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Do I Need Life Insurance When I Retire?

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3.2.21 |

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Is life Insurance still relevant during my golden years?

Retirement is often seen as a time of relaxation and financial security.

With reduced income and fewer dependents, many retirees question the need for life insurance.

However, life's uncertainties can disrupt even the best-laid plans.

Imagine enjoying your golden years, free from the stresses of work.

You've worked hard, paid off your mortgage, saved diligently, and your kids have moved out of home. You feel like you’re sitting on the pig's back, you’ve earned this!

Suddenly, a health crisis emerges, demanding significant financial resources. Or perhaps your adult children face a job loss, or a divorce and needs your financial support to help them through it.

As you can see, while it might seem tempting to drop coverage altogether, the decision isn't always black and white.

Read on to explore the factors to consider when evaluating your life insurance needs during retirement.

What’s the Deal With Life Insurance?

Life insurance provides a financial safety net for your loved ones during the most difficult time of their lives.

It's a contract between you and an insurance company where you agree to pay regular premiums in exchange for a tax-free lump sum payment to your beneficiaries upon your passing. It should really be called death insurance, though that doesn’t sound so appealing! Most life insurance policies also offer the option to pay you the full benefit if you are diagnosed with an illness that will be terminal within 12 or 24 months.

The Reserve Bank of New Zealand says life insurance coverage “softens the financial impact of events such as death, disablement, and major illness, allowing insured individuals and their families to maintain their living standards”.

“It may also support mechanisms for long-term saving and provision for retirement, although the sale of new insurance policies that provide this facility has largely ceased in New Zealand.”

Life insurance options in New Zealand:

Term life insurance: This is the most common and provides coverage for a specific period, such as 10, 20, or 30 years. If you pass away within that term, your beneficiaries receive the payout. Many older life insurance policies are known as "Endowment" or "Whole of Life." While these older policies often offer additional benefits, such as cash value, they might not have the same tax advantages in New Zealand as in other countries. Before cancelling an endowment or whole of life policy, it's crucial to consider the potential consequences carefully. These policies can hold significant value and cancelling them might result in forfeiting that value. While the details can be complex, consulting with a financial adviser is essential to understand the pros and cons before making any decisions.
Funeral costs: Most life insurance policies offer a quick payout to help cover funeral costs, providing some relief for your loved ones during a difficult time. Learn more: is funeral insurance worth it?‍
Alternatives: There are also policies called trauma (also known as critical illness), disability (or total permanent disablement insurance), and income protection insurances that payout for a serious illness or disability.

Life insurance money can be used to cover a range of expenses, including:

Funeral costs, medical bills, and estate settlement fees.
Debt repayment.
Supporting dependents and maintaining their lifestyle.
Funding children's or grandchildren's education.

Life insurance needs can change frequently due to life events like births, marriages, job changes, and financial shifts. Regular reviews of your policies are essential to ensure you have the right coverage for your current situation.

When to Consider Dropping Life Insurance

While life insurance is a valuable tool for many, there are circumstances where it may not be considered necessary in retirement, or when retirement might mean a lower amount is more appropriate. Let's explore some common scenarios:

Debt-Free Retirement

If you've successfully paid off your mortgage, credit cards, and any other debts, your need for life insurance will usually decrease significantly. Your surviving spouse or dependents may have sufficient income or assets to maintain their lifestyle without relying on a life insurance payout.

Substantial Savings and Investments

A substantial savings and investment portfolio can provide for your loved ones after your passing. If your assets are sufficient to cover final expenses, any lingering debts, and ongoing living costs, life insurance might be redundant.

Independent and Self-Sufficient Dependents

If your children are financially independent and no longer rely on you for support, your need for life insurance may diminish. Consider any current or potential special circumstances, such as adult children with disabilities or unforeseen life events, which may require careful thought.

Health Considerations

If you're facing significant health challenges, the cost of life insurance may increase substantially or become unavailable altogether. In such cases, it's essential to reassess your coverage needs and explore alternative financial planning strategies.

Estate Planning Alternatives

Other estate planning tools, such as trusts, wills, and powers of attorney, can help protect your assets and provide for your loved ones. Consulting with an estate planning solicitor can help determine the most suitable options for your situation.

While the factors above are relevant to consider, let's explore why maintaining life insurance might still be a smart decision.

Your Life Insurance Needs in Retirement

Life insurance is usually less crucial as you age. However, just like anything when it comes to personal finances, the level of cover you need is a personal matter! Add to this: changing family dynamics, longer life expectancies, and economic realities have all transformed the retirement landscape.

Today's economic climate presents challenges for retirees and young adults alike. Rising living and housing costs, student debt, and job market uncertainties mean many adult children still rely on parental support and are living at home for longer periods.

This, combined with increasing life expectancies, may mean the need for life insurance may be more pressing in your 60s than you first thought.

Here are some factors that warrant careful consideration before cancelling your policy:

Outstanding debts: If you still have a mortgage, credit card debt that isn’t repaid each month, or other debts, life insurance can provide a financial cushion for your loved ones.
Estate planning: Life insurance can be a valuable tool for estate planning, helping to provide liquidity for beneficiaries.
Income replacement: Do you still earn an income? If you're the primary income earner in your household, life insurance can help replace your lost income and maintain your family's standard of living.
Final expenses: Life insurance can cover funeral costs, medical bills, and other expenses associated with your passing.
Dependents: Life is unpredictable. Even if your children have moved out, they might face unforeseen circumstances requiring financial assistance. Retaining life insurance may be worth considering if your children move back in or otherwise need to rely on you. Alternatively, if you take on a caregiving role for elderly parents or grandchildren, their financial situation could be impacted if you were to pass away.
The high cost of living: Rising living costs and housing prices can leave your children and grandchildren struggling to afford to buy their own homes. Life insurance could help them get a foot in the door.
The curve ball: Unexpected events like health issues, job losses, or family crises can strain finances and drain the funds which would have been left to your family in the event of your death. Some health treatments and drugs are not funded in New Zealand and can be incredibly expensive. For example, many Kiwis fork out huge money for unfunded cancer treatment. Retirement also often includes holidays overseas as you have more time on your hands. What if you had an accident or medical event overseas and your family was left with huge medical bills? The case of Kiwi man Charlie Lowe highlights this. Lowe fractured, dislocated and compressed his spine after falling over while on holiday in Cambodia. He is now facing a $100,000 bill for medical care and transport. Imagine if your accident was fatal and then your family was not only left with medical bills, but also the costs associated with bringing you back to New Zealand. Even with careful planning, life often throws curveballs. Life insurance can provide more peace of mind for you and your family.
Charitable giving: You can designate a charity as a beneficiary of your life insurance policy.

These scenarios highlight the importance of considering life insurance, even in retirement. It can protect your loved ones from the costly burden of unforeseen events and can even help build generational wealth.

Protecting Your Business

If you're a business owner, life insurance can help protect your business and ensure its continuity in the event of your passing.

Business continuity: Life insurance can provide funds to cover operational costs, such as salaries, rent, and utilities, during a period of transition.
Debt repayment: Life insurance can help repay them, protecting your business's financial health.
Key person insurance: For businesses heavily reliant on specific individuals, key person insurance can protect against financial losses if a key employee dies unexpectedly.

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The Bottom Line: Is Life Insurance Right for You?

As you transition into retirement, it's smart to reassess your financial commitments, including life insurance.

The urge to cut back on costs is realistic as your income shrinks.

Retirement might even seem like an ideal time to cancel your policy completely. While this might be tempting, it's important to consider the potential consequences of dropping coverage.

Retirement, like any stage of life, is full of unexpected twists and turns. Health challenges, family changes, or economic downturns can arise, significantly impacting your financial well-being.

Life insurance serves as a financial safety net, protecting your loved ones from the burdens of unforeseen events. It can provide crucial support for your family during challenging times, ensuring their financial security and allowing them to navigate life's uncertainties with greater peace of mind.

Consulting with a financial adviser, including the team here at Become Wealth, can help you make an informed decision about whether to keep, cut back on, or drop your life insurance policy. They can help you assess your unique circumstances, evaluate your options, and create a personalised plan that aligns with your retirement goals.

Remember, life insurance is not just about protecting your finances; it's about safeguarding your legacy and ensuring your loved ones' well-being.