How to use life insurance when planning your retirement

1 min readLast updated January 24, 2024by Rachel Carey

Life insurance ensures your loved ones are protected financially when you’re gone.

As of 2022, 50 percent of Americans have a life insurance policy, paying, on average, $40 to $55 per month.  

In exchange for premium payments from you, usually made monthly or annually, your chosen life insurance provider pays out a lump sum to your family or beneficiaries when you die.  

Many different types of life insurance are available to suit various needs and lifestyles.  

Do I need life insurance in retirement? 

Not everyone requires life insurance in retirement; some decide to forgo the option once their children have flown the nest and their debts are paid off. Others continue their monthly premiums to help their family cover any final expenses or to leave some tax-free inheritance.  

Here are some questions you should ask to help you decide if continuing to pay for life insurance in retirement is the right option for you: 

  • How will you pay for your funeral expenses?  

According to the National Funeral Directors Association, in 2021, the average funeral cost was between $6,971 to $7,848. On top of this, many people leave behind medical expenses when they pass away. Payouts from your life insurance policy can help your family cover these outstanding costs.  

  • Do you have debt?  

Ideally, you want to become debt-free before you retire. However, this isn’t always possible. According to the Transamerica Center for Retirement Studies (TCRS), 78 percent of Baby Boomers carry debt as they approach retirement. If you expect to be still grappling with debt in retirement, instead of passing this on to your loved ones, continuing your life insurance coverage might be worthwhile to help pay this off.  

  • Do you have dependents? 

If you have children who are still living at home, family members who depend on you for care, or a spouse who may lose a significant amount of income if your pension ends, continuing with life insurance is a good idea.  

  • Will you owe estate taxes? 

Estate tax is a tax on estates worth more than a certain amount. When an estate passes into the hands of an estate executor – somebody who ensures a person’s wealth and assets are used in the way the individual intended – they will assess the estate's value. 

Then, they will pay any tax if it is eligible. Life insurance can be a good way to cover this bill. 

How do I use life insurance in my retirement planning? 

The answer to this question usually depends on your wealth and the type of life insurance you choose.  

Various life insurance policies, including whole life insurance and universal life insurance, may contain a cash value feature. This means a portion of your premium goes towards building a cash value. 

While this can be used to help your loved ones financially in the event of your death, you can also choose to access this money before your policy ends. These withdrawals are tax-free, but withdrawals could reduce the payout to your beneficiaries when you die.   

A more common option in retirement planning is term life insurance. Term life plans last for a specified amount of time – 20 years, for example. 

Many experts recommend them (especially if you’re a younger buyer) since they mean your beneficiaries will receive larger death payouts. They can be converted into whole-life policies at any time.   

Term life insurance is often more affordable, meaning you can pay your premium and still have some money remaining to invest in your retirement. 

That said, there are some drawbacks. You have to requalify at the end of every term, and the cost of your premium increases every time. Plus, the policy accumulates no cash value. 

Finally, qualifying for term life insurance is challenging if you have a serious ongoing health issue.   

How does life insurance work when I die? 

For your beneficiaries, a life insurance payout process is relatively simple.  

Firstly, they must file a claim with your insurance company and include all the relevant paperwork. The insurance company will then have a specific amount of time to review the claim – this varies from state to state but it is usually between 30 to 60 days.  

Once the claim is approved, they can choose how they wish to receive the payout. This can be via a lump sum, annuity payments, or as a retained asset account – an interest-bearing account similar to a checking account.  

One of the biggest benefits of these policies is that compared to other insurance contracts is that there are minimal limits on what your family can choose to spend the money on when it comes to them. Additionally, payouts are tax-free. 

Payouts can support your loved ones after your death, helping with anything from funeral costs and outstanding medical bills to covering inheritance and estate taxes and outstanding debt.  

Improper planning or lack of clarity around your wishes can lead to lengthy litigation, high costs, excess taxes, family disputes, and your assets getting into the wrong hands.  

By getting your affairs in order, you are saving your loved ones a lot of time and potential heartbreak down the line. 

If you need help, it's important to seek expert advice. A good place to start is Unbiased. Here you can get matched with an independent SEC-regulated financial advisor who can ensure you’re getting the most out of your current plan and are on course to achieving your retirement goals.   

Find your perfect financial professional today

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.