In retirement there is so much you say goodbye to – a boss, work clothes, a commute. But should you get rid of the life insurance policy you've had forever?
That's a tricky question because much depends on your unique situation. However, there are some guidelines to help you make your decision.
When it's okay to let your policy go
In most situations, David Walters, a certified financial planner with Palisades Hudson Financial Group says he primarily views life insurance as an income replacement tool in order to provide support when one of the primary earners of the household dies prematurely. “In many cases, this need goes away in retirement, although this might not be the case if there is a pension that would cease at the primary income earners death.”
If the children are out of the house and supporting themselves and you've saved enough assets to comfortably provide for both spouses throughout retirement, a life insurance policy may no longer be necessary, he says. “The money saved from not making premium payments may be put to better use elsewhere,” says Walters.
There's no reason retain a policy if it was purchased for a specific need that no longer exists, says John Male, a certified financial planner with The Gassman Financial Group. For example, if you purchased a policy to cover a mortgage and it has been paid off.
Then too, if the insured survives a beneficiary, and there are no other beneficiaries and the policy has no cash value, the combined circumstances may mitigate the need for the policy, says retirement planner David Alemian.
However, “The decision to get rid of a policy should not be made lightly and careful consideration should be given before canceling a life insurance policy,” he says.
Keep your policy if....
When does it make sense to hang on to that policy? Someone in poor health would likely want to maintain any life insurance policies they have in place. Other situations where you might want to have life insurance without an income replacement need is if there is a specific need for liquidity at one's death, such an anticipated estate tax liabilities. Also, if a policy has built up enough cash value so that it can be maintained with relatively small premium payments, you would likely want to keep the policy in force, says Walters.
There are many reasons to keep a life insurance policy in retirement. “Let's suppose a covered/insured person has no financial reason to leave any money to anyone on the planet because all relatives, family and friends are no longer around. This person can simply contact the insurance company and request a reduced paid-up policy where he or she no longer needs to make premiums and then change the beneficiary to a charity,” explains Larry Rosenthal, president of Rosenthal Wealth Management Group.
Be sure you really don't need your policy any more. “Insurance can fund expenses that may increase after a death. Simple things like mowing the lawn or household chores that were previously done by the decedent must now be paid for,” points out Herbert Schechter, CPA, managing director of Minneapolis Portfolio Management Group.
Insurance can also provide an added level of security for retirement. “What happens if pensions or Social Security payments are reduced? What happens if the value of investments decline? Many Madoff victims no wish they had their insurance policies,” says Schechter.
Things change. You may feel secure today, but things can change during retirement years. A person retiring at 65 may have 30 years or longer to live. Costs of living, new health care costs and other changes may cause the insurance to be the funds of last resort for loved ones, says Schechter.
Some policies can be changed or converted to provide additional benefits to pay for nursing home or other retirement need.
What if you can't afford your policy?
Sometimes though, budgets can be tight in retirement. “Certain types of polices may become prohibitively expensive,” says Male.
What if you can no longer afford your premiums but you want to keep your policy? The good news is, you have options. You can ask family member beneficiaries to help pay the premiums. “It may turn out to be an excellent investment as a few thousand dollars in premium payments may keep a policy in force that pays hundreds of thousands of dollars in death benefits to the contributing beneficiary,” says Scott Page, CEO and founder of The Lifeline Program, a life settlement company. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. The policyholder or family receives a lump sum payment which can be used for any purpose, from paying-off bills to funding long-term care. This process may become more mainstream as states like Texas recently changed its Medicaid laws, requiring individuals with life insurance to explore life settlement options before becoming eligible for state-sponsored medical care.
Another alternative is to see if the policy premium can be lowered and made affordable by lowering the death benefit, says Alemian.
Deciding to let your life insurance go is a big decision. As with all tough calls, you want to get input from your financial advisor.
Edit 10/22/13: Expanded third to last paragraph.