When you first get life insurance, the goal is often to provide a backstop for your loved ones. Life insurance is an important part of protecting your family’s financial future in the event that you pass away unexpectedly.
But what happens when you retire and no longer have children that rely on your income for survival? If you term life insurance, your policy lapses, and you don’t have to worry about it. For those with whole/universal life, however, the question of what to do with life insurance in retirement is a thornier issue.
DO YOU WANT TO KEEP PAYING PREMIUMS?
If you have a life partner, it can make sense to maintain the life insurance premiums if you hope to provide for him or her in the event that you pass on first. However, there might be other assets that your partner can draw on, including your Social Security death benefits, an annuity with survivorship, or your IRA.
Your life insurance policy might not be necessary, and paying the premiums might not make sense — especially since insurance that builds cash value can become more expensive, particularly in a low-rate environment. If you are trying to reduce your regular expenses to manage your cash flow, keeping your life insurance policy when it’s not longer required doesn’t make a lot of sense.
Some retirees find that it makes more sense to surrender the whole/universal life insurance policy for the cash value, rather than continue paying premiums. In most cases, the cash value isn’t likely to provide long-term retirement income, but it can be enough to take a nice vacation or add to an investment account for future, potentially higher, returns.
WHAT ABOUT A LIFE SETTLEMENT?
Retirees have another option if they want to stop paying premiums, but aren’t sure if the cash value is worth the surrender of the policy. A life settlement is an arrangement in which an investor pays to become the beneficiary of your policy. He or she pays a lump sum that usually amounts to more than the cash value you would receive for surrendering the policy.The investor takes over the payment of the premiums, so you no longer have to worry about it. The investor feels that, in the end, when the benefit is paid out, he or she will come out ahead.
A life settlement can be one way to receive a large chunk of capital that can be used for something else. Depending on your age, the size of the policy, and the type of policy, you might be able to receive an amount that would allow you to purchase an immediate annuity, allowing you to turn a regular expense into a permanent source of income for you.
It’s important to be careful about your life settlement, however. Going through a reputable broker is the best option, and you need to be aware that a broker will take a portion of the settlement as a fee. Pay attention to the fees before you agree to a life settlement, and make sure that this arrangement will meet your needs, and the needs of your life partner should you pass on first.
MAINTAINING THE POLICY FOR THE BENEFIT OF YOUR HEIRS
You should only consider surrendering your policy for cash value or participating in a life settlement arrangement if you meet the following conditions:
- The premiums have become unaffordable and you don’t want to lose the value you’ve accumulated over the years
- You are in need of extra liquidity due to your current retirement situation
- The coverage is unneeded because there are other options for your life partner and/or heirs to receive what they need
In some cases, it makes sense to keep your whole/universal life insurance policy in retirement. A death benefit from life insurance is tax-free to those who receive it, so it can actually be an estate planning tool. There are some retirees who maintain their policies so that their heirs can use the money to pay inheritance and/or estate taxes down the road. Of course, if you can’t afford the premiums or if you need the liquidity, shoring up your own situation is more important than providing extra money for your heirs.
Before making a move with your life insurance policy in retirement, consult with a knowledgeable financial advisor. Your financial advisor can help you evaluate your current situation and the options, and make a decision that will provide the greatest benefit for you, your partner, and your heirs.