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Do I Need Life Insurance in Retirement?

As you get closer to retirement, it’s crucial to plan for every detail. While your primary concern will be whether you’ve saved enough, one element that can come into play is life insurance. should i have multiple savings accounts 3

Typically, most individuals believe that life insurance coverage is only necessary when they have dependents. However, it can be a valuable asset at any stage of life, including retirement. In this article, we’re going to outline the steps you should take to determine whether you need life insurance in retirement or not. 

Step One: What Are the Benefits of Life Insurance in Retirement?

Whether you have a policy already or are looking into purchasing one, you must understand its benefits. For the most part, buying coverage because it’s “nice to have” doesn’t make much sense when you are likely to have a fixed income. 

While everyone’s situation will be unique, here are some common reasons why having a life insurance policy in retirement could be a good idea. 

Financial Stability

Even if your children are grown and out of the house, your death could have a significant impact on their lives and the life of your spouse. One critical factor to consider when shopping for a policy is whether it can provide financial stability once you’re gone. 

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For example, perhaps you have a mortgage that will be paid off in 10 or 15 years. If you’re gone, will your spouse be able to cover the cost? 

Other points to consider can include: 

  • Medical Expenses - While Medicare can cover some costs, what happens if your spouse has to undergo surgery or long-term treatment? Your death benefit can provide financial relief. 
  • Retirement Income - If you’re worried about how long your retirement accounts will last, having life insurance can ensure that your spouse won’t have to find work during their golden years. 

Inheritance and Legacy Planning

In addition to making sure you have enough for retirement, your attention may turn to what you’re leaving behind as well. Estate planning is another crucial part of getting older, and you want to consider how life insurance will factor into that. 

As a general rule, insurance benefits are tax-free, but there is a small catch. If the payout pushes your total estate to the point where taxes will be incurred, your beneficiaries will have to pay them. In 2020, this number is $11.58 million per individual. 

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High Cost of Living

Although retirement is an excellent excuse to downsize and reduce your monthly expenses, your location can make a considerable difference. For example, if you choose to retire to San Diego, it will cost a lot more than moving to Bakersfield. 

So, when calculating whether or not you need life insurance, consider whether your spouse can continue to live in the same place once you’re gone. If not, a sizable death benefit might be necessary. Be sure to think about the standard of living that you and your spouse have grown accustomed to as well. 

We also recommend talking to your children about the potential of purchasing your home once you’re gone. If your kids are interested, then your death benefit could help them realize that goal. 

Final Expenses

The average funeral in America can cost between $7,000 and $12,000. If your children or spouse don’t have that kind of disposable income, a life insurance policy can help cover these expenses. Burial insurance may be the best choice, but it will depend on how much you want for your death benefit. 

One advantage of burial insurance is that the funds don’t have to be allocated to your funeral. So, if there is money left over, your beneficiaries can spend it however they like. 

One thing to consider when looking at final expenses is to discuss these details with your loved ones. In many cases, children or spouses want to spend far more than necessary due to a sense of guilt or obligation. By talking about your end-of-life planning, you can make sure that your loved ones know your wishes ahead of time. 

Step Two: What are the Costs of Life Insurance in Retirement? 

If you decide that life insurance is necessary, you have to be sure that you budget for it accordingly. Typically, there are two types of coverage: term insurance and permanent. 

To help you understand the costs you might have to pay during your golden years, we have created charts below. These prices are based on individuals in excellent health, so be sure to compare plans and rates before making a final decision. 

Term Life Insurance

If you want something clean and simple, then term life insurance is probably the best choice. These plans are the most straightforward, and they can be the most affordable. Best of all, depending on your situation, you can get substantial coverage if necessary. 

That being said, most insurance companies will put a cap on your death benefits based on your age. The older you are, the less coverage you can buy. So, if you’re hoping to get a policy with six or seven figures, you’ll need to discuss options with your insurance agent or financial advisor first. 

Sample Rates for Retirees

  • Age: 60
  • Coverage Amount: $250K.
  • Term: 10 years.
  • Monthly Cost: $60
  • Age: 60
  • Coverage Amount: $500K
  • Term: 10 years
  • Monthly Cost: $113
  • Age: 60
  • Coverage Amount: 250K
  • Term: 20 Years
  • -Monthly Cost: $115
  • Age: 60
  • Coverage Amount: $500K
  • Term: 20 Years
  • Monthly Cost: $211
  • Age: 70
  • Coverage Amount: $250K
  • Term: 10 Years
  • Monthly Cost: $172
  • Age: 70
  • Coverage Amount: $500K
  • Term: 10 years
  • Monthly Cost: $319
  • Age: 70
  • Coverage Amount: $250K
  • Term: 20 years
  • Monthly Cost: $407
  • Age: 70
  • Coverage Amount: $500K
  • Term: 20 years
  • Monthly Cost: $819

Whole or Permanent Life Insurance

With a term policy, your coverage only lasts until it expires. If you want coverage to continue for longer, permanent life insurance could be an alternative. Best of all, these policies can come with living benefits, which we’ll discuss later on. 

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Since whole life insurance continues forever, your rates are not locked in as soon as you buy it. Instead, each company will increase your premiums as you get older. Usually, these increases happen every couple of years, but they may occur annually. So, keep in mind that your monthly expenses will get higher over time. 

Sample Rates for Retirees

  • Age: 60
  • Coverage Amount: $250K
  • Monthly Cost: $864.78
  • Age: 60
  • Coverage Amount: $500K
  • Monthly Cost: $1,725.21
  • Age: 65
  • Coverage Amount: $250K
  • Monthly Cost: $1,122.74
  • Age: 65
  • Coverage Amount: $500K
  • Monthly Cost: $2,241.12
  • Age: 70
  • Coverage Amount: $250K
  • Monthly Cost: $1517.50
  • Age: 70
  • Coverage Amount: $500K
  • Monthly Cost: $3030.65

Step Three: Consider Living Benefits

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Although buying life insurance can provide peace of mind for your beneficiaries, what if you want to take advantage of your coverage while alive? Fortunately, you can add living benefits to some policies. Typically, you will need permanent life insurance to get these add-ons, so be sure to talk to your insurance agent or financial advisor before settling on a plan. 

Another point to consider is that these options are not available with every insurance company, so you’ll want to compare plans with as many carriers as possible to find the best one. 

Long-Term Care Insurance

If you have to move into an assisted-living facility, the costs can be high. Unfortunately, Medicare and most health insurance plans don’t cover these expenses, so you’ll have to rely on your retirement nest egg. 

One way to mitigate these costs is to purchase long-term care insurance. This coverage can assist with living expenses related to your care. Best of all, the funds can be utilized whether you’re in a facility or receiving at-home treatments. 

The downside to this kind of insurance, however, is that it can be prohibitively expensive. That being said, assisted-living costs will be much higher, so you’ll have to weigh the pros and cons before making a final decision. 

Retirement Annuities

One of the primary benefits of whole life insurance is that a portion of your premiums goes into a cash value (CV) fund. The longer you have coverage, the larger your account gets. So, if you’ve paid into the plan for years, you may have a substantial nest egg saved. 

There are multiple ways to use this money while you’re still alive. First, you can withdraw it as a loan. The advantage of this tactic is that you can earn money by paying back the loan. This is known as infinite banking, and it can help you build wealth over time. 

Another way to use the funds is to pay your monthly premiums with them. However, if you plan to do this, you need to monitor the account so that it won’t become insolvent. Insurance coverage is only valid as long as you pay premiums, so you don’t want to run out of money too soon.

The final method of tapping into your cash value is with annuities. These are payments from the insurance company, which can be another revenue stream during retirement. 

However, if you’re already close to retiring, you will have to wait several years. Also, depending on your age, you might not have enough time to build sufficient cash value to make it worthwhile. 

There is an alternative option, however. If you purchase limited pay life insurance, you can fund your CV in much less time. 

Rather than taking decades to build a sizable nest egg, you can put money away over 10 years. Limited pay plans are a form of permanent insurance as well, so you never have to worry about running out of coverage. The downside, however, is that there is a limit to how much you can put away. 

Disability Insurance

In some cases, you can get a disability rider added to your life insurance. With this policy, you can typically either receive a portion of your death benefit (i.e., one percent a month) or waive premiums. Usually, this rider will cost extra, so be sure to budget that into your retirement planning. 

This insurance only kicks in if you are permanently disabled and unable to work. So, you will want to read the fine print before adding it to your policy, particularly since you won’t be working during your golden years. 

Step Four: Can You Afford Life Insurance?

Wanting life insurance and paying for it are two separate things. Before signing off on a policy, you have to make sure that you can afford monthly payments for the foreseeable future. Here are some considerations to make when deliberating. 

What is Your Retirement Budget? 

Before retiring, you should have an accurate assessment of your monthly budget. This can include components like rent, utilities, food, transportation, travel, and health insurance. If your retirement income is already stretched thin, you will have to consider an affordable life insurance policy. 

Alternatively, you can either find ways to cut down on your expenses (i.e., downsizing) or find new revenue streams. For example, perhaps you continue working part-time during the first part of your retirement. Or, maybe you invest in a rental property to earn monthly income from renters. 

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How to Minimize Life Insurance Costs

If you’re worried that you cannot afford life insurance in retirement, here are some ways to lower your monthly payments. 

  • Reduce Your Death Benefit - Consider the reasons why you are buying life insurance and get a policy with the minimum coverage amount. While having extra is nice, it can increase your costs. 
  • Consider Guaranteed Universal Life Insurance - If you’re not going to utilize the cash value portion of whole life insurance, there’s no reason to get it. Instead, a GUL policy will last forever but won’t create a separate fund. Because of this system, GUL coverage is much more affordable without adding any risk. 

Contact NextGen Wealth Today

If you’re still on the fence regarding life insurance in retirement, having a financial planner on your side can help. At NextGen Wealth, we’ll make sure you’re making the right decision for yourself and your loved ones. Contact us today to find out more. 

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About the Author

Aurtho Clint Haynes, CFPThis article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.