Just about any time you purchase or make a payment on insurance, you’re spending money you hope to never get back. Auto insurance is only used in case you have an accident, which, by definition, you aren’t trying to do. Same with home insurance. Health care is the only type of insurance you pay for (for most American readers) that you use regularly, but even then, hopefully, it is only during checkups.
But there is one type of insurance whose rarity of use surpasses all others: life insurance.
Every time you made a payment on your life insurance (or when you purchased a policy), you were balancing it against your possible death. But the purpose of life insurance isn’t to replace you (as auto or home insurance might be), but to replace your earning potential. That way, if something happened to you while you were still working, your family or other dependents wouldn’t suddenly be left with nothing.
That’s why when people retire, they tend to either cash out or otherwise discontinue their life insurance. After all, there seems to be no reason to pay for it once you have passed your prime earning years. For many, life insurance is seen as a needless expense on a fixed income.
But this is often far from the case. While different investment and financial experts have different opinions on the benefits of life insurance after you retire, there are certain situations where it can make sense.
Every situation is different, of course, and it all depends on what you have saved, what you are earning, what you and your dependents need money for after you are gone, and what you want your legacy to be. There are no cut-and-dried solutions, so no matter what, consult with your financial advisor before you make any decisions.
Life insurance is a policy that you are glad to never have used. But even after you retire, there are some situations where you and your loved ones will be glad you had it.
5 Situations Where Older Adults Need Life Insurance
No two people’s needs are the same. But if you have any of these considerations or desires, you may want to talk to your financial advisor about the probity of continuing to have or purchasing a life insurance policy.
1. Dependent Children or Grandchildren
While many retirees have independent adult children with established careers, that is no longer universal for everyone. Today, a lot of people have dependents even after they retire. A few reasons children might be dependents include:
- You had children later in life, and they are still in school/grad school
- Your children are struggling in their careers
- Your children have had life changes (such as divorce or partner having to move for work) and need help with things like lodging and childcare
- You are responsible for raising your grandchildren
- You have children with disabilities
Some of these are legal dependencies, others are emotional ones. But we live in challenging financial times, and not everyone is in control of their own destiny. Having a life insurance policy to protect those who depend on you after you are gone is a way to create a little bit more security.
2. Funeral Costs
The average cost of a funeral in the United States is $7,045, and that’s before cemetery costs, which can add another $3,000 or so. That means that a standard funeral will run as much as $10,000 or even more. That’s an enormous amount of money and can dramatically cut into whatever you leave your children.
This is where life insurance often comes in. Using it as a hedge against funerary costs is one of the most common uses for life insurance. Now, it takes at least 30 days for a payout, so the funeral will still have to be paid for in advance of collection, but knowing that money is coming means that your survivors won’t have to worry about costs as long as they can temporarily cover the upfront expenses.
It also means you know the amount that is coming, so that you can prepare in advance. It even gives you the chance to plan your own funeral, which can be a wonderful, if bittersweet, gift to give to yourself and your loved ones.
3. Gifts or Charity Donations
For many people, the chance to leave a charitable donation after they die is incredibly appealing. It is a way to leave a legacy, whether you are funding a shelter for cats or endowing a chair at a symphony orchestra. But unless you are very well-off, it’s hard to plan for this when you don’t know what your expenses will be over the course of your life.
That’s where (surprise!) life insurance comes in. Having a policy for the express purpose of donating to a charity means that you don’t have to worry about circumscribing your spending or inheritance wishes in order to fund a cause of your choosing. You don’t have to set aside a chunk that you could otherwise use for vacations or health care or helping your family, and you don’t have to worry about eating into your gift if an emergency arises.
4. Collateral or Creditor Proof
There are times as an older adult when you might need a loan. You may be selling your house to get a place downtown, which might be more expensive than your house. You may want to take a trip around the world. You might be looking to move into an assisted living community.
Whatever the case, it can sometimes be hard to get loans, particularly when you are not working. There are reverse mortgages and other financial products designed for people 62 and over, but those aren’t always the right choice, designated for your purposes, or even feasible.
In these cases, you might have to take out a traditional loan, which can be harder as an older adult, in part because creditors are wary about being paid back in the event of your death. A life insurance policy is a guarantee of sums, great collateral, and proof to any creditor. It means you can get what you need now on fair and decent terms without burdening your survivors.
5. Inheritance or Estate Taxes
This certainly doesn’t apply to everyone. In America, the new inheritance tax shields you up to $11.2 million for a single person or $22.4 for a couple. It could drop to a lower standard (5.46 million and $10.5 million, respectively) in 2025, but that isn’t a sure thing.
Obviously, not everyone will be impacted by the inheritance tax. But we’re optimistic here, and we hope some of our readers have been fortunate enough in life to have these considerations!
If this is you, you may want a life insurance policy to cover the taxes of what you will leave your inheritors. This way, they don’t have to pay the taxes on what is left to them, so they can collect the full amount you want to leave.
Doing What’s Right For You
Here’s a bonus reason you might want a life insurance policy: so you can spend what you want in life and still have something left to leave your children. We know that post-retirement can be a balance between living the life you want and planning your estate and will. For some people, a life insurance policy allows them to do both.
And that’s the point of having life insurance after you retire. For the people who need or want it, it is the comfort of having plans securely made. It is having something in the back of your pocket that lets you know the plans you have for the rest of your life aren’t dependent on the whims of the market or a sudden expense. It is a way of securing your legacy.
Life insurance policies aren’t needed for everyone after they retire. But if you have talked to your financial advisor about your plans and determine that it makes sense, they can be a source of security.
When you are working, life insurance policies are a somewhat grim reminder of life’s worst-case scenarios. But after you retire they can be a path toward one of the best things in life: peace of mind.
At Institute on Aging, our programs and services help older adults, their families, and caregivers explore aging together, through good times and bad, as an adventure and a journey. Contact us today to learn more.