Do You Really Need Insurance in Retirement? It Depends

Most of us understand that insurance of various types is an indispensable part of our financial lives. We depend on the benefits offered through life, health, and casualty insurance to provide for the unexpected but all-too-frequent liabilities we all face every day. Most of us wouldn’t think of operating a vehicle or owning a home without the security of knowing we were adequately insured against accidents or other calamities. Similarly, most of us understand the importance of life and health insurance. Especially for those with dependent children or spouses, insurance on the life of one or more primary breadwinners provides vital financial resources if the unthinkable should occur. And with medical costs rising every day, good healthcare coverage is a must-have.

But as we transition into retirement, our financial lives and priorities undergo significant changes, which means that our insurance needs shift at the same time. Part of a solid retirement strategy involves a careful evaluation of your insurance needs going forward and, in many cases, adjustments to where and how you allocate your insurance premium dollars. Let’s take a look at three critical areas where insurance needs for retirees can differ from those of younger individuals.

Life insurance

As mentioned above, the importance of life insurance, especially for younger families, is well established. In the event of the death of a breadwinner, life insurance can create an “instant estate” to uphold the financial security of spouses, children, and others who may be dependent upon the breadwinner’s income. For business owners, key-person or buy-sell insurance may be necessary to fund agreements crucial to the continuance of a business in the event of the death of a partner or key employee.

But as you move into retirement, you may no longer have the need to provide continuation of income for children or a spouse. Depending on your pensions, Social Security benefits, and income from retirement accounts and other investments, your retirement income stream may not be subject to cessation with your passing. It is also likely that your children are no longer dependent on you financially. In these situations, it may no longer make sense for you to continue paying premiums for life insurance.

On the other hand, depending on the size and complexity of your estate, life insurance could be used to provide flexibility for your heirs or to minimize the effects of taxation on core assets of the estate. For example, an irrevocable life insurance trust (ILIT) might be useful for providing a source of funding to pay final expenses or estate taxes, rather than having your heirs forced to dispose of illiquid assets. For those with estates that may exceed the exemption levels (currently almost $13 million per individual, but scheduled to be reduced to about half that on January 1, 2026), an ILIT could provide a useful option. Because funds provided through life insurance are directed to a beneficiary, life insurance can also be useful for providing proceeds in specific ways desired by the insured, such as  retiring debt or providing for a grandchild, a charitable organization, or another entity of special interest to the owner of the policy.

A final word on life insurance in retirement: if you own cash-value policies (as opposed to term life insurance) and you no longer have the need to provide a death benefit for dependents, you may wish to consider a cash surrender or policy loan. Both of these can be ways to generate additional assets for investment. With a surrender, the amount in excess of premiums paid will be considered as ordinary income. With a policy loan, as long as the policy remains in force, you will probably not owe taxes on the proceeds, but if the policy lapses, you could owe ordinary income taxes on the amount received in excess of premiums paid. It is wise to consult with your tax advisor if you are considering either of these strategies.

Health insurance

Healthcare costs are perennially at the top of the list of retirees’ concerns. A recent survey indicated that 64% of those still working cite healthcare costs as a major worry. Most retirees, of course, are looking toward Medicare to cover most of their healthcare costs in retirement. Medicare Part A (covering most hospital costs) is free for most retirees, though a $1,600 deductible must be satisfied. Part B (covering doctor visits and other medical expenses) costs about $165 per month or more, depending on your income, and there is a $262 deductible. Costs for Medicare Part C (“Medicare Advantage Plan”) vary according to the plan you have, as do costs for Medicare Part D, which covers most prescription drugs.

But what about a Medicare-eligible person whose spouse is younger? If you and your spouse are presently covered under an employer or other plan, you’ll need to be sure you’ve secured coverage for a younger spouse before you drop the coverage and go on Medicare; your spouse will not become eligible until age 65 unless they are disabled. In some cases, you may be able to continue employer-provided coverage, or you may be able to maintain COBRA coverage for your spouse up to 36 months after your employer coverage ends. The other alternative is securing coverage for your spouse through the federal marketplace, which you can access at healthcare.gov.

Long-term care insurance

As people age, they may reach the point where they require assistance with one or more activities of daily living (ADLs) such as dressing, bathing, toileting, or feeding themselves. Costs for this type of care are generally not covered by Medicare. Importantly, some 70% of persons age 65 and over will require some form of long term care during their lives. Long-term care may be provided by a family member, by in in-home health aide, or by a skilled nursing facility (nursing home). But such care is often expensive; a home health aide may cost more than $5,000 per month, and a room in a skilled nursing facility can run upwards of $4,500 per month.

For these reasons many who are approaching retirement may wish to consider the purchase of long-term care insurance (LTCI). As with life insurance, premiums vary by age and state of health, and also by the benefits offered by the particular plan. Some policies, for example, offer a death benefit, similar to life insurance, that can return some or all of premiums paid if the policy is never used.

At Aspen Wealth Management, we provide guidance to clients who want are planning for a secure, satisfying retirement. Our advice is always presented with the client’s best interest foremost. To learn more about our retirement planning services, visit our website.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.