Should You Surrender Your Life Insurance Policies When You Retire?

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As individuals approach retirement, they often begin reviewing their annual expenses, looking for ways to trim unnecessary expenses so their retirement savings last as long as possible now that their paychecks are about to stop for their working years.  A common question that comes up during these client meetings is “Should I get rid of my life insurance policy now that I will be retiring?”

Very often, the answer is “Yes, you should surrender your life insurance policy”, because by the time individuals reach retirement, their mortgage is paid off, kids are through college and out of the house, they have no debt outside of maybe a car loan, and they have accumulated large sums in their retirement accounts. So, what is the need for life insurance?

However, for some individuals, the answer is “No, you should keep your life insurance policies in force,” and we will review several of those scenarios in this article as well.   

Retirees That Should Surrender Their Life Insurance Policies

Since this is the more common scenario, we will start with the situations where it may make sense to surrender your life insurance policies when you retire.

Remember Why You Have Life Insurance In The First Place

Let’s start off with the most basic reason why individuals have life insurance to begin with.  Life insurance is a financial safety net that protects you and your family against the risk if you unexpectedly pass away before you're able to accumulate enough assets to support you and your family for the rest of their lives, there is a big insurance policy that pays out to provide your family with the financial support that they need to sustain their standard of living.

Once you have paid off mortgages, the kids are out of the house, and you have accumulated enough wealth in investment accounts to support you, your spouse, and any dependents for the rest of their lives, there is very little need for life insurance.

For example, if we have a married couple, both age 67, who want to retire this year and they have accumulated $800,000 in their 401(K) accounts, we can show them via retirement projections that, based on their estimated expenses in retirement, the $800,000 in their 401(K) accounts in addition to their social security benefits is more than enough to sustain their expenses until age 95. So, why would they need to keep paying into their life insurance policies when they are essentially self-insured.  If something happens to one of the spouses, there may be enough assets to provide support for the surviving spouse for the rest of their life.  So again, instead of paying $3,000 per year for a life insurance policy that they no longer need, why not surrender the policy, and spend the money on more travel, gifts for the kids, or just maintain a larger retirement nest egg to better hedge against inflation over time?   

It's simple.  If there is no longer a financial need for life insurance protection, why are you continuing to pay for financial protection that you don’t need?  There are a lot of retirees that fall into this category.

Individuals That Should KEEP Their Life Insurance Policies in Retirement

So, who are the individuals who should keep their life insurance policies after they retire?  They fall into a few categories.

#1:  Still Have A Mortgage or Debt

If a married couple is about to retire and they still have a mortgage or debt, it may make sense to continue to sustain their life insurance policies until the mortgage and/or debt have been satisfied, because if something happens to one of the spouses and they lose one of the social security benefits or part-time retirement income, it could put the surviving spouse in a difficult financial situation without a life insurance policy to pay off the mortgage.

#2:  Single Life Pension Election

If an individual has a pension, when they retire, they have to elect a survivor benefit for their pension. If they elect a single life with no survivor benefit and that pension is a large portion of the household income and that spouse passes away, that pension would just stop, so a life insurance policy may be needed to protect against that pension spouse passing away unexpectedly.

#3:  Estate Tax Liability

Uber wealthy individuals who pass away with over $13 Million in assets may have to pay estate tax at the federal level.  Knowing they are going to have an estate tax liability, oftentimes these individuals will purchase a whole life insurance policy and place it in an ILIT (Irrevocable Life Insurance Trust) to remove it from their estate, but the policy will pay the estate tax liability on behalf of the beneficiaries of the estate.

#4: Tax-Free Inheritance

Some individuals will buy a whole life insurance policy so they have an inheritance asset earmarked for their children or heirs.  The plan is to maintain that policy forever, and after the second spouse passes, the kids receive their inheritance in the form of a tax-free life insurance payout.   This one can be a wishy-washy reason to maintain an insurance policy in retirement, because you have to pay into the insurance policy for a long time, and if you run an apple-to-apple comparison of accumulating the inheritance in a life insurance policy versus accumulating all of the life insurance premium dollars in another type of account, like a brokerage account, sometimes the latter is the more advantageous way to go. 

#5: Illiquid Asset Within the Estate

An individual may have ownership in a privately held business or investment real estate which, if they were to pass away, the estate may have expenses that need to be paid. Or, if a business owner has two kids, and one child inherits the business, they may want a life insurance policy to be the inheritance asset for the child not receiving ownership in the family business.  In these illiquid estate situations, the individual may maintain a life insurance policy to provide liquidity to the estate for any number of reasons.

#6: Poor Health Status

The final reason to potentially keep your life insurance in retirement is for individuals who are in poor health.  Sometimes an individual is forced into retirement due to a health issue.  Until that health issue is resolved, it probably makes sense to keep the life insurance policy in force. Even though they may no longer “need” that insurance policy to support a spouse or dependents, it may be a prudent investment decision to keep that policy in force if the individual has a shortened life expectancy and the policy may pay out within the next 10 years. 

While “keeping” the life insurance policy in retirement is less commonly the optimal solution, there are situations like the ones listed above, where keeping the policy makes sense.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

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