Last week we looked at insuring the different stages of life, with emphasis on the importance of life, disability, critical illness and long-term care insurance at each phase. Here, we want to explore the impact of life insurance during retirement. While some people believe that life insurance is absolutely necessary even in retirement, others argue that it’s a waste of money. We won’t comment on which group is right and wrong, since everybody’s situation is different and there is no right or wrong. However, we will present the arguments of both sides so you can make your own decision.
Life insurance is necessary in retirement
While your spouse may not depend on your income anymore in retirement to pay for living expenses, your death does still leave a dramatic financial impact on him/her. At your death, your RRSPs/RRIFs will be combined, resulting in higher mandatory withdrawals. With nobody to split the income, your spouse may be bumped into a higher tax bracket and be stuck with a higher tax bill.
Secondly, because of your spouse’s higher income, he/she may be subject to the OAS clawback, which occurs starting at around $71,000 currently. The entire OAS benefit is clawed back at around $116,000, which could potentially result in the loss of $13,000 in OAS benefits annually.
Finally, your overall family income will be reduced by the amount of CPP you were receiving. Since the government will only top up the survivor’s CPP to the maximum amount, anybody already receiving the maximum will not get a bonus. Using current rates, the family income may be reduced by over $12,000 in CPP annually.
These are the three major financial impacts your death will have on your spouse in retirement. Although the survivor likely requires less income than a couple, there may still be a gap that can be filled with life insurance.
Life insurance can also be used in retirement for the same reason as during your working years: to pay off debts and for final expenses like funeral costs, probate and executor fees. Depending on the size of your estate, probate and executor fees can add up to be tens of thousands of dollars.
If you are adequately self-insured for these expenses, meaning you can draw on your assets to pay these costs, then life insurance becomes more of a want than a need. You may want to leave an inheritance to your children or grandchildren, leave a legacy to charity or equalize your estate so that each beneficiary is treated fairly.
Another want that life insurance can take care of is paying off the taxes owing on the last survivor’s death. Although assets and RRSP can be rolled over to the spouse upon the first death, tax is usually triggered when the survivor passes away as well. A joint last-to-die policy is usually used to pay off the tax so that your estate passes to your beneficiaries intact.
Life insurance is a waste of money in retirement
The main reason for acquiring life insurance in the first place is so that your dependents do not suffer financially after your death. Since you are in retirement, you are living off your nest egg and hence your spouse is no longer dependent on your income for living expenses. You have built up sufficient assets during your working years that you are able to self-insure. Although as noted above, your spouse will still suffer financially after your death, it will not be a financially catastrophic loss for him/her. Therefore, it can be argued self-insurance has obviated the need for life insurance, so it is not necessary in retirement.
At this point, life insurance becomes more of a want than a need. If you do not want to leave an inheritance to your children or grandchildren, leave a legacy to charity, equalize your estate or pay off taxes, then you do not need life insurance.
As you know, life insurance premium depends on age and health. As we age and become more susceptible to chronic illnesses, our life insurance premium goes through the roof. It is not unheard of to see life insurance premium for over $4,000 annually for a $100,000 face amount permanent policy for a 70 year old non-smoking man. Upon further analysis, it may make more sense for you to save this amount for your own use.
Now you have a better idea of whether or not you need life insurance in retirement. The decision will also depend on your existing life insurance. If you do side with the camp that believes life insurance is necessary, be aware that you will need permanent life insurance to guarantee the death benefit will be paid, since term insurance usually expires at age 80 or 85.
The decision will also depend on your existing life insurance. If you already have permanent insurance in place at a young age, you will be paying low premiums in retirement compared to someone who is taking out a new policy. If you have a term policy, you can look at converting a portion of it to permanent insurance to lock in the rates. The premium of the converted permanent policy is based on your age at conversion, so the sooner you do it, the lower your premium.
Many factors come into play when looking at life insurance in retirement. It’s important for you to examine these factors carefully and weigh the cost against the benefits of owning life insurance in retirement.
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