To have, or not to have. That is the common retirement planning question about life insurance. The answer can be derived from a liberal interpretation of another well-known Shakespeare line from Hamlet: “To thine own self be true.”
That is, the answer depends on your personal situation. Base your decision on only what is true in your life and not the lives of others. Because, when it comes to life insurance, there is no single solution that’s right for everyone.
Do you need life insurance in retirement?
As your life changes, so do your financial needs, including insurance coverage. When you reach retirement, you’re essentially entering a new phase of life. So, it’s a time to reevaluate your financial needs.
You can generally determine your need for life insurance by considering these three factors: whether you’re married, whether you have dependents and your level of wealth.
If you are unmarried and have no dependents, then it’s unlikely you need life insurance. After all, the only person presumably relying on you financially is yourself.
On the other hand, if you have dependents – whether you are married or not – you should probably have some type of coverage.
Many people though who are nearing retirement or in retirement are married and without dependents. By then, if you had kids, they have likely moved out and are supporting themselves. This is when your wealth becomes a bigger factor.
The question becomes: do you and your spouse have enough financial assets to live independently in the event one of you passes away? If you’re fortunate to have enough, then life insurance may be unnecessary. But, if the surviving spouse will likely find it financially difficult to live on his or her own, then it makes sense to have a life insurance policy in place.
You might be wondering what “enough assets” means. That too depends on your personal situation. It encompasses your financial needs and retirement income sources, such as your 401(k), Social Security, pension, etc. That’s why, with so many different pieces involved, it’s better to work with a financial adviser to review your situation and help determine your need for life insurance.
How much life insurance do you need?
If you think you should have life insurance, the next question is how much, or what type. To keep things simple, let’s go over three of the more common types of life insurance: term, whole and variable.
Term life insurance
Term life insurance is generally the least complex and least expensive type of coverage. You get to choose the policy amount (from less than $50,000 to more than $1 million) and the term length (usually from 5 to 30 years).
If you don’t pass away, your policy expires without a payout. This is the potential drawback of term life insurance: you can outlive your policy.
Whole life insurance
As the name suggests, whole life insurance covers you for your whole life. The policy is permanent, as long as you pay the premium. Part of the premium paid goes into a cash value account that you can withdraw and borrow from, pass on to heirs, or use to pay the premiums.
There are several downsides to whole life insurance. One is that it’s expensive. Another is that it’s too much coverage for most people. Why continue to pay for life insurance in your 80s or 90s when it’s unlikely anyone depends on you at that age? Further, you could potentially pay more into it than you get back. Often, people eventually make the mistake of using the cash value that’s been built up over time to pay the premiums until nothing is left and the policy lapses.
Variable life insurance
Variable life insurance has many of the same components as whole life insurance. The key difference is that the cash value is placed in investments. That means, in addition to flexible premiums and the death benefit, an advantage of variable life insurance is the greater potential to grow the cash value.
However, there are disadvantages to that investing component. There is more work involved in having to manage the investments. And, as we know, investing comes with risk. Therefore, there is also potential to lose some of that cash value. Lastly, there are additional fees and administrative charges.
Ultimately, life insurance is just one potential piece of your overall retirement plan. As such, work with a qualified financial adviser you trust who can help evaluate your insurance needs along with all other areas of your financial life.