(FitCommerce has no financial interest in life insurance companies, we are solely a non-partial advisory.)

Another Switch to Flip

Retirement years are totally different than your previous earnings years. We already posted about changes from saving mode to spending mode in:

Flipping the Switch — When to Start Spending Your Retirement Savings — Guilt Free

When it comes to life insurance during retirement years, there’s yet another switch to flip.

During our earnings years, the major breadwinner in the family had a major burden to keep providing for the spouse and children should they unexpectedly die particularly the hefty cost of providing for college costs.

There will most likely be a heavy mortgage on the house and other debts on cars and the like. Unless you wanted your family out on the street, you needed enough insurance to also eliminate these debts.

But the big enchilada is that loss of income to the family when you’re gone. It most likely would lead to a severe drop in lifestyle.

So, you piled up the life insurance and because you were relatively young, it didn’t cost that much. In fact, your employer may have even provided it as a group benefit scaled to your salary. You were covered.

Then Financial Risks Shift Later in Life

There’s a noticeable shift in the later years. You’re an empty nester, the kids are off on their own and gainfully employed, you’re no longer responsible for their financial welfare. Your mortgage is paid off. You’ve made significant contribution to your social security account and can look forward to steady monthly check for the rest of your life. You’ve made consistent contributions to you 401(k) or IRA and now have a sizeable nest egg.

All those responsibilities you had during your earnings years have peeled off, but you’re not out of the woods yet. When you retire you will no longer have employment earnings. How will you make up the gap?

Other than public sector workers, less than 5% of private sector workers have a pension. In the case of public sector employees, they could expect a drop of between 25% to 50% in income as they shift from salary to pension. In the case of most private sector employees, it drops to zero.

Now the risks shift to income stream preservation for the surviving spouse. It’s now time to determine if late stage life insurance makes sense.

The Biggest Fear is Our Survivor Outliving the Money

The biggest fear among boomers is not dying but outliving their money as they age. The fear is that in their eighties or nineties they’ll be living in poverty.

Generally, when you retire and your steady income drops you will need to start drawing down from your IRA to supplement social security. But if you’re alive and still bringing in income you may not have to tap into your IRA. So, the thought process is, should you suddenly drop dead and your income evaporates, is your current IRA balance significant enough to take care of your partner for the next 10-20 years?  That is worrisome.

Not be a Burden to Your Children

It’s pretty much universal that no boomer wants to stick their adult children with a big financial responsibility.  We want our children to thrive and meet their own family’s financial needs without the added burden of supporting a surviving elderly parent.

So, that’s another perspective to take when considering whether to take out additional life insurance.

The Financial Risks When You Retire — It’s Not About Just You

Many boomers may have the blinders on that they’ve lived a good life and are ready to die at any time. But they have to take the blinders off and thing carefully about their survivors, namely their surviving partner. Will they be OK should you suddenly die?

Loss of your business / job income

In this instance, let’s say you have a part-time job or an independent business that brings in $40K a year. Nice. However, should you suddenly drop dead, poof that income stream dissolves and your partner no longer has that income.

That could place a heavy burden and angst on them to draw more heavily from the IRA and run a risk of outliving the money. It’s a good reason to look at an affordable life insurance policy.

Drop in Pension Benefits

If you’re one of the lucky people who have a pension, then due to ERISA and REA acts some portion of the pension is transferable to your spouse or civil partner.  But, most likely it won’t be the full 100% until death. It could range from a lump sum buyout to a percentage of the pension.

Again, when you die, there will be less income coming into the household. Will social security plus IRA drawdown be enough for them to comfortable get to end of life?  A little life insurance may help.

The Social Security Safety Net

There is good news. Should you die and your social security income be higher than your spouses, then they can collect yours. So, at least there’s a floor of income for life.

How Much Life Insurance Should You Carry in Your Later Years?

By the time you retire there is a different perspective on position in life.  By now, your children are out of the nest and on their own. And most of your living years are behind you and not in front of you which means less money is required for your surviving partner to make it to their end of life. You should now consider the following to assess if you still need life insurance; will there be enough cash on hand to:

• Dispose of You
• Dispose of Debt
• Get through Probate
• Pay Estate Taxes

Enough to Dispose of You

Dying ain’t cheap. When you die, something has to be done with your remains and depending upon burial vs. cremation and throw in a memorial service and feed the mourners, it could be a significant piece of change. You don’t want your partner, in a mourning state, to have to pinch pennies at this stage of the game.  There are affordable burial insurance you can purchase to alleviate.

Enough to Dispose of Debt

Hopefully your mortgage has been fully paid off for a while and you detest credit cards. But, let’s say you took out an emergency home improvement loan to fix a leaking roof for $15K. It would be wise not to stick that expense on your partner when you die but have enough insurance to wipe it clean.

Enough Liquid Cash to Get Through Probate

Even if you have a significant net worth when you die, if it’s all in your name, it will be tied up in probate for anywhere from 6 months to a year.  Even though your surviving partner will have a significant transfer or wealth down the road the first year’s financial angst can be lessened with enough life insurance to get through the first year.

Estate Tax Considerations

If you’re without a spouse or partner and your will names others as beneficiaries, such as children, other relatives, friends, or charities, you may not want to burden them with the estate taxes and want insurance sufficient to cover such.

Is Life Insurance for Seniors Affordable?  The Risk / Reward Math

Here’s an example of a 70-something male, non-smoker with a single moderate pre-existing condition.  For him to take out a 15 year $100K policy will cost him roughly $300 per month. (This was a quick online quote, it can most likely be shopped around for greater savings).

Over the 15 years, that $300 per month policy will run a full $57,240 of expenditure. If he doesn’t die in that time frame and collect, the insurance company won that bet and he is out of that money. Sounds like a lot, probably would have paid for 3 trips to Europe, or a back yard pool, or a nice tuition contribution to the grandchildren.

But the flip side is should he die within the policy period, his partner will receive the $100K, will offer some financial relief during a period of extreme grief. At least during the mourning period there won’t be any financial stress.

Now let’s look at it from the perspective of a Las Vegas odds handicapper. Do you want to wager $57,240 on the chances of a $100,000 payout?  Will that person in question will die within 15 years?

Using the Social Security Administration’s quick online calculator, the average U.S. male age 70 can expect to live an additional 15.3 years bringing it up to 85 which is right on the cusp.

A big decision factor is affordability. Can the couple afford the $3,600 per year for the coverage? That may in and of itself be a burden. Assuming you can make the annual payments without severe sacrificing, taking out this policy looks like a good action to take.

Finally, stating the obvious, you can only take out the life insurance while you’re healthy, that is, have no pre-existing conditions that will prevent getting coverage at all. If you wait too long and your health declines you may well be out of luck.

 Is t Possible You Don’t Need Any Life Insurance at All?

Yes, it’s conceivable.  Given a situation where it’s you and your partner living together. The house is totally paid for and has been kept up. You have zero debt. You both draw down social security, have $1 million plus in your IRA, and you have a pension that’s 50% or better transferable to your survivor.

Should you suddenly die, it’s conceivable that your survivor can get by quite nicely on social security, the modified pension and conservative IRA withdrawals without any worry about outliving the money.