The primary purpose of life insurance is to replace an income and/or retire debt. So why would someone who has done a good job financially need life insurance as he reaches retirement? Perhaps that is the wrong question. (If you ask the wrong question, the answer doesn’t matter.) Perhaps it would be better phrased as “of what benefit would life insurance be to an individual who has done a good job financially as he reaches retirement?”
The answer, in a word, is flexibility. The person having life insurance will have options that the uninsured will not have. (Just to clarify, I’m talking here of someone who is well off, who has no money worries, but is not “wealthy.” For reference, a survey done by CNBC defined wealthy as a $5 million net worth with at least $1 million in cash.)
First, if the insured is a participant in a defined benefit pension plan, the opportunity exits to select the highest pay out option. I’m not saying that option should be selected, that depends on the totality of the circumstances, but without the life insurance it shouldn’t even be considered.
Second, as I wrote about a few weeks ago, several states, including New Jersey, still levy an estate tax on the moderately wealthy (or not so moderately wealthy in the case of New Jersey). The life insurance could be gifted to a trust to pay those taxes, thus enabling the entire estate to pass intact.
Third, it allows the insured to take advantage of opportunities he/she might otherwise not be inclined to take, knowing that if the risk doesn’t pan out, the loss can be covered by the life insurance proceeds.
Fourth, it can allow for a portion of the estate to pass to a favorite charity at death without dis-inheriting the children and/or grandchildren. Money left to a qualified charity is not subject to estate taxes and if the life insurance is owned by an irrevocable trust, it isn’t either.
Fifth, the insured can exchange the life policy for a long term care policy. When done in accordance with the provisions of the Pension Protection Act of 2006, this exchange can be done tax free, even if there is a gain in the life policy.
As you can see, having life insurance creates tremendous flexibility, even if you don’t “need” it in the traditional sense. Let this be a rejoinder to the argument that “I won’t need life insurance when I retire.” True, you may not “need” it. But your options will be greatly limited without it.