When Are You Considered Self-Insured?

When Are You Considered Self-Insured?

Retirement affords you the freedom to do what you want. For the first time in a long time, you are no longer required to show up at a specified place at a specified time. When you think about it, you were probably three or four years old the last time you had that kind of freedom.

Along with freedom, retirement also offers you the flexibility to rethink your life insurance coverage. If you have enough money to retire and live on for the rest of your life with no additional savings required, you have also potentially transcended the need for life insurance.

Life insurance should be looked at as income replacement first and foremost. So if your income is fully funded by your portfolio and/or other sources like pensions and Social Security, the need for life insurance no longer exists. If something happens to you or your spouse, your portfolio and other income sources remain in place to continue to pay the surviving spouse.

(An exception to this would be if a meaningful pension disappeared after the death of one spouse; in that case, life insurance could be utilized to replace that income source. Another exception is using life insurance to create liquidity for heirs to cover estate taxes, but that strategy is beyond the scope of this article. And with a $5.34 million individual estate tax exemption [$10.68 million for married couples], it is also beyond the scope of most people’s net worth.)

Once your retirement plan is fully-funded and you are considered self-insured, it is time to review your life insurance policies to determine if you should cancel them. First, look at the term policies. If you don’t need them, simply stop paying your premiums to cancel them. This will provide a nice bit of annual cost savings, decreasing your retirement living expenses and making your retirement plan even stronger.

Next, take a look at the whole life policies. This is where things get a bit complicated as whole life policies are complex by design. With a whole life policy, you have built up cash value via the investments within the policy. Typically after a period of time, you are no longer paying premiums into the whole life policy; rather, the insurance company is taking their premiums out of your accumulated cash value. While the policy may not be costing you anything out-of-pocket, that accumulated cash is your money and can be withdrawn. Adding money to your liquid asset pool at retirement could make your plan significantly stronger.

Just because you are self-insured doesn’t mean you should automatically cash in your whole life insurance policy. It is important to make sure that you are out of the penalty period to avoid surrender charges, which can be significant. Additionally, you may be at a stage where the policy is projected to provide you with coverage for the rest of your life, and the death benefit is significantly more than the accumulated cash value, which provides an attractive, low-risk return on investment.

Like any complex financial decision, it is important to discuss canceling your life insurance policies in retirement with a qualified financial advisor. You will want this analysis performed in conjunction with a retirement plan and by an advisor other than the acting agent on your insurance policies to ensure conflict-free advice.

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