Life insurance plays a crucial role during a person's working years. As you approach retirement, though, your goals may change, and you might lose your coverage from company benefits, which would require you to buy your own policy to stay insured. But how much life insurance do you need in retirement, and do you even need it at all?
While life insurance might not serve the same purposes in retirement as when you were working, it can still be an important part of your financial plan. Here are some points to consider as you decide how much life insurance you will need.
Do You Need Life Insurance After 65?
As you enter retirement, it's possible that the life insurance needs you had while you were working no longer apply. Your children may have grown up, or you may have finished paying off your mortgage, and once you leave the workforce, your family will no longer be relying on your weekly paycheck. However, retirees can still use life insurance in a number of ways, including:
- Covering outstanding debt. If you have any debts from credit cards, mortgages or student loans, you could use life insurance to pay off that debt. You may also have to take on medical debt during your retirement, or you might owe estate taxes after passing away. By addressing these expenses with life insurance, you can avoid leaving debt to your heirs.
- Creating an inheritance. Life insurance is one of the most effective ways to leave an inheritance, thanks to favorable tax rules. Whether you're helping your grandkids pay for college, providing for a family member with special needs or donating to your favorite charity, life insurance can help you support your loved ones and causes that are close to your heart.
- Replacing your retirement income. Even in retirement, you could still be bringing in some household income through your Social Security checks, pension or part-time work. When you pass away, life insurance can help replace this income.
- Taking care of other family members. You could also be supporting your family in nonfinancial ways, such as babysitting grandkids or helping your spouse around the house. When you pass away, your family might need to hire someone to perform those duties, and life insurance could help pay for it.
- Paying for final expenses. The median cost of a funeral and burial was $7,640 in 2019, according to the National Funeral Directors Association. With life insurance, you can handle these expenses so your grieving family doesn't have to.
When Don't You Need Coverage?
While there are a number of reasons to have life insurance in retirement, they might not apply to everyone. If you have considerable financial resources, you could use your own money to cover any needs rather than using life insurance.
On the other hand, if your retirement budget is limited, it might not be possible to afford life insurance. You would need to pay premiums to maintain the coverage, and you'd be doing so without an employer picking up part of the costs. Ultimately, you will need to take care of your own financial needs during retirement before you can create an inheritance for your heirs.
If you don't have any family members or other loved ones who may need financial support, life insurance might not be necessary for you unless you want to make a large donation to a charity of your choosing.
What Type of Life Insurance Makes Sense for Retirement?
There are two main categories of life insurance: term insurance and permanent (also referred to as whole) insurance. Term life insurance is temporary coverage with a set expiration date. For example, a 10-year term policy covers you for 10 years and then expires if you live past that point. Permanent life insurance coverage, however, can last for the rest of your life without expiring, provided that you keep paying the premiums.
Permanent life makes more sense for most retirement needs, such as covering final expenses and leaving an inheritance. Since these needs won't end, it's important to have a life insurance policy that doesn't expire.
There are some situations where term life insurance can make sense in retirement too. For example, let's say you plan on working part-time for another five years after leaving your main job. You could buy a five-year term policy to protect your income during this stretch, and then that coverage would expire once you leave the workforce and no longer need it. For needs that will last your entire life, though, consider permanent coverage.
Should You Buy a New Policy or Use an Existing One?
If you decide that you could use life insurance in retirement, the next step is figuring out how to set up your coverage. One option is to buy a brand-new policy. By doing so, you can apply for the exact policy type and coverage amount you'd like.
The downside to this is that you would need to go through medical underwriting. If you have preexisting health issues, your premiums could go up, or your request for coverage might even be denied. Given that the likelihood of health issues increases as you get older, the earlier you apply for a policy in retirement, the better your chances are of qualifying with an affordable premium.
If you're currently working and still have coverage from company benefits, that could be another way to set up retirement life insurance. While you can't stay in an employee insurance program after retiring, some plans will let you convert the group coverage into an individual policy. Depending on your plan's rules, this could be a way to set up retirement coverage without taking a medical exam. There's no guarantee it will work out to a better deal, but if you have this option, it may be worth comparing to the cost of buying a new policy.
Another approach is to maintain an individual term life insurance policy outside of work. Some policies include an extra benefit called a term conversion rider, which lets you exchange the term for permanent coverage without a medical exam. At the start of retirement, it may make sense to use this feature.
How Much Life Insurance Do You Need?
Calculating how much life insurance you need in retirement is a little different from calculating how much you need while you're working because it will no longer be based on your salary. As a result, a lot of quick guidance that once applied, such as purchasing a policy with a death benefit equal to 7-10x your annual salary, won't apply anymore.
Instead, consider making your calculations based on how much you'd like for different goals, which is formally known as conducting an insurance needs analysis. For example, when you retire you might decide that you'd like $10,000 for final expenses, $15,000 to cover your debt and $40,000 to leave as an inheritance for your grandchildren, which would amount to $65,000 of retirement life insurance.
The amount of life insurance you need during retirement could be significantly less than the amount you needed when you were working, since you aren't trying to replace years of salary for your family. Note that you might also have to choose a smaller policy because you will no longer be getting help from your employer to cover the premiums.
As you conduct your estate planning, it's a good idea to meet with an experienced life insurance agent who can help you determine whether you might need life insurance after 65 and point you toward the right policy for your situation.