Dear Savvy Senior,
Is life insurance needed in retirement? I'm about to retire and have been thinking about dropping my policy to escape the premiums. Is this a good idea?
-- Over Insured
Dear Over,
While many retirees choose to stop paying their life insurance premiums when they no longer have young families to take care of, there are a few reasons you may still want to keep your policy. Here are some different points to consider that can help you determine if you still need life insurance in retirement.
Dependents: Life insurance is designed to help protect your spouse and children from poverty in the case of your untimely death. But if your children are grown and are on their own, and you have sufficient financial resources to cover you and your spouse's retirement costs, then there is little need to continue to have life insurance.
But, if you had a child late in life or have a relative with special needs who is dependent on you for income, it makes sense to keep paying the premiums on your policy.
You also need to make sure your spouse's retirement income will not take a significant hit when you die. Check out the conditions of your pension or annuity (if you have them) to see if they stop paying when you die, and factor in your lost Social Security income too. If you find that your spouse will lose a significant portion of income upon your death, you may want to keep the policy to help make up the difference.
Work: Will you need to take another job in retirement to earn income? Since life insurance helps replace lost income to your family when you die, you may want to keep your policy if your spouse or other family members are relying on that income. If, however, you have very little income from your retirement job, then there's probably no need to continue with the policy.
Estate taxes: Life insurance can also be a handy estate-planning tool. If, for example, you own a business that you want to keep in the family and you don't have enough liquid assets to take care of the estate taxes, you can sometimes use a life insurance policy to help your heirs pay off Uncle Sam when you die.
It's a good idea to talk to a disinterested third party (not your insurance agent), like an estate planning expert or a fee-only financial planner to help you determine if your life insurance policy can help you with this.
Life Settlement Option
If you find that you don't need your life insurance policy any longer, you may want to consider selling it in a "life settlement" transaction to a third party company for more than the cash surrender value would be, but less than its net death benefit. The best candidates are people over age 65 who own a policy with a face value of $250,000 or more.
Once you sell your policy, however, the life settlement company becomes the new owner, pays the future premiums and collects the death benefit when you die.
How much money you can expect to get with a life settlement will depend on your age, health and life expectancy, the type of insurance policy, the premium costs and the value of your policy. Most sellers generally get 12 to 25 percent of the death benefit.
If you're interested in this option, get quotes from several brokers or life settlement providers. Also, find out what fees you'll be required to pay. To locate credible providers or brokers, the Life Insurance Settlement Association provides a referral service at lisa.org.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of "The Savvy Senior" book.
