Life insurance options for retirees
You’ve worked all your life, paid your bills and saved up enough to finally make the break you’re been waiting for – welcome to retirement.
As part of the process, you may be considering what you can or should do with your life insurance. Let’s address the various life insurance options and needs going forward.
Group life insurance through work
In many cases, your group life insurance policy can be converted over to an individual life insurance policy without a medical exam. This option will only be available for 30 days after you drop out of the group insurance plan, so it’s important to investigate this option as soon as you can. Your HR department should be able to provide quotes and options for this conversion process.
Other’s may be fortunate enough to have retiree benefits that include life insurance. Generally, that coverage is not forever but ceases around age 70. Because all plans like this are custom, you’ll again need to contact your HR department to find out specific ages, as well as when you lose the option to convert the coverage to an individual policy.
Individual term life insurance
If you have a term policy, you may decide you don’t need it anymore, or don’t want to go through the hassles of applying for a permanent life insurance policy. Similar to the group insurance where you can convert to an individual policy, most individual term life insurance policies will allow you to convert to a permanent life insurance policy without a medical exam. Retirees commonly will convert their term policy to a permanent life policy then reduce the face amount. Doing so is an easy way to move from say a $500,000 term policy down to $50,000 or $100,000 of permanent life insurance without a medical exam while still receiving the rates of someone who took a medical exam.
Individual permanent life insurance
-Term to 100
If you have an old term to 100 policy, approach the cancellation of this policy with caution. The premiums on the old term to 100 life insurance policies are no longer what they were in years past, so that old policy may be the cheapest insurance coverage you’ll ever have again. If the premiums are too high, you may be able to reduce the amount of coverage to reduce the premiums.
– Universal Life
If you have an old Universal Life insurance policy with investments, there are a number of considerations. First, you’ll need to find out what the internal insurance cost structure is (the internal cost structure is different than the premiums). This is referred to as the “Cost of Insurance” or COI. If you have YRT or annually increasing, you may consider converting to level COI. Doing so locks in your insurance costs level for life. You’ll need to speak to your broker or insurance company to get current premiums costs for switching from annually increasing to level insurance costs.
Secondly, if you’re considering canceling the policy, be careful. If you cancel the policy and withdraw the investments you will be subject to taxation. And as a retiree, you’re going to be even more worried about your overall tax bill. There are alternate options such as using any investments as collateral on a non-taxable loan (basically, the bank takes the policy as collateral and loans you money. The loan money isn’t taxable). Alternatively, you could reduce the amount of insurance down to the minimum allowed by the policy. This reduces your insurance costs but keeps your investments sheltered and untaxed. Be careful, these types of strategies are high risk and you’ll need to consult an accountant and a knowledgeable insurance broker before doing anything – there’s little room to change back if you make a mistake with this.
– Whole Life
And finally, if you have an old whole life policy that you’re considering canceling, the considerations are similar to the other types of permanent life insurance. Instead of canceling, you may be able to reduce the amount of coverage to reduce premiums. If you do cancel the policy, again be aware that there are likely tax implications. And one last option with a whole life policy is what is known as Reduce Paid Up Values. This option allows you to stop paying premiums but not cancel the policy. Instead, you receive a smaller amount of coverage for the rest of your life with no further premiums owing. This option allows you to keep some amount of coverage, without the burden of paying any further premiums.
Due to the complex nature of the various policies and the uniqueness of your preferences, it will help to get all of your insurance paperwork together for a full review. You should contact your insurance company and ask for a ‘current in-force illustration’. This document will give you the current values of your policy along with projections going forward, based on current information. The in-force illustration along with your existing insurance paperwork will then allow you to meet with your insurance broker and do a thorough review of your existing coverage and devise a strategy going forward.