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Retiring Debt-free – Do You Still Need Life Insurance?

You might not – but the answer depends on several factors.

The other day, we had some new clients come in for their first meeting. This couple is in their late 50s, about five years from retirement, and they’re super excited because they’ve just paid off their last consumer debt – all credit cards, lines of credit on their home, car payments, and yes, even their mortgage were officially paid in full. If I were part of the Dave Ramsey show, they’d have been yelling “We’re Debt Free!”

What prompted their visit was, they wanted to take a look at what else needed to happen and be taken care of between now and when they retire. They didn’t want to be blindsided by anything, and they also didn’t want to find themselves in the situation we see so often, when people tell us they wish they’d come in five or 10 years ago, because now they have significantly fewer options. 

In working with any new client, I always ask, “what are the top 5 things that keep you up at night?” Some people have 10 things, others have only three or four. This couple told us that, outside of monthly utility bills, car, health and home insurance, their biggest expense was life insurance. Their question was, now that they’re debt-free, should they cancel those policies? Do they serve a purpose now?

Please understand, this is a very common question that we get from people, whether they’ve paid everything off, or have the means to, but are keeping a mortgage and the tax deduction that comes with it. 

So, we sat down and did some calculations for these folks. As they’re still relatively young (around 57), we found that while they are indeed debt free (and we’re truly happy for them!), the issue they faced was that they’d focused on paying off debt, and hadn’t amassed quite enough of an investment portfolio to see them through 30 or 40 years in retirement. 

In light of this, our recommendation was that they continue to carry enough life insurance to make sure their retirement plan was fully funded, should something happen to one of them in the years leading up to their retirement date. Additionally, we did a cash flow analysis that illustrated a few opportunities that could help them maximize Social Security as part of their retirement income. In order to do this, they would need to keep their current term insurance not just until retirement, but until age 83 or 84. This will help ensure their family retirement would still play out as planned, regardless of what life throws at them. 

In reviewing those life insurance policies they’d wanted to cancel, we educated them on both the term (or temporary) policies they had, as well as a couple of small whole (permanent) policies that had been gifted to them by their parents as children. During this review, we realized their term coverage would run out at age 65, because when they purchased the plans at age 45, they assumed retirement would happen in 20 years. 

However, these folks were conscientious and didn’t upsize their lifestyle, socking away enough money to make early retirement a possibility. Now, we faced protecting their retirement plan against the longevity of one of them, should either of them pass away at an earlier age. To cover this scenario, we replaced a portion of their term coverage with some permanent policies that are guaranteed to provide support to a surviving spouse. 

Furthermore, we maintained a portion of their current term coverage, and we added a 15-year term policy that will cover the gap in Social Security from age 57 to age 70. At 62, some of the term coverage will lapse, and once that 15 years is up, we’ll let that policy lapse as well. That will leave them with the two small policies from childhood, as well as the two permanent polices, one on each spouse. 

Of course, this plan does not eliminate market risk, but it does eliminate the loss-of-life risk as they head into retirement. Loss of life can be a retirement plan killer, and one we find many folks don’t take seriously enough. No one wants to think about death (including us!), but what we do is devise a plan to maximize income and cash flow in retirement, while minimizing the amount of “life happens” risk. Too many families are playing Russian roulette without even knowing it. 

Ask yourself: are you? 

So, to answer the original question – is it ever a good idea to cancel a life insurance policy? Yes, it can be. Even if you’re younger, the cost of life insurance is continuing to go down as people are living longer and longer. So whether you cancel because you got a better rate, or because you feel you no longer need the coverage, make sure that before doing anything, you consult with a financial planner to make sure you’re not making a mistake. Your future self will thank you. 

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