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Do You Need Life Insurance in Retirement?

April 24th, 2024 | 3 min. read

By Advance Capital Team

happy retired couple

Navigating the transition into retirement comes with many financial decisions, one of the most significant being whether to maintain life insurance coverage.

The essence of this decision doesn’t solely rest on financial calculations but also on a deep understanding of your personal situation, future goals and the legacy you wish to leave behind.

That’s why, as a client of Advance Capital Management, you can expect guidance from an adviser on how to use life insurance in your retirement planning, if appropriate.

But life insurance, often thought of as a necessity during the working years, morphs into a question mark in retirement.

Is it still necessary? If so, what type should you have, and how much?

These questions are crucial for retirees aiming to secure their financial legacy while ensuring their loved ones are protected. So, let’s explore some key factors that will guide you in assessing the necessity of life insurance coverage as you transition into retirement.

Evaluating the need for life insurance in retirement

As you approach or enter retirement, it’s time to revisit your financial landscape, including the need for life insurance. This decision is contingent upon a couple major personal factors:

Marital Status and Dependents: The presence or absence of dependents significantly impacts the need for life insurance. For those without dependents, the rationale for life insurance may be minimal. However, if you have people relying on your financial support, maintaining life insurance coverage becomes a consideration of care and responsibility.

Financial Stability and Legacy: The crux of the matter often lies in assessing your financial estate. Do your assets and savings provide a sufficient safety net for your surviving partner or dependents? If your financial legacy ensures their security, life insurance may not be imperative. Conversely, if there's a potential financial void, a life insurance policy could serve as a crucial safety net.

Determining the adequacy of your assets requires careful consideration and a realistic appraisal of your lifestyle, debts and potential future needs. This is a nuanced calculation, often best navigated with the assistance of a financial adviser, who can help align your insurance strategy with your overall retirement plan.

Choosing appropriate life insurance coverage in retirement

If life insurance aligns with your retirement strategy, the next step is to discern the appropriate type and amount of coverage. Let’s briefly explore the options:

Term Life Insurance: Term life insurance stands out as the most straightforward and cost-effective option available. It allows you to select a coverage amount that can range from less than $50,000 to over $1 million, along with a term length typically spanning from 5 to 30 years.

The primary limitation of term life insurance arises if the policyholder outlives the policy term; in such cases, the policy expires without any payout.

Whole Life Insurance: Whole life insurance, true to its name, provides coverage throughout your entire life. This type of policy is permanent, contingent on the continuation of premium payments. A portion of these premiums contributes to a cash value account, which offers the flexibility to withdraw funds, borrow against them, bequeath them to heirs or even utilize them to cover future premiums.

However, whole life insurance does come with its drawbacks. Primarily, it is more costly compared to other types of life insurance. Additionally, it often provides more coverage than necessary for the average individual.

Questioning the practicality of maintaining life insurance into your 80s or 90s is valid, especially when it’s improbable that dependents will require financial support from you at that stage.

Another consideration is the potential for the policy’s costs to surpass its benefits over time. It’s not uncommon for policyholders to deplete the accumulated cash value by using it to pay premiums, eventually leading to the policy’s lapse when the cash value is exhausted.

Variable Life Insurance: Variable life insurance shares several characteristics with whole life insurance but distinguishes itself through the investment of the cash value. This means that besides offering flexible premiums and a death benefit, variable life insurance also presents the opportunity for the cash value to grow based on investment performance.

Yet, the investment feature introduces certain drawbacks. Managing the investments requires more effort and understanding from the policyholder, adding complexity to the policy. Given the inherent risks associated with investing, there's also the possibility of experiencing a decline in the cash value.

Moreover, policyholders should be mindful of additional fees and administrative charges associated with the investment component of variable life insurance.

Bottom line

Ultimately, determining the need for life insurance in retirement is a nuanced decision that hinges on individual circumstances, financial goals and the well-being of dependents.

Whether you opt for term, whole or variable life insurance, the choice should align with your long-term financial strategy and the legacy you want to leave. It’s essential to weigh the benefits and limitations of each policy type carefully.

Seeking guidance from a financial adviser can help ensure that your life insurance decisions aim to enhance your overall retirement plan and provide peace of mind for you and your loved ones. Schedule your free financial review here!

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.