What type of life insurance should I consider for retirement planning?
When considering retirement and life insurance, first determine if your death's projected financial loss is increasing or decreasing; this factor can reveal how your life insurance and retirement income might correlate. Ultimately, understanding your death's projected financial loss can help you choose between the two main categories of life insurance policies — term life insurance and permanent life insurance.
You have a decreasing projected financial loss if...
Your income will go away or decrease significantly after retirement. If that's the case, you can likely project that your beneficiaries would experience much less of a financial loss if you were to die after you retire than if you were to die before retirement.
If you have a decreasing projected financial loss and you've invested well for your retirement years, term life insurance may be your best insurance policy for retirement planning. You can set the coverage to last only as long as you'd be providing an income — or shorter. Funeral insurance can also make sense if you just want to make sure your final expenses are covered after you retire. These more affordable plans can help you avoid adding more costs in your retirement years when your income will decrease and your loved ones won't be relying on you financially anyway.
You have an increasing projected financial loss if...
You plan to continue increasing your income during retirement, such as if you own a business or have a high net worth. In other words, your beneficiaries would experience much more of a financial loss if you pass after retirement compared to if you pass before retirement.
If you have an increasing projected financial loss, you'll likely want to provide for your beneficiaries through permanent life insurance in case your death would eliminate the increasing income you plan to provide even into retirement. Permanent life insurance (either whole life or universal life) may also help offset the cost of estate taxes that will come out of your estate before it gets passed on to your loved ones — but you should consult your tax advisor to understand any tax implications for your particular circumstances.
Regardless of your projected financial loss, a permanent policy also makes sense if you want to ensure your death benefit will be paid out no matter when you die. With a term policy, you're only covered for a specific number of years. Learn more about how types of life insurance differ.
How do I select a coverage amount I can afford?
There are two aspects of life insurance coverage: how long your policy will last, and how much it will pay out upon your passing. Your age and health may affect what coverage amounts you're eligible for, but ideally you'll select the amount that can adequately provide for your beneficiaries for the length of time they'll need support — and at a premium you can afford over time. Remember to factor in your savings, investments, and how your financial situation will change when you retire.
Selecting a coverage length
If you decide to purchase a term life insurance plan, you'll be given term length options, usually between 10 and 30 years, depending on your eligibility. The maximum term period you're eligible for typically decreases as you age. So, if you're in your 20s or 30s and planning for retirement, it can make sense to opt for the longest term you qualify for; that way it's in effect for as long as possible while you're still providing an income for your family.
However, if you're buying life insurance during retirement because you want to cover, say, the remaining balance on a 15-year mortgage you got five years ago, 10 years of coverage would make more sense. Learn more about how long your life insurance should last.
Selecting a payout amount
When determining the payout amount your loved ones will receive upon your death, add up their expected living expenses, emergency costs that may come up, and your potential outstanding debt. Remember to consider how long you want your payout to last for each of those expenses. Life insurance payouts may be distributed all at once rather than over time, so your beneficiaries will need to plan accordingly. Learn more about how much life insurance you might need.
Upon your passing, your life insurer might distribute the death benefit all at once or in payments over time.
Should I keep emergency funds during retirement?
Regardless of your age, you should keep an emergency fund for unexpected financial needs. If you're concerned that an unexpected cost during retirement could leave your family vulnerable to financial hardship, permanent life insurance policies might provide you with peace of mind. If the need arises, a permanent policy can allow you to take out a loan against the policy's cash value. You can then pay back that amount, or it will be subtracted from your death benefit.
How to get life insurance for retirement
You can compare your retirement life insurance options and get a quote in minutes from Progressive through eFinancial.