A question we’re often asked by special risk FRS folks approaching retirement is, “Do I need to carry life insurance after I retire?”
Generally speaking, the answer is usually “No.” Let’s talk about why and then perhaps a couple of scenarios where you would want to carry life insurance in retirement.
So, think about it this way. Why did you need life insurance in your working years? For most folks, it’s to be able to replace the lost future income that spouses and children are dependent on. While you are alive, the income you bring in supports them and allows them to enjoy all that life has to offer them.
But if you were to die, that income stream would stop, and you’d need to replace it. Life insurance is a good way of doing that by providing a lump sum of cash, exactly at the time it’s needed, so that the income stream our family needs doesn’t stop.
But at retirement, assuming you’ve done it right, that income stream from work is replaced by the retirement income stream you’ve set up through your pension, FRS investment plan, your investments, and Social Security.
And, hopefully, you don’t have as many dependents anymore as the kids are probably grown and self-supporting as well.
So the need to carry life insurance to replace your lost income if you died has gone away and is replaced by the responsible investing you’ve been doing, as well as possibly your pension and Social Security. So that’s the scenario most of us fall in, where there is no real good reason to continue with your life insurance coverage once you’ve retired.
So are there any good reasons some people may have to carry life insurance beyond the day they retire?
Actually, there are. For example, if you have a special needs child who is going to need support their entire life, that may be a reason to carry some form of permanent life insurance beyond retirement. Every case is different, so you’d want to consult with an astute advisor that is familiar with these kinds of scenarios. Someone like Northstar Financial Planners that has lots of experience there and isn’t incentivized to sell you a life insurance policy because they are a true fiduciary advisor. More on that in another session.
Another reason we see some special risk FRS participants carry life insurance is because they chose Option 1 or 2 on their pension, and they are looking for a way to continue the income stream if the FRS retiree were to predecease their spouse. Usually, when we see this, it means that planning wasn’t done very well and most likely they were “sold” the life policy by a life insurance agent who really didn’t understand how Option 3 is calculated.
If you’re considering Option 1 or 2 and carrying life insurance on top of it, it’s worth your while to consult with someone who’s not biased on you buying the life insurance policy—someone who doesn’t get a commission on the deal. And someone who truly understands the whole picture and how it all works.
Life insurance and reasons to carry life insurance in retirement can get complex in a hurry, so again, it’s probably a good idea to consult with someone who isn’t going to make a big commission off the sale of the policy. That’s where a fiduciary, fee-only advisor can really make a difference. Give us a call if you’d like to talk.
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