You're Retired. Should You Ditch Your Life Insurance Policy?
by Amy Bell
After toiling away in the workplace for decades, you've finally reached those much-awaited, glorious retirement years. That means you can ditch those uncomfortable business suits, bid farewell to boring staff meetings and say good riddance to endless hours pecking away at a computer. And while you're at it, you might as well scrap your life insurance policy, too. Wait, not so fast…
You may want to take stock of your current situation before you make this critical decision. For some people, it simply does not make sense to continue to pay into a life insurance policy after retirement. If you no longer have young children who rely on your income and your spouse is covered by retirement investments, maybe you should chuck that policy.
On the other hand, there are plenty of good reasons to hang onto life insurance for a while longer. For example, if you still have family members who rely on your income, if you own a high-value estate or if you simply want to leave a legacy behind, you may decide to keep paying into life insurance.
To keep or not to keep that life insurance policy? It's the million dollar question for retirees across the nation. If you're trying to determine whether you should throw out your life insurance policy along with your business ties, here are a few things you should keep in mind.
It Isn't About You
It's important to remember that life insurance isn't about you. As a matter of fact, life insurance is not even meant to insure your life. The purpose of life insurance is to protect those who rely on your income from financial hardship if you were to die. If you were to pass away during your working years, an effective life insurance plan would ensure all your family's financial needs will be covered, from the monthly mortgage and utility bills to your child's college education.
But as a retiree, you (hopefully) no longer have children who rely on your income. By the time you reach retirement, your children are most likely grown and earning their own income. If your 35-year-old moocher of a mama's boy is still living your basement rent-free, it's probably time to give him the boot.
So, what about your spouse? At this point in your lives, if you were to bite the dust your spouse would probably be covered by income from your retirement investments. Because you are no longer working, you are not bringing in a stream of work income. There's no need to cover income that isn't there. Plus, if your spouse is also retired, he or she will continue to receive a steady source of income from your retirement funds. Therefore, his or her income would remain the same after your death.
To quickly and easily resolve this dilemma, all you have to do is ask yourself one simple question: will any of my loved ones suffer from a financial loss if I were to croak tomorrow? If your answer is "no," then there's probably no need for you to keep your life insurance policy. Unless, of course, you have other, personal reasons to hang onto your policy.
It's the Gift That Keeps on Giving
Many retirees want to leave behind a legacy after they're six feet under. Maybe you're comforted knowing your family will receive some kind of payout after your death. Even if they don't need this money, you may want them to have it.
If you feel strongly about this, it may be worth it to give up some of your income now to make sure your heirs receive a special gift later. The significant death benefit could be enough to cover your grandson's college tuition or your granddaughter's wedding. Better yet, it could give your moocher of a son enough cash for a down payment on a house of his own.
Let's say your grandkids are spoiled rotten and you don't feel the need to leave any money to them. In that case, you may prefer to make your favorite charity the beneficiary of your life insurance policy. If there's a special charity that's near and dear to your heart, you could leave a big chunk of money behind to the cause.
Protecting Your Estate
If you own a successful small business or have a high net worth, your estate may be subject to estate taxes after your death. Depending on the value of your estate, these taxes can be extremely expensive. In the end, this could cause some serious financial turmoil for your loved ones.
If that's the case, you may want to keep that life insurance policy after all. However, a term insurance policy is probably not the best type of life insurance for those with large estates. You may want to look into a permanent life insurance policy. Although these policies are more expensive than term insurance, they come with longer term periods.
A term insurance policy typically only covers you for 15 or 20 years, and the payout amount decreases over time. On the other hand, permanent or "whole" life insurance generally remains in effect for your entire life as long as you keep paying premiums.
A whole life policy will provide your family with the money they need to pay off your estate taxes after you die. Not only will this ensure your family doesn't suffer financially, but it could also protect your business from being liquidated.
A Personal Choice
Of course, whether you choose to keep or ditch your life insurance policy post-retirement is entirely up to you. It all depends on your unique wants and needs. If you're struggling to make this decision, discuss the pros and cons with your financial advisor.