As you near retirement, you’ll have many new financial decisions to make. A big one is deciding what to do about life insurance. You may be losing your policy from your employer, meaning you should determine whether to purchase a new policy yourself. Since there are various types to choose from, it’s important to understand how they differ and what their purposes are.
Do You Need Life Insurance?
There are many reasons why life insurance for retirees is a good idea. It’s common to leave the death benefit to your family members, which may allow you to leave inheritance to your heirs or increase the amount you leave them by paying off your final debts and estate taxes. Alternatively, if you’re concerned about your heirs not having enough to pay for your final expenses, you can use the death benefit to cover that. Another option is to have a larger amount to donate to a charitable cause that matters to you.
Types of Life Insurance for Retirees
To fulfill the above goals, there are three types of life insurance that retirees may need.
1. Annuities
You won’t have any income from your job when you retire, but it’s still possible to have some form of income: through annuities. An annuity provides you with a guaranteed income, often for the rest of your life — perhaps even beyond, such as if you want to leave a benefit for your spouse. Annuities come in various types. It’s important to understand the differences to ensure you choose the right one for you.
First, it’s necessary to choose between fixed and variable annuities. Fixed annuities give you a predictable amount. You pay either a lump sum or several payments over a set amount of time until the annuitization phase, which is when the insurer pays you back for either a particular length of time or your entire life.
Variable annuities are similar, except the amount you receive in returns depends on what subaccounts you chose – these are various stock and bond products. This means there’s a higher risk but also a greater potential reward. To lower the risk, add a rider for a guaranteed minimum withdrawal, which will mean you receive a minimum amount even during recessions.
The second decision is whether you want an immediate or deferred annuity. If you’re already retired, an immediate annuity may be best, as it means there will be no wait for payouts. You’ll need to pay a lump sum rather than regular payments. With deferred annuity, you won’t receive anything until a specific date in the future. If you’ve chosen a fixed annuity, this will give the funds a chance to gain interest. If you have a variable annuity, the idea is the amount will increase due to market gains.
2. Term or Whole Life Insurance
You may also want either term or whole life insurance to pay a death benefit to a beneficiary of your choice.
Term life insurance covers a set amount of time, with typical terms lasting anywhere from 10 years to 30 years. If you live longer than the term, the coverage will end without paying out a death benefit. The policy will also end if you stop paying premiums for any reason.
The alternative is whole life insurance. These policies never expire (although coverage will end if you don’t pay the premiums). If you have a policy from before you retired, you’ll be able to keep it through your retirement. Most whole life insurance policies require you to pay the same amount in premiums every month. The exception is universal life insurance, where you’re able to increase or decrease the premiums each year.
It is also possible (at least in some cases) to stop paying premiums and still retain coverage. You’ll need to talk to your insurer about this to find out your options. For instance, it may be possible to change to paid-up additional insurance.
In addition to providing a death benefit, many whole life policies have a cash value, which gives you access to some funds during your lifetime. You may have accumulated a large cash value if you had a policy throughout your working years. Bear in mind, though, that accessing the cash value is not straightforward: you’ll owe taxes on the cash amount (called the surrender value) minus the amount you paid in premiums (called the policy basis). Furthermore, you may face a penalty if you’re still in the surrender period, which – if your policy has one – lasts for as much as 15 years.
3. Final Expense
You may see final expense insurance marketed as burial, funeral, simplified whole life, or modified whole life insurance. No matter the name, it is a type of whole life insurance specifically for covering final expenses, like a funeral or memorial, burial (including embalming and casket) or cremation, obituary, flowers, and nursing home bills. However, your insurer will put no restrictions on how the beneficiary actually uses the funds.
When deciding if you should take out a final expense policy, consider how much your family has available for funeral costs. According to Lincoln Heritage Funeral Advantage, a typical funeral costs between $7,000 and $12,000. Your family may need to pay this on top of the medical bills for the care you receive at the end of your life plus legal expenses for your estate. Final expense insurance may be a good way to cover these costs. However, there are other options, such as using your savings to prepay your funeral.
It’s important to note that the only real difference between final expense insurance and other whole life insurance policies is that the death benefit is smaller. According to Investopedia, coverage may be limited to as little as $2,000 and the maximum is no more than about $50,000. It is most common for policies to offer between $7,000 and $12,000. Policyholders who are aged 76 and above when they take out a policy often receive a smaller death benefit.
The reduced death benefit means premiums are lower than with other whole life policies. However, how much you pay in premiums still depends on factors like your age, your health (such as whether you’re a tobacco user), and — in states where this is allowed — your gender (men pay more than women due to average lifespans). Plus, there may be age requirements, including a minimum age (typically around 45) and a maximum age (around 85).
It is common for final expense policies to not require a medical exam — although policyholders do need to answer health questions. This makes approval for a policy easier, but it still does not mean approval is a guarantee.
If you have serious health problems, you may like to take out guaranteed issue final expense insurance. With these, policyholders must wait two or three years before they qualify for death benefits. If the policyholder dies before the end of the term, the beneficiary receives just the amount paid in premiums plus interest (usually around 10%).
Learn more useful tips for retirement by subscribing to Silver&Smart.