Having life insurance in retirement can be comforting and seem worthwhile if you don’t have a big enough nest egg to leave your family when you die.
Since life insurance is often used to replace income if you die prematurely during your working life to protect your family from financial disaster without your income, it can be seen as an expense not worth having in retirement.
With children out of the house and a spouse set up with enough assets, there may no longer be a need to continue paying life insurance premiums. One life insurance product targeted towards retirees is indexed universal life insurance.
Since its introduction to the market many years ago, indexed universal life insurance has grown substantially. Agents promote the product as an excellent way to save money to have sufficient cash flow for retirement. 
The shortcomings of indexed life highlighted in this article are not necessarily reasons against getting a policy that plans for retirement. They’re merely facts you should consider before you commit your hard-earned dollars to this particular retirement strategy.
Before you land on any retirement plan, you need to decide whether or not you actually need life insurance. We’re here to help.
Life Insurance in Retirement
“In most cases, it doesn’t make sense” to keep a policy, says Tony Steuer, an author, and insurance literacy advocate. Here are nine factors to consider when deciding if a life insurance policy is no longer needed in retirement:
Check your retirement portfolio
If you’ve got enough money set aside in retirement to cover your spouse’s expenses, along with paying medical bills, taxes, and other costs after your death, then you should be OK, says Jeff Rose, an investment advisor and Certified Financial Planner in Illinois.
“If they’re set and they have that nest egg, then they’re probably fine,” Rose says.
Having a $500,000 term life insurance policy at age 30 makes sense, Steuer says, but having it at age 65 when you have $500,000 in a retirement fund is duplicitous. Most people reduce their expenses in retirement, Steuer says, so they usually don’t need as much money as they think they will.
Are you working longer in life?
The rule of thumb for life insurance used to be to buy a term life insurance policy, and build a nest egg so you wouldn’t need it when the term expired, Rose says. But instead of retiring at age 60, more people are working into their 70s and beyond because they’re living longer, or have more debts and need to work longer, he says.
For someone with more bills and debt later in life, a life insurance policy is still a good thing to have, he says, especially if they can’t afford to retire comfortably and their family relies on their income.
Are your children gone?
With a young family, life insurance provides security by replacing your income if you die. But if your children are no longer dependent on you, and you have enough assets to cover your bills, then a life insurance policy in retirement isn’t needed.
Instead of paying insurance premiums, spend that money on daily living expenses or on health care.
Does someone depend on you?
On the other side of the dependency coin, if a spouse or someone else will depend on you for income for the rest of their lives — such as a relative with special needs or if you’ve had a child late in life — then an insurance policy in retirement makes sense.
Life insurance can also help a spouse who would lose all or part of your pension or Social Security income when you die.
Have you considered long-term care insurance?
A better place to put your money in retirement is long-term care insurance, Steuer says. Pulling money out of a life insurance policy to pay for health care in retirement can get you less coverage than long-term care insurance would.
What you’re paying for when buying life insurance is covering the risk of dying, which can be expensive. “Insurance is all about leveraging against potential risk,” Steuer says. “And I think that’s one thing people overlook — that it’s a way to leverage against risk.”
Buying long-term care insurance — which can cover assisted living and basic daily care such as cooking, bathing and dressing — can be very expensive after age 65, Rose says. Monthly premiums can be $500 to $800.
A better solution may be to buy a hybrid policy of life insurance and long-term care, he says. Policyholders who contribute a lump sum of $50,000, for example, will have less long-term care coverage under a hybrid policy than they would under a standard policy, but they’ll have access to the principal at all times.
Do you have heirs?
If you’re lucky enough to outlive everyone who could have been your heir, you probably don’t need life insurance. The same goes if you’re single or divorced.
Is your funeral paid for?
If you’ve prepaid your funeral, or you have enough money set aside to pay for it, then you don’t need life insurance. If this is a cost that your spouse or family can’t afford then a life insurance policy will help pay for it, if not all of it.
Will you have estate taxes?
If you don’t have enough money to pay estate taxes to cover an expense your family will have to pay upon your death, such as estate taxes on a large piece of property, then a life insurance policy that’s tied to your estate plan can be a good idea.
Does the cash value equal the death benefit?
If you have a whole life insurance policy that remains in effect for your entire life and requires premium payments each year, it will accumulate a cash value over time. If the cash value and death benefit are almost equal, then getting rid of the policy may be worthwhile.
However, you don’t want to simply cash out the policy, which would make it taxable income. Instead, make a tax-free exchange for a new paid-up policy that would double the existing benefit.
Another option is to borrow against the cash value of the policy, which doesn’t require paying taxes. Your heirs won’t have to pay back the loan or interest on it because the loan amount will be subtracted from the death benefits.
In the end, it comes down to having enough money — whether through life insurance or other assets — to cover expenses after death and take care of your loved ones. It’s a complex equation, but one worth doing.
Indexed Universal Life
By this point, you may have determined that you do still need life insurance after all.
In that case, you need to understand how indexed universal life policies differ from alternative plans, and what they can offer you and your loved ones. Then you can decide if it is the right retirement savings strategy for you.
IUL Is Long-Term
It’s not unusual for the indexed universal life product to have a cash value that’s significantly below the premiums paid for several years after issue. The policy may also have surrender charges for 10-15 years and more.
Therefore, you should not purchase indexed universal life thinking you can move the money when another savings or investment opportunity presents itself. Indexed universal life is not appropriate for someone who likes to move around investments.
Mortality Charges Apply
Index universal life is life insurance, so mortality charges must be deducted from the contract value. These charges can affect the returns on your investment if you intend to purchase the policy solely for retirement savings.
Mortality charges are quite substantial if you’re older, have questionable health, or smoke tobacco. Therefore, the charges will have a significant impact on your net returns.
Unpredictable Mortality Charges
Your carrier reserves the right to change mortality charges. According to the wording on most contracts, the mortality charges increase as the client ages. The agent will outline rate changes in your proposal. But carriers reserve the right to increase the rates beyond the numbers presented in the proposal.
Returns Are Similar To Bond Returns
If you’re hoping for stock-like returns on your indexed universal life, think again. The policy provides for an index-linked interest credit at the close of each crediting period.
The guarantee of no negative interest credit is one feature that makes indexed universal life so attractive.
Carriers invest the bulk of the paid premiums in bonds. That means that your returns will be about the same as bond returns. Indexed universal life may not be right for you if you’re hoping for a higher return on your investment.
Variable Interest Crediting Formula
Your indexed universal life policy is governed by an interest-crediting formula. This formula has a participation, cap, or spread rate that the carrier can change at will.
It’s not profitable for the carrier to provide a strong long-term guarantee on the formula. So your subsequent credit payouts may not be as attractive as your first.
Unreliable Illustrations
Agents demonstrate indexed universal life as a retirement savings vehicle. They use figures based on the premiums paid for a number of years. In addition to contract loans over the retirement period.
The illustrations may show values for 20-40 years and more. But keep in mind that they’re based on assumptions and not actual market values.
When mortality charges and the variable interest crediting formula come into play, the favorable illustrations are rendered unreliable.
Management Changes Can Affect Your Payouts
Remember, the carrier has the right to change mortality rates and elements of the interest crediting formula over time. So the benefits of the investment hinges on the company’s commitment to fair treatment.
There’s no way to guarantee that future management will hold the same values as the previous management. In fact, the possibility exists that they might choose to maximize their profits at the expense of existing customers.
Therefore, it’s wise to purchase a policy from a reputable and well-established brand. This will help to protect your investment in the long run.
Contract Lapse Can Be Disastrous For Your Taxes
Indexed universal life policyholders benefit from tax-free contract loans that exceed the premiums paid. The accumulated loan is paid off at death by a tax-free death benefit.
This seems ideal in principle, but it’s a different story when the accumulated loans cause the contract to lapse.
This lapse can lead to a tax nightmare if it happens to you. In that case, you’ll have to pay tax on the sum of cash withdrawn from the contract minus the premiums paid.
The taxes owed can be significant. And you’ll have to find the money to pay it if you already used up the cash generated on the contract. Find out if your carrier made provisions on the policy to prevent such an event from happening.
Bottom Line: IUL for Retirement
These precautions do not make indexed universal life a terrible retirement savings option. However, it pays to enter the contract with your eyes wide open.
Diversify your retirement savings strategies wherever possible. It’s best not to have to rely on your indexed universal life to provide all the money you need for retirement.
You can compare rates for life insurance with our calculator tool on this page or call us at 800-712-8519 to speak with us about your life insurance needs.
