One of the most common questions I receive on my radio show, from clients, and from professional associates is “Do I still need life insurance as I approach retirement or in my retirement years.” It’s a very valid and smart question. And like most other questions regarding insurance options, the answer is (the often frustrating) “It depends.” It depends on:
- Where you are in life
- What your family situation is
- Other factors unique to your own multi-faceted circumstances.
Why Life Insurance in the first place?
Let’s back up a little bit first. When you get life insurance, you’re most likely doing it to replace the earned income of the deceased, whether that’s you or your spouse. When the deceased is gone, his or her income is eliminated from your family’s funds to live on. A life insurance policy can often be a great tool to maintain your family’s financial security moving forward.
Traditionally, most financial advisers would say that most people need larger amounts of life insurance coverage when they are younger and starting a family. At this stage of life, your mind is on your family’s security. And life insurance becomes part of the answer for that. Typically, younger people:
- Have a larger mortgage than they do when they approach retirement (hopefully).
- Are starting a family or have young kids and they haven’t yet saved a lot for college.
- Could have one spouse at home to care for their child reducing their monthly income.
- May have higher credit card bills to pay for child care necessities.
- May also have existing college loans, taking a chunk out of the family budget.
As time goes by, and as folks do a good job saving over the years and paying down debt, the need for life insurance should be lower if not non-existent. This sounds pretty logical right?
Changing financial risks that may warrant life insurance
Not so fast. What seems logical is not always the case. Right now, things seem to be changing for many families and individuals. We all face different risks than we did in the past.
I am finding among my clients that many people need to keep their life insurance longer, and the amount needed is becoming higher and higher all the time.
Rather than facing a reality you expected, in which your savings are enough to support you in retirement when your income stops, you may face an entirely different reality – one that makes it very necessary to have the benefits of life insurance. And here are just some of the most common obligations you may face during your retirement years:
Paying college loans
Many people are forced to take on significant debts to help their children get through college. And keep in mind that not every student completes college in four years. Some require that extra fifth year, because of any number of situations, such as transferring to another school, not performing up to par along the way, taking a semester abroad that interrupts their path to a four-year degree, and more. So you may need to dig into your savings to help your kids get that diploma. And perhaps continue on to graduate school and other advanced degree institutions.
Caring for a special needs child
You may have a special needs child whose quality of life in the future will depend upon the financial support you can provide via a trust or other plan to support them for a long time after you are not here to support them later.
Supporting your parents
You may be in, or find yourself in at some point in the future, a situation in which you must financially support your parents. If your parents didn’t save adequately, or if their savings are depleted through the financial drain of illness or the need for assisted living, it may be up to you to cover their financial obligations as you approach your own retirement. The ‘sandwich generation’ of people supporting their kids and their parents faces some daunting financial drains.
Protecting estate from taxes
You may be wealthy, and as such, your estate may be subject to costly federal and state estate taxes. If your estate is above a certain value threshold, the draconian effect of estate taxes can be massive. Life insurance can minimize much of that burden on you and on your family.
Protecting against a government pension offset
You may have a situation in which one spouse is covered under a government pension and one has a job that provides social security. Listen to our podcast below for clarity on how these situations may play out for the surviving spouse. It’s one of the examples of how ‘it depends’ comes into play as the valid answer for whether or not you need to carry life insurance. You may want to carry life insurance to help reduce the possible effects of the government pension offset rule administered by the social security administration (one of those little asterisks at the bottom of a social security statement that many people overlook.)
There can be other reasons to keep life insurance coverage as well, but my point in sharing these unique life situations is this: don’t be so quick to pull the trigger on getting rid of your life insurance when you approach retirement. Think long and hard and consult with a qualified financial professional first. Because once you dump your life insurance, you may not be able to add it again.
If you have specific questions about the need for life insurance as you approach retirement, or have questions about other important issues that can impact your and your family’s quality life down the road, it’s always smart to ask questions now in order to make informed decisions.
Our podcast is available to start you off on your exploration of what life insurance can do for you.