The question is simple enough, “Do I need to keep my life insurance policy when I retire?”
The answer, however, can be a bit more difficult to determine.
A 65-year-old woman has an average life expectancy of 20.8 years, so with over two decades of retirement ahead, does it make financial sense to maintain your coverage?1
Your kids have flown the nest, and retirement is nearly here. As you prepare to enter a new chapter, a few considerations could make the answer a little easier.
Keep, reduce, or cancel your life insurance policy? 5 questions to answer.
I’ve rounded up a few questions to ask yourself when deciding to keep, reduce or cancel your policy altogether. Your answers can help paint a better picture of how life insurance may play into your greater goals and wellbeing for retirement.
To start, what is the purpose of my life insurance policy?
The primary purpose of a life insurance policy is to replace lost income due to an individual’s passing. Protection like this is paramount for those who rely on a steady income, such as younger families with higher debt and fewer assets.
But as you near retirement and have accumulated more significant assets, there isn’t the same glaring need for your policy. If the fundamental goal of life insurance is to replace income, and you don’t have income you’d like to replace, why retain your policy?
It’s not uncommon for women to have more life insurance than they need heading into retirement, but everyone’s situation is different, so be sure to review your options with your advisor.
With that being said, do I have any dependents?
Let’s add on to that—do I have any dependents, and are they self-sufficient? Our children are our children forever, no matter their age, and many parents continue to support their kids well after they fly the nest.
A recent study by the Pew Research Center offers some insight into how often, and in what capacity, parents financially help their adult children.
- Among surveyed parents, 40% say they’ve helped their adult children (ages 18-29) under exceptional circumstances.
- 16% say they help cover the costs of recurring expenses.
- The most popular response indicated that 43% of parents offered financial support for particular circumstances and regular expenses.2
It’s important to recognize the type of financial support you’re providing your child and to ensure you protect your financial future.
- Are you covering necessary monthly expenses like rent, utilities, groceries, and other bills? How long do you anticipate this ongoing support to last?
- Are you offering financial support on occasion? Special circumstances could include a medical bill or down payment on a home, for example.
- Are you giving what you can afford, or are you scrimping to help your kids get by? Ensure you prioritize your financial needs, especially heading into retirement.
If you’re nearing retirement and continuing to help a child cover their ongoing expenses, you may consider maintaining your life insurance policy. But if your kids are on their own and financially independent, this type of financial protection may not be necessary (and pat yourself on the back).
No matter the level of dependence, you may find it beneficial to discuss your plans with your family before making changes to your policy. A life insurance policy can protect against more than just a loss of income; you may want to maintain a small policy to help cover funeral costs, for example.
Speaking of family, what about my estate plan?
Your legacy, the one you build every day and the one you leave behind, is an essential element of your retirement plan, and your life insurance coverage should be part of that consideration. Your coverage can help cover high costs like potential estate tax consequences, debts, business expenses, burial arrangements, and more. It may also serve as an inheritance for your children or other loved ones.
But to decide if it’s worth keeping, you’ll want to weigh the premiums you pay throughout your lifetime against the potential payouts your beneficiaries would receive.
- What type of policy do you have, term or permanent?
- How much are your monthly premiums?
- What is the projected death benefit?
An interesting point to consider is the current estate tax exemption rate, which sits at a historic high of $11.7 million per person.3 While the rate will sunset by 2025, it’s possible it could be lowered sooner.
Your life insurance payout will increase the size of your estate. If your estate exceeds the current tax exemption rate, anything above that amount will be subject to a 40% estate tax if the beneficiary is anyone other than a spouse.
This means that your life insurance policy could face significant estate tax consequences depending on your accumulated assets and possible policy changes. Because of this, you’ll want to take the time now to review your policy details and how they may impact your more significant wealth transfer goals.
What debt do I have?
Based on what I’ve discussed so far, you may be leaning towards reducing or eliminating your life insurance policy. But something that may make you reconsider? Debt, especially a significant amount.
There could be a million reasons why you’ve accrued debt at this stage in life. You may have bought a second home, paid for your child’s education, bought the grandkids a car, the list goes on and on.
If you’re paying off an ample amount of debt, maintaining a life insurance policy could make a lot of sense. Lost income aside, your policy could be used to help your loved ones pay off outstanding loans or liabilities.
Like everything else discussed here, this scenario isn’t black and white. You’ll want to consider this strategy in conjunction with your broader financial picture, as there may be other ways to address your unique situation better.
Finally, what sort of lifestyle do I envision for retirement?
Close your eyes and ask yourself, “If I didn’t have to put money towards an insurance premium, where would I spend it?”
When you’re focused on financially protecting your loved ones, it can be challenging to pull back and imagine such scenarios. But prioritizing your retirement is essential—you’ve worked so hard to get here, you deserve to enjoy your financial freedom.
Working with a professional who has your whole financial wellbeing in mind is critical. Why? Because it’s important to know whether or not the money you’re paying toward your life insurance premiums is the right move or if it may be better spent elsewhere.
If it makes sense to reduce or eliminate your coverage, this can create an exciting opportunity to reassess your retirement values, goals, and priorities. Freeing up those extra funds may afford you the ability to spend on the people or organizations you care about and create a more flexible cash flow.
Life insurance after 65? Let’s figure out the answer together.
Your financial life is like a fabric woven together over decades of planning, spending, and saving. That being said, pulling a loose thread here or adding a stitch there can create a greater impact than we realize.
Before making any significant decisions regarding life insurance in retirement, let’s get together and take a look at your big picture. At Wealthcare for Women, my goal is to help you strike a balance between caring for your family after your passing and crossing off your retirement bucket list.
Whenever you’re ready, schedule some time to talk.