Do You Still Need Life Insurance When You Transition to Retirement?
Are you still paying premiums for life insurance? If so, are you sure you still need to? That might seem like a funny question if you’ve carried life insurance for a long time. However, you may not need that insurance policy anymore. It’s a question worth evaluating.
Managing Risk
You can’t avoid all risks completely. Nor can you insure yourself against any potential loss because you’ll become “insurance poor.”
The key to the game is to objectively evaluate and then “manage” risk. When you were younger and raising a family, the financial risk your family faced if you were no longer here was much more real. If your paycheck wasn’t there for your family, what would they do?
However, now that your family is grown and out of the house, do you still need to pay those premiums and keep that life insurance policy that you’ve had for years? It’s an important question that is more emotional than rational for most people. It’s interesting to have a conversation with someone who has had life insurance for years and decides they don’t need to keep it. They feel uncomfortable letting go of paying the monthly premium after paying it for so long. Those life insurance agents did a great job!
How to Evaluate If You Still Need Your Life Insurance Policy
Deciding whether to keep a life insurance policy is really just a math question that you can evaluate by answering three “risk management” questions:
- What’s the financial loss if I don’t have this insurance?
- What’s the probability that I’ll suffer this loss during a specified period of time?
- Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?
Think about it for a moment. What is life insurance? It’s money. Money that is delivered to your heirs upon your death. So, the question is, does your spouse and family still need that additional money when you die (over and above everything you’ve saved and accumulated) to support and continue their lifestyle? Let’s assume that you’ve gone through the process of putting a price tag on your ideal lifestyle.
You’ve prioritized what you would like to do while you’re living and have a plan for what happens when you pass away. You’ve tallied all of your income sources like Social Security, pensions, and rental real estate (if you have any). And, you have a crystal-clear handle on where all of your money is and the total value of your retirement savings. You can afford to do what you want, when you want, where you want, and with whom you want because you’ve eliminated your dependence on a paycheck from work!
Answering Question #1
Going back to Question #1, what is the financial loss if you don’t have this insurance? Take a moment to think about this. By definition, if you have enough money support you and your spouse while you’re both living, shouldn’t there also be enough money to support only one of you if something happens? If the answer is yes, then it’s likely you don’t need to pay for life insurance anymore. Your spouse and family don’t need more “money” when you pass away (i.e. life insurance) because you already have enough. It might be nice to have more money, but according to the priorities you laid out in your retirement plan, there is no need for more money to satisfy those priorities.
Two Exceptions
There are two exceptions where you may still want to carry life insurance:
If you have a monthly pension that ends when you pass away because you have chosen the single life pension option. Or,
You’re purchasing the life insurance inside of an irrevocable life insurance trust to help provide liquidity and pay your estate taxes (or income taxes due if you have large IRA holdings).
The key point is to “know your numbers” cold. If you’ve done your homework and followed a process, and you know exactly where you stand financially, then it becomes a rational decision based on fact, not emotion. Take the time to know your numbers, and objectively evaluate them so you don’t pay for something you don’t need anymore.
It’s highly unlikely that an insurance agent is going to tell you this because they continue to receive commissions as long as you keep the insurance, so you have to do a little homework. The bottom line is if the risk of “financial” loss is no longer there, chances are you don’t need to pay life insurance premiums anymore.
You may be far better off spending those premium dollars to cover a more pressing financial risk like long-term care or personal liability from a lawsuit. Or, if you’ve already taken care of that, take another vacation every year, or go out to dinner one more time every month to a restaurant you wouldn’t have gone to otherwise!
Jack Phelps
Financial Advisor / Managing Director