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Should I keep my life insurance after I retire?
The decision to keep a life insurance policy after retirement depends on your family and financial circumstances. Although many retirees choose to stop paying their life insurance premiums when they no longer have young families, there are several reasons to keep a policy. Here are some things to consider before making a decision.
family: Life insurance is designed to help protect your spouse and children in the event of an unexpected death. But if you have grown children who are financially independent and have enough financial resources to cover your and your spouse’s retirement expenses, the need for current life insurance may be minimal.
On the other hand, if you had a child at a later age or have a relative with special needs who is dependent on you for income, it may make sense to continue paying the premiums on your policy.
You also need to make sure that your spouse’s pension income will not drop significantly when you die. Check the terms of your pension or annuity to determine your survivor benefit, and consider your lost Social Security income. If you find that your spouse will lose a significant portion of their income after your death, you may want to keep the policy to make up the difference.
Debts: If you are still paying off a mortgage or have other large debts, it may be best to keep your policy to help your family pay off those debts after you die. If your debt is a small portion of your net worth that poses no risk of financial hardship, life insurance may not be necessary.
job: Because life insurance helps replace your family’s lost income when you die, you may want to keep your policy if your spouse or other family members depend on you for income. But if you have very little income from your retirement work, you probably don’t need to continue with the policy.
Property taxes: Life insurance can also be an estate planning tool if you have a very large estate (over $12.92 million in 2023). If you own a large business that you want to keep in the family and don’t have enough liquid assets to pay the estate taxes, your estate can use the proceeds of a life insurance policy to help your heirs pay those taxes when you die.
To help you with this decision, consider talking to an estate planning expert or a fee-based financial advisor who can help you weigh the pros and cons.
Sell or exchange your policy: If you decide you no longer need your life insurance policy, you can surrender it for its cash value or let it lapse. Another option is to sell your policy in a “life settlement” transaction to a third party company. Selling a life settlement usually pays more than the cash surrender value of the policy.
If you’re interested in this option, get quotes from several life settlement providers or brokers in your state. Some states provide directories of licensed providers. Be sure to confirm the information with your state’s insurance department.
Another option is to use a Section 1035 tax-free exchange to exchange your policy for a hybrid product that combines life insurance with long-term care insurance coverage. These products come in a variety of forms, but often combine a whole or universal life policy with long-term care. If you don’t use long-term care coverage, your heirs receive a death benefit.
Donate your policy: If you choose to make a charitable contribution from your life insurance policy, your deduction will depend on whether the policy’s value has grown in excess of the premiums and whether the policy is paid up or has payments remaining to be made. To receive an income tax deduction, the donor must irrevocably transfer ownership of the policy to a nonprofit organization. With this transfer, the donor must relinquish all instances of ownership and rights in the policy. A direct gift of a life insurance policy will result in a charitable income tax deduction equal to the lesser of the value of the policy or the donor’s basis in the policy. See chap. 170(e) and Rev. Rul. 78-137.
Generally, the donor’s basis in a policy is equal to the total premiums paid by the donor. As a practical matter, the charitable income tax deduction will usually equal the donor’s basis, as in most cases the cost basis will not be greater than the policy value, i.e. the recovery price or the interpolated terminal reserve value (ITRV).
“Savvy Living” was written by Jim Miller, a regular contributor to NBC’s “Today Show.” The column and others like it are available to read through the American Legion’s Planned Giving program, a way to establish your legacy of support for the organization while providing for your current financial needs. Learn more about the process and the variety of charitable programs you can benefit from legion.org/plannedgiving. Clicking “Learn More” will display an “E-Newsletter” button where you can sign up for regular information from Planned Giving.