Do you need life insurance once you are retired?
Life insurance is an important consideration for many people, but as you reach retirement age, the question of whether or not to continue coverage becomes even more complex.
Let’s discuss the pros and cons of having life insurance in retirement and whether it makes sense for you.
Why have life insurance?
First, let’s look at the reasons why people buy life insurance in the first place.
One of the main reasons is that if you have dependents who rely on your income, such as a spouse or children, life insurance can help provide financial security for them in the event of your death.
Additionally, if you have outstanding debts or financial obligations, life insurance can help ensure that these debts are taken care of.
In both scenarios, life insurance is used to create an estate to ensure your family is taken care of.
When it might not make sense
However, once you are retired, you may have little income or debt to insure. Let’s run through an example.
Bill and Sandra are both 66 years old. If Bill passed away, he would have the following assets and sources of income to his name.
- $100k in a TFSA
- $400k in a RRIF
- $2,000/month pension
- $1,000/month CPP
- $685/month OAS
How these assets transfer
The TFSA and RRIF would transfer to Sandra tax-free upon Bill’s death, so insurance isn’t necessary.
He also has a pension that pays him $2,000 per month. Upon his death, Sandra would be entitled to 66% of this amount or just over $1,300 per month.
His CPP pays him $1,000 per month; if he passes away, Sandra would continue receiving $600 per month.
To find out what your spouse could receive if you passed away, check out the following video: What happens to your CPP when you pass away
He is also receiving his OAS security pension, which is paying him $685 per month. Unfortunately, there is no survivor benefit with the OAS pension, so Sandra wouldn’t receive any of this.
To summarize, upon Bill’s death, the family or Sandra, in this case, would receive around $1,800 less per month. However, Sandra might not need this $1,800 as she now only has to worry about expenses for herself, so if she can get by on $1,800 per month less than before, life insurance would not be necessary.
Minimal debt in retirement
For most retirees, life insurance is unnecessary because the amount of debt they have is minimal, or the income the family would be missing out on if one of the spouses passed away is not worth insuring.
However, if you carry large debts in retirement or have substantial income that will not transfer to your spouse, insurance could still help protect your family’s needs.
Estate protection
So as mentioned, the first reason to have life insurance is to create an estate to ensure your family is taken care of.
The second reason to have insurance is to protect your estate.
Families with significant assets may be looking at a substantial tax bill upon death.
When it may make sense
In these scenarios, life insurance can be used to offset the tax bill the family is facing.
For example, Jim and Bertha are 70 years old and have put together a tax and retirement plan with their advisor. If they both passed away at 90, their estate would face a $500,000 tax bill.
A life insurance policy could be used to offset this tax liability.
Jim and Bertha could buy a joint last-to-die insurance policy that will pay a death benefit of $500,000. The annual cost for this policy is just over $13,000 per year.
If they both pass away after one year, they would have paid $13,000, and the estate would receive a benefit of $500,000. This would equal a return of over 15,000% on their initial payment.
If either Jim or Bertha lives to 90, they would have paid over $260k in insurance premiums for the same death benefit of $500,000. This is equivalent to receiving a 6% rate of return on their premiums.
If one of them happens to live until 95, the rate of return on their premiums drops to 3.2%
Depending on when you pass away, these types of insurance policies may or may not make sense.
To summarize
So do you need life insurance when you are retired? For the majority of people, I would argue no, unless you have a large amount of debt or a high income that won’t transfer to your spouse.
If you want to use life insurance to cover a large tax bill, it can make sense, but it becomes less of a good investment the longer you age.
Carefully consider your financial situation and consult your advisor before making a final decision.
