Life insurance in retirement

The calculation that decides it

Work out what a surviving spouse would actually live on. Household income often falls further than household costs do.

A pension may reduce or stop depending on the survivor election made at retirement. Social Security household income typically drops to the higher of the two benefits rather than both continuing.

If the gap between the survivor's income and their costs is material, that's your coverage need, and it's the most commonly missed one in retirement planning.

What employer coverage does

Retiree life insurance, where it exists at all, is often a fraction of what you had while working, and employers can change or end it.

Find out what continues, at what amount, and whether the employer can alter it. Then decide what you need to own personally.

Needs that remain

• Survivor income, where a pension or Social Security drops
• Final expenses and estate settlement costs
• A remaining mortgage or other debt
• A dependent adult child or a lifelong dependant
• Estate liquidity, where assets are illiquid
• An inheritance you want to leave deliberately

Before you drop a policy

• Check whether a term policy still has a live conversion option
• Request an in-force illustration on any permanent policy before surrendering it
• Check for outstanding loans — surrendering with a large loan can trigger a taxable gain
• Consider reduced paid-up or other non-forfeiture options instead of surrender
• Remember you can reduce coverage rather than ending it

The pension election

The survivor election at retirement is usually irrevocable and it's one of the largest financial decisions of that year. A higher single-life pension paired with insurance is sometimes proposed as an alternative to a joint-and-survivor election.

That strategy can work and it depends entirely on your health, the pension figures and the cost of coverage — and it fails badly if the insurance lapses. Model it carefully with an adviser before electing, not after.