Is it necessary to keep life insurance for retirees? If you’re retired or soon to be, you may be thinking whether to keep that life insurance policy you’ve had all these years, or to take out a new one. Should you keep life insurance in retirement? We offer some information to help you decide.
If you’ve retired from the federal government, your situation is slightly different, and we touch on that as well.
Table of Contents
Why Life Insurance?
We all understand the basic purpose of life insurance. It’s to protect your spouse, children, and other loved ones in case of an unexpected demise by replacing lost income. But if you no longer have fulltime employment, and your earned income from a retirement job is a small part of your total income, you may decide life insurance is no longer needed.
The cost of keeping life insurance increases with time. The policy you paid into at age 40 costs a lot more at age 60. A 10-year term policy with $500,000 in coverage costs on average $238 per year for a 40-year-old man, and $1,361 per year for a 60-year-old man.
If your children are grown and independent, and your spouse would be taken care of in the event of your passing, then it might make sense to save the premiums each year and take a short vacation instead.
But suppose you got married or adopted children later in life and your kids are still in school or college, or you have special needs children who depend on you? In that case, you might want to keep your life insurance.
Reasons to Keep Life Insurance in Retirement
Here are some other situations in which you might consider holding onto your life insurance policy as a retiree.
You’re Dependent on Social Security or a Pension
If you’re receiving Social Security retirement benefits, a pension from previous employment, or an annuity, these may end upon your death. If your spouse or others are relying on this income, a life insurance policy can help protect them financially. Your spouse and family members could be eligible for survivors benefits but the rules can be complex. A life insurance policy provides guaranteed protection.
You Have Debts
Over 10 million people aged 65 and over have a mortgage. Altogether, 53% of Americans aged 75 and over have some form of debt such as credit card balances and car loans. If your family or your estate would be responsible for paying this debt, a life insurance policy could make things much easier for your survivors.
Estate Taxes
Along with debts, life insurance proceeds can help your heirs pay estate taxes if you have a very large estate. If your relatives and estate don’t have enough cash to pay estate taxes, a life insurance policy can help. You’ll want to check with an estate-planning financial specialist.
You Want to Leave a Legacy
A life insurance policy can supplement other assets like IRAs and annuities for your heirs. It can provide a tax-free inheritance. It can also help with funeral and burial costs.
Your Policy Has a Living Benefit
Some life insurance policies allow you to withdraw funds for healthcare or long-term care expenses. These may be helpful, as medical and long-term care bills can be expensive. You’ll want to check the terms of your policy and compare with the costs of long-term care [LINK TO LONG-TERM CARE PAGE] or paying out of pocket.
Whole and universal life insurance policies have a cash value. When the cash value reaches a certain level, you can withdraw or borrow cash from it. You also can use the cash value to pay premiums, so you no longer have to pay out of pocket.
How to Get Rid of a Life Insurance Policy
If you’re still paying into a life insurance policy, and you and your spouse and family have decided you no longer need it, there are several options to unburden yourself of it:
- Cancel or surrender it
- Sell it
- Swap it
Cancel or Surrender It
Whole life and universal life policies have a cash value. Although it’s usually much less than the death benefit, if you need funds for an emergency or an unexpected expense, you can surrender the policy for cash. This is the easiest option. Fees and taxes may apply. You can also use the proceeds to purchase an annuity or other source of retirement income.
Term life policies have no cash value. If you stop paying premiums, the term life policy ends.
Sell It
An alternative to surrendering your policy is to sell it. This is called a “life settlement.” The companies that may buy your policy are settlement companies. You generally solicit offers from multiple settlement companies. Each company will request information about your policy and also a copy of your medical records from your healthcare providers. It may then make an offer. You choose from the offers you receive.
You can follow this process yourself or hire a broker to help you. A broker will charge for their services but often can get higher offers than you could get by yourself. The process can take 60 to 120 days to complete. The average settlement is 20% of the policy’s benefit value. Older policyholders and higher death benefits will get higher offers. A portion of the settlement may be taxable as ordinary income.
Swap It
Some term life policies allow you to convert the policy to a new whole life policy without needing another medical exam. The premiums will be higher, but the policy will remain in effect for the rest of your life and the premiums will not change. The whole life policy will also have a cash value that you can withdraw from or use to pay premiums.
How to Get New Life Insurance in Retirement
Many people have reached retirement age and decide they want to get new life insurance. This may happen for the same reasons people want to keep an existing policy: they have outstanding debt, they’re working and their spouse or family depends on their earned income, they want to leave a tax-free inheritance, or they want to help cover their final expenses.
Some older adults opt for a life insurance policy that also offer healthcare and long-term care coverage. Should they have a long-term illness, the policy allows them to use funds for their care expenses.
Adults in their 60s and over may believe they’re too old to get life insurance. While the premiums will be higher than for someone younger, it is often possible, especially if the applicant is in good health. Non-smokers and those with healthy weight and no major health issues will of course qualify more readily. Even if you’ve had cancer or another illness in the past, you may be accepted if you’ve been healthy for the past 10 years. An insurance broker can help you negotiate with providers and obtain the best rates.
Life Insurance for Federal Employees After Retirement
According to OPM, if you meet certain conditions you can keep your existing basic and optional federal employees group life insurance (FEGLI) coverage into retirement. One of the conditions is that your annuity payments start within 30 days after retirement. If your annuity is delayed because you’re retiring under the Minimum Retirement Age (MRA) Plus 10 rule, your life insurance coverage is put on hold until your annuity starts. You can also decrease or cancel your life insurance, but cannot increase it after retirement. Also, once your decrease or cancel your life insurance after retirement, you cannot later increase or reinstate it.
Worldwide Assurance of Employees of Public Agencies (WAEPA) Insurance
The WAEPA is a private company that has provided group term life insurance to current and former federal civilian employees and their families since 1943. WAEPA insurance isn’t dependent on your salary, so coverage limits can be higher than with FEGLI. WAEPA offers coverage up to $1.5 million. Because WAEPA applies to current and former federal employees, you can keep WAEPI insurance if you leave the federal government for any reason. WAEPA also offers financial education, pre-retirement seminars, and scholarships to members and their families.
SAMBA (Federal Employee Benefit Association)
SAMBA is a nonprofit federal employee benefit association established in 1948 that offers term life insurance, as well as health insurance, dental and vision plans, accident insurance, and long-term disability insurance. Life insurance is available to current and retired federal employees under age 70, with accidental death and dismemberment coverage at no additional cost for beneficiaries under age 65. Coverage is available up to $600,000.
Federal Employee Life Insurance (FEGLI Alternative)
FEGLI Alternative is a private life insurance program for federal employees. It covers current and retired federal employees and their families. Coverage ranges from $25,000 to $100,000. Premiums depend on your age and the amount of coverage.