You can save a boat load of money by re-evaluating your life insurance needs once you retire.
If you do, you’ll probably find that you need a whole lot less insurance after you retire than you needed while you were working. In many cases, you’ll discover that you won’t need life insurance at all during retirement.
So Do I Need Life Insurance in Retirement?
The Purpose Of Life Insurance is the Key
Counter to what many life insurance agents tell you, life insurance isn’t an investment.
That’s one reason why term life is far better than whole life. It’s also one of the reasons I question the need for life insurance on a non-working spouse.
Insurance is a financial tool and nothing more.
This tool is unbelievably efficient at doing it’s job which is to protect the people who depend on you financially. It does that job by creating a pile of cash that can be invested if you die. Those investments can then create income and replace the income you can’t earn because you are busy being dead.
If you read between the lines you can see why you probably won’t need as much (or any) insurance once you retire.
First of all, once you call it a day at work, much of your income will be passive. (If you don’t have any passive retirement income you won’t be able to retire unless you swear off food and shelter for good. Don’t’ try this at home.)
You don’t have to do anything to earn passive income other than waddle down to the mailbox once a month, collect your check and deposit it. If that passive income is generated from investments, it will continue after you pass away.
Depending on your situation, pension income might also continue to flow to your survivors after you punch that big time clock in the sky. And Social Security will pay your surviving spouse as well – albeit the amount will likey be diminished.
And the good news doesn’t stop there.
Hopefully, once you retire fewer people will depend on you financially and you will have fewer debts. With any luck, the kids will be out of the house by the time you hit 65 and your mortgage will be paid off as well.
You can see that these three forces come together to decrease or eliminate your need for life insurance in retirement.
a. Passive Income
b. Fewer Dependents
c. Lower Expenses
Pulling it Together
Before you decide to cancel your life insurance, you have to do a little ciphering to figure out how much life insurance you need.
But let’s keep it super simple right now to illustrate.
Let’s assume that you need $2 million in life insurance now while you are working. That’s the amount that can be invested to replace your income of $100,000 according to your calculations.
But when you think about the future, you see that your needs are going to change.
You happily realize that your expenses will drop to $50,000 when you retire and that will be covered by passive income from investments and pensions. You are a happy camper.
But it’s not all ice cream and cake friend.
You realize that if you die, your surviving spouse will still need $50,000 a year to live on but her survivor benefits from the pensions and Social Security will drop by $10,000. The other $40,000 is covered by investment and pension income.
Therefore, the worst case is you’ll need enough life insurance to replace that $10,000 in lost income. That works out to be $200,000 in death benefit – or 10% of what you currently need. And if your spouse can cut $10,000 in expenses once you move on to greener pastures, you won’t need any life insurance at all.
You can see that you only need life insurance after you retire if your death at that point would put a meaningful dent in the income your family would need at the time.
The only other case where you need life insurance after you retire is if you are subject to estate tax or you absolutely positively want to leave a sum of money to someone even though they may not need it. These are topics for a different post.
Finally
I am a huge fan of having life insurance – but only for the right reasons.
The right reason is to protect your family.
Consider how much protection you need – and how that need changes over time – when deciding whether or not you need life insurance coverage after you retire.
This guest post was written by Neal Frankle. He’s a CFP ® and the owner of WealthPilgrim.com – one of my all time favorite personal finance blogs.
