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Life Insurance in Retirement

Updated: May 28

Life Insurance Basics

Life insurance umbrella of protection on family

Let’s start by looking at the big picture. Why do people buy life insurance?

To protect their families, specifically from the threat of financial loss.

A young couple buys insurance so that the widow (or widower) can keep the same standard of living, even after they lose their spouse. It’s usually enough to provide a cushion for several years, allowing the survivor to grieve without worrying about their finances.

In retirement, the need for life insurance changes. Most retirees no longer need life insurance to make sure their families are protected, as they have retirement savings for that. Instead, life insurance is a way to leave a legacy instead of a necessity.

Determining if You Need Coverage.

There are four main reasons for buying (or keeping) life insurance coverage in retirement.

  • Long-Term Care: LTC is a concern for many retirees. While traditional LTC insurance has become prohibitively expensive for many, hybrid policies offer many of the same benefits at a reasonable cost.

  • Debt: If you have outstanding debt, a mortgage, or other substantial obligations, life insurance can ensure these are covered, preventing the burden from falling on your loved ones.

  • Dependents: This comes up most often with adult dependents, specifically those with disabilities.

  • Estate Planning: Life insurance is a powerful tool for estate planning in two areas. First, for covering estate taxes or as a means of minimizing estate taxes. Second, for evening out inheritances.

Traditional Long-Term Care policies were like term life insurance; if you didn’t use the benefits, you were out the premiums paid. Considering the significant expense, many retirees decided to self-insure instead of risking the loss of years’ worth of premiums.  

Then came hybrid long-term care policies. Hybrid policies pair long-term care benefits with permanent life insurance. It works like this: when you begin using your long-term care benefits, you’re effectively taking an accelerated payment from your death benefit. They can be effective for retirees who don’t like the use-it or lose-it nature of traditional long-term care policies.

Using life insurance proceeds to pay off debt can be a simple way of reducing stress on your loved ones. It can offset the loss of Social Security or pension income, allowing them to continue with their same standard of living.

The flip side to this is that it often isn’t necessary. For instance, many retirees have paid off homes and next to no debt. Or maybe they have sufficient retirement savings to offset any debt. Either way, many retirees find that they no longer need life insurance once they hit retirement.

What I typically recommend is matching term life insurance to expected retirement date, with the expectation that, barring the unknown, the need for life insurance will go away at retirement.

I’ve worked with several clients with disabled adult children. The parents typically wanted to leave a bequest to provide for continued care, even after they were gone. Life insurance can be a great option for protecting your children. With the right policy, you can know, or approximate, the amount of coverage at any point in time. You can tailor the coverage to the income needed to continue your dependent’s care.

If you have a child with disabilities, specifically those who receive government assistance, speak to an attorney about a special needs trust prior to making them a beneficiary on anything. A life insurance payout could hurt their eligibility for benefits; an attorney is important here. Through planning, you can potentially save your child enormous costs and headache on down the road.

Finally, life insurance can be used in both planning for estate taxes and for leveling inheritances.

Specific tools like ILITs (irrevocable life insurance trust) are popular for passing wealth to the next generation, inheritance tax free. That said, inheritance taxes are only an issue for those with taxable estates over $13 million individually or $26 million as a couple. It’s likely that won’t be an issue for most of my readers. Keep an eye on 2026, as the current estate tax exemption is set to expire. If it does expire, the exemption will be cut in half and we will likely see a return to strategies like ILITs, A/B Trusts, and family limited partnerships.

As for inheritances, this often comes up for owners of businesses and farms or real property. With farms specifically, life insurance policies are a good way of leaving a similar amount to each child, without actually splitting the farm. I usually see one child who works on the farm, get the farm. The other child, or children, receive inheritances from an insurance policy of similar value to the property. This keeps the inheritances even, while giving each child an inheritance that will be of use.

Big picture, if you don’t fall into one of the above areas or have another specific reason to own life insurance, you likely don’t need coverage.

Types of Insurance:

This can get complicated, so I’m going to keep it at a high level. There are two types of life insurance: permanent and term. Term life insurance provides coverage for a specific period, offering a death benefit without any cash value accumulation, generally at lower premiums. In contrast, permanent life insurance offers lifelong coverage with the additional benefit of cash value accumulation, typically at higher premiums. For a deeper dive into these types check out this link.

Speaking of cash value, I should probably explain it. Over time, a portion of the premiums you pay for a permanent life insurance policy accumulates as cash value, which you can borrow against, withdraw, or use to pay your premiums.

For younger clients, I exclusively use term insurance. It gives them the biggest bang for their buck.

For retirees, the optimal choice depends on what you’re protecting.

  • Debt: Likely term, with the term coinciding with the year the debt will be paid. This can be level-term, with a guaranteed death benefit over the duration of the policy, or decreasing term, where the coverage amount drops, mirroring the debt being paid.

  • Dependents: Likely permanent. You’re buying this for the guaranteed protection when you pass, not for cash value. You want the most death benefit per dollar of premium, but you don’t want the coverage to expire, so term doesn’t work. Guaranteed Universal Life (GUL) can be a good fit here. It’s a permanent policy, but it’s structured so that little cash value accumulates. This keeps your rates low.

  • Estate Planning: Again, likely permanent. If you’re buying for estate planning purposes, there are a lot of options and they’re all beyond the scope of this piece. If you’re buying to leave a specific amount to each child, then a GUL can be a good fit. Another option is an Indexed Universal Life, specifically one with an increasing death benefit. This would allow you to increase the value of the policy to match the growth of the asset you don’t want to split.

How Much Coverage to Obtain:

If you’re still reading, I’m guessing you need insurance. Start the purchase process by looking at the reason why you need the coverage.

You don’t have to make this complicated. Estimate how much you need to pay off that specific debt, then round it up. If you want to protect your dependents, the number is a bit different. I would estimate the annual cost and then multiply it by the years you want to cover. Don’t forget to include inflation in the number either. Finally, for estate planning, I would simply look at the value of the asset, farm, or business that you want to match and use that value.

Keep in mind, many insurance policies offer breakpoints based on the value of the death benefit. These typically occur at $100k, $250k, $500k, $750k, and $1mm. I would try to round up to one of these increments to get a lower marginal price.

Where to Buy Insurance:

You have a few options here.

I recommend using someone who is able to shop your policy to various insurance companies to find the best policy for your needs. This can be a financial advisor, independent insurance agent, or it can be a company like DPL Financial or Low Load Insurance Services.

I would stay away from captive agents, like those from the various BigNameMutual or StateNameLife (names changed so I don’t receive a nasty letter on down the road.) These agents are typically incentivized by their firms to sell their products. They might technically be able to sell other products, but at the end of the day, their contracts are validated based on sales of their employers’ products. You don’t want to second guess if you’re getting the best policy for you, so I’d just stay away.

Reviewing Current Insurance Policies:

Here’s a situation I see often. A new client comes in and we begin reviewing their insurance policies. Turns out they have 3-4 policies that they’ve bought over the years, often at the urging of a friend who was in the insurance business.

The policies are typically a mess. They’re often whole life policies, which I don’t like. The death benefit is usually between $50k and $100k, which, while a significant amount of money, is rarely enough to provide the protection needed. The cash value is usually negligible, although I’ve seen a few policies with significant cash.

So how do I review these policies? I start by gathering the following pieces of information:

· Insurance Company

· Type of Insurance

· Death Benefit

· Premium Amount

· Term (if applicable)

· Policy Illustration, if available

· Beneficiary Names

From there, I look at the total coverage to see if the current coverage is sufficient to meet protection needs.

Next, I look at each individual policy. If it’s a term policy, does the term coverage last long enough? If it’s permanent insurance, is the policy paid up? If not, is the policy in danger of collapsing? Are there loans against the policy? Based on the current premiums, could you get similar coverage elsewhere for a lower price?

Note, if you have a permanent policy, you’ll likely need the insurance company to run a current illustration for you. This will show you if you’ve paid enough to keep the policy in place or if you need to adjust your monthly premium amount. Be aware that if you’ve taken loans against a policy and the policy collapses, those loans become taxable income. You want to make sure policies with loans stay in force.

Look at the cash value in the policy and options. Some policies, particularly old ones, offer solid interest rates on cash value. I’ve seen policies that could effectively be used as an extra savings account, with a 4% interest rate. That rate is good now, but it was great a few years ago when most banks were paying zero.

Finally, I’m checking beneficiaries. At least once a year, you should make sure the named beneficiaries match up with who you want to get the proceeds. I’ve seen couples divorce but forget to update beneficiaries, leading to unexpected gifts down the road.

I recommend keeping an organizer or spreadsheet with all this information so that you can simply update it each year. It’ll make your life simpler.

Options for a Bad Policy

If you have a policy that doesn’t fit in your plan, that’s okay! You have options. Here are three of them.

  • Surrender the Policy: You can surrender the policy for its cash value. Be aware that gains coming from the policy will likely be taxable. There could be fees here as well.

  • Convert to Annuity: If you have substantial cash value in a policy and no need for the death benefit, you can use a 1035 exchange to convert your policy into an annuity. The best part about a 1035 exchange is that it’s not a taxable transaction; you’re deferring any gains till you begin taking distributions from the annuity. Even if you’re looking for growth, don’t overlook annuities. There are some variable annuities with low overall expenses that allow you to invest using Vanguard or other index funds.  

  • Gift the Policy: If you’re charitably inclined, you can actually gift a life insurance policy. Not all nonprofits will accept them, it depends on their gift acceptance policy, but it can be a handy way to get a deduction while avoiding a taxable surrender.

When you SHOULDN’T Buy a Policy

As a licensed and regulated investment advisor, I have to follow certain rules when it comes to marketing. In short, my statements have to be truthful at all times and I have to be very careful if I’m recommending a specific investment.

On the other hand, insurance agents have to do none of this. Life insurance marketing is the Wild Wild West. They can say almost anything, with no repercussions.

Don’t believe me? Check out Instagram or Tik Tok and search for MPI or Life Insurance Retirement Plan. You’ll hear dozens of agents explaining the various ways that their product is better than a 401k or how it’s a Rich Man’s Roth IRA, without income or contribution limits. They tout the tax-efficiency of their products, often using the term tax-free retirement income. They even throw out all the upside of the market, without the losses.

You’re probably thinking that sounds pretty good. I mean who wouldn’t want an account that only goes up, without any taxes?

The problem is that these policies are smoke and mirrors. The tax-free income is actually just a loan, so of course it’s tax-free. The policies are often tax-time bombs, with policy collapse leading to significant tax bills. Finally, they’re expensive. Most agents fail to mention that you’ll likely be underwater for the first five or more years you’re contributing to the policy.

Want to know a secret? Agents typically receive commission equivalent to the first year’s premium. This is firm dependent, and it depends on how your premiums are structured, but it’s a fairly accurate rule of thumb.

Just remember that life insurance isn’t an investment, it’s a means of protecting yourself and your loved ones. You have investments and you have insurance. Your insurance shouldn’t be an investment.

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