Do Retirees Need Life Insurance?

Traditionally, life insurance is purchased during your working years to replace lost your income for your family in case you died.  But if you’re retired, do you still need life insurance?  Yes.  And there may be three reasons to own a policy.

First, many couples are dependent upon two Social Security or pension checks. And when one spouse passes away, the survivor finds that the income falls but many of the expenses and lifestyle requirements remain the same.  The inexpensive way to protect against this is to own term life insurance.

Recently, I obtained a $100,000 policy for a 70-year-old male at a premium of $200 per month. If he predeceases his wife (women statistically outlive men by seven  years), she will receive this $100,000.  Invested at 8% (a hypothetical rate), this would produce an income of $8,000 a year to offset the loss of his Social Security check.  If used up over her lifetime, (assumed to be another seven  years), the principal plus interest would generate over $17,000 annually.

The second reason is for estate planning purposes. Let’s say you’ve developed your net worth by owning real property and you have two sons.  One son takes an active interest and manages most of your property.  The other son lives 2,000 miles away, travels around the globe as an archeologist and has no interest in the properties.  Maybe you want to leave the properties to the son who cares for them but are concerned what to give the other son.  Easy answer, buy life insurance and name the archeologist as the beneficiary.

Or if your estate is over $1 million, the excess is subject to estate taxes at hefty rates.  A simple, often inexpensive, way to pay the tax without taking money from the beneficiaries is to have a life insurance policy pay the tax.

And finally, life insurance can help you make the most of your IRA or retirement plan.  For instance, suppose you are age 70 and it’s time to start taking mandatory distributions from your IRA. Let’s assume the distributions are a hypothetical $15,000 annually.  If you invested that at a hypothetical 8% (5.2% net after combined taxes of 35%), you would accumulate $190,439.  Take that same amount and buy life insurance, and upon death your heirs get $1.25 million (New England Financial, December 2, 2001, 15-year rate guarantee $15,675 per year, non-smoker, male age 70).  You can do the same if you have a qualified retirement plan, but the numbers are even better as you can purchase the policy inside the plan with pre-tax dollars.


Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.