Life Insurance in Retirement: 9 Critical Reasons to Keep Your Coverage

If you're like most people that we visit with that are stepping into retirement, you have some old life insurance policies that you've probably accumulated over the years. Maybe some group insurance policies, term insurance policies, whole life policies, and you're asking yourself, should I carry these into retirement with me? Do I need life insurance in retirement? Today, I'm going to share with you nine reasons you might consider having life insurance in retirement. Hey, I'm Casey Weade, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner.

Now, we're going to be talking about life insurance today. And as I said in the open, you probably accumulated some policies over the years, and you're asking yourself what to do with those policies. Don't do anything with those policies until I walk you through the nine reasons you might consider keeping those or even upgrading those policies as you step into retirement.

The first of those reasons is social security. Now, this is basically how this will function if someone passes away during your retirement years where you're both on your social security. You retain the larger of your two benefits.

Now, for a couple who has a large disparity in those benefits, you have a couple that is living on a spousal benefit in conjunction with a primary benefit, it may not be as big of a deal. Because of that disparity, you're just losing a smaller chunk of income, the smaller of those two benefits. However, if you have benefits that are fairly similar, maybe you had similar working incomes, that means your benefits may be cut in half.

If you both had $2,000 or $3,000 a month, then you had $4,000 to $6,000 a month combined. Now, those numbers getting cut in half leaves you with $2,000 to $3,000 a month. Now, you have a gap to make up potentially when it comes to that retirement income.

And that may cause another problem leading us to number two. Number two has to do with tax increases. Now, when all of a sudden you have a loss in income, say due to a social security reduction, now the surviving spouse has to go pull some additional dollars from someplace.

That may be their IRA causing additional taxation. That additional taxation may push them into a higher tax bracket. But not just that, but I think one of the so often most overlooked elements of this is that your survivor will no longer be married filing jointly.

Now, they're going to be filing as a single filer. A single filer could be paying substantially more in taxes than a married couple. And quite often, there isn't a lot of taxability changes, especially if you're 75, 80, 85 years old, you may still have roughly the same taxable income, if not more due to a higher income need.

And now you're paying more and more in taxes in retirement. And that's one of the things that could be a good reason for you to carry life insurance in retirement. Now, let's move on to number three.

Number three could be a pension. Maybe you have a pension from your working years, and you don't have 100% joint survivor coverage for that pension. Meaning that the pension you have today may not entirely go to your surviving spouse.

It may get cut in half, maybe reduced by 75%. It may go away altogether. And that would mean, again, you need to replace that pension income.

And I can't emphasize this enough. Quite often, what we find is the survivors don't have a significant change in their income need. And that's why they need to start taking just as much, if not more income, as they were when both spouses were surviving.

And then we get to the next one, and that is long-term care benefits. Now, you think about life insurance, you probably don't think about long-term care benefits. However, today, there's a lot of life insurance policy options out there that'll allow you to leverage your death benefit that's attached to that life insurance policy for long-term care specifically, or provide an accelerated death benefit that could be used for home health care, or some type of chronic illness, or critical illness.

So many a times, we're working with families that are retiring with old life insurance policies, where they have some cash value built up into those policies. If you have cash value built up in those policies, but you don't have some of these accelerated death benefit provisions, or the ability to use the death benefit while you're alive, then it may make sense to replace that old policy with a new policy that has those benefit provisions attached to it, so that you have another use for that policy in retirement. Our fifth reason for why you might need life insurance in retirement is often the one we look to the most, and that is our final expenses.

Studies show us that final expense costs land somewhere between $30,000 and $70,000. And you might say, well, that seems really high for funeral expenses. Well, the majority of those expenses are actually hospital care expenses during the last month of life that often run around $30,000 to $60,000.

So the majority of those final expenses are those last care years, or those last care months that we have in the hospital. And of course, we have hospice costs that, if incurred, on average, are somewhere around $15,000 to $20,000. And we haven't yet gotten to our burial or funeral costs.

Those funeral costs could be as little as $1,000. However, depending on how elaborate of a funeral that you would like to have, those numbers could easily go well over $15,000, even $20,000. Now, our sixth reason here won't impact a lot of taxpayers.

However, for very wealthy taxpayers, this could be a really good reason to own life insurance. And for a lot of the families we work with that are in that category, they're worried about something known as estate taxes. Over certain thresholds, you could be paying federal estate taxes of 40% on dollars over these thresholds.

And this doesn't even take into consideration potential inheritance taxes in your state. But you want to take a look at what those laws are in the given state that you are a resident in. Currently, those levels are very high and affect very few taxpayers.

Those levels are $13.6 million roughly here in 2024, which means as a couple, those levels are about $27.2 million before you start incurring estate taxes. However, if there isn't a change in current tax law, our TCJA tax rules are set to expire going back to the previous estate tax exemption of $5 million in January 1st of 2026. That is also adjusted for inflation, so that'll be roughly $7 million threshold or $14 million as a threshold for a couple come 2026.

And you may want to get ahead of that and take advantage of the current estate tax exemption we have prior to that 2026 date. And if you're over that threshold, you may want to consider having some life insurance to cover those estate taxes to avoid having to liquidate any hard assets, such as business assets, real estate, and maybe a farm. Number seven, you have legacy goals or inheritance goals.

You want to leave assets behind to the next generation. And when we build a financial plan, when you build your financial strategy, you should always be looking for the best tool for the job. We want to find the closest distance between two points.

That's a straight line. So when it comes to any of your retirement goals, you want to have cash for emergencies, income to last a lifetime, a growth for inflation protection, or leaving assets behind. We want to find the best tool for the job.

The best tool for the job that was designed to leave assets behind for the next generation was life insurance, being passed behind as a tax-free asset for the next generation. And that's why it's the most efficient tool. We also may need to mitigate some estate taxes because even though life insurance is income tax-free, it could still be subject to estate taxes if you're over those thresholds we talked about a moment ago.

And then you want to consider allocating that life insurance policy or moving it in to an irrevocable life insurance trust and getting it outside of the estate so it's not subject to those estate taxes. Then we come to number eight. I call this personal care.

And what I mean by that is I think we often overlook how much we benefit from the care of our spouse, especially as we age. We get to be 75, 80, 85, 90 years old. Quite often, one spouse is in better health than the other.

They may be helping with meals. They may be helping with cleaning and just some of those general duties around the household. This doesn't mean that the surviving spouse is incapacitated, that they can't perform two out of six activities of daily living.

It just means that they need some additional help, which increases the expenses that they have in retirement. But then we get to our final reason here. And that final reason has to do with increased spending, not due to just those regular household duties, but because quite often we find that near the end of the life, one of those two spouses, the surviving spouse, has been doing a lot of caretaking.

They haven't had a lot of time to follow some of their dreams of travel or spending money on the grandkids or even spending money snowboarding, for that matter. In many instances, we will find that that surviving spouse will actually spend more, if not substantially more, after the loss of their spouse than they did as a collective prior. So these are the reasons you may need to carry life insurance into retirement.

And if you'd like us to do any evaluation of your life insurance policy, see if we can improve upon your current situation or analyze your need for life insurance, all you have to do is call the number on your screen for a free life insurance evaluation with one of our personal financial advisors here at Howard Bailey that'll visit with you virtually no matter where you're at in the country.