Do I Need Life Insurance in Retirement?

You work your entire life with the hope that one day you may be able to retire when you choose and have the free time to take advantage of all of the social activities, travel, and hobbies you couldn’t do regularly with the responsibility of a career and providing for your family.

Even though the daily grind has ended, managing your finances doesn’t, and that inevitably might change as life events happen to and around you. A question people often ask their financial professionals is do I need life insurance in retirement?

The answer is it depends. For many individuals, life insurance can be a critical part of their retirement portfolio and financial strategy. Everyone’s circumstances are unique to their life events, experiences, and expectations. Several of the reasons why life insurance could be beneficial for a retiree include:

Provide a tax-free inheritance –When people think of life insurance, an inheritance passed on to their beneficiaries is generally what comes to mind. What people might not know is that it is tax-free and can help a family financially stay afloat, should you pass away.
Covering financial expenses –One thing we all have in life is expenses and they can be steep. Life insurance can help pay for medical bills, estate taxes, and funeral costs.
Providing for loved ones –Life insurance can help support your family financially should you pass away.
Pay down outstanding debt –Debt is stressful, and it is extremely challenging to pay down, especially if you or a beneficiary struggle financially. Life insurance can help pay down mortgages, credit card bills, car loans, and other forms of debt.

What is life insurance?

Life insurance is a contract that pays a sum of money to your beneficiaries after you die. It is also used as an income stream to help supplement other sources of income in retirement such as a pension or Social Security and can be a beneficial way to help cover the costs of bills if you have outstanding debts, living expenses, education, and burial costs

It is not just the benefits a policy offers that factor into your decision to pursue one policy against another but also the price and this varies significantly with age, health, and the type of insurance you choose.

Is it possible to buy life insurance through a qualified retirement plan such as a 401(k) or pension?

Yes, it is possible to purchase life insurance through a qualified retirement plan. By doing so, you can pay for the coverage using pre-tax dollars. This can be very complex, and you are encouraged to speak with a financial professional. If your plan is terminated early or you retire the remaining balance can be rolled over into an IRA.

A downside to this strategy is that it involves complex regulatory requirements and can be costly.ᶦᶦ

What types of life insurance are available?

There are three main types of life insurance: whole life insurance, term life insurance, and universal life insurance (Note: there are many different types of life insurance, final expense, credit life, decreasing term life, mortgage life, etc. We are focusing on the three most common ones). Each type offers benefits that will align with different financial and retirement goals as each individual and family are unique to their personal wants and needs. Let’s dig a little deeper into the three main types of life insurance.

1) Whole life insurance (also called “cash value life insurance”)

Whole life insurance is considered the most secure form of insurance.ᶦᶦᶦ It is a permanent life insurance that offers guaranteed premiums, a guaranteed death benefit, and a cash value option that grows. Also, interest accrues on a tax-deferred basis and some policies may earn dividends based on the company’s performance. Should you pass away, your loved ones will receive proceeds tax-free, and these policies, in many cases, have “living benefits” that can be helpful should you experience health problems as you age.

How do they determine the cost of whole life insurance?

Amount of coverage you have –The larger the death benefit payout, the higher the premiums.
Age –Younger buyers generally pay lower premiums, so it is beneficial to buy whole life insurance earlier.
Health –If you suffer from a pre-existing condition like diabetes or another medical condition, or you practice unhealthy habits like smoking, your premiums could be higher.
Length of your policy –The longer your coverage period lasts, the higher your rates will be.
Sex –Men may pay more than women because they have a lower life expectancy.
Career choice –Riskier jobs such as logging, being an iron or steel worker, construction, or being an aircraft pilot, to name a few, may help to drive your rate higher.ᶦᵛ
Hobbies –People who participate in risky hobbies like mountain climbing or base jumping may have higher premiums.
Type of policy –Whole life insurance is more expensive than universal life insurance and term life insurance.

The pros and cons of whole life insurance:

Pros

Guaranteed cash value –The cash value is guaranteed to grow, tax-deferred.ᵛ
Cash value growth –The cash value grows at a set rate each year at a guaranteed rate of return. The growth is tax-deferred.ᵛᶦ
The upside to keeping it in an irrevocable trust –Trust tax rates, like estate tax rates can be high, which makes putting a whole life insurance policy into an irrevocable trust (Irrevocable life insurance trust ILIT) a beneficial strategy to eventually transfer wealth to your loved ones. With the current high tax exemption, few people run into federal estate tax problems but using the tax efficiency and simplicity of the policy once put into a trust is a plus.ᵛᶦᶦ
Fixed premiums –The amount you pay each month or year is set for the life of the policy.ᵛᶦᶦᶦ
Can borrow money against your policy –As long as the policy isn’t a Modified Endowment Contract, you can access your death benefit and borrow against it. Keep in mind when you die, the total you borrowed is subtracted from the death benefit that is paid to your beneficiaries.
Tax-free death benefit –Your death benefit is paid to your heirs tax-free.

Cons

Flexibility –There is limited flexibility. Premiums and death benefits can’t be changed so you want to review your decisions carefully.
Higher rates for older policyholders –Premiums are typically higher than other types of life insurance.ᶦˣ
Low returns –A significant downside is the return for a well-structured whole life insurance policy is between 1% and 3.5%.ˣ This could be far lower that the potential returns from the stock market.
Withdrawals and loans may affect the benefits of your policy –Taking a loan or withdrawal against your policy may decrease or even eliminate the death benefit for your beneficiaries depending on how much you take. If the contract terminates with outstanding debt, you could be subject to an income tax liability. The cash surrender value could potentially lead to your policy lapsing. The cash surrender value is the amount of cash you have built less any surrender charges or fees.ˣᶦ

2) Universal life insurance

A permanent life insurance policy that provides coverage for the duration of your life. You can adjust your premiums and death benefit as your life events change offering a certain flexibility. There is also a savings component or investment function that can potentially increase the cash value over time. However, should a policyholder need access to the money they would have to pay taxes on the withdrawals.

Guaranteed universal –A permanent life insurance policy that has fixed premiums and a guaranteed death benefit.ˣᶦᶦ
Variable –A permanent life insurance policy that has a savings component where cash value can be invested.ˣᶦᶦᶦ
Indexed –A type of universal life where the cash value grows based on the stock market index.

How do they determine the cost of universal life insurance?

Amount of your death benefit –The greater your death benefit, the higher the premium.
Age –Generally, the younger you are, the less expensive your life insurance policy may be. The older you get the greater the likelihood of dying becomes therefore the cost increases. So, the sooner you get your policy, the cheaper it may be.
Health –If you are in poor health, you may face higher premiums due to the risk of an earlier death.
Interest rate –The interest rate applied to the cash value component may increase the cost of the policy.ˣᶦᵛ
Policy features –Adding additional riders or other special benefits may increase the cost of your premium.

The pros and cons of universal life insurance:

Pros

Premiums are flexible –The flexibility of universal life insurance gives you the option to modify your payments as life events happen, although there are limits to the flexibility.
There is a cash value option –The flexible savings component of the universal policy can accumulate over time based on a portion of your premium payments not used to cover the cost of insurance. It can grow with interest and, depending on terms, can be used for withdrawals or loans.ˣᵛ
Death benefits are adjustable –You are allowed to increase your death benefit if you pass a medical exam and are willing to pay a higher premium. You can decrease your death benefit to lower the cost of your premium.ˣᵛᶦ
Loans against your policy are permitted –Loans are only available on policies that have a cash value component.ˣᵛᶦᶦ

Cons

Making minimum payments or missing payments altogether can negatively impact your cash value –Premium payments may increase if you skip or make minimum payments.
Certain withdrawals may be taxed –If you withdraw any gains on your policy (like dividends) these amounts may be taxed as ordinary income.ˣᵛᶦᶦᶦ
A fixed premium payment is not guaranteed –Many people see a fixed premium as a safeguard which universal life insurance does not offer.
No guarantee of any return –There is no guarantee that your investment will generate a return due to market unpredictability.

3) Term life insurance

Term life insurance is typically the most affordable life insurance option. Generally, you purchase the life insurance to last a period of time, usually 10, 20, or 30 years. With term life insurance your premium will stay the same throughout those years. It is the type of policy that guarantees payment of the death benefit to your beneficiaries at the policy’s face value that is not generally taxable. The cash benefit may be used to settle debt, funeral costs, healthcare, and other expenses. However, there is no requirement that beneficiaries use the insurance proceeds to settle the deceased’s debts.

If the policy expires before your death or you live beyond the policy term, there is no payout. There is the possibility of renewing the policy at the expiration date, though the insurance company may recalculate the premium based on your age at the time of renewal.

How do they determine the cost of term life insurance?

Amount of coverage you have –The greater the coverage amount, the more it is going to cost.
Age –Generally, the younger you are, the less expensive your life insurance policy may be. The older you get the greater the likelihood of dying becomes therefore the cost increases. So, the sooner you get your policy, the cheaper it may be.
Health –Your health is a critical component to determining what you could pay for a policy. If you are a smoker, for example, your policy will probably cost you more due to the risk factors of smoking.ˣᶦˣ Quitting smoking can potentially help you get a better rate. If you suffer from a pre-existing condition like diabetes or another medical condition, you also may have higher premiums.
Length of your policy –The longer your coverage period lasts, the higher your rates will be.
Sex –Women usually pay less for life insurance than their male counterparts (on average 24% lessˣˣ) because, according to a New York Times articleˣˣᶦ, women tend to outlive men.
Career choice –If you work in a high-risk job, such as a logger, iron or steel worker, or aircraft pilot, it may help to drive your rate higher.ˣˣᶦᶦ

The pros and cons of term life insurance:

Pros

Affordability –Less expensive than permanent life insurance. Younger people, particularly young parents find term life insurance appealing for the decent coverage at a lower cost. Premiums are lower the earlier you purchase a policy and if you purchase online, you may also get a lower rate. If the insured passes away while the policy is in effect, the family can use the death benefit to help supplement lost income.ˣˣᶦᶦᶦ
Flexibility –You get to decide the length of your coverage. When your coverage ends, you may have the option to end or continue your coverage without a medical exam. You have the option to lower your death benefit over time, which can reduce your premium.
Tax-free payout –Death benefits are typically paid out tax-free to your beneficiaries.
Additional riders –You can add riders to your policy, for example, critical illness coverage or accidental death benefit which adds another layer of safeguarding.

Cons

No cash value –Unlike permanent life insurance, term doesn’t allow you to accumulate cash value.
Coverage ends –You won’t receive the benefits if you outlive the term of your policy.
Cost of renewal –Generally, if you renew your policy, it will be recalculated and you could pay a higher premium based on factors like age and health.
Limited flexibility –Term life insurance doesn’t offer the same variety of options to adjust coverage as permanent life insurance.ˣˣᶦᵛ
No return on premiums –If you outlive the term, unlike many permanent policies, standard term life insurance don’t return premiums.ˣˣᵛ

Schedule a meeting with your financial professional

Choosing the life insurance policy that aligns with your financial and retirement strategy and goals is a complex decision with many different options and scenarios. It is highly encouraged that you discuss your questions and concerns with your financial professional to determine which would be beneficial for you and your family both in the short- and long-term. Remember, these decisions could be the difference between your family struggling and being able to manage their expenses in the event you are no longer around.

_{Important Disclosures:}

_{This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial, legal or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.}

_{Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges. Policy values will fluctuate and are subject to market risk and to possible loss of principal. Guarantees are based on the claims paying ability of the issuer.}

_{Withdrawals are taxed only to the extent that they exceed the policy owner’s cost basis in the policy and usually loans are free from current Federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding.}

_{All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.}

_{This article was prepared by LPL Marketing Solutions.}

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_Sources:

_{[i] 10 Reasons Why You Need Life Insurance in Retirement}

_{[ii] Life Insurance in a Qualified Retirement Plan}

_{[iii] The Ultimate Guide for Choosing the Best Type of Life Insurance Policy | The American College of Financial Services}

_{[iv] 10 High Risk Occupations for Life Insurance Coverage | Ethos Life}

_{[v] Whole Life Insurance | Custom Cash Value Whole Life | New York Life}

_{[vi] Whole Life Insurance Cash Value Chart – Forbes Advisor}

_{[vii] 7 Reasons for an Irrevocable Life Insurance Trust (ILIT)}

_{[viii] What are some pros and cons of whole life insurance? | Department of Financial Services}