You can save a boat load of money by re-evaluating your life insurance needs once you retire.
If you do, you’ll probably find that you need a whole lot less insurance after you retire than you needed while you were working. In many cases, you’ll discover that you won’t need life insurance at all during retirement.
So Do I Need Life Insurance in Retirement?
The Purpose Of Life Insurance is the Key
Counter to what many life insurance agents tell you, life insurance isn’t an investment.
That’s one reason why term life is far better than whole life. It’s also one of the reasons I question the need for life insurance on a non-working spouse.
Insurance is a financial tool and nothing more.
This tool is unbelievably efficient at doing it’s job which is to protect the people who depend on you financially. It does that job by creating a pile of cash that can be invested if you die. Those investments can then create income and replace the income you can’t earn because you are busy being dead.
If you read between the lines you can see why you probably won’t need as much (or any) insurance once you retire.
First of all, once you call it a day at work, much of your income will be passive. (If you don’t have any passive retirement income you won’t be able to retire unless you swear off food and shelter for good. Don’t’ try this at home.)
You don’t have to do anything to earn passive income other than waddle down to the mailbox once a month, collect your check and deposit it. If that passive income is generated from investments, it will continue after you pass away.
Depending on your situation, pension income might also continue to flow to your survivors after you punch that big time clock in the sky. And Social Security will pay your surviving spouse as well – albeit the amount will likey be diminished.
And the good news doesn’t stop there.
Hopefully, once you retire fewer people will depend on you financially and you will have fewer debts. With any luck, the kids will be out of the house by the time you hit 65 and your mortgage will be paid off as well.
You can see that these three forces come together to decrease or eliminate your need for life insurance in retirement.
a. Passive Income
b. Fewer Dependents
c. Lower Expenses
Pulling it Together
Before you decide to cancel your life insurance, you have to do a little ciphering to figure out how much life insurance you need.
But let’s keep it super simple right now to illustrate.
Let’s assume that you need $2 million in life insurance now while you are working. That’s the amount that can be invested to replace your income of $100,000 according to your calculations.
But when you think about the future, you see that your needs are going to change.
You happily realize that your expenses will drop to $50,000 when you retire and that will be covered by passive income from investments and pensions. You are a happy camper.
But it’s not all ice cream and cake friend.
You realize that if you die, your surviving spouse will still need $50,000 a year to live on but her survivor benefits from the pensions and Social Security will drop by $10,000. The other $40,000 is covered by investment and pension income.
Therefore, the worst case is you’ll need enough life insurance to replace that $10,000 in lost income. That works out to be $200,000 in death benefit – or 10% of what you currently need. And if your spouse can cut $10,000 in expenses once you move on to greener pastures, you won’t need any life insurance at all.
You can see that you only need life insurance after you retire if your death at that point would put a meaningful dent in the income your family would need at the time.
The only other case where you need life insurance after you retire is if you are subject to estate tax or you absolutely positively want to leave a sum of money to someone even though they may not need it. These are topics for a different post.
I am a huge fan of having life insurance – but only for the right reasons.
The right reason is to protect your family.
Consider how much protection you need – and how that need changes over time – when deciding whether or not you need life insurance coverage after you retire.
John S says
I would tend to agree, that for many, life insurance is not really needed in retirement. If they have worked hard and prepared in life then they should be able to self-insure. The only thing that I have really seen to be potentially good would to have a small policy to pay for funeral expenses…say a $5k or $10k policy, but beyond that would be a waste.
Glen Craig says
Good point about funeral expenses.
@John – agreed – depending on the cost. I have never looked into this but I should . My guess is that it could be very expensive because people tend to buy it when they are older. Still, if a person has limited resources and want to do the right thing, it’s probably smart to at least check out.
Glen – thanks for allowing me to write for your awesome blog!
Those who have saved nothing at all and have no net worth actually need it the most–or else their relatives are stuck paying for their burial out of pocket! And chances are if you are so bad at money management that you eked out your life on SS alone, your relatives won’t be any better off financially, either, so a policy that at least covers funeral costs is usually a very good idea.
I agree that life insurance shouldn’t be necessary in retirement, however, many retirees have more debt than assets, in which case it may be a good idea to maintain your policy. This is not the norm, though.
Life insurance is simply a tool. It is not good or bad. One type is not “better” than another. They are simply different and are used for different things based on the needs of an individual. I think the thing we sometimes forget is that insurnace is a privledge… not a right. We cannot go and buy it whenever we want… we have to qualify (I do not include “guaranteed issue insurance” due to cost).
As far as “self insuring”…. I believe the concept is ridiculous. If you are “self insuring” we can assume that an insurance need is present, correct? There is more efficient way to pass on dollars post mortem than via a designated beneficiary (insurance, seg fund, rrsp, tfsa, etc.) You bypass probate, accountant fees, lawer fees and are tax exempt with the insurance. If you have the dollars to self insure, you obviously do not need to dollars to be “liquid” correct? Heck even in the most skewed scenario in which you bought a $100k paid up polcy for $100k (it would never cost that much…) wouldn’t the saving for your estate or beneficiary be better off?
Again, take this all with a grain of salt haha I just can’t think of a scenario in which there is a more efficient transfer of dollars post mortem than insurance. can you?