Life Insurance in Retirement – “To Keep or Not to Keep, That is the Question”September 22nd, 2020 by Jim Allen
September is National Life Insurance month and is the time when we conduct annual life insurance policy reviews for our clients. Life insurance is an important component of most people’s financial plan when they are married and/or have children to support. The basic financial strategy is to buy enough life insurance to replace income in the event of early death of a family breadwinner. Should someone die pre-maturely, there might not be enough income to support your family. Life insurance can make up this lost income, pay off a mortgage or fund a college education.
One of the more frequent questions we get when meeting with clients or potential clients is: “Should we keep our life insurance after we retire?” Unfortunately, there isn’t a right or wrong answer to this question.
As we get older and accumulate wealth, the need for life insurance should decrease or be eliminated altogether. Ideally, at some point, your personal capital (savings) should be able to replace any income lost because you have stopped working – either because of retirement or death. This is why many people just purchase term life insurance as their need for the coverage should stop after they accumulate enough personal savings.
While that concept is sound and does work for most people, that isn’t always the case. For instance, people often retire (or are forced to retire due to job elimination or poor health) without having accumulated enough savings. Also, when a spouse dies, some Social Security benefit is lost, as is a portion of pension payments. These changes to the retirement income plan need to be looked at to determine whether keeping the existing life insurance improves the chances of not running out of money. As part of our comprehensive MoneyLife approach, we always analyze the need for continuing with existing life insurance coverage. What really matters is whether continuing with the policy improves the “probability of success” of having enough money in retirement. If it does, then maybe the policy is worth keeping. If it doesn’t, then maybe the premiums being paid for the life insurance coverage can be used for other purposes.
Of course, the economics of the life insurance policy always need to be reviewed as well. While keeping the coverage may improve the chance of success in retirement, a detailed review of the policy to see if the policy will stay in force, or if premiums will increase need to be considered. We do this every year during Life Insurance Awareness Month to make sure our clients as protected and their financial future is secure. We strongly feel that this is part of our fiduciary obligation to our clients.
Readers of this article are eligible for a complementary life insurance review and analysis. Please contact me to schedule an appointment.
Jim Allen, CFP, CLU, ChFC is the Director of Financial Planning and a Principal at Anchor Bay Capital. In addition to his 30 years of financial planning experience and his professional credentials, he holds a Master’s Degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.”