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How Much Life Insurance Do I Need at Retirement?

Posted by Peter DeMarco on Sep 24, 2013 9:24:00 AM

Deciding how much life insurance to carry into retirement should be oneaspect of everyone’s retirement planning strategy.  While most retirement planning focuses on saving up enough money for retirement and investing it wisely, life insurance still may play an important role in people’s financial situation after retirement.  The following is a brief guide to help people who are nearing retirement or just recently retired consider what level of life insurance coverage they want to carry in the coming years. 

The Primary Purpose of Life Insurance

The primary purpose of life insurance is to financially provide for loved ones after you pass away.  During your working years, life insurance is generally meant to replace one’s salary in the event of a tragedy.  Retirement calculators and financial advisors try to estimate how much life insurance it would take to replace your salary, based on rates of return.  

Life Insurance in Retirement Planning  

During retirement, however, life insurance may or may not be needed to financially provide for loved ones.  There are two basic scenarios, either of which may describe your retirement plan.  

First, your retirement income may come from assets that you own, such as:  

  • stocks 

  • bonds 

  • mutual funds 

  • CDs 

  • real estate   

If your income during retirement comes strictly from these types of investments – whether from interest earned or principal used – then these assets can be passed onto whomever you choose upon your death.  If there is someone who depends on you financially, you can structure a will to transfer assets to that person.  There is not much of a need for life insurance in this situation.  

Second, your retirement income could come from benefits that you earned through employment, namely a pension.  If a large portion of your retirement income is dependent upon your pension, then you might need life insurance.  If you have a spouse who does not receive the pension, then life insurance is one way to make sure he or she will be financially provided for in the event you pass away first. To learn more about how life insurance and retirement effects your taxes, read our tax guide.

 

Life Insurance to Pay for Burial Expenses  

The above consideration is the primary reason to take out a life insurance policy during retirement.  If you need to replace a pension, then you may need hundreds of thousands of dollars in life insurance.  There is another factor to consider, but it is much smaller.   The money from a life insurance policy may be the first money survivors have access to upon your death.  Some people, even if they are financially comfortable, take out a small life insurance policy to pay for burial expenses, because it is often the most accessible money after a death.  If you have a life insurance policy, your loved ones will not have to wait for your estate to be settled, which can take months or years, before paying funeral and burial expenses.  These expenses tend to range between $10,000 and $20,000, so any amount of life insurance in that range would be appropriate.

 

Tax Tips For Business

 

Summary

If your retirement income is largely derived from a pension, then you might want a sizeable life insurance policy.  If you live off of a different form of income during retirement, though, then you may have a small policy to pay for burial expenses or you might not even need a policy.  Ultimately, a financial advisor can help you make the best decision for your personal situation.

Topics: Family Business & Succession

Peter DeMarco

Peter DeMarco

Peter DeMarco, with nearly three decades of tax planning experience, is a Vice President at Meaden & Moore as well as Director of the Tax Services Group.