Life Insurance – Do Retirees Still Need It?

Often retirees own life insurance that they bought many years ago when their needs were different. The purpose of most life insurance policies is to make sure your family will be okay if you are no longer around to earn a paycheck. So, now that you have burned your business ties and thrown your briefcase off a cliff, should you also dump your life insurance policy?

The answer is…maybe.

Here are 3 Questions to help you think through this decision:

1)  Will your surviving spouse or family members “need” the money?

The survivor will probably lose some income upon the death of the first spouse.  He or she keeps the larger of a couple’s two Social Security benefits and loses the smaller one. Will he or she also lose all or part of your pension (assuming you have one) or lose any other income? I generally assume that a surviving spouse will spend 80% of the amount the couple spent. The surviving spouse may need the life insurance proceeds if his or her income would drop by more than 20% and there is not a large enough investment portfolio to compensate.

2)  Does it make sense to keep the policy anyway based on the policy cost vs. potential benefits?

Sometimes a little cost benefit analysis shows that it makes sense to keep the policy regardless of whether your dependents “need” the money. Here are two examples:

a)  Term Life Insurance provides the lowest cost coverage, but does not build cash value. The insurance company keeps the price level throughout the term, which means that you are overpaying (based on your probability of dying) in the early years, and dramatically underpaying toward the end of the term. A healthy 40-year-old could buy a $500,000 policy with a 25-year term for $650 per year. However, at age 66, $650 would only buy $67,000 of insurance. Therefore, I would argue that the cost is immaterial compared to the potential payoff (and probability of collecting) in the final few years of the original 25-year term.

b)  Permanent Insurance is more expensive than term, but it builds up cash value, which gives the policy owner options. One such option is to eliminate premiums by reducing the death benefit. This may be more attractive than walking away with the cash value, which could have tax consequences. The other possibility is that your policy could become self-funding (i.e., paid-up) so that you do not need to continue to make payments. This may require you to change the dividend option, so talk to your insurance agent.

3) Is there a better policy for your current stage of life?

It may make sense to exchange your current life insurance policy for one that offers more appropriate coverage, costs, or benefits. One of the most sought-after features among retirees is long-term care riders. These riders allow the insured to use the policy’s death benefit, while he or she is still alive, to pay for LTC costs. The death benefit will be paid out income tax-free either way, for LTC or upon death of the insured.

Other Considerations for keeping a life insurance policy include:

  • To leave a legacy to kids or charities
  • To equal up an estate between a current spouse and children from a prior marriage
  • To pay estate taxes for high and ultra-high net worth retirees (Note: current estate tax exemption is $11.7 million per person in 2021, $23.4 million for a couple.  However, that is likely to be reduced.  Current law has it returning to $5.49 million, adjusted for inflation, so around $6 million, in 2026)

The bottom line is most retirees want to minimize expenses so they have more to spend on cruises and mahjong. However, life insurance can be tricky, so make this decision carefully. Call us if you need help.