Life insurance is something many people carry throughout their working years. But once retirement begins, the question changes. Do you still need it?
Let’s walk through the key reasons for owning life insurance and whether they still apply after you retire.
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Why People Buy Life Insurance
The two most common reasons are:
- To provide income protection for dependents like a spouse or children
- To cover debts and financial obligations to ensure your family is not left with a financial burden
In both cases, life insurance helps create an estate to protect the people you care about. But in retirement, the picture often changes.
A Common Retirement Scenario
Take Bill and Sandra. They are both 66. If Bill passes away, here is what Sandra would receive:
- $100,000 from Bill’s TFSA and $400,000 from his RRIF, both of which transfer tax-free
- 66 percent of his $2,000 monthly pension, which is around $1,300 per month
- $600 per month from his CPP
- No OAS payments, as those do not continue to a surviving spouse
Altogether, Sandra loses about $1,800 per month in income. But she may not need it, since her expenses could also drop after Bill’s death. In this case, life insurance may not be necessary.
When Life Insurance Still Makes Sense
There are some cases where life insurance can still be useful in retirement:
- You carry a large amount of debt
- You rely on income that will not transfer to your spouse
- You want to offset a large tax bill your estate may face
Example: Using Life Insurance to Offset Taxes
Jim and Bertha are both 70. They worked with their advisor and discovered that their estate would owe $500,000 in taxes by age 90.
They decided to buy a joint last-to-die life insurance policy for $13,000 per year. The policy would pay their estate $500,000 tax-free. The return on this strategy depends on how long they live. If they pass away early, the return is high. If they live into their 90s, the return is lower, but the estate still receives a guaranteed benefit.
Final Thoughts
Most retirees do not need life insurance. If your debts are paid and your income will continue to your spouse, the cost of insurance may not be worth it. But if your estate will face a large tax bill or if your income will drop significantly after death, life insurance can still be valuable.
If you need help with planning your retirement visit our website and book an appointment with us.
