If you\u2019ve reached your retirement savings goals, should you still keep your life insurance policy?<\/p>\n
Take the hypothetical case of Bob. He now has $1 million in his 401(k) and, at age 57, still has five more years before he wants to retire.<\/p>\n
As the primary breadwinner in his household, Bob wants to ensure that his wife, 55, will have enough money to live comfortably if he were to pass away before she does. His wife is the primary beneficiary on his 401(k).<\/p>\n
Currently, Bob is paying about $150 a month on his life insurance policy. However, if his wife inherits his 401(k), he wonders if she would still need the insurance payout. They don\u2019t have any kids, so he\u2019s not sure if he should keep making those monthly premium payments.<\/p>\n
Life insurance is often recommended if someone financially depends on you, such as spouses, children or aging parents. But if you have enough money saved up for retirement, you may wonder if you should reduce or cancel your coverage.<\/p>\n
Before doing so, consider your total budget \u2014 now and in retirement. Do you still have mortgage payments? How much are your household expenses? And how much debt do you have?<\/p>\n
If you still have a hefty mortgage or other debt, such as credit card debt, personal loans, car loans or student loans, you\u2019ll want to ensure your loved ones have enough money to cover those expenses if you were to suddenly pass away. However, even without those liabilities, it may still be worth keeping your insurance.<\/p>\n
While Bob has $1 million in his 401(k), would his wife have enough to live comfortably if he were to pass away tomorrow?<\/p>\n
She\u2019s 55, so she could live another 40 years. While she would receive some Social Security benefits in retirement, the couple has to consider whether that, combined with 401(k) withdrawals, would be enough to cover expenses and leave enough to live off.<\/p>\n
As a spousal beneficiary, Bob\u2019s wife could take a portion of the 401(k) as a lump sum. While this withdrawal would be penalty-free, it\u2019s taxed as regular income, which could result in a hefty bill. She could also roll the inherited 401(k) over into her own 401(k) or IRA, if she has one.<\/p>\n
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If Bob continues to make payments on his life insurance policy, then his wife would receive a death benefit upon his death. This payment is often tax-free, except for any interest earned, and can either be distributed as a lump sum or over a period of time.<\/p>\n
The money could be used to replace lost income. Moreover, it could help Bob\u2019s wife cover immediate expenses, such as debt payments and funeral costs, before having to navigate the complexities of an inherited 401(k) during an emotionally devastating time. If the policyholder has kids, the money could also be used to pay for their education.<\/p>\n
So, if $150 is not a major monthly expense for Bob, he may want to consider keeping the policy. But it also depends on the type of life insurance he has.<\/p>\n
Read More: Vanguard reveals what could be coming for U.S. stocks, and it\u2019s raising alarm bells for retirees. Here\u2019s why and how to protect yourself<\/a><\/p>\n Term life insurance covers you for a specified period of time (typically 10, 20 or 30 years) and expires once that period is over. It\u2019s usually the most affordable option; it\u2019s also a predictable expense, since premiums remain the same throughout the term.<\/p>\n This might be an option for someone who wants to ensure their children are financially supported until they graduate from college.<\/p>\n There\u2019s also permanent life insurance (including whole life insurance), which provides coverage until you die \u2014 so long as you keep paying your premiums. Permanent life insurance builds cash value over time, which could be useful to policyholders while they\u2019re still alive.<\/p>\n With whole life insurance, for example, you may be able to withdraw cash from your policy in the form of a loan. You\u2019ll be charged interest, but you may get a better rate than a traditional loan.<\/p>\n This could potentially help with large expenses such as unexpected medical bills. If you don\u2019t pay off the loan before you pass away, the loan and accrued interest are deducted from the death benefit.<\/p>\n The type of insurance coverage you have may influence your decision whether to cancel or not. It\u2019s advisable to reach out to your insurance agent or financial advisor to help you make the best decision for your circumstances.<\/p>\n For example, with a permanent policy, you may have the option to sell the policy rather than cancel it, in which case you\u2019d receive a cash payout. The payout amount depends, among other factors, on your age, life expectancy and death benefit amount.<\/p>\n It\u2019s also possible to purchase a combination of life and long-term care insurance, which will provide both a death benefit and coverage for long-term care costs.<\/p>\n You may be able to add a long-term care rider onto an existing permanent policy. And some policies offer an \u201caccelerated death benefit\u201d that provides tax-free cash advances (subtracted from the death benefit) to policyholders diagnosed with a qualifying illness or condition.<\/p>\n This could come in handy if Bob had to move into a nursing home or required extended long-term care. Medicare doesn\u2019t cover most long-term care services, such as room and board at nursing homes.<\/p>\n And these expenses can add up. The median monthly cost of a home health aide in 2024 was $6,483, while a private room in a nursing home cost $10,646 a month, according to Genworth. (1)<\/p>\n This means there would be less money to pass on via a death benefit. But, it could also mean that loved ones don\u2019t have to dip into their savings \u2014 or retirement funds \u2014 to pay for long-term care.<\/p>\n Bob and his wife may want to sit down with their financial advisor to model different scenarios and get a professional opinion on what to do with his life insurance.<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n