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Do You Need Life Insurance in Retirement?

Do You Need Life Insurance in Retirement?

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.

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paoli2   |     |   Comment #1
Aren't the Cash Values of a policy taxable if you cash them in?  If they are, that might be a good reason for some to hold on to them.  For a senior, adding the cash value to RMD and any interest income could really be costly for them for their social security taxes as it would make their taxable income a lot higher for that year.
Ally   |     |   Comment #2
My husband and I put some of the cash from the insurance policy into some of the investments that was offered with the policy quite a few years ago and when he passed the investments were worth triple the insurance policy. We still were given the amount of the life insurance plus the cash that was left in with the policy and the cash with the life insurance policy has been making the payments for the policy for many years. The investments were  triple the amount of the policy when he passed and I disclaimed it and gave it to the children who were the contingent beneficiaries and they had the taxes taken out on it before they received the check. There was no tax due on the life insurance policy and the cash that had accumulated with the life insurance. My husband and I have been paying the taxes on the dividends from cash from the policy throughout the years. When we were married there was no such thing as a term insurance. I understand that this is not the best investment to make by what the radio talking heads say but it cost us very little in premiums in the first few years or so and it paid for itself after that and at the time of his death we had nearly 5 times what the policy was taken out for.  
paoli2   |     |   Comment #3
#2  There does not seem to be any tax due with the insurance policy or dividends which accumulate unless you withdraw them.  Your situation reminds me of a policy a dear friend of ours talked us into buying upteen years ago when he was an insurance agent.  We only bought it so he could get the commission and help him out but that policy has turned out to be the best thing we ever bought!  We have never taken any of the accumulations from it or cash value over the years and now we use the dividends to pay the premium on it.  Even tho we do that, it still seems to accumulate more cash value each year.  I was thinking that maybe that could be a way for this generation to accumulate some money for their futures since interest rates are so low now.  I had never thought of insurance as an investment vehicle but if you get with the right company and right policy like you and I seemed to have done, it certainly can be.  Your money is basically protected much better than the stock market because they pay you if you die and if you need the cash value, it is there for you. 

We thought we were doing our friend a favor and it turned out he really did us one by selling us that policy so many years ago.  He is no longer in insurance now.  He has a career in opera in Europe.
Ally   |     |   Comment #4
Insurance is no investment. The interest paid on the cash within the policy was so little and that is why we put most of the money in the investments side of the policy and transferred more at a later date still making sure that the cash part had enough to pay the policy premiums. We did pay tax on the dividends but it was so little. Made less tax for the boys when I disclaimed it. I pay tax on the dividends of the life insurance policy that my parents bought for me when I was born. We never paid tax for my the policy my in-laws purchased for my husband when he was born. Must be a different kind of life insurance policy. If I have time this week I will call and have it explained to me. 
paoli2   |     |   Comment #5
#4  The way I understand it, one doesn't pay taxes on insurance you inherit as a beneficiary.  I was referring to cashing the policy in early and taking the cash values out.  That is supposed to be taxable.  We don't get Dividends on our Permanent Life Policy for DP, it's called Paid Up Additional Cash Coverage. What they usually pay us is about 4 - 5% of the basic insurance amount.  It pays up the yearly premium and the rest goes towards our Cash Value.  This is why I remarked it was like an investment because that policy makes us more Cash Value than I could ever get in a bank.  It is definitely not a Term Policy.  I had read up on both types before we got this one and decided I wanted no part of the Term Policy even tho they are much cheaper.   However, I do feel that those on limited income should have insurance on the bread winner and if Term is all they can afford that is better than nothing.  Your policy sounds a lot like the one we have but ours has nothing to do with "investments" from anything I have read on it.  The insurance company may be investing our premiums to make the extra money for us but they don't share this info with us on the regular yearly statements.
bbug   |     |   Comment #6
I cancelled my term policy because of escalating costs, reduced coverage and termination at age 80 in addition to it not being a necessity. I am still waiting for it to be cost effective. By next October, the difference between what the coverage would have been and the premiums saved will be a small amount.

But, after cancellation of mine and my wife's policies, we bought a house for our daughter and apllied for term insurance to cover the mortgage. I was denied because of health issues, but my wife was accepted. It's strange how life works. She passed away after less than a year.