#95 - Do I Still Need Life Insurance in Retirement?

Eric Blake: Having assets is not the same as having access to cash when it is needed. Retirement accounts may create taxes, and even investment accounts can create tax consequences. Yes, you can place beneficiary designations on many of these assets, but what happens if you need to sell assets that are down in value because you need funds to cover funeral expenses?

Real estate can take time to sell. Pension income may stop altogether when one spouse passes away. Life insurance, assuming proper beneficiary designations are in place, can provide immediate funds, and in most cases those proceeds are tax free.

Welcome to another episode of the Simply Retirement Podcast, where we educate and empower women to live your retirement on your terms. I'm your host, Eric Blake, a practicing retirement planner with over 25 years of experience and the founder of Blake Wealth Management. I would not be the man I am today without the women in my life.

Joining me once again is Wendy McConnell. Wendy, how are you?

Wendy McConnell: I'm good. How are you?

Eric Blake: I'm doing well. I have a quick question for you on the pickleball front.

Wendy McConnell: Oh, okay.

Eric Blake: Do you ever play outside, or do you play inside?

Wendy McConnell: I'm curious about that too.

Eric Blake: I'm actually a member of an indoor facility, but I also play outside. Just not this time of year.

Wendy McConnell: Right. Are you outside all the time?

Eric Blake: No. There's a court about a mile and a half from us that's outdoors, and it's really nice when the weather is warm. But for the most part I play inside. Do you have Pickler up there?

Wendy McConnell: That's exactly what I'm in.

Eric Blake: Awesome. We have a Pickler not too far from us as well. They opened about a year ago, and I'm thrilled about it. I'm completely over the moon. It's worth every penny. I just love it.

We also have four brand-new courts in our neighborhood.

Actually, you should never bring up pickleball with me because I'll just light up like a firefly.

Wendy McConnell: That was my fault.

Eric Blake: I'll acknowledge that.

In today's episode, I want to refer back to Episode 93, which we recorded with Lisa Berg. In that episode, we discussed life settlements and how a life insurance policy that you no longer need, want, or can afford might potentially be used through a life settlement.

But as I thought more about that conversation, I realized the first question we really need to ask is this: Do I still need life insurance in retirement?

And, of course, the honest answer is it depends.

Wendy McConnell: Of course.

Eric Blake: Today, we're going to walk through how to think about that decision, what changes in retirement, and what circumstances might create the need for life insurance.

To help you think through this, we're also including a practical checklist in the show notes titled “What Issues Should I Consider When Reviewing My Life Insurance Policy?” It's designed to help you evaluate whether your coverage still fits your situation.

As always, you can find links and resources mentioned in today's episode at simplyretirementpodcast.com.

Let's start with the role life insurance typically plays during your working years.

The primary purpose of life insurance during that time is to bridge the gap between where you are today and financial independence in the future.

In other words, it protects your plan while you are still building it.

If income stops unexpectedly due to the premature death of a spouse, life insurance helps maintain financial stability for the surviving spouse and anyone financially dependent on that individual.

That could mean replacing income, paying off a mortgage, or ensuring children can still attend college.

During your working years, financial obligations are often higher and full financial independence has usually not been reached yet. That is where life insurance plays a very important role.

Wendy McConnell: Got it.

Eric Blake: But as we move closer to retirement, or once you are already retired, many of those original reasons for life insurance begin to change.

You may no longer rely on earned income. Your mortgage may be paid off, or at least significantly reduced. Ideally your children are no longer financially dependent on you.

And hopefully you have reached, or are very close to reaching, financial independence.

Because of that, the need for life insurance often changes. But that doesn't necessarily mean the need disappears entirely.

In some cases, it may make sense to keep an existing policy. In other situations, it may not.

There are even cases where someone may choose to purchase a new life insurance policy in retirement.

So the question really isn't simply whether you should have life insurance in retirement. The real question is what circumstances might create the need for it.

Wendy McConnell: Okay, that makes sense.

Eric Blake: One situation I see quite often involves retirement accounts.

Many retirees hold a large portion of their assets in accounts such as IRAs or 401(k)s. These accounts usually have beneficiary designations, so probate may not be the issue.

However, withdrawals from those accounts are typically taxable.

If funds need to be accessed quickly for funeral expenses or end-of-life medical bills, those withdrawals could create a significant tax burden.

Life insurance proceeds, on the other hand, are typically received tax free and provide immediate liquidity.

Another situation involves pensions.

I have seen this particularly with military pensions. The maximum survivor benefit for a military pension is 55 percent. In some cases no survivor benefit was selected at all.

We had a client who was widowed about two years ago, and there was no survivor benefit on the pension.

Because of her age, she was not yet eligible for Social Security survivor benefits. That meant she had to rely entirely on her own income.

This is not about criticizing past decisions, because we do not always know the circumstances at the time. But situations like this highlight where life insurance could potentially fill that gap.

We have another client in a similar situation where we intentionally used a permanent life insurance policy to provide that protection.

Wendy McConnell: Okay.

Eric Blake: The same concept can apply to Social Security.

When one spouse passes away, one of those Social Security benefits disappears. That can create a reduction in income for the surviving spouse.

Another situation involves mortgages. Today more couples are carrying mortgages into retirement.

Wendy McConnell: Yes, that seems pretty common now.

Eric Blake: Exactly. If income drops because of the loss of Social Security or a pension, that mortgage can quickly become a burden for the surviving spouse.

That is another situation where life insurance might play an important role.

Wendy McConnell: Got it.

Eric Blake: Another factor to consider is how your assets are structured.

Many of our clients, especially women who are widowed or divorced, express a strong desire not to burden their children financially.

Sometimes life insurance may simply provide enough funds to cover funeral expenses.

Wendy McConnell: Even if it is just enough to cover burial or funeral costs.

Eric Blake: Exactly.

Another point I want to emphasize is that adding a child or family member as a joint owner on a bank account is almost never the right solution.

Doing so can create loss of control and may unintentionally disinherit someone important to you.

There are usually better options, such as beneficiary designations, proper estate planning, or possibly life insurance.

Estate planning is another area where life insurance may come into play.

Under current tax law the estate tax exemption is quite high, so many families are not affected.

Wendy McConnell: I'm just under that number.

Eric Blake: Well, that makes things easier.

But for families whose estates exceed that exemption, estate taxes can create a liquidity need. Life insurance can help cover those taxes without forcing the sale of assets.

If we step back and look at all of these situations, the common theme is liquidity.

Having assets is not the same as having access to cash when it is needed.

Retirement accounts may trigger taxes. Investment assets may be down in value. Real estate can take time to sell.

Life insurance can provide immediate funds, and in most cases those proceeds are tax free.

In retirement, life insurance is usually less about building wealth and more about creating liquidity when it is needed.

Eric Blake: As we wrap up today's episode, remember that life insurance plays a very important role during your working years by helping bridge the gap between where you are today and financial independence.

In retirement that gap may already be closed, but certain risks may still exist.

The answer to whether you still need life insurance in retirement ultimately depends on your personal circumstances.

Thank you, Wendy, for joining me once again.

Wendy McConnell: Thanks for having me.

Eric Blake: And thank you for tuning in.

If you are looking for a personalized retirement plan that helps you make thoughtful decisions around life insurance, retirement income, and taxes, you can visit getmysimplyretirementroadmap.com to schedule a conversation with our team.

For all of the resources mentioned today, visit simplyretirementpodcast.com.

Until next time, please remember retirement is not the end of the road. It is the start of a new journey.

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