Do You Need Life Insurance after You Retire?

It’s hard to believe, but the 20-year term life insurance policies my wife and I have are about to expire. We bought them when we adopted our children, and my how time flies. And it has me wondering whether we need to have life insurance as our kids leave the house and we start looking forward to retirement. So it was perfect timing that my good friend and Certified Financial Planner Neal Frankle of Wealth Pilgrim offered to share his views on this subject. Neal, take it away–

Some life insurance agents suggest (strongly) that having life insurance after you retire is a great idea. And it is great … for the agents and for the insurance companies who sell it. This boils down to the argument of whole life vs. term life insurance.  And if you buy into the idea that you need life insurance after you retire, you’ll have no choice other than to buy whole life. When you do, you’ll pay those big fat premiums. And that allows the insurance agents to play more golf and drive those big fancy cars. But is it a good proposition for you? In most cases … no.

Why you won’t need life insurance after you retire.

First, let’s review the purpose of life insurance. For most people, life insurance is not a wealth builder, it is a wealth protector. There are far better ways to build wealth than by buying expensive whole life insurance. And there is no better way to protect your wealth and family than by having the proper amount of inexpensive term life insurance. Term life is cheap and it creates an immediate large pool of cash if you die prematurely. That dough can be invested to create income. And that investment income replaces the salary that you can’t bring home anymore because you’re dead. That’s the purpose of life insurance.

You now understand why you probably won’t need life insurance after you retire. By the time you retire, you have already built your wealth. If you retire, it means you can live off of your investment income and/or pension income. And because that income is passive, it will continue with or without you. So your passive retirement income is what protects your family once you retire. And that means you don’t need insurance at that time. Voila!

Who might need life insurance past retirement?

If you don’t think you’ll ever have enough to retire and other people rely on you financially, chances are good your family will benefit if you have life insurance in place. But if you are reading this 10 or more years before you retire, you should focus your energy on changing that situation. Put together a retirement plan and work your tail off so you can retire someday. Life is meant to enjoy, friend.

There is another, very tiny, segment of our society that needs life insurance after retirement. These are wealthy people who are subject to estate tax. This is only an issue if your estate is greater than $5.25 million. Most of us don’t have to worry about it. But if you have a large estate, you will always need life insurance. That’s where whole life becomes viable. But that’s about the only time it’s a smart tactic to consider.

The dangerous dark side of buying life insurance for post-retirement.

I can’t stand it when life insurance agents try to convince people that if they buy whole life insurance, they can spend all their money during retirement. The pitch is that if you have life insurance, you can spend everything else. When you die broke, your family will collect the life insurance proceeds and that will make up for your spendthrift ways.

This is a truly beautiful plan and it works great – if you know exactly when you are going to die. But what happens if you live longer than you expected? What happens if you run through all your cash and still have life left? In that case, your expensive life insurance policy isn’t going to put food on the table. And neither is your life insurance agent. A financial plan based on spending all your money isn’t a financial plan, it’s a way to sell life insurance.

Before you buy life insurance, consider what you are trying to do and how long you need to do it. Life insurance is a great way to protect you family while you are working. But during your working years, if you stick to your financial plan, you won’t need life insurance after you retire. Your financial obligations will be diminished after you stop working and your savings and investments will grow. If you have the right financial and spending plan, your investments will create the income your family will need. And you won’t need to waste money on life insurance.

Are you planning on having life insurance after you retire? Why or why not?

This is a guest post written by Neal Frankle. He is a Certified Financial Planner ® in Los Angeles and the creator of WealthPilgrim.com – one of my favorite personal finance blogs.

Published or Updated: March 24, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Kirk Kinder says:

    Great article, Rob. I especially like your point about life insurance agents selling policies after retirement. If you don’t have an estate tax issue, I really don’t see the need for life insurance after retirement. If you do have a true need, then you probably shouldn’t be retiring.

  2. audrey francis says:

    Would have been nice though not to have each of us shell out $1000 to pay for my grandpa’s $13,000 funeral.

  3. Kam Stephens says:

    Sure seems like there are at least 2 sides to every story and sadly your one sided approach doesn’t fly in the real world. You are giving blanket advise to the masses as if we are all in the same boat ala dave ramsey and the other financial entertainers. You have a couple decent points but you are missing 20 others on the opposing side. I own 3 different WL policies and my only regret is not putting more into them when I was younger and healthier. It would take 10 paragraphs to list out all you missed, but I will tell you that when I do spend my 401k, my savings, and my other investment accts that havent made crap in 15 years I sure will love still having $1m in cash value from my terrible WL policy that my horrible financial adviser sold me because he is evil and only cares about commission.

    • Rob Berger says:

      Kam, I’d sure like to hear more details. It’s interesting that you haven’t made money in the market in 15 years. What are you investing in? And I’m curious how much you would have had if you invested the insurance premiums rather than turning them over to an insurance company.

  4. manuel says:

    Not a true assessment for all in my humble opinion. My wife is twenty years younger than I. Life insurance , term, will protect her. So, age of spouses has a big influence whether insurance is need or not. Available asstets may not last as long as one widhes.

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