protection at a more affordable cost.
Comparison of Policy Options for Seniors
| Feature | Term Life Insurance | Permanent Life Insurance (Whole/Universal) | Final Expense Insurance |
|---|---|---|---|
| Coverage Duration | Set period (e.g., 10, 20 years). Expires. | Lifelong, as long as premiums are paid. | Lifelong, for end-of-life costs. |
| Cost | Typically more affordable for younger seniors. Can become very expensive to renew. | Higher premiums than term, but remain level and don't increase. | Low, fixed premiums for a smaller death benefit. |
| Cash Value | No cash value accumulation. | Accumulates tax-deferred cash value. | May build a small amount of cash value. |
| Medical Exam | Often required for traditional policies. | Often required for higher coverage amounts. | Often simplified or guaranteed issue (no exam). |
| Best for Seniors | Covering a specific, temporary debt or income need. | Leaving a legacy or providing lifelong protection with a fixed budget. | Covering funeral and burial costs. |
What to Do Next
The best course of action depends entirely on your specific situation. There is no single correct answer for every senior. Start by reviewing your financial goals, evaluating your current assets, and determining if there are still financial obligations that require coverage. Consult with a qualified financial advisor to discuss your options and ensure your decision aligns with your long-term retirement plan.
For more information on financial planning in retirement, consider visiting a resource like NerdWallet's guide on life insurance in your 60s and 70s.(https://www.nerdwallet.com/article/insurance/life-insurance-needs-60s-70s)
Conclusion
Making the right choice about life insurance in retirement is a personal financial decision that requires careful consideration. While some seniors may find that their policies are no longer necessary, others will discover that continued coverage is essential for protecting their spouse, providing a legacy, or covering final expenses. By taking the time to assess your individual needs and understanding the alternatives available, you can feel confident in your decision and secure in your retirement.
