Tuesday November 28, 2023
Do You Need Life Insurance During Retirement?
The decision to retain a life insurance policy after retirement depends on your family and financial circumstances. While many retirees choose to stop paying their life insurance premiums when they no longer have young families, there are several reasons to keep a policy. Here are some things to consider before making a decision.
Family: Life insurance is designed to help protect your spouse and children in case of an unexpected passing. However, if you have adult children who are financially independent and sufficient financial resources to cover you and your spouse’s retirement costs, the need for ongoing life insurance may be minimal.
On the other hand, if you had a child late in life or have a relative with special needs who is dependent on you for income, it may make sense to keep paying the premiums on your policy.
You also need to make sure your spouse’s retirement income will not significantly drop when you die. Check out the conditions of your pension or annuity to determine the survivor’s benefit and factor in your lost Social Security income as well. If you find that your spouse will lose a significant portion of income upon your passing, you may want to keep the policy to help make up the difference.
Debts: If you are still paying off a mortgage or have other large debts, it may be best to keep your policy in order to help your family pay off these debts after you pass. If your debt is a small part of your net worth that poses no risk of financial difficulty, then life insurance may not be necessary.
Work: 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 depend on you for income. However, if you have very little income from your retirement job, it is likely unnecessary to continue with the policy.
Estate taxes: Life insurance can also be an estate planning tool if you have a very large estate, in excess of $12.92 million in 2023. If you own a large business that you want to keep in the family and you do not have enough liquid assets to pay the estate taxes, your estate may use the proceeds from a life insurance policy to help your heirs pay estate taxes when you die.
To help you with this decision, consider talking to an estate-planning expert or a fee-only financial advisor who can help you weigh out the pros and cons.
Sell or Swap Your Policy: If you decide that you do not need your life insurance policy any longer, you may surrender it for its cash value or allow it to lapse. Another option is to sell your policy in a “life settlement” transaction to a third-party company. A life settlement sale typically pays more than the policy cash surrender value.
If you are interested in this option, get quotes from several life settlement providers or brokers in your state. Some states provide directories containing licensed life settlement providers. Make sure to confirm the information with your state’s insurance department.
Another option is to use a tax-free Section 1035 exchange to exchange your policy for a hybrid product that blends life insurance with long-term-care insurance coverage. These products come in various forms, but they often combine a whole or universal life policy with a long-term-care rider. If you do not use the long-term-care coverage, your heirs get the death benefit.
Donate Your Policy: If you choose to make a charitable contribution of your life insurance policy, your deduction will depend on whether the policy has increased in value above the premiums and whether the policy is paid up or there are remaining payments to be made. To receive an income tax deduction, the donor must irrevocably transfer ownership of the policy to a nonprofit. With this transfer, the donor must relinquish all incidents of ownership and rights in the policy. An outright gift of a life insurance policy will produce a charitable income tax deduction equal to the lesser of the policy's value or the donor's basis in the policy. See Sec. 170(e) and Rev. Rul. 78-137.
In general, the donor's basis in a policy equals the total amount of premiums paid by the donor. As a practical matter, the charitable income tax deduction will normally equal the donor's basis because, in most instances, the cost basis will not be greater than the policy's value, i.e., replacement cost or interpolated terminal reserve value (ITRV).
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.