Should I have life insurance in retirement?

George isn’t sure if his $100 monthly insurance premiums are better off in a savings account

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(Izabela Habur/Getty Images)

(Izabela Habur/Getty Images)

Q: I am 59 and mostly retired. My wife and I both have life insurance policies which are costing us about $100 a month. As we are financially secure, is there any need to continue paying the premiums or should we just cancel the policies?

The insurance agent recommends keeping it as I will die eventually and will cash in at that time but my thought is I can take the cash value and save $1,200 a year now.

The policy is $33,000 for me and $17,000 for my wife.

Also, I was told that I may have to pay taxes on the cash value.

 —George

A: I like to start any discussion about life insurance with an assessment of insurance needs, George. Insurance should be a risk management tool first and foremost and if you have beneficiaries who would be impacted negatively financially by your death, you should probably consider life insurance.

An insurance needs analysis can be conducted by an insurance agent or financial planner or at least approximated using online resources. If a shortfall exists, it should likely be addressed with life insurance.

In your case, George, you seem pretty confident that you are financially secure. Generally, a retiree may be self-insured through their savings and government pensions, meaning that life insurance is not necessary from a risk management perspective. If that’s the case, I think the decision to keep or cancel the policies becomes an investment, estate planning and tax discussion.

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When assessing an insurance policy in a situation like yours, I like to look at the expected “return” on the policy for the rest of your life. If you pay $1,200 in premiums in the coming year and die at 60, that $33,000 payout to your estate is a 2,650% return on investment. Not bad. But you need to die.

If you live until 110, you may have been better off putting your premium dollars under your mattress. Since it sounds like you own whole life policies, without knowing all the facts about how the policies are expected to grow with dividends during that time, I can’t tell you how low the return may in fact be, George.

The point is, the return on investment from an insurance policy is variable. It depends primarily on how long you live. I think you need to crunch the numbers to look at the projected annual payout to your estate (including dividends or investment growth, depending on the type of policy) and compare it to investing the $1,200 a year in premiums in stocks and bonds or GICs instead. In this way, you can figure out the annualized rate of return based on dying in any given year and then try to assess if the return looks good relative to what you think your life expectancy might be. Keeping the insurance policies may be a very good “investment” if you’re conservative GIC investors or if you think you’ll have a short life expectancy.

All that said, I think you also need to consider your estate planning objectives. If you don’t have beneficiaries or don’t care to provide for them–preferring to maximize your retirement–consider cancelling the policies. The cash value and the premium savings may put more money in your hands now if that’s your primary objective.

Finally, from a taxation perspective, cashing in a whole life insurance policy will generally result in taxation. The cash value in excess of the adjusted cost base is taxable as regular income on your tax return. The adjusted cost base is not just the premiums paid to the policy. It’s the premiums paid less the cost of insurance and may mean that a good portion of the cash value is taxable to you.

The good news for you, George, at age 59, is that your income may be lower now than after you begin CPP, OAS and RRIF withdrawals. Thus the tax implications from cancelling the policy may be modest.

Insurance can be a great tool for planning related to corporations, cottages, second marriages and so on, but some of these strategies are beyond the scope of my answer to you, George.

I can’t help but chime in on your insurance agent’s recommendation on the policies. Recommending that you keep life insurance because you will die eventually is like wearing a winter jacket in the summer because it will snow eventually. Sometimes it actually pays to be short-sighted in your financial (and your fashion) choices to avoid keeping a product you don’t need—or wearing a jacket that makes you sweat.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.


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