Many people assume that life insurance is unnecessary in retirement but that kind of thinking ignores the fact that life insurance is, for some, an important part of financial planning. Here are some important things to consider before you call and cancel your life insurance policy.
1. The tax benefits.
If you set up your life insurance policy correctly, you can use it to provide a tax-free inheritance to your beneficiary. To take advantage of this tax benefit, the policy must name the owner as the beneficiary. For example, my life insurance policy has my husband listed as both the owner and the beneficiary of the policy, even though it’s my life that’s insured. Listing myself as the owner of the policy would make it part of my estate and therefore subject to estate taxes.
However, with my husband listed as the owner and beneficiary of the policy the money will be passed on to him tax-free. The one caveat here is the fact that the owner of the policy has all of the rights to the policy. So only take this approach with a beneficiary you deeply trust.
2. Inheritance proceeds can be passed to beneficiaries outside of probate.
In addition to the tax advantages, don’t forget that life insurance proceeds are passed to beneficiaries outside of probate. By keeping your life insurance policy up to date after you retire, you ensure that your heirs will receive those benefits quickly, even if the rest of your estate is tied up in probate for months or even years. The probate process can take time, especially if you have a complex estate. This is particularly helpful for family members that might need an injection of cash to pay the taxes on the rest of your estate.
3. Life insurance can help maintain a dependent’s quality of life after you’re gone.
After your death, life insurance can help maintain your spouse’s or child’s quality of life. This is especially important for those individuals who have a spouse in assisted living or a child with special needs. If your retirement is partially funded by a pension or an annuity that’s solely in your name, you’ll need to determine if your spouse’s income is enough to cover every day expenses after your death. And, even if your spouse is eligible for a Social Security survivors benefit as a widow or widower, the entire household benefit may go down after your death.
4. Life insurance can be used to pay off your debt.
While many of us enter into retirement with no mortgage or other debts, not everyone is so lucky. If you’re carrying any debt, and particularly a mortgage, into your retirement, a life insurance policy can ensure your heirs are able to pay off the debt after you’re gone. A life insurance policy can make the difference between your spouse continuing to live at home or having to move and downsize after your death.