Do You Need Life Insurance in Retirement?

As you approach retirement, you might question whether keeping or purchasing life insurance makes sense.

Many assume that life insurance is no longer necessary once you live off retirement savings instead of a paycheck. However, even with solid retirement savings, the best term life insurance companies can play a vital role in your financial strategy.

In this guide, we’ll break down the details of how life insurance may (or may not) fit into your retirement plan and the types of life insurance that are a good fit for retirees.

Key Insights on Life Insurance in Retirement

It may be wise to have a life insurance policy in retirement to protect your loved ones.
The type of policy and amount of coverage you choose will depend on your personal financial situation.
Some policies offer lifelong coverage and can help pay for burial and funeral expenses.
If you have enough assets and investments to cover your (and your dependent’s) expenses for the rest of your life, you might not need a life insurance policy in retirement.

Factors to Consider When Deciding if You Need Life Insurance in Retirement

Current financial situation: First, you’ll want to review your overall financial picture. The details of your assets, savings, pensions, Social Security, investments, and other income sources will help you determine whether you need asset protection through a life insurance policy.
Debts and liabilities: You’ll also want to review your outstanding debts and financial obligations. Your mortgage balance, credit card debts, personal loans, and other debts may make a life insurance policy attractive.
Dependents and beneficiaries: Life insurance isn’t for you; it’s for your family. Even in retirement, you might want to leave behind more than just your assets. A life insurance policy can provide an additional nest egg for your spouse and children (or any other dependents).
Health care and final expenses: Some life insurance policies provide benefits beyond a cash payout, helping with healthcare costs, including long-term care and funeral expenses. Many cash-value life insurance policies feature long-term care riders and cover burial and funeral costs. With average funeral expenses reaching up to $12,000, final expense life insurance can provide valuable peace of mind.

According to Michael R. Acosta, CFP® and owner of Genesis Wealth Planning, LLC, life insurance can be a powerful component in a retiree's 'de-accumulation' strategy when it's appropriately chosen and funded. The tax-free death benefit can help restore assets used during retirement, providing enhanced financial security and flexibility.

Acosta adds that if the insured passes away before their spouse or significant other, the death benefit can help restore the surviving spouse's financial position, support their de-accumulation approach, or create a legacy for children or charitable causes.

Types of Life Insurance for Retirees

If you are considering getting a life insurance policy in retirement, here are a few types of life insurance policies that may be a good fit:

Term life insurance: A term policy provides coverage until a specific age (usually up to 80) and typically offers higher payouts at lower costs than other insurance types. It's ideal for covering specific debts like a mortgage, with coverage that can end once these debts are paid off.
Whole life insurance: Whole life insurance provides lifelong coverage and builds cash value over time, making it effective for leaving a financial legacy. While premiums are higher than term policies, the coverage lasts your entire lifetime.
Universal life insurance: Universal life insurance features flexible premiums and death benefits, plus the ability to invest the policy's cash value. The cash value grows tax-free and can provide retirement income. Though premiums tend to be higher, shopping around can help you find competitive rates.
Burial insurance: If you want a policy to cover end-of-life expenses such as your funeral and burial costs, some policies offer up to $25,000. Burial life insurance has lower premiums than other types of whole life insurance but with much lower coverage amounts.
Cash value life insurance: Cash value life insurance (including whole and universal life) offers retirement income and a death benefit. They can help cover estate taxes and other expenses while providing tax-advantaged income during retirement.

Pros and Cons of Life Insurance in Retirement

Pros

Financial security for loved ones: Provides tax-free financial protection for your spouse, children, or other beneficiaries after your passing.
Coverage for final expenses: Helps your family manage funeral costs, medical bills, and any remaining debts without depleting their savings.
Estate planning benefits: Can be used strategically for wealth transfer, charitable giving, and minimizing estate tax burden.
Tax-efficient wealth transfer: Offers a tax-advantaged way to pass wealth to your beneficiaries, particularly with larger estates.

Cons

Cost considerations: Premium costs typically increase significantly with age, potentially straining retirement budgets.
Policy expiration risk: Term policies may expire during your lifetime, meaning you could pay premiums without receiving benefits.
Alternative options: Other financial tools, such as investments or trusts, might provide better returns or more flexible benefits for your specific situation.

When Life Insurance May Not Be Necessary in Retirement

Not everyone needs life insurance during retirement. Here's when you might consider skipping or dropping coverage:

Strong financial foundation: You have substantial savings and assets that can comfortably cover your retirement needs, outstanding debts, and end-of-life expenses.
No financial dependents: No one relies on your income or assets for their financial well-being, and you don't need to provide for a surviving spouse or dependent children.
Alternative financial strategies: You've established other investment vehicles, such as annuities or diverse investment portfolios, that adequately meet your wealth transfer and estate planning goals.
Cost versus benefit concerns: The premium costs are too high compared to the coverage amount, or the payments would significantly strain your retirement budget.
Minimal financial obligations: You're debt-free and have minimal financial commitments beyond basic living expenses, reducing the need for additional financial protection.

How to Determine the Right Amount of Life Insurance in Retirement

To calculate your ideal coverage amount in retirement, consider these key financial factors:

Current income and expenses: Evaluate whether your retirement income sources (Social Security, pensions, investments) adequately cover both your needs and those of your dependents.
Outstanding debts: Calculate your total liabilities, including mortgage balance, personal loans, credit cards, and any other financial obligations that need to be settled.
Continued employment: If you work part-time or consult during retirement, consider how much of this income your family would need to replace.
Legacy planning: Determine if you want to leave tax-free funds to beneficiaries beyond your existing assets and how much you'd like to provide.
End-of-life expenses: Factor in costs for funeral services, burial arrangements, and potential medical expenses, which can often exceed expectations.

Consider working with a financial advisor or using a life insurance calculator to analyze these factors and determine the appropriate coverage amount for your situation.

FAQs

Should you keep life insurance after you retire?

It depends on your financial situation. Life insurance can be valuable for covering debts, end-of-life expenses, and providing a tax-free inheritance to beneficiaries. However, some policies have high premiums and restrictions that may not make financial sense for your retirement.

Do I get my money back if I outlive my life insurance?

With standard-term life insurance, you don't receive a refund if you outlive the policy. The only way to recover premiums is through a "Return of Premium" rider, which must be added when purchasing the policy.

Do you keep life insurance after retirement?

You can maintain any existing personal life insurance policies if you continue paying the premiums. However, employer-provided life insurance typically ends when you leave your job.

Is term or whole life insurance better for retirees?

Whole life insurance offers lifelong coverage and can help with end-of-life expenses, but it comes with higher premiums. Term life insurance is generally more affordable but temporary. The better choice depends on your specific financial goals and budget.

At what age is life insurance no longer needed?

There's no specific age when life insurance becomes unnecessary. The need for coverage ends when your investments and income sources can fully cover all financial obligations for the remainder of your life and meet your legacy goals.

Bottom Line

Life insurance needs don't necessarily end with your career. Your needs during retirement depend on several factors: your financial obligations, dependents, and desire to leave a legacy.

Whether you choose term, whole life, or another policy type, it should align with your specific circumstances and goals. Consider senior life insurance provider options carefully and consult with a licensed financial advisor who can help evaluate your unique situation.