If You Might Need Life Insurance During Retirement, Don't Delay

Even if you don't earn a king's ransom, good planning and diligent saving can prevent you from having to rely on Social Security benefits. However, there are other tools to consider, including life insurance.

Like so many pieces of the retirement puzzle, addressing financial concerns in your 30s and 40s can help prepare you for the future and boost your confidence in your ability to manage money. It's far easier, for example, to buy life insurance in your thirties than in your fifties.

USA Today's recent article, "Financial planning: How to determine if you need life insurance in retirement," notes that many older Americans wonder if they'll need life insurance in retirement. They are concerned whether their surviving spouse and loved ones will need the capital generated by the life insurance policy—the death benefit—to replace their income and to preserve assets.

The answer depends on the facts and circumstances. Some experts believe that you wouldn't need life insurance if you planned well enough prior to retirement. You'll have no debt, plenty of assets to replace the income lost due to your death, and sufficient money to leave to heirs. That all sounds good in theory, but reality may be different.

Run the numbers. Examine your cash flow statement before and after the death of either spouse. If there's more than enough income to cover the surviving spouse's living expenses throughout retirement, then you might not need life insurance. However, suppose there's not enough income, even after you calculate the amount the couple has saved and whether that can reliably provide for the surviving spouse. In that case, you might need life insurance.

Life insurance can be used for other goals, in addition to income replacement and paying off debt. It can be used for estate taxes, taxes due on inherited IRA distributions or taxes due on death-bed Roth conversions of qualified accounts, or for charitable planning.

A retiree with a large farm or business worth more than $22 million might want their heirs to use life insurance proceeds to pay estate taxes and to avoid selling the bequeathed asset. They can also use required minimum distributions (RMDs) from IRAs to purchase life insurance to provide a tax-free legacy to heirs while designating a non-profit organization as the eventual retirement account beneficiary. "This strategy allows a retiree to double the impact of their retirement account while eliminating income taxes on the retirement savings.

In addition, with the possible need to fund long-term care expenses in retirement, retirees might consider buying a permanent life insurance policy with a rider for long-term care. In other cases, insurance policies with a large death benefit can substitute long-term care coverage for the beneficiary, the surviving spouse.

If it turns out that you do need life insurance during retirement, your best option is to purchase term life insurance and not a policy that builds cash value.

Speak with your estate planning attorney to work through the numbers and make sure that any insurance policy you purchase works as part of your estate plan.

Reference: USA Today (May 2, 2018) "Financial planning: How to determine if you need life insurance in retirement"