How Much Life Insurance Do You Need in Retirement?

Lori FlandersLife Insurance, Retirement, Retirement Planning

By Brian Fricke

We live in a world of uncertainty, and with every new day comes a new challenge. We can’t predict the future and what it holds, but we can take the steps necessary to ensure these challenges don’t get the best of us. Throughout all the uncertainty, there should always be one thing you’re sure about—and that’s insurance. Although having insurance doesn’t make the unfortunate circumstances go away, it allows you to take back some control over your situation. 

If you’re retiring soon, one of the most important policies you should focus on is your life insurance policy. Not only does it protect you, but it protects your loved ones and grants them some peace of mind if the unexpected happens. Figuring out how much insurance you need in retirement or if you need it at all is challenging. However, there are a handful of reasons why you still might want to keep life insurance and properly leverage your policy. 

What Type of Insurance Do You Need? 

There are two types of life insurance: term insurance and permanent (cash value) insurance. Term insurance is a term-based policy in which the policyholder renews the plan after a set amount of time. In the end, it’s up to the policyholder whether or not they want to renew or continue their policy. In my opinion, term insurance is the most cost-effective policy for 90%+ of situations.

On the other hand, permanent insurance is often chosen by people who anticipate their healthcare expenses increasing as they age. However, these types of policies are less attractive due to the expensive price tag. When shopping for insurance, you should first determine how much coverage you need, how much you can afford and how long you anticipate needing your policy. 

Can You Maximize Your Traditional Pension Benefits?

If you’re fortunate enough to have a traditional pension or the type that pays you the same monthly income no matter how long you live, you could qualify for a higher monthly pension benefit. By claiming the Life Only pension option, you might be able to increase your monthly benefit by up to 30% to support your living expenses during retirement.

For couples, however, this can be difficult to take advantage of. The pension benefit actually goes away when the pensioner passes away, which doesn’t make the situation any better for the surviving spouse. This is where life insurance can make sense if you have enough coverage that would allow the surviving spouse to replace “lost pension benefits.” Before making changes to your retirement plan or life insurance policy, it’s important to speak with a financial professional who can help you decide what’s best for your situation. 

A Guaranteed Inheritance 

What most policyholders don’t know is that a substantial life insurance plan has the potential to be a great inheritance. A life insurance policy allows you to leave an inheritance without your beneficiaries having to pay income tax on the money they receive. So if you have (or buy) a policy with a $250,000 death benefit, your heirs will actually get $250,000 income tax free.

In the long run, your life insurance policy could become the perfect investment for your children who wish to further grow their wealth! While most people get discouraged by the high premiums of these large policies, and get rid of their life insurance plans, it can be beneficial for your children to continue to pay into yours. For instance, they might spend $20,000-$30,000 a year paying the premium on your policy, but the payout could be a huge opportunity to pass down tax-efficient wealth to your children. 

Charitable Gifts 

Life insurance can be an effective and viable asset to give to a charity of your choice. If you plan to leave your wealth to a charitable organization and create a legacy, you can leave your life insurance to your church or any other nonprofit organization you’re passionate about. By gifting your life insurance policy, you can greatly reduce your taxable estate. 

Additionally, it’s possible to name a verifiable charity organization as your beneficiary. This means that upon your death, the charity will receive your death benefits from your policy. By doing this, you can also ensure that the transaction remains private, which can be important to donors who wish to keep their gifting plans secret from their heirs or other beneficiaries. 

Will You Need Long-Term Care? 

The reality is that some people end up paying long-term care costs out of pocket. The great thing about keeping your life insurance policy during retirement is that it can recover the money spent on your long-term care. This can create a better situation for you and your family as healthcare expenses increase further into retirement.

If you want to find out the ideal amount of insurance you need, you have to make a clear assessment of your financial and family needs. Usually, the younger you are, the less expensive life insurance premiums are; however, the older you are, the more expensive your policy will be. 

How Much Is Enough? 

In order to figure out how much life insurance you need in retirement, you have to understand your options. Outside of the traditional sense of replacing your income, you should be thinking about how you can leverage your policy to grow and preserve your wealth long after you make the transition. Although there’s no specific formula, there is a method that works for most situations. 

The DIME Method 

A great way to find out how much coverage you need is by using the DIME method, which allows you to calculate the coverage you need according to your debt, income, mortgage, and education expenses. Once you add up these expenses, you’ll find out the base number for the amount of insurance you need. 

The DIME method doesn’t take your unique situation into account, which is why it’s important to speak with an advisor who specializes in insurance and knows the best strategies so you can get the most out of your policy. 

We Can Help 

Making the transition into retirement should not be a dreadful process. We understand that retirement can be very emotional and stressful. We also know that you want a retirement action plan that gives you permission to do what you want, when you want.

As you approach retirement, it’s important to have your insurance needs squared away before it’s too late. We at Financial Management Concepts take your financial planning seriously and know the importance of a strong insurance policy. Take the first step toward your version of an Incredible Retirement® by scheduling a free 20-minute discovery call today or reaching out to me at [email protected] or 407-647-7006.

If you’re interested in learning more about how you can get the most out of your life insurance during retirement, request a free copy of my book: Worry Free Retirement—Do What You Want, When You Want, Where You Want.

About Brian

Brian Fricke, CFP® is the President and Founder of Financial Management Concepts, a Fee Only® retirement planning and investment management firm. Brian has over 30 years of experience in retirement planning and investment management.

Brian is also the author of Worry-Free Retirement and a book specifically for Lockheed Martin employees, Safe Landings: How Lockheed Martin Employees Can Avoid the Turbulence That Can Crash Retirement.

Using FMC’s 3-step Financial Roadmap® process, Brian helps his clients sleep better at night, relieved of the stress and worry of running out of money in retirement.

Brian serves as the Investment Committee Chair of the LCMS Foundation and is on the Board of Trustees of the New Smyrna Beach Firefighters pension fund. When he’s not working, he enjoys surfing, paddle boarding, and traveling with his wife, Annette, and he is the proud father of two grown sons, Adam and Justin (who is married to daughter-in-law Chelsea). Brian and his sons epitomize the “worry-free” lifestyle by traveling to different countries with friends on their annual father-son surf trips. To learn more about Brian, connect with him on LinkedIn.