Later-Life Insurance Rules

Do you really need life insurance after you retire?

With an uncertain economy and the erosion of many retirement plans, people nearing—or in—retirement are seeking ways to build savings and protect their spouses.

Cara Petrus
Life insurance isn’t the answer for most of them.

The primary reason is simple: Life insurance is essential for people supporting families, to protect dependents if the breadwinner dies. But if you are retired, there is little reason to insure your life if no one is depending on you.

That is a good thing, because the cost of coverage rises steeply as you age. Life-insurance companies aren’t dumb; they know that the odds you will die increase each year, so your premiums rise accordingly.

Even though life insurance is expensive—and, in most cases, unnecessary—for older people, agents often pitch it as a pension supplement, an investment and an estate-creation tool. But if you already have a substantial estate, you probably don’t need life insurance to protect your dependents (or a life settlement for that matter).

Granted, life insurance can be a critical tool in an estate-planning or charitable-giving strategy for wealthy investors. For example, death benefits can be used to pay estate taxes that otherwise would have to be paid by selling investments or illiquid assets at a discount. And if you already own a policy, it can be a very good fixed-income investment.

For everyone else, however, buying life insurance in retirement is likely to be more trouble than it is worth, and can actually leave a surviving spouse worse off.

Before you sign on the dotted line, consider the following caveats.

• Coverage always becomes more expensive as you age. A healthy 40-year-old male can buy $500,000 of 20-year level “term life” insurance for roughly $500 a year, but could pay $6,000 a year for the same coverage at 65 and nearly twice that at 70. The cost of term coverage is transparent and high enough to scare away many older people.

They may be more easily talked into buying “cash value” life insurance, in which the cost of the actual insurance is masked.

Cash-value policies combine term coverage with an investment account. You contribute money (the “premium”) to your account, or policy, each year. The insurer deducts fees, commissions and the cost of insurance, and anything left over goes into your account. Over time, the cash value grows slowly. (“Whole life” is the most common type of cash-value insurance.)

It can be difficult to discern how much the actual life insurance costs when it is wrapped inside a cash-value policy. For this reason, some agents claim it is less expensive than term-life coverage.

It isn’t. Your life expectancy—and the cost of insuring you—doesn’t change just because your policy has a savings account grafted onto it. The difference with a cash-value policy is that your premiums are front-loaded, essentially prefunding the life insurance in later years, offsetting its rising costs.

• Life insurance is a costly investment. Commissions and fees can consume 100% of the money you put into a cash-value policy in the first year, and high annual costs can offset much or all of the interest you might earn in subsequent years.

Mutual funds disclose their fees and the returns. But you might never really know how well an insurance policy performed. It can be difficult or impossible to break out the cost of the insurance and other expenses.

• It isn’t a pension substitute. For decades, salesmen have encouraged people nearing retirement to elect to take their monthly pension as a larger amount that will end at their death, instead of accepting a smaller monthly pension with payouts that will continue over the life of a spouse.

Supposedly, the additional pension a person receives each month can be used to buy life insurance to protect the surviving spouse.

This isn’t as simple as it sounds. To make it work, you will need to estimate the value of the pension payments the survivor will forfeit, and buy enough life insurance to replace that.

In addition to the higher costs, this strategy puts your spouse at risk. Agents show illustrations of how much your cash value will grow to over the years.

But if the illustration is overly rosy and actual growth is lower, you may be forced to contribute higher premiums in subsequent years, which can be a challenge on a fixed income.

If you don’t pay the premiums, your policy could lapse, and your spouse will end up with neither life insurance nor a pension when you die.

A persistent misconception about life insurance is that one can get something for nothing. This is rarely the case, and even less likely when you are older.

A retiree might assume that even if he begins to pay premiums at an older age, the death benefit will far exceed the premiums he paid over the years. It is true that there’s a windfall if you die early, but if you die late, your heirs will get less than if you had invested the same premiums elsewhere.

Your insurer has a far better grasp of the odds than you do.

Write to Ellen E. Schultz at