Many people, after their children have grown and they’ve paid off the mortgage, consider not renewing their term life insurance coverage or surrendering their permanent life policy, particularly as they near retirement.
But that may not always be the best strategy, and there are instances when maintaining a life insurance policy in your retirement makes sense. The decision should be based on your finances and life circumstances. Below are some instances where keeping a life insurance policy in retirement is the sensible course of action.
As a wealth transfer instrument – Life insurance can help you transfer assets to your loved ones. The nice thing about life insurance is that the death benefit is income-tax-free and possibly estate-tax-free, if properly constructed.
It also provides an avenue for ensuring that your estate can be split among your children, particularly if you also have assets like a family business, which is not easy to split up if it is to continue as an ongoing concern – especially if some of the adult children are not interested in running the business. Life insurance in this case gives those who aren’t interested in the family business a way to still receive a cash amount to the value of the business.
Paying for expenses – The last thing you want to do is to pass on your health care debts to your surviving spouse. A life insurance benefit can ensure that your family has the funds necessary to pay for funeral costs, your medical bills, without reaching into their own pockets. It can also help them pay off an existing mortgage and other types of debt.
Paying for a chronic disease – Many life insurance policies allow you to access benefits to pay for treatment and care for a chronic and end-of-life illness before death. Policies define chronic illness as either cognitive impairment (e.g., Alzheimer’s disease) or the inability to perform two out of six activities of daily living. The catch is you need to get a certification from a medical professional.
As a charitable gift – Some retirees have a non-profit organization to which they wish to leave their life insurance policy benefit. If so, do make sure that the organization will accept your policy and has a 501 (c) (3) not-for-profit status. Some organizations might need the life insurance policy arranged a certain way or not be able to handle the donation at all.
If you name the charity as the owner and beneficiary of the insurance policy, then you can deduct the premiums from your federal taxes.
The takeaway
If you maintain coverage past the age of 65, you can ensure that your loved ones can be well taken care of and that any associated expenses or debts can be paid for by them after you pass.