Life insurance is part of any solid financial plan. First-hand, I’ve experienced how it can save a family in the darkest of days. I’ve also seen how the lack of life insurance leaves loved ones in a difficult situation. Without a doubt, there is a proper discussion to be had about life insurance as part of any retirement planning.
The above, however, leads to a particular question during plan meetings–should a retiree keep their life insurance come retirement? Many of our current and future retirees have that question and bring it up to me time and time again. The answer, however, has several layers. It’s hard to flatly say “yes” or “no.” I have certain thought-processes I run through when helping retirees determine the right choice for their life insurance. Below, I’ll briefly address some of the process to help shed some light on the topic.
Decision Making 101.
I try to keep this discussion with clients as binary as possible; I don’t want to complicate the situation any more than it has to be.
First, I ask:
- Does someone you care about have a need for a lump sum of dollars at your passing outside of your regular savings?
- Do you want someone, or some entity, to have a guaranteed lump sum cash infusion when you die?
If the answer to either questions is “no,” you can then likely cancel that policy upon retirement and feel comfortable doing so. Effectively, you’re saying you’ve saved enough during your working years that you’re comfortable your assets will cover you (and those important to you) if something should happen.
If you’re unsure about your answers above, let me expound upon examples of needs and wants for retirement life insurance.
There are plenty of instances I recommend having life insurance in retirement. The first is when there is a need for someone to be economically dependent on more than your assets after you pass.
For instance, plenty of our clients have retirement pensions. In many of these situations, one spouse worked and the other didn’t. Part of the reason they are able to retire is they have that predictable pension coming in every month to subsidize their retirement needs. What happens if the pension eligible spouse dies? Often, the surviving spouse is left with a fraction, if any, of those monthly dollars. Thus, if you could mainly retire because of that pension, there is a realistic chance your spouse couldn’t stay retired if something happened to you, especially if those reliable pension dollars ceased.
Here is another example. You have someone other than a spouse dependent on more than your assets. I’ve had the pleasure of helping plenty of clients who have a special needs child, sibling, or other relative. If something happened to them, their loved ones will still need guaranteed funds. Life insurance helps ensure they can continue to receive the care they need. (By the way, in many of these cases, we look to set that future life insurance benefit amount into trusts for a loved one’s later needs.)
Retirement Wants: The other side of this coin is the retirement want column. Upon reading this, you may think you definitely don’t have a retirement need. Keep reading, however. You may have a retirement want for life insurance that you didn’t anticipate. Here are two good examples of situations in which clients want to have some sort of insurance coverage in retirement.
First, several clients want assurance that each grandchild has a certain dollar amount set aside for college (or something else). These individuals may want $100,000 to go to each grandkid at death, but they may not be able to, as leaving these dollars outright from their other assets might put their spouse in financial jeopardy. In this instance, there is a want, not a need, for a retirement life insurance policy.
The other good example is charitable donations. Many times, life insurance vehicles end up being a great way to leave a specific bequest to a charitable institution. Insurance can often be leveraged into leaving a sizeable gift to a charity you are passionate about.
In both these instances, there is not a need for life insurance. Rather there is a want for purposeful dollars to be left behind outside of your normal retirement assets.
As you can see, there are questions about life insurance to think through when approaching retirement. It’s a common circumstance to wonder what to do with those policies; never fear that your questions about them are unique.
In more instances than not, we’ve taken care of our clients retirement needs and wants with other forms of financial planning. That said, there are certainly many occasions when insurances are a great planning tool. They provide a great resource to accomplish your stated goals.
What do you think? Something to keep, or not? Definitely give it some thought, or at least have that discussion.