Do I Need Life Insurance in Retirement?

By Carl Lachman, MBA, CFP®

It’s a Backup Plan

I went on my first backpack when I was 10 years old, and I have enjoyed backpacking ever since. Over these 40 years of trips to some fantastic and remote places, I have learned what I need to carry and what I can leave at home.

Although I take as little as possible and always choose the lightest things to carry, I always take two cameras. Why? Because photographs are my favorite mementos of these trips to bring home. I want to make sure that if one camera breaks, I always have a backup.

Life insurance is a backup plan for something we don’t like thinking about. What happens to those I love if something happens to me?

A Solution for Financial Hardship from Death

At my fee-only financial advisory firm filled with CERTIFIED FINANCIAL PLANNER® professionals, we have done a lot of life insurance analysis. At the start of our firm 34 years ago, our founder set our still-current thinking that life insurance is needed only if the death of a person will leave their surviving spouse or dependents in financial difficulty.

Do you have an income that supports your dependents? Do you receive a pension that provides everything for you and your spouse, and does it stop when you die? Are your dependents young or unable to work, so they need your income to survive? Do you have debt that your dependents would be unable to pay if something happened to you and you don’t have other assets that could be used in paying off debt?

These are some questions to consider when determining if you need life insurance. Such situations involve dependents and spouses who will face financial hardship if something happens to the other spouse.

You Probably No Longer Need Life Insurance in Retirement

In retirement, you probably no longer have situations like these, so there is a good chance you no longer need life insurance. If you have all the money you need for the rest of your life, then what life risk needs to be insured?

Think about it: When one decides to retire, they must have done some financial planning and determined they have all the assets and sources of retirement income (like Social Security or a pension) they need to support themselves for the rest of their life without needing a job. And, if they have all that they need for the rest of their life and no one will have a financial hardship if they die, then they don’t need life insurance. It might be nice to have, and it might help others if they die—but it is not a necessity.

Life insurance is a financial decision, not an emotional decision. Don’t let brochures with sunsets, beaches, and happy couples convince you otherwise.

What About Funeral and Burial Expenses?

Yes, you can buy a small life insurance policy to cover final expenses, but for the amount of insurance you are getting, it is expensive. Skip it. Save up money, or buy a funeral plot or cremation service in advance.

Should I Keep My Life Insurance Policy When I Retire?

If you retire in good health and you already have some life insurance, it may make sense to keep it. Run a retirement income projection with your financial planner. If you retire in poor health and have life insurance, definitely keep it.

What About Long-Term-Care (LTC) Insurance?

This insurance takes effect if you are unable to complete some of the “activities of daily living,” like needing help dressing or bathing. An LTC policy can pay for certain assisted living and home healthcare solutions.

The policies are expensive, and you should shop around. However, LTC policies start paying while you are living, compared with life insurance, which only pays when you die. If you are worried about health costs in retirement, there is a good chance that an LTC policy is more appropriate than life insurance.

I Need To Protect Dependents If I Die: What Sort of Life Insurance Should I Buy?

The best answer from financial planners who are not biased by a sales commission is almost always the same: Buy term life insurance. You get the life insurance you need at a competitive price. Other forms of life insurance, such as whole life, universal life, and permanent life insurance policies, are more expensive and are only advantageous in extremely unlikely circumstances. Don’t be seduced by cash values, dividends, or index returns. These features are not as good as the marketing materials suggest.

How Much Life Insurance Should I Buy?

If you need to replace your income for your dependents, then the quick answer is 25 times your take-home pay. Thus, if you have after-tax income of $50,000 per year, then get a term policy of $1.25 million. This is, however, just the quick answer and assumes a 4% annual withdrawal from the life insurance proceeds.

Don’t faint at these numbers, because this a quick answer and is probably higher than it needs to be. If a closer look at your assets, investments, liabilities, and the future ability of your dependents to work are all considered, then the actual need for the insurance policy is probably less.

It’s A Math Thing

While I spend my days as a fee-only financial planner working with spreadsheets and making calculations, and I earned a math minor in college for fun, my wife avoids numbers like the plague. Her favorite quip when I start talking about finances is to quote Dan Aykroyd as President Gerald Ford in a Saturday Night Live skit when he said during a mock presidential debate: “I was under the impression there would be no math.”

If you get a headache thinking about math and finances, then get some unbiased advice about life insurance from someone who is not being compensated by insurance companies. The decision to get life insurance before or during retirement is just a math thing. For those of us who look at the pros and cons of life insurance daily, it is not hard to do the analysis, and you will have the confidence that you are making a good decision once you see the results of the number crunching.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your situation.

Carl Lachman, CFP®, MBA