What Happens to Your Life Insurance When You Retire?

Retiring can be exciting for many Canadians but also nerve-wracking. It marks the beginning of a new chapter and can bring significant lifestyle changes.

But what about life insurance? What happens to your life insurance policy when you retire? Do you cash out your policy or does it just lapse? And do you even need life insurance during retirement?

The answer, as is the case with most personal finance questions, is “It depends”. On what? Let’s find out!

Understanding Life Insurance & Its Types

Life insurance is a financial tool that provides a financial safety net for family members in the event of a policyholder’s death. 

There are two types of life insurance policies in Canada, term life insurance and permanent life insurance. 

Permanent Life Insurance

Permanent life insurance options, like whole and universal life, offer coverage until death. These policies also accumulate cash value over time, which can be accessed during retirement. 

This makes this type of policy a popular choice for Canadians seeking both coverage and an additional source of income during retirement. However, permanent life insurance policies have higher premiums than term policies, but they’re often worth it. 

Term Life Insurance

With term life insurance, coverage lasts only for a set period, like 10, 20, or 30 years. This means if your policy expires before or during retirement, you might find yourself without coverage at a time when you may need it most.

However, many term policies do offer conversion options that allow you to shift to a permanent policy if you’re nearing the end of your term or are close to retiring. It’s always advisable to review these options by consulting with an insurance broker. 

What Happens to My Life Insurance Policy When I Retire?

When you retire your life insurance can change depending on what policy type you have, your financial situation, and your personal needs. 

If you have a permanent or whole life insurance policy, nothing changes. As long as you continue making premium payments your policy will remain active till you die.

If you have a term life insurance policy or a group plan you may lose coverage upon retirement or have to cash out your policy. However, most life insurance plans can be maintained, adjusted, or converted to ensure continued coverage during your golden years. 

You may have to pay slightly higher premiums but you can convert your term policy to a permanent policy or change your group plan to a personal plan without having to undergo a medical exam or paying any unnecessary costs.  

Do I Need Life Insurance in Retirement?

Again, “it depends”. 

Ask yourself, what do you need life insurance for? Do you have a spouse or children who can benefit from keeping the policy? Do you have a small business or business partner that your policy can protect? What are the sources of your retirement income? Do you have enough to pay for premiums?

If you aren’t making an income, or don’t have dependents, you may not need life insurance when retiring. 

However, if you do have dependents, and you feel that your family would benefit from a life insurance payout, opting for a permanent life insurance policy, particularly one with a cash value component, can be in your best interest. 

You can borrow against this cash value or even use it to cover unexpected expenses without having to rely on your primary retirement savings.

Adjusting Life Insurance Upon Retirement

When you retire, it’s wise to reassess your coverage needs to ensure your policy matches your new lifestyle and financial situation. 

Without dependents or a mortgage, your coverage needs may be lower than during your working years. Lowering your coverage amount or even switching to a different type of policy could potentially help you save on premiums.

Another option, if you’re holding a term policy nearing expiration, is policy conversion. Many term policies let you switch to a permanent policy, which is helpful if you still want coverage but without the time constraints. 

Tax Implications of Life Insurance for Retirees

Life insurance has some unique tax benefits that retirees can use to their advantage. 

Proceeds from life insurance are generally tax-free, meaning beneficiaries won’t owe taxes on the payout. This is especially helpful when estate planning because it allows you to pass on wealth without significant tax deductions.

Therefore, life insurance also acts as a valuable estate planning tool. By designating policy proceeds to cover any estate taxes or final expenses, you can preserve assets for heirs. 

This financial planning approach can lower the tax burden on your estate and ensure that more of what you’ve worked for is passed on without loss to taxes.

Life Insurance as Part of a Comprehensive Retirement Plan

Your life insurance should coordinate with other financial plans like pensions, RRSPs, TFSAs, and savings accounts. 

By making life insurance part of a broader retirement strategy, you can support your goals for long-term financial security, ensuring that all your assets complement each other.

Consulting with a financial advisor or insurance broker can also be incredibly beneficial here. 

These experts can help you decide how life insurance fits within your broader goals, whether as a source of income, emergency fund, or asset for legacy planning. Advisors can also help identify the best type of policy for retirees, making sure you’re not over- or under-insured.

Challenges & Considerations of Life Insurance for Retirees

Retirees face unique age and health factors when it comes to life insurance. As you age, premium rates can increase, and certain health conditions can make getting coverage harder or more expensive. 

Therefore, if you’re looking at policy changes or upgrades, it’s good to consider this sooner rather than later to avoid any unnecessary complications. 

Another top tip is to pick a policy that aligns with your future needs rather than your current ones and to find the right balance of coverage and cost, especially when working with a fixed retirement income.

Future Trends in Life Insurance for Retirees

With Canada’s aging population more and more life insurance products come with features like long-term care riders and flexible death benefits. These options provide added coverage for medical or long-term care expenses, allowing you to use your life insurance if you need ongoing care. 

In Canada, these types of policies are helping seniors maintain coverage without facing prohibitive costs or restrictions and there are certain providers that are even specializing in life insurance for seniors.

Life Insurance for Nova Scotian Retirees

Life insurance in retirement can be much more than a safety net—it’s a versatile tool that, when managed well, can help support a secure, comfortable retirement that provides peace of mind to retirees and their families alike.

Have more questions? Book a free no-obligation meeting with Nova Scotia’s most trusted life insurance brokerage – McIver Insurance Inc.

FAQs

What happens to my term life insurance when I retire?

Upon retirement or expiration, your term life insurance policy will end without a payout. However,  most policies do allow you to convert your term policy to a permanent policy without taking a medical exam. 

How can I use the cash value of my life insurance in retirement?

You can tap into the cash value of your permanent life insurance policy in several ways. The most common way is to withdraw directly from the cash value or borrow against it through policy loans. Some policies even allow for cash value to be converted into an annuity or pay out dividends to help supplement retirement income. 

Should I keep my life insurance policy after I retire?

Speaking to a financial advisor or insurance expert is the best way to determine whether you should keep your policy or not after you retire. Experts will determine your financial goals, your dependents’ needs, and the type of policy you hold to help you make an informed decision.