Is life insurance needed in retirement?
6. Don't expect insurance to replace retirement savings If you don't have a lot of money saved for retirement, don't expect a cash value policy to be your only savings strategy. It takes several years for cash value insurance to build up a substantial savings. If you're older and hope to retire in a few years, it's probably best to buy a term insurance policy to protect your dependents and fund a retirement account to build wealth.
"It's not financially beneficial for someone in their late 50s to purchase a cash value policy just for asset accumulation purposes," says Levin. "The cost of insurance is going to be higher and there's not going to be a lot of time to let the cash value build up significantly.
"If you're not financially ready for retirement, you'll be better off maximizing an investment vehicle that's not an insurance policy -- like a 401(k), IRA or Roth IRA."
7. Consider your settlement options After retirement, if you don't need your life insurance policy, you could sell it in a "life settlement" transaction. The Life Insurance Settlement Association says a life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. The original owner of the policy is typically someone who is age 65 or older. The policy would eventually pay the investor the benefit. "For a person who's over age 70, they could receive around 20 percent to 25 percent of the policy's face value," says Graziano. So someone might receive $250,000 cash to sell a policy that has a $1 million death benefit.
Not everyone believes third-party life insurance settlements are a good idea. "They are very controversial," says Jacoby. "They're getting a lot of states' attention these days, both from an ethics point of view and an abuse point of view."
The problem occurs when a person takes out a policy with no intention of receiving the benefit. They buy it simply to cash out with an investor. "Most policies do not have a specific prohibition of them," says Jacoby, but insurance companies may include language in future policies prohibiting third-party sales. Settlements are regulated by state insurance departments, so different rules apply by state.
A third-party life settlement is not to be confused with a viatical settlement. The latter is an existing policy owned by a terminally ill client who would presumably use the money for medical expenses and final estate planning. Generally speaking, life insurance settlements are offered to individuals who do not have catastrophic medical problems.
Life insurance isn't for everyone. As you approach retirement, be sure to evaluate whether you still need it. It's probably best to get an opinion from a disinterested third party, such as a fee-based financial planner who does not sell insurance products at all.