If you're about to enter retirement or are already there, you may wonder if life insurance still makes sense. This question is more pressing if you lost employer-provided life insurance and need to decide whether to buy a new life insurance policy for yourself. You could need life insurance in retirement to cover final expenses, pay off your final debts and estate taxes, and leave an inheritance. If you've already got these goals covered though, then you likely no longer need life insurance.
Not surprisingly, there's no one-size-fits-all answer. But we'll help you consider the different variables that impact your situation to determine what's best for you.
Key Takeaways
- Life insurance pays out a death benefit to your heirs when you pass away.
- Retirees must balance life insurance benefits against the ongoing costs, especially if they lose their job-based coverage.
- If you retire with debt or still earn some income for your family, keeping life insurance in retirement is a good idea.
- Life insurance in retirement can also make sense to leave an inheritance and pay estate taxes.
- You may not need life insurance in retirement if you're debt-free, have prepaid your final expenses, and don't want to leave a larger inheritance.
- If you own cash-value life insurance, you'll want to consider any tax consequences of canceling the policy.
How Life Insurance Fits In
Prior to retirement, most families use most or all of their household income to support their lifestyle, as well as provide such services for the household as childcare. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If one person works, the same holds true, while the other is usually responsible for childcare and household duties. If either person were to pass away, the household could find itself in a financial emergency at one of the worst possible times.
After you retire and your kids grow up, you may no longer need life insurance for these goals, but there are still other situations where it makes sense.
Non-wage earners often provide essential household services, such as childcare, that are expensive to replace.
Types of Life Insurance
Life insurance is a commonly used tool to protect against potential income and other losses. But like any insurance product, there are multiple types of life insurance. Some common ones to use in retirement include:
- Term life insurance: Term life insurance is temporary life insurance that offers coverage for a set period of time — normally 10 to 30 years. If you outlive the term or stop paying premiums, your coverage ends.
- Whole life insurance: As a type of permanent life insurance, these policies do not have an expiration date so long as you keep paying the premiums. Whole life can be useful for lifelong needs and is often used in estate planning. Whole life insurance can also include cash value, which is money you could access while alive.
- Universal life insurance: Another type of permanent life insurance, universal life insurance enables you to adjust the premium payments up and down each year. By contrast, most whole life policies charge the same premium the entire time.
- Burial insurance: Burial insurance, also known as final expense or funeral insurance, is a small whole life insurance policy designed to cover your funeral costs. These policies typically only offer coverage between $5,000 to $35,000. Some burial life insurance policies do not require a medical exam.
Here are some questions that may help you decide whether you need life insurance in retirement.
Tip
Which insurance companies are the best? Check out our rankings of the top term, whole life, and no-exam insurers.
Deciding If You Need Life Insurance in Retirement
When deciding whether you should maintain a life insurance policy in retirement, there are a few questions you should ask yourself. Consider these factors when making your decision.
Do You Still Earn Outside Income?
Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. If you retire and no longer work to make ends meet, you probably don’t need life insurance in retirement. One exception is if you expect to owe estate taxes, in which case, life insurance can be a good solution to cover the bill. Otherwise, you may want life insurance to bequest a tax-free sum to your beneficiaries or charity.
When you die, your family can usually inherit and receive payouts from your existing sources of income. Your named beneficiaries will receive your retirement accounts. However, inheriting an IRA can create tax consequences for family members, depending on who inherits it and the type of retirement account it is. And while Social Security pays a survivor benefit, that survivor benefit varies based on your unique situation and it won't be as much as Social Security paid while you were alive. Make sure you know what benefits your family stands to inherit, any tax consequences, and their income needs before making a decision on whether you need life insurance in retirement.
How Will You Pay for Your Final Expenses?
The average funeral costs between $7,000 and $12,000. Your family could also owe for your final medical bills as well as legal costs to process your will and estate. Do you want to cover these costs for your family? You could do so using a small life insurance policy in retirement. On the other hand, if you have enough in savings and prepay your funeral while alive, then you may not need life insurance in retirement.
Are You in Debt?
Ideally, you will arrive at retirement age debt-free, but that’s not always the case. In fact, more than 10 million Americans over the age of 65 had a mortgage in 2022. A 2023 report stated that 41% of homeowners ages 65 to 79 still carried a mortgage, as did 31% of people ages 80 and older.
Student loan debt is forecast to be a problem for an increasing number of retirees in the future, too. Some 3.5 million people over the age of 60 had more than $135 billion of student loans in 2023. Over the past 20 years, student loan debt held by senior citizens has increased 19-fold — either the remnants of their own loans or because of co-signing loans for children or grandchildren.
Continuing life insurance coverage in retirement might be advised if you’re still paying off debt. Take a “better safe than sorry” approach unless those debt payments are such a small part of your net worth that there would be no risk of financial difficulty.
What Does Your Family Situation Look Like?
Whether or not you need life insurance in retirement also depends on whether you have a spouse or children.
If you have children who are out of the house and providing for their own families, for example, you likely do not need life insurance. On the other hand, if you have children with special needs or kids who are still living in your home, you should consider keeping your current insurance or purchasing coverage if you don't already have a policy. Also, if your spouse would lose a substantial amount of your pension income or other monthly payment upon your death in retirement, life insurance can fill that gap.You should also keep life insurance if you're continuing to work part-time and earning income in retirement.
Would It Help Your Estate?
Some people with considerable assets can use life insurance strategically—for instance, as a way to take care of estate taxes. The proceeds could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans.
As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is complicated. You’ll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably don’t apply. If so, you may not need life insurance for this purpose. But to be sure, it’s a good idea to ask a qualified expert.
Consider Cash Value Life Insurance
If you've accumulated substantial cash value in a permanent life insurance policy but are still paying premiums on it, consider your options carefully. If you want to stop paying premiums but keep some coverage in retirement, reach out to the life insurance company about how this may be structured. For example, you could settle for a reduced amount of paid-up life insurance on which no premiums are due.
If you no longer have a life insurance need and you want the cash value, surrendering your policy is one way to do that. But it can have significant tax consequences. The amount of cash surrender value you receive minus the policy basis (the amount of premiums you paid) is taxable. Talk to the life insurance company to understand what the taxable amount would be in your situation, then talk to a CPA to understand what you'd owe.
Also, bear in mind that permanent life insurance policies have a surrender period that can last anywhere from a few to 15 years. During this time, a penalty is assessed if you surrender the policy.
FAQs
Do I really need life insurance after retirement?
You could need life insurance in retirement if you want to cover your final expenses and estate taxes, have outstanding debt, still earn income, or want to provide a tax-free inheritance to your loved ones. Otherwise, you probably do not need life insurance after retirement.
At what age is life insurance no longer needed?
Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses.
Should a 65-year-old buy life insurance?
A 65-year-old should buy life insurance if they want a death benefit to cover their final expenses, create an inheritance, and pay off their remaining debt. While qualifying for life insurance is more challenging as people get older, it is still possible at age 65. If a 65-year-old doesn't have these financial goals, they should not buy life insurance.
What happens to life insurance after you retire?
If you had life insurance through work, you lose that coverage. Your group plan may let you switch the policy to your own individual plan, though the cost could be higher than what you were paying as an employee. If you own life insurance outside of work, retiring will not change the coverage or the cost.
The Bottom Line
It may seem counterproductive to give up having life insurance after so long, but the truth may be that you no longer need it in retirement. If you have no income to replace, very little debt, a self-sufficient family, and no pricey concerns around settling your estate, there’s a good chance you can say goodbye to that policy. As far as estate planning goes, you could well need a different type of policy or major changes to your current one anyway.
This is the perfect question for a financial planner or a fee-only insurance consultant. Be careful about simply asking your insurance agent. Because they are often paid by commission, they might have an interest in keeping you on the policy even if you don’t need it, or having you exchange it for another one. By weighing these questions with a professional, you can decide if you need life insurance in retirement.
