You’ve likely had insurance for most of your adult lives. You may not have thought about it if it was part of your benefits package. It was probably something you knew about, but not much else. You might have bought a policy to cover your family in the event of an emergency.
You may be nearing retirement, or you might already be there. You are no longer eligible for employer-provided insurance and must decide whether you want to purchase a new policy or keep paying premiums on an old policy. Which is the best choice?
There is no single solution. We’ll help to consider all the variables that can impact your situation and determine what is best for you.
What Life Insurance Does Not Fit In
Most families use their household income to provide for their lifestyle and to pay for childcare. Both incomes are essential for maintaining the family’s standard of living if two people work. The same applies if one person is employed, but the other is responsible for household chores and childcare. The household could be in financial trouble if one member dies.
Types of life insurance
Life insurance is an effective tool for protecting against income loss and other potential losses. There are many types of life insurance, just like other insurance products. Term insurance provides coverage for a specified period, usually between 10 and 30 years. Permanent insurance is also known as cash-value insurance. It is a policy that can be used for all your lifelong needs. There are two types: whole life and universal life. These questions can help you decide whether or not to purchase life insurance in retirement.
Do You Still Earn Outside Income?
You may be able to determine your current coverage needs based on the function of life insurance. You don’t necessarily need life insurance if you are retired and have no income. However, if you anticipate owing estate taxes, then life insurance may be an option. Life insurance may be a good option to leave a tax-free gift to your beneficiaries or charity.
Your family will usually be able to inherit your income and receive payments from it when you pass away. Your retirement accounts will be passed to your named beneficiaries. However, inheriting an IRA could have tax consequences depending on who it is and what type it is. Social Security does not pay survivor benefits. However, your named beneficiaries will receive your retirement accounts.
Are you in debt?
Although it is ideal to be debt-free at retirement, this is not always possible. A 2018 report found that 46% of homeowners 65 years and older had a mortgage. 2 32% were still paying house bills in 2019. 3
In the future, student loan debt will be a major problem for a growing number of retired people. 4 Senior citizens will continue to have student loan debt.
Experts recommend that you continue to have life insurance coverage if your debt payments are still being made. If the debt payments represent a small portion of your net worth, it is best to be safe than sorry.
Are your children and spouse self-sufficient?
You don’t necessarily need life insurance if your spouse and children have left your home to provide for their families. If you have special needs children or children who live in your home, it is worth considering keeping or purchasing coverage. Life insurance can also be used to cover your spouse’s loss of a significant amount of their pension or any other monthly payment in the event you die.
This could be a way to help your estate.
Life insurance can be used strategically by people who have substantial assets, for example, to pay off business debt or fund any buy-sell agreements related to your estate. It can pay off your business debt, finance any buy-sell agreements that are related to your estate or business, and even fund your retirement plans.
It is not easy to use life insurance as part of an estate plan that is tax-efficient. An estate planning attorney is required. Estate tax considerations won’t apply if your estate isn’t worth millions. This is why you may not require life insurance. It’s best to consult a qualified expert to make sure.
Cash Value Life Insurance
Consider your options if you have a significant cash value in a permanent insurance policy, but still, pay premiums. Talk to your life insurance company to discuss how you can stop paying premiums and keep the policy. You could, for example, settle for a lower amount of life insurance that is paid up and has no premiums.
You can surrender your policy if you don’t have life insurance and want to cash the value. It can also have serious tax implications. It is taxable if you get cash surrender value less the policy basis (the amount you paid in premiums) Talk to your life insurance company to find out what the taxable amount is for you. Next, talk to a CPA about what you owe.
Keep in mind, permanent life insurance policies can have a surrender period of anywhere from a few years to twenty years. If you decide to surrender your policy, a penalty will be assessed.
The bottom line
Although it may seem counterproductive, you may not need life insurance anymore. There are good chances that you can get rid of your policy if you have no income to replace it, no debt, a small family, and no concerns about settling your estate. You may need to change your existing policy or make major changes in estate planning.
This question is perfect for a financial advisor or fee-only consultant in insurance. Asking your agent for advice is not enough. They might be paid commissions so they may want to keep you on the policy, even if it isn’t necessary, or have you swap it for one.