Reassessing Life Insurance in Retirement

The central value of life insurance is to protect against the financial consequences of a premature death. A policy’s proceeds can help provide income for surviving loved ones, pay off a mortgage or fund the future college education of young children.

Retirement not only heralds the end of working for a paycheck, but it often means that many of the financial obligations of working Americans may no longer exist, prompting an important question: “Should I continue to maintain my life insurance coverage in retirement?”

Retain Coverage?  It Depends

Whether someone should keep his or her current life insurance coverage during retirement will depend upon his or her unique personal circumstance. But, given that life insurance may have been purchased under an entirely different set of family and financial circumstances than may exist in retirement, it is essential that retirees and near-retirees reevaluate their life insurance coverage.

There are strong reasons for reducing life insurance coverage in retirement.

• The need for survivor income or for funds to meet future financial obligations may have evaporated. Accumulated assets may be fully sufficient for retirement financial security.
• Premiums may be high and represent a meaningful amount of retirement expenses. This cash may be better used to enhance the sustainability of retirement savings.
• The surviving spouse, who may be eligible for survivor benefits and as the inheritor of the retirement assets, may not need the death benefit payment.

That said, there are good reasons to consider maintaining life insurance coverage into retirement, including:

• The cash value may be a conservative source of funds to meet unexpected expenses or serve as an alternative income source during down markets.
• Since gifts of property (car, house, etc.) may result in unequal financial transfer to heirs, life insurance can be used to equalize the value of transfers to the inheritors of the estate.
• Life insurance can serve as a retirement income supplement for the surviving spouse should he or she not qualify for survivor benefits.
• Considerable debt still exists in retirement.

The decision to continue, or not continue, life insurance coverage into retirement is not a binary one. Some individuals may find that the best use is to repurpose an existing life policy, using the accumulated cash value to fund a long-term care insurance policy via a tax-free 1035 exchange, or converting it to a life annuity, if the policy permits.

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