Personal Finance

4 Reasons To Carry Life Insurance In Retirement

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When transitioning into retirement, many people have fewer financial obligations and less money devoted to insure both themselves and their families. Yet new retirees should pause before they go entirely without life insurance.

With grown kids who support themselves, you may be tempted to drop your life insurance. Your housing costs may have declined, perhaps because you’re downsizing. And other expenses in your life may climb, including those for health insurance and a more active travel schedule.

At the same time, you’re leaving the full-time workforce, and the benefits that come with it, including your work-sponsored life insurance. You may also be at the end of the term for the supplementary life insurance you bought to provide for your family if you were to pass away during your wage-earning years.

Many of these concerns won’t apply if you carry a permanent life insurance policy, the other major category of life insurance offered by life insurance companies. A term life insurance policy protects policyholders against this risk by covering them for a set number of years, typically between 10 and 30 years, but permanent—or whole life—insurance policies cover the insured until their death. While significantly more expensive than a term insurance policy, permanent life insurance can guarantee protections for a policyholder's family after death.

Here are four reasons some seniors may want to carry some type of life insurance policy into retirement.

You want to cover your funeral expenses

85% of people who carry a life insurance policy do so to cover their burial and funeral expenses, according to the 2017 Insurance Barometer Study by the LIMRA and Life Happens, a nonprofit.

Funeral expenses include the cost of embalming, purchasing a casket, the viewing ceremony, the burial plot and more, and could cost between $7,000 and $10,000. If your family can comfortably tolerate this loss, or if you have a special savings fund set up to cover this cost, you might not need life insurance coverage. However, for many families, a sudden $10,000 expense could cause significant financial hardship, and the last thing you'd want is your family taking on debt during a time of loss. If your loved ones would struggle to pay for your funeral expenses, an insurance policy may be worth carrying during your retirement years.

You're still paying off a mortgage

Many people have a goal of paying off their mortgage before or early into retirement. However, this goal is easier to set than you realize. If you've had to refinance your mortgage—or if you purchased your home late in life—you may still owe a significant amount of mortgage debt during retirement. That's not a problem if you've saved and budgeted for this debt. However, if you don't want your loved ones to have to worry about this expense after you pass, consider taking out a life insurance policy that covers the amount remaining on your mortgage.

You rely on a single life annuity from your pension

Life insurance can also cover you—or your surviving spouse—against lost pension income in retirement. Some people depend on a monthly pension annuity to provide a significant portion of their retirement income. When you qualify for a pension, you need to choose from a number of payout options that will affect the size of your monthly annuity and whether your spouse will continue to receive any payments after your death. For example, here are three pension payout plans you might choose from, with possible payment amounts included.

Payment plan Monthly payment Spouse's monthly payment after your death
100% Joint and Survivor $1,400 $1,400
50% Joint and Survivor $1,500 $750
Single Life $1,700 $0

In this example, if you chose to allocate 100% of your annuity both to you and your spouse, you'd receive a lower monthly payment, but your spouse would continue to receive this same amount after your death. If you chose to allocate only 50% to your spouse, you'd receive a larger amount up until your death, but your spouse would only receive half of that amount after you die. If you chose a single life annuity, which allocates 100% of the payment to you, the policyholder, then you'd receive the highest possible monthly amount. However, when you die—even if it's just one year into your retirement—the monthly payments would stop.

Some retirees choose to pair a single life pension plan with a life insurance policy, both to establish higher pension payments now, and to provide for their loved ones in the event of their death. Of course, by paying premiums on a life insurance policy, you're effectively lowering your monthly income. For this reason, it makes sense to set the maximum life insurance premium you'd pay as the difference between the amounts you'd receive from a single life annuity and a joint and survivor annuity. So, in our example, it might not make sense to pay more than $300 per month for a life insurance policy, since by paying more than $300 per month, your net income would be less than you'd receive under a 100% joint and survivor annuity.

You'll leave behind a large enough estate to incur estate taxes

Wealthy retirees should consider purchasing a life insurance policy to cover the tax bill on their estate.

Your estate consists of everything you own including cash, personal belongings, real estate and other businesses, and property you have an interest in. You have the right to pass your estate to whomever you wish upon your death. However, current IRS standards state that this transfer of wealth will be subject to taxation if the total value of your estate exceeds $5.6 million for an individual, or $11.2 million for a couple.

For example, if you personally possess an estate that’s worth $10 million, and you wish to leave that amount to your children, they will owe taxes to the IRS for the $4.4 million that exceeds the exclusion amount. If you're passing on illiquid assets, such as a sizable home, your heirs may be forced to liquidate these assets in order to come up with the cash necessary to pay these taxes. However, a life insurance policy that covers the amount necessary to pay your estate taxes could enable your loved ones to retain your estate without forced liquidation.

The article, 4 Reasons to Carry Life Insurance in Retirement, originally appeared on ValuePenguin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.