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Do you need life insurance after you retire?
Maybe you’ve been holding on to a policy for a long time. Or maybe you’re thinking of buying a new one.
Whatever the case, you’ll want to make sure you make the right decision.
In this post, you’ll learn:
- Why you need life insurance in retirement
- Why you don’t need it
- What type of insurance you should get
- How much insurance you need
And much more. Let’s get started.
Why You Need Life Insurance In Retirement
When you retire, the only thing that changes in your life is that your employment or self-employed income stops.
Everything else remains the same: your debt, your family, your bills.
Just because your income stopped, doesn’t mean you don’t need life insurance anymore. Here are a few reasons why you still want to carry some coverage.
Paying off debt
Is your mortgage completely paid off yet? If you don’t want to saddle your partner with a large debt after you pass away, you can keep a term policy around to cover the mortgage.
Besides a traditional mortgage, reverse mortgages are gaining popularity with retirees. Part of the reason is because of rising property values. A reverse mortgage lets you access the equity in your home as a loan without mandatory interest and principal repayments.
If you’re thinking about getting a reverse mortgage, you’ll want to make sure you cover the loan with life insurance.
Income replacement for dependents
Do you have a pension that decreases or is eliminated upon your death? This can be CPP, an annuity, or another private pension. If you die prematurely, will your partner have enough money to last his/her lifetime?
Besides your spouse, do you have minor children or adult children who are dependent on you? You can use term insurance to bridge the gap from now until your minor children are independent.
For the adult children, are they dependent for life because of a mental or physical disability? If so, permanent insurance is a better choice than term.
Final expenses
Final expenses include the cost of a funeral and burial or cremation costs.
If you want your family to have money to “put you in the ground”, you’ll need some life insurance. The best type of insurance for this is a type of permanent insurance like whole life or universal life.
Because final expense costs range from $5,000 to over $15,000, you can get a small permanent life insurance policy to cover this amount.
Besides the funeral, other final expenses you might want to cover are executor and probate fees.
Leaving an inheritance
Many people leave an inheritance to their loved ones through the will. Some of the most common assets that pass through the will are real estate and non-registered investments. But these assets could either be illiquid or your loved ones could be selling them at an inopportune time.
Worse yet, if there’s a disagreement, your estate can spend months or even years tied up in court battles.
If you want to leave a liquid, cash inheritance, your best bet is a permanent life insurance policy. The proceeds from the policy bypass your estate so your beneficiaries get the money quickly.
Estate planning
Besides leaving an inheritance, you can use life insurance to execute a variety of estate planning strategies. Here are some of the more common ones:
- Charitable giving: Increase your donation by using life insurance to leave a legacy to your favourite charity.
- Insured annuity: Increase your retirement income while leaving an inheritance to your loved ones.
- Estate equalization: One child gets the cottage, the other gets the life insurance proceeds.
- Pay off taxes: A large RRSP/RRIF and capital gain give rise to a large tax liability upon your death. You can rollover your assets tax-free to your spouse when you die, and vice versa. With this in mind, a joint last-to-die life insurance policy is best suited for paying taxes.
All of these will require some type of permanent life insurance to ensure that there’s a payout when you pass away.
Using whole life insurance for retirement
Lots of whole life and universal life insurance policies have cash values that you can use as a retirement investment. The advantage of investing inside a permanent life insurance policy is that the cash value grows tax-sheltered.
Years of investing tax-sheltered results in a significant cash value once you reach retirement age. At this point, you can withdraw the funds directly from the policy to supplement your retirement income.
A more tax-efficient way of accessing the money is to use the policy as collateral for a loan. After you pass away, you use the death benefit to pay off the loan, with the remainder going to your beneficiaries. This is called the insured retirement program strategy.
It takes a long time for the cash value to build up so if you’re thinking about it after you’re retired, it’s probably too late. You’ll want to buy the insurance to execute this strategy during your working years.
Why You Don't Need Life Insurance In Retirement
Despite all the reasons for having life insurance after retiring, you might still be on the fence. Here are some of the reasons why you don’t need life insurance in retirement.
Debt-free
One of the main reasons people get life insurance is to cover debt. If that’s why you have life insurance and you’ve paid off all your debt, then you don’t need to keep your policy anymore.
Keep in mind that you still have the option of a reverse mortgage later in life. If that’s a strong possibility, you should keep your insurance policy instead of canceling it.
No dependents
Life insurance is not for you. It’s for your loved ones. If all your loved ones are independent, then you don’t need life insurance anymore.
This is especially true if income sources remain stable even if you pass away. For example, if you converted your RRSP to a RRIF, your RRIF would rollover to your spouse tax-free. Since he/she would continue to withdraw money from it every year, your death wouldn’t cause any financial hardship.
Self-insurance
One of the reasons people who are working need life insurance is that they don’t have the assets to protect their family.
But once you’ve saved up enough, your family can use the assets you leave behind to maintain its lifestyle. This is called self-insurance.
Before you drop your life insurance entirely, make sure you actually have enough assets for self-insurance. There’s nothing worse than thinking you’re self-insured only to find out you’re not when it’s too late.
What Life Insurance For A Retiree Looks Like
So you’ve come to the conclusion that you need some form of life insurance in retirement. What exactly does that look like? What kind of policy should you get?
What type of life insurance do you need?
The 2 main types of life insurance are term and permanent.
Term insurance is an affordable option for covering short-term needs and usually expires at age 80 or 85. You’ll want to get term insurance to cover your mortgage and for income replacement.
Permanent insurance lasts a lifetime. If you want to cover final expenses, leave an inheritance, or do estate planning, you’ll need to use permanent insurance.
What if you already have a policy?
Lots of people carry life insurance into retirement. If you have a term policy, when is it going to expire? Should you renew it or convert it? If you have a permanent policy, should you keep it?
You’ll want to find out all the facts about your current policy, including:
- Type of insurance
- Amount of coverage
- When it will expire/renew
- What are the premiums
- How long you have to pay premiums for
- How much cash value is inside the policy
- Who the beneficiaries are
- Can you convert it and if so, how much the premiums will be
After doing your homework, you’ll want to find out if you still want to have life insurance for any of the purposes described in the first section. If so, can you accomplish them with your current policy?
Don’t underestimate the power of a term conversion. It lets you convert your existing term policy into a permanent policy without providing any evidence of insurability. So even if your health is poor, you can convert it without having to qualify for a new permanent policy.
How much life insurance do you need?
Cover debt: Simply buy up to the amount of the balance owing.
Replace income: Multiply the income you want to replace by the number of years. For example, if you want your life insurance to provide $25,000 for 4 years, you need to buy $100,000 of coverage.
Final expense: If you know the type of funeral you want, you can buy up to its cost. Keep inflation in mind as you might not pass away for another 20-30 years.
Leaving an inheritance & charitable giving: Since this is more of a personal decision, the amount depends on how much you want to leave as a legacy.
Pay off taxes: This one’s more complicated. You need to calculate your tax liability at life expectancy. For that, you’ll need to factor in capital gains, RRSP/RRIF balance, and a projected rate of return. It’s not going to be perfect but at least you’ll get close to the amount you need.
How much does life insurance cost in retirement?
The 2 tables below show you quotes for 65, 70, 75, and 80-year-old male and female non-smokers. The death benefit is $250,000 and the premiums are paid monthly.
Term-10 means that the premium is guaranteed level for 10 years, term-15 for 15 years, and term-20 for 20 years. After the term expires, you can renew it at a much higher premium until age 85.
For permanent insurance, we used universal life. It has guaranteed level premiums until age 100, at which point the policy is paid up.
Male, non-smoker, $250,000
| Product | Age 65 | Age 70 | Age 75 | Age 80 |
|---|---|---|---|---|
| Term-10 | $194.40 | $326.25 | $771.53 | N/A |
| Term-15 | $289.13 | $428.85 | N/A | N/A |
| Term-20 | $379.35 | N/A | N/A | N/A |
| Universal life | $672.84 | $936.22 | $1,295.70 | $1,667.52 |
Female, non-smoker, $250,000
| Product | Age 65 | Age 70 | Age 75 | Age 80 |
|---|---|---|---|---|
| Term-10 | $134.10 | $247.95 | $596.48 | N/A |
| Term-15 | $194.18 | $310.50 | N/A | N/A |
| Term-20 | $265.50 | N/A | N/A | N/A |
| Universal life | $607.79 | $814.42 | $1,142.22 | $1,496.82 |
Final Thoughts
As we get older, our life insurance needs generally shrink. But as you can see, there are still many reasons to have life insurance in retirement.
As a retiree, are you looking to buy a new insurance policy? If so, is term or permanent better for you?
Or do you already have a life insurance policy? What are you going to do with it?
Let us know in the comments below.
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
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