When thinking through retirement planning, most people rightly focus on savings, investments, and sustainable income. But what about life insurance? For some, especially those with people who depend on their income, term life insurance can play a role in protecting what they’re building.
But once you’re retired—and no longer earning a paycheck—life insurance often shifts from useful protection to unnecessary expense. Let’s walk through when life insurance can be a smart part of a retirement strategy—and when it’s simply not worth the cost.
Term Life Insurance: A Fit for Your Working Years
If you’re in your early- to mid-career, term life insurance is usually the most practical solution. It’s designed to protect your income during the years when your family relies on it the most—covering things like a mortgage, childcare, or education expenses if something happens to you.
Term policies are relatively inexpensive and easy to understand. With term life insurance, you buy protection for a set timeframe—typically 10, 20, or 30 years. If something happens to you while the policy is active, your loved ones receive a death benefit. Once your financial obligations shrink and your retirement savings grow, the need for life insurance usually disappears.
Why Permanent Life Insurance Usually Doesn’t Belong in Retirement
Permanent life insurance—including whole life, universal life, and variable life—is often marketed as a retirement planning tool. These policies provide a death benefit while also accumulating cash value over time, which you can tap into through policy loans if needed.
However, for most people, the costs and complexity outweigh the benefits. High premiums, surrender charges, and opaque internal fees make these policies inefficient compared to investing directly in retirement accounts like IRAs or 401(k)s. The cash value component typically grows slowly. If not carefully managed, policy loans can reduce your death benefit or cause the policy to lapse.
Please Note: Permanent life insurance is rarely the best financial move for retirees unless there is a specific estate planning need or liquidity concern.
When Might Life Insurance Still Make Sense in Retirement?
While many retirees no longer need life insurance once their income needs shrink and debts are paid off, there can be some exceptions. In certain situations, keeping or even securing coverage can still serve a real purpose:
Estate Planning Needs
If your estate is large enough to trigger federal or state estate taxes, a permanent life insurance policy can provide liquidity for your heirs to pay the tax bill without needing to sell off assets. This can be especially useful for estates with illiquid holdings like real estate or family businesses.
Business Succession
Life insurance can help fund a buy-sell agreement between business partners or provide a payout to family members who won’t be continuing in the business. It’s a way to ease transitions and reduce financial strain during succession.
Irreplaceable Existing Policies
If you already own a permanent life policy and have paid into it for years, it may be worth keeping—especially if the policy has favorable terms or your health would make new coverage expensive or unattainable. In some cases, the cash value can also act as a backup source of liquidity.
Income Replacement for Dependents
If a loved one still relies on your pension, Social Security benefits, or other income that would stop upon your death, a term or permanent policy could offer peace of mind. This can be especially relevant for retirees who support a younger spouse, an adult child with special needs, or elderly parents.
The Truth About “Life Insurance Retirement Plans” (LIRPs)
Life Insurance Retirement Plans (LIRPs) is a marketing term used to promote permanent life insurance as a retirement savings vehicle. The pitch? Overfund a permanent policy and focus on building cash value. After all, that cash value can grow tax-deferred over time, allowing you to borrow from it tax-free in retirement.
Sounds good in theory…
But in reality, LIRPs come with high fees, limited transparency, and optimistic assumptions. The cash value of life insurance may not grow as projected, and borrowing too much can cause a tax event or lapse of the policy. If your goal is tax-efficient retirement income, a Roth IRA or even taxable brokerage accounts typically offer more flexibility at a lower cost.
Furthermore, many LIRPs are built on long-term projections that can be fragile. If interest rates change or policy performance lags, you may be forced to pay higher premiums later just to keep the coverage in force. There’s also the risk of accidentally triggering modified endowment contracts (MECs)—often the result of overfunding a policy too quickly—often caused by overfunding the policy too quickly—adding surprise risk to what was pitched as a tax-free solution.
Key Considerations Before Keeping a Policy Into Retirement
As you evaluate whether life insurance still fits into your retirement picture, it’s worth stepping back and asking what the policy is actually doing for you today. These considerations can help you determine whether to keep the coverage, make changes, or let it go altogether:
Ongoing financial responsibilities to others
If no one relies on your income, such as a spouse, dependent child, or aging parent, then the policy may no longer serve a meaningful purpose. Life insurance is generally designed to replace income or cover obligations, so if those needs no longer exist, the rationale for keeping it weakens.
Premium strain relative to your current financial goals
Even if a policy once made sense, it might no longer align with how you want to allocate resources in retirement. If the insurance product is taking up part of your budget without meeting an active need, the cost may be out of proportion with its value—especially when compared to other priorities like travel, family, or healthcare.
Better potential outcomes from investing the money
Money spent on premiums might generate more value elsewhere. Redirecting that amount into a Roth IRA, taxable brokerage account, or even an emergency cash reserve could provide more liquidity, flexibility, and long-term growth, depending on your goals and risk tolerance—especially if your policy’s cash value component is underperforming.
Emotional attachment vs. actual utility
It’s common to feel tied to a policy simply because you’ve paid into it for years. But nostalgia shouldn’t guide financial decisions—evaluate whether the cash value component, projected death benefit, and remaining costs still serve a meaningful purpose within your overall financial and retirement strategy. If not, it may be time to explore other options.
Life Insurance and Retirement Planning FAQs
1. What should I do with my old permanent policy if I no longer need it?
You have several choices. You can keep the policy if it still fits into your long-term goals, surrender it for its cash value component, or consider a 1035 exchange to move the value into another insurance product with more favorable terms.
A 1035 exchange lets you move the built-up value from an existing policy into a new one without creating a taxable event in the process. This can be helpful if you’re seeking a simpler policy, annuity options, or lower premiums while preserving the gains you’ve already built.
2. What happens if my permanent policy becomes a modified endowment contract (MEC)?
The tax advantages shift significantly when a policy becomes a modified endowment contract (MEC). Withdrawals and loans are taxed like income and may also face penalties before age 59½, reducing the flexibility many people count on in retirement.
This change in tax treatment can catch policyholders off guard. It’s important to understand how funding patterns or large contributions can trigger MEC status—and how it might make what was once a flexible planning tool much more restrictive.
3. Can I just use my life insurance as an investment instead of a 401(k) or Roth?
Life insurance shouldn’t be viewed as an “investment”. While it’s true that permanent policies grow cash value over time, the associated fees, limitations, and assumptions usually make life insurance for retirement a less efficient choice compared to more traditional investment strategies.
A Roth IRA or employer-sponsored plan like a 401(k) will offer better long-term performance, lower fees, and far more transparency. For most people, those vehicles provide more control, predictability, and overall value as far as investments (not protections) are concerned.
4. How do I know if my policy is underperforming?
Request an in-force illustration from your life insurance company. This document gives you a snapshot of projected values based on current performance and assumptions, showing you whether the policy is growing as expected—or falling behind.
Reviewing these annually or after major financial changes is a good idea. Comparing past projections to current illustrations can help you assess whether the cash value component is worth keeping or if other alternatives may be more beneficial.
5. Should I work with a professional before canceling a policy?
Yes. Canceling a policy can lead to tax consequences, loss of coverage, and, in some cases, surrender charges that reduce your policy’s value. Once canceled, you may be unable to replace the coverage if your health changes.
A financial professional can help you determine whether the policy still fits your plan or whether a strategic move—like converting it, exchanging it, or simply pausing premium payments—is a better fit. Before stepping away from a long-standing insurance product, carefully considering all your available options is a good idea.
The Bottom Line: Invest for Retirement, Insure for Risk
For most people, the best use of life insurance is simple: protect your family during your working years. Once you’re retired, you likely don’t need it anymore. If you do, it should be for a very specific reason—not because someone pitched it as a retirement plan alternative.
If you’re holding onto a policy simply because it’s familiar or feels like a backup plan, it’s worth asking what it’s doing for you now. Insurance is a tool—not a one-size-fits-all solution. The premiums may be better spent elsewhere if they no longer protect something meaningful or provide strategic benefits (like estate liquidity or dependent income replacement). Retirement planning thrives on clarity, simplicity, and purpose—and that includes your insurance strategy.
We Can Help You Think It Through
Our team of financial professionals can help you evaluate options based on your unique circumstances. Whether you want to walk away from a policy, maintain coverage for liquidity, or use it as part of broader estate planning, we’ll give you honest input about your choices.
Schedule an introductory call with our team to discuss it. You deserve advice tailored to your retirement—not someone else’s sales quota.
Sheena is a highly regarded financial professional known for her clear explanations and practical advice on complex financial matters. She earned her CERTIFIED FINANCIAL PLANNER™️ designation in 2010 and holds a Bachelor of Science degree in Finance from the University of Wisconsin LaCrosse.
