First Person: Do You Need Life Insurance If You Are Retired?

When you enter retirement, many of your financial circumstances may change. The mortgage on your house may be paid off as well as other loans and your asset base may be growing if you purchase "luxury" items such as boats or trailers. One issue that my clients frequently ask me about is whether they still need to carry life insurance now that they are retired. As with many financial planning questions, the answer is "maybe". Your need for life insurance in retirement will be dependent on your financial situation and your goals for leaving money behind.

Your net worth

The basic purpose of carrying life insurance is to make sure that your financial contributions to your dependents are covered if you die. It makes sense for parents with young children to carry life insurance. Their income will need to be replaced to pay for the mortgage, other house costs, children's schooling and all of the other expenses that occur in a typical family. When you retire, you do not necessarily have dependents any longer. Your children may be grown and gone and most of your debts with your spouse paid off. If you have no debt and enough savings to fund your spouse's retirement, you may no longer need life insurance coverage. The money saved on premiums could be added to your savings to help cover the costs of your eventual burial.

Your legacy plans

Life insurance is a tool that can be used for many more purposes than simply replacing lost income. It is an effective way to leave substantial amounts of money to your favorite charity. For example, if you were going to give your charity $100 per month in donations, you could buy a life insurance policy and pay the $100 in premiums. Then, on your death, the charity inherits the face value of the policy. It can be a powerful way to ratchet up your charitable giving legacy. Because there are many rules about using this strategy, it is important to consult an experienced CPA when setting up this type of plan.

Your inheritance wishes

Some people's goals when they die are to have exactly enough assets to cover their debts, basically winding up their financial position. For others, however, leaving money to their children or other heirs is important. When deciding whether you need to carry life insurance, compare your net assets with the amount you wish to leave to your heirs. Keep the estate tax in mind if you have a large estate as this tax will have to be paid before distributing the net estate. You may wish to continue coverage under a term life plan to meet your bequest wishes.

Your estate tax situation

Estate taxes are a hotly debated political issue these days and the rules are forever-changing. In 2013, they will change again. If you are leaving an estate of more than $500,000, you should consult an estate attorney when drafting your will and planning for estate taxes. If you have a large estate that consists mostly of illiquid assets such as real estate, some of the property may have to be sold off before being distributed to beneficiaries in order to pay the estate taxes. Maintaining a term insurance policy to cover the estimated estate taxes ensures that your assets can transfer the way you intended.

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