Savvy Senior : Do you need life insurance after you retire?

Dear Savvy Senior,

Do I still need life insurance after I retire? I’ve been thinking about dropping my policy to escape the premiums. Is this a good idea?

— Approaching Retirement

Dear Approaching,

It depends on your family and financial situation. While many retirees choose to stop paying their life insurance premiums when they no longer have young families to take care of, there are several reasons you may still want to keep your policy. Here are some different factors to help you decide.

Family situation: Life insurance is designed to help protect your spouse and children from poverty in the case of your untimely death. But if your children are grown and are on their own, and you have sufficient financial resources to cover you and your spouse’s retirement costs, then there is little need to continue to have life insurance.

On the other hand, if you had a child late in life or have a relative with special needs who is dependent on you for income, it makes sense to keep paying the premiums on your policy.

You also need to make sure your spouse’s retirement income will not take a significant hit when you die. Check out the conditions of your pension or annuity (if you have them) to see if they stop paying when you die, and factor in your lost Social Security income too. If you find that your spouse will lose a significant portion of income upon your death, you may want to keep the policy to help make up the difference.

Debts: If you are still paying off your mortgage or have other large debts, you should probably keep your policy to help your loved ones pay off these debts when you die. But if your debt payments are a small part of your net worth that poses no risk of financial difficulty, then you may not need it.

Work: Will you need to take another job in retirement to earn income? Since life insurance helps replace lost income to your family when you die, you may want to keep your policy if your spouse or other family members are relying on that income. However, if you have very little income from your retirement job, then there’s probably no need to continue with the policy.

Estate taxes: Life insurance can also be a handy estate-planning tool. If, for example, you own a business that you want to keep in the family and you don’t have enough liquid assets to take care of the estate taxes, you can sometimes use a life insurance policy to help your heirs pay off Uncle Sam when you die.

To help you with this decision, consider talking to an estate-planning expert or a fee-only financial advisor who can help you weigh out the pros and cons.

Sell or swap your policy

If you decide that you don’t need your life insurance policy any longer, you may want to consider selling it in a “life settlement” transaction to a third-party company, which typically pays four to eight times more than the policy cash surrender value. The best candidates are people over age 65 who own a policy with a face value of $100,000 or more.

If you’re interested in this option, get quotes from several life settlement providers or brokers in your state. To find them, the Life Insurance Settlement Association provides a directory at LISA.org.

Another option is to use a tax-free 1035 exchange to swap your policy for a hybrid product that blends life insurance with long-term-care insurance coverage. These products come in various forms, but they often combine a whole or universal life policy with a long-term-care rider. If you don’t use the long-term-care coverage, your heirs get the death benefit.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.