Many couples streamline their spending as they prepare to move into retirement. That’s a good thing. And sometimes leads to one of the biggest mistakes couples make.
The enthusiasm for ditching many unnecessary expenses accumulated over their family years can diminish the thought about what to keep. And high on the list is life insurance. The kids are grown and gone, college is paid for. You have a career’s worth of savings accumulated. Why keep it? And so very quickly, people feel great about canceling that insurance and proud of themselves that they are “cutting back” and saving money. And too often that turns out to be a critically bad decision.
I’ll never forget the time that I was discussing insurance with a couple when she said “I want to ring the bell” referring to receiving the payout from her husband’s life insurance policy. But that was a ‘one-off’ and said in jest (… I think). Usually, we don’t want to really think about receiving life insurance payouts because of what it means – the loss of your life partner.
Unfortunately, many survivors have found out the hard way that canceling life insurance took away one of the most powerful tools available to protect their financial independence and security for their future. On average, a female baby boomer can expect to outlive her husband by 10-15 years and experience an average decline in income of 40%. This income decline is the result of a combination of factors including loss of government benefits, reduced pensions and higher taxes (loss of ability to pension income split). When you retire with the mortgage paid off and money saved, it doesn’t mean your risks have gone away. Rather, your risks have changed. What that insurance money would be there for has changed. It has shifted from protecting your family during your working years to protecting each other’s retirement should one of you predecease the other. It is there to replace lost income. Remember, your plans need to work for both of you together, and each of you should you find yourself single again.
Before rushing to make the decision to cancel your life insurance, here are 3 things to do:
- Work with your advisor / financial planner to run a survivor scenario in your retirement plan. Most plans have you both living to 95 or even 100. But if something had happened to one of you yesterday, what would the survivor’s retirement income look like. Many times that survivor scenario looks very different than your together scenario. Will a survivor be able to live comfortably for their lifetime? Do you have enough if you don’t have life insurance?
- If your savings aren’t enough, what options would a survivor have? Is there a property that can be sold? Other assets that can be converted into income-generating assets to fill the gap? If not, or if the choices simply aren’t palatable, have your advisor determine the amount of life insurance that you should consider having to protect each other’s retirement and financial security.
- Considering points one and two above, work with your advisor to review your current life insurance policies. Are they adequate? Are they the right kind of coverage? Can you eliminate some coverage, or do you need to keep it all? Do the policies need to be changed in any way, or do you need buy new insurance (if you qualify).
Making sure each other (and your family) will be ok in the event one survives the other is a circumstance that most married couples consider during their working years. It is a circumstance that they should also consider as they look toward retirement. Plan Single isn’t about planning separate from each other, but rather planning for each other. Failing to do so is one of the greatest mistakes married couples (and sometimes their advisors) make in retirement planning. We certainly want you to plan a long happy healthy active life together. Protecting each other in the event of “what if”, will put your minds at ease and allow you to enjoy the freedom retirement brings.