Do You Really Need Life Insurance in Retirement?
In retirement, you need a plan that will keep you healthy and happy for many years, but what happens when those years run out? Well, you need a plan for that too. Life insurance in retirement is one solution.
We all will end up in different financial places in retirement, and our cash flow and savings will dictate how our “final expenses” play out after we pass. Not everyone needs life insurance in retirement, but even if you don’t “need” it, you still may want it.
How Much Life Insurance Do I Need in Retirement? Plus, What Kind?
Let’s break down some of the reasons for having life insurance in retirement in both the need and want categories. Then, let’s look at the life insurance recommendations for each of these unique needs on what type of insurance fits best and how much life insurance you will need.
Reason One: No Savings
You may need life insurance if your saving plan didn’t quite pan out like you thought it would. According to a study done by Northwestern Mutual, 1 in 3 Americans have less than $5,000 saved for retirement. The average funeral costs between $7,000 and $9,000, and many people have large medical bills from their last days, so you can see how that math does not add up.
You might have Social Security coming in monthly or even a pension. However, you typically need that money for retirement living expenses. Unless you think you can save a little of that money each month in retirement, life insurance is a good idea. (Be honest with yourself. If you could not save it before retirement, you probably will not save it now.)
Life Insurance Recommendations for No Savings
Your options will depend on your cash flow situation.
- First, you need to decide how much insurance you need. Making sure you provide for at least end of life funeral costs.
- Second, you will need to see what you can afford to pay each a month in premium.
Term life and traditional whole life insurance is usually too expensive when you are older, and your social security death payment is only $255.
We recommend Final Expense Insurance. Also called, Funeral Insurance or Burial Insurance, Final Expense will give you a smaller face value ($10,000 to $20,000 is very common) but it is priced accordingly. This amount will help your loved ones cover your end of life costs.
If you are close to or already in your retirement years, I recommend getting this insurance sooner rather than later, as the premiums will go up every year you get older.
Life Insurance for your final expenses has a bonus when it comes to cash flow – it is paid to the beneficiary directly and is not subject to federal income tax which can save hundreds/thousands. Moreover, because it does not have to go through probate delays, your family gets the money faster.
Finally, here is one last benefit: You can assign funds from the life insurance to be paid directly to your funeral home. This little convenience can be a big deal to your loved ones.
Reason 2. Market Volatility Concerns
Another type of retiree may want life insurance because they are concerned about their savings being affected by market losses. Maybe you are like “most Americans” who have an average of $84,821 saved for retirement. However, $85k well below what experts consider enough for living expenses. Think of what one bad market year could do to your nest egg.
Even if you had a couple million in retirement, there are reasons for life insurance in relation to market losses. It just depends on how much you are intending to leave behind and for what reasons.
For example, one spouse dies right after a large market crash (hopefully unrelated). The crash leaves the other spouse with half their portfolio assets and the same amount of living costs. The surviving spouse can use the life insurance money to fill in the holes from the lost income and catch up in the market.
You could use this money to pay off a mortgage. Similarly, you could use it to handle any issues with the estate. In addition, it is always good to know that your loved ones will have cash to bury you, no matter what the market conditions.
Life Insurance Recommendations
- IUL – For those that have cash to pay premiums and market assets to protect, I recommend you talk to a licensed agent about an IUL – Indexed Universal Life Insurance. These policies offer flexibility for your particular phase in life. However, they are complex, so please talk to a professional about your options.
- Final Expense – For those that are mostly concerned about final expense costs (i.e. funeral, medical bills, credit card/loan balances, etc.), a small final expense policy might be your best bet.
3. Long-Term Care Considerations
As an alternative to Long Term Care Insurance, some retirees consider Life Insurance Policies that have LTC riders or a Chronic Illness Rider. For example, an insurance carrier might offer a product (like an IUL policy) with an option to purchase up-front a rider that will cover long term care events. You can pay qualified long-term care expenses with the death benefit, naturally, before death. Then, when you pass, the insurance company pays what is left to your beneficiaries.
Can Life Insurance be Used for Retirement?
On the other hand, there is life insurance for retirement savings. This is a totally different ballgame than buying life insurance for death benefit needs. Many people will buy a whole life or traditional life insurance policy that has a cash value with the purpose of using this cash value as a source of income in retirement. Let’s look at how to do this.
How to Use Life Insurance for Retirement
To start, using life insurance retirement means planning ahead – usually before you retire. Whole life insurance policies, such as traditional and Indexed Universal Life policies have a cash value component built into them.
In addition, you can structure them to build more or extra cash in them by lowering their death benefit and contributing more premium. (There are rules to how to structure these policies to be tax preferred and legal, so working with an independent insurance agent or financial advisor is the best way to build a policy for you.)
The purpose of structuring a whole life policy in this way (with more cash value building up) is to be able to access this cash in retirement. Policy owners can take out “loans” against their policy’s cash to use for retirement funds.
Often times, this money is removed (all or partially) from the volatility of the stock market. As a result, this cash provides a “bucket” of money that could be accessed during down times in the market. Alternatively, you could use it for one time purchases in retirement, (for example: cars, vacations, down payments, etc.)
So, What’s the Best Insurance Policy for Retirement?
Of course, this answer depends on your personal needs and wants. However, I would recommend some form of life insurance to all retirees.
- If you can afford to be responsible for your funeral and burial expenses, do it. Your family will appreciate it.
- If you can afford to make sure your spouse can continue to enjoy retirement when you are gone, hop to it.
- If you are looking for an alternative to Long Term Care Insurance, call an agent and learn your options. Medical expenses are not getting cheaper. In addition, Medicare does not cover these.
My Personal Experience
I’ll leave you with my own family’s relevant story. Last year, when my father-in-law unexpectedly passed away, his Final Expense policy saved everyone time and from stress. This left my mother-in-law well taken care of financially, but a lot of her assets were not in cash at the moment.
It was a great relief for all of us not to have to jump through a bunch of hoops to get the bills all taken care of. The policy paid money directly to the funeral home and then sent my mother-in-law the rest in a check. All of that without a tax event. It made me grateful to have a family that planned for each other and made the last year a little less stressful for all.
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