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Do you still need life insurance if you're retired?

Life insurance if retired

As you're nearing or in retirement, you may have a decision to make: Take out a life insurance policy or not?

If you have a family member who relies on your income, or you're still in debt in retirement, life insurance may make sense for you. Learn what you should consider and the options available to you.

What to consider

Before deciding whether you should purchase life insurance, first assess your financial situation. "Figure out exactly what you are trying to insure so you do not purchase too much coverage, which will result in paying a higher premium unnecessarily," says David Bakke, an insurance expert at Money Crashers.

These questions may help you determine if you need life insurance in retirement:

  • Are you still working? Even if you're just working part-time in retirement, then your death may lead to a loss of income that your family relies on to maintain their standard of living. Life insurance can help soften this financial blow.
  • Do your children still live at home? According to the U.S. Census Bureau, more than 30 percent of 18- to 34-year-olds still live with their parents. If you still have dependents living at home, then life insurance could be a way to help ensure they are supported after your death.
  • Do you have debt? According to the Consumer Financial Protection Bureau, "Older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years than in previous decades." In the event of your death, your estate is responsible for covering your debt. And in some states, the spouse is held responsible in the event your estate cannot cover the cost. Life insurance can help cover these expenses.
  • Would your family owe estate taxes? If your family must pay estate taxes on your home or property after you die, then life insurance can help foot the bill. While the vast majority of homeowners won't be required to pay estate taxes, it is an important consideration if you're in the minority.

If you answered "yes" to any of these questions, then life insurance may be a good option for you.

So what kind of life insurance should you purchase?

Post-retirement life insurance: What's out there?

Not all life insurance works the same. You can choose between two main life insurance options: permanent and term.

Permanent life insurance is designed to last the duration of your life, and it will stay active as long as you pay your premiums. You can also earn cash value on a tax-deferred basis, which you can use in the future for anything. Term life insurance only covers you for a set period of time.

There are multiple kinds of permanent life insurance to choose from, each with their own unique benefits:

  • Whole life insurance: While you're alive, the policy will accumulate a cash value; at your death, your beneficiary will receive a benefit. Your premium and cash value will stay the same for the duration of your policy, which is good if you value stability and not so good if you value flexibility.
  • Variable life insurance: You can distribute your premium across a variety of investments, which can increase the amount of your death benefit and cash-value returns. In doing so, however, you also take on more risk than you would with whole life insurance.
  • Universal life insurance: This type of coverage allows you to alter the conditions of your policy, and you have the freedom to increase or decrease your payments, thus increasing or decreasing your death benefit. The downside is that the insurer can alter the conditions of your policy depending on your financial and health situations.
  • Variable universal life insurance: This is similar to universal life insurance with the added flexibility that variable life insurance offers. If you're interested in maximum control and investment potential -- which also means maximum risk -- then variable universal life insurance might be for you.

While permanent life insurance is an appealing option, its "lifelong" nature might not work best for many retirees who speculate they'll only need insurance for a select number of years. For these people, term life insurance may be a better option.

Unlike permanent life insurance, which lasts for the duration of the policyholder's life, term life insurance is active in increments of five, 10, 20 or 30 years. The premium is based on the average mortality rate throughout the duration of the policy, so you can count on a set amount.

Term life insurance is ideal if you don't want to be insured for the rest of your life but could benefit from life insurance for a set period. If you expect to pay off your home loan in five years, for example, then a five-year policy makes sense.

The downside is that it may feel like you're leaving money on the table when the term ends, as there is no guaranteed payout. The security of term life insurance, however, could outweigh this downside depending on your situation.

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