When Retirees Need Life Insurance

Aaron Crowe | Life Insurance | 13 Jan, 2015 | No Comments

Not having life insurance in retirement seems like a no-brainer. If your children are no longer living with you, your home is paid off and your spouse isn’t dependent on your income because you have enough money saved in a retirement fund, then having a life insurance policy can seem like an expense you don’t need.

In some cases it can be worthwhile for retirees to still have life insurance. Here are a few:

Supplement retirement: If you didn’t save enough for retirement when you were young, a whole life insurance policy can be used to pull cash value out of to supplement retirement. But just as retirement needs are best dealt with earlier in life, so are life insurance needs, with policies being a lot cheaper at a young age.

“While this may be a very valid use of life insurance, and a reason to have a policy in force through retirement, the policy must be obtained much earlier in life to be cost effective,” says Rob Drury, executive director of the Association of Christian Financial Advisors.

Someone still depends on you: Life insurance is primarily used to provide income to dependents after the policyholder dies. This is mostly needed during child-raising years, with savings and investments filling the gap in later years. But a spouse, special needs child or family member who can’t fend for themselves may still rely upon your income when you’re retired and are no longer raising children, Drury says.

“In reality, one may have dependents much later, or even for the remainder of one’s life,” he says. “If a spouse relies on one’s pension or Social Security income that will terminate or be dramatically reduced upon one’s death, this is a dependent income need.”

Some pension programs offer options to purchase continued payments to a surviving spouse or other dependents, Drury says. But life insurance is usually a more cost effective option for providing such income.

Dependents may also have major debts to pay off after you die, including mortgages, cars and student loans. Life insurance could help them pay those debts.

Retirees can also maximize their pension with a life insurance policy, says Steven Kobrin, who owns a life insurance brokerage.

“When a retiree is ready to draw down money from his retirement plan, he is given two choices: take the maximum monthly benefit for his life only, or take a lower amount and extended it over both his life and his wife’s as well,” Kobrin says.

“The problem if he takes the first option is that he has sufficient retirement income, but that stops when he passes away,” he says. “Were he to take out life insurance, that benefit would kick in when the pension is lost. This way he and his wife could have the highest monthly benefit while he’s alive, and she would still be taken care of when she loses him.”

Estate planning: Since term life insurance isn’t guaranteed to be in force at the time of the insured’s death, permanent life insurance can best help here, Drury says. If you have a large estate, a life insurance policy can help pay estate taxes and can be used to pay more of an inheritance to your children.

For example, if a family owns a cattle farm and they want to pass it to their oldest son, who also manages the farm, then a life insurance policy can help provide equal benefits to their other children if the farm is the majority of their estate, says Daniel Wrenne, a certified financial planner.

You still have debt: You may have a mortgage or other large debt in retirement, which you may not want to leave to your family.

“Not wanting to leave their house to their children with a mortgage, they may take out a policy to cover the balance of the mortgage,” says Christopher Huntley, co-founder of JRC Insurance Group.

Another possible debt to think about is paying for a funeral. A funeral can cost $10,000 or more, and a life insurance policy can pay for it.

Same-sex marriage issues: If your same-sex spouse collects a much larger Social Security benefit than you do and you live in a state where your marriage is not legally recognized, you may not be eligible for a survivor’s benefit and you may not have enough assets to cover your retirement expenses without it, says Timothy LaPean, a certified financial planner.

The best advice when planning for life insurance needs in retirement is to plan ahead properly early in life.

“I’m a big believer that life insurance should only protect against risks as opposed to being a retirement vehicle,” says Michael Solari, a certified financial planner. “If retirees have saved enough then there is little if any need to protect against a loss.

Aaron Crowe is a freelance journalist who covers the insurance industry and personal finance for various websites, including his website CashSmarter.com.

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