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Do You Need Life Insurance After Early Retirement?

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Do you need life insurance after early retirement?

A couple of months ago, I posted my Ultimate Early Retirement checklist. (#1 on Google if you search that term by the way. Although, I’m probably the only one who will ever Google those exact words…) One of the items on my checklist is life insurance. However, some readers objected that life insurance might not need to be on the list due to the following reasons.

  • If you’re retired and don’t have any earned income, then you don’t need to replace that income.
  • If your net worth is high enough, then you don’t really need life insurance. As a couple, life will presumably cost less when one person passes away. You shouldn’t need life insurance if you’re already comfortably living on your nest egg.
  • If you don’t have a dependent, then you probably don’t need life insurance.

These sound like valid points to me, but I still think I need life insurance. It’s been over 2 years since I visited this topic and our situation has changed somewhat since then. It is a good idea to review everything to see if I still need life insurance.

Life Insurance Recap

I had a hefty life insurance policy with my old employer. When I left my full time job in 2012, all that coverage went away. I figured that I still needed a little life insurance and signed up for a 20 year term life insurance policy. I’m paying $24 per month for a $250,000 policy. The policy will help pay for any immediate expenses and help replace my self-employment income. My goal is for my family to maintain their lifestyle if something happens to me.

Income

In 2013, I made about $1,500 from self employment. The good news is that I’m doing a better 2 years later. I’m making about $3,500 per month in 2015.

My current self employment income: about $3,500/month

Social Security survivor benefit: $1,961/month for RB40jr up until 18 years old AND $1,961/month for Mrs. RB40 until our kid is 16 year old.

It looks like the Social Security benefit can still replace all of my income up until our kid is grown up. That’s great news for the family.

Debt

Primary home mortgage: We owe about $235,000.

Mrs. RB40 can sell off our rentals and use the proceeds to pay off the primary home. She does not want to be a landlord. The process of fixing up the rentals and selling them off can take several months so the life insurance payout would come in handy during that time.

Big expense

College: $100,000 to $350,000?

RB40jr has about $43k in his 529. He can use part of the social security benefit to add to his 529 until he’s 18. Mrs. RB40 can also use part of my retirement fund to pay for Baby RB40’s college if needed. RB40jr might have to live at home and go to a local college for the first 2 years if money is tight.

Mrs. RB40’s early retirement plan

Here is the big change from 2 years ago. In 2013, Mrs. RB40 wasn’t planning to retire early because she liked her job. She enjoyed working and contributing to the society. However, she has seen my quality of life improved immensely and she wants a piece of it, too. We’re working on it and she should be able to retire early by 2020. If I pass away, then life will be more complicated and she might have to go back to work. Can our budget handle this change?

Budget

Expense: $4,500 per month

Current income: ~$8,200 after tax from all sources.

  • $5,000 – Mrs. RB40’s income after taxes and deduction
  • $2,000 – Joe’s take home after taxes and deduction
  • $800 – Dividend portfolio
  • $400 – Rentals, P2P lending, and other sources.

Our passive income is a little low right now at just $1,200 per month. It looks like Social Security benefit will be able to fill the gap, though. Social Security benefit will provide about $4,000/month and that should be enough to help pay the bills. When the benefits run out in 2029, then Mrs. RB40 can turn on the tap from our retirement accounts.

Life insurance will be helpful

It looks like life insurance would still be helpful for us.

  • Income replacement – We should be okay on this front. Social Security benefits can replace my income until RB40jr is grownup. After that, Mrs. RB40 can withdraw from our retirement accounts.
  • Immediate expenses – This is where the life insurance policy would be helpful. We have some cash cushion, but it could run dry pretty quickly with all the things that need to be done. Fixing up the rentals and selling them could take quite a few months. The funeral expense will probably cost more than I imagined. Mrs. RB40 will probably need to hire an accountant and other professionals to sort out our finances. She will have to figure out what to do about my website and other investments. If she is still working full time, she will have to figure out childcare arrangement. There are just a lot of things to do and I want to give her the time she needs to make good decisions without worrying about money.

All in all, I think the $250,000 policy is perfect for us at this time. It’s not a huge amount, but it’s just enough to tie the family over so they can keep going. When Mrs. RB40 retires, we’ll have to see if it makes sense to get life insurance for her, too.  We’ll deal with that in a few years.

If your kids are on their own and your retirement is covered, then you might not need life insurance. Everyone need to sit down and figure out their own needs.

Do you think you need life insurance after you retire?

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 17 comments… add one }
  • Pennypincher September 11, 2015, 4:46 am

    Your plan sounds very good. Unless your are struck by lightening, it looks as if both you and Mrs.RB40 will live a long, healthy life. If a spouse dies, then most likely the other would have to return to work-words from my accountant, not me.
    All I know is the insurance agents around here are pretty well off financially. Especially the ones who own their own agencies.

    • retirebyforty September 11, 2015, 9:38 am

      Why does your accountant thinks the other would have to return to work? It looks to me like Social Security benefits + passive income should cover the cost of living. Once the Social Security benefits run out, the retirement accounts would be take over.

      • Pennypincher September 12, 2015, 2:20 am

        Regarding my accountant saying, if a spouse dies (usually husband/breadwinner) then the wife would most likely have to return to work. I think he was using that example as a worse case scenario. Example: Still raising young kids to put through college, etc.
        One never knows how much college will really cost until the year of enrollment. It costs far more than one can imagine, even with scholarships (free money!) handed out. Save people, save!

  • Steve Miller September 11, 2015, 5:31 am

    Once I retired, I dropped my life insurance.

    My reasoning was that life insurance is primarily designed to ensure your spouse has the means to cover their expenses if you have an early demise.

    If you are living within the 4% rule, your retirement investments SHOULD last you the duration of your life so why would you need extra income if one of you passes? The surviving person would probably spend a little less that the both of you combined.

    That’s my reasoning. Am I wrong?

    • retirebyforty September 11, 2015, 9:39 am

      I think you’re right. That’s why I got the 20 years term. Once our kid is on his own, then we don’t have much to worry about.

  • Mr. Budgets @MrandMrsBudgets September 11, 2015, 5:43 am

    I think in your situation life insurance makes sense. Mr. Budgets and I don’t have life insurance and since we don’t have kids, nor plan to, it is hard for us to justify it. We both make enough to support ourselves, have a lot already saved for retirement and have a bit in taxable accounts. I figure our taxable investments are an added safety net since one could always cash out if they really needed more money.

    • retirebyforty September 11, 2015, 9:40 am

      Kids make a big difference. They make things very complicated. If we don’t have a kid, I probably wouldn’t consider life insurance.

  • Dave in Sunny FL September 11, 2015, 6:38 am

    While you mention hiring an accountant to sort out your finances, I think you are undervaluing your contributions to the household. You provide the child care (often in very creative, entertaining, hard-to-replace ways), run the books, handle shopping chores, and do many other things that your readers don’t know, and that you may not have accounted for. Even if Mrs. RB40 could cover those tasks, even if she could create the time to duplicate ALL of the things it takes you your whole day to do, she will not be able to duplicate your efficiency at them. So, she will either spend more on hiring someone to replace your effort, or she will spend more on the tasks while doing them herself.

    You don’t mention whether she has life insurance, either. Assuming your life insurance planning is based on an expectation that it only needs to be a supplement to the labor of the second parent, consider this: Is the total of the coverage on both parents sufficient to provide for all the needs of a child who is not able to work? Even harsher, but more likely: What if an accident that kills one parent debilitates the other parent, and they are unable to work for some period of time?

    Given your age and apparent health, term life is a bargain for you now. Given your dreams and plans, and the expectations I think you have for the kind of future you can provide for your family, my opinion is that you are underinsured. God Bless and good health!

    • retirebyforty September 11, 2015, 9:44 am

      You’re right. She can cover all these things, but it will leave her ragged. She can use the payout to hire some domestic helps and baby sitters until she adjust to the new reality. It will be tough and I don’t want her to worry about money too.
      She has life insurance through work. Gosh, your scenario is depressing. I don’t even want to think about it.
      I’ll go over your comment with Mrs. RB40 and see if she thinks we should increase my coverage. Thanks.

  • freebird September 11, 2015, 7:38 am

    I guess I don’t need this at all because I have no dependents, but I get some free at work and I doubled it for what I think is a reasonable premium.

    In your case the total benefit seems fine, but shouldn’t it be split between you and the Mrs? On the basis of income replacement her portion should be about twice yours, at least until she starts early retirement.

    After I retire life will be all about spending and no more need to earn, so I think “longevity insurance” makes more sense for me than life insurance, assuming I don’t do something silly like marry and have children!

    • retirebyforty September 11, 2015, 9:46 am

      She has insurance through her work at this time. Yes, having children will complicate your life. It’s good for the most part, though.

  • Leigh September 11, 2015, 9:41 am

    I don’t have any life insurance beyond the minimum my employer offers ($50,000), which should cover funeral expenses. I have no dependents. My partner and I both live off of 20-30% of our net separate income and have many years of savings. He wouldn’t inherit my assets if something happened to me as we’re not married. I’ve offered him my condo and he doesn’t want it – he would rather earn his own way. We’re both a bit independent!

    $250,000 seems like a reasonable policy to give your wife a bit to cover the gap, though it does seem like you two are getting very close to full retirement being possible for both of you! Exciting!

    • retirebyforty September 11, 2015, 9:47 am

      That makes sense for you. It’s nice to be independent. 🙂

  • Bryan @ Just One More Year September 11, 2015, 1:16 pm

    I don’t think we will have any additional term insurance after I retire.

    The only remaining policy I will have after what my employer provides is a $250k term plan. Our assets, survivor SS, and passive income can cover an early death for me with my wife and kids ok financially.

  • Our Next Life September 14, 2015, 12:22 pm

    This is a helpful post! We both have term life policies that run until our mid-50s, and we have no plans to cancel those. But we’ll lose a lot of our life insurance when we retire, since it’s employer-provided, and we’re okay with that. In truth, we really only *need* life insurance for a few more years, until we’re fully financially independent, but we think of the money we’d get if something happened to either of us as financial consolation at a time of major loss.

  • Cardinal93 September 17, 2015, 5:16 pm

    My first ever comment here, but I’ve been reading your blog for a while (love it!).

    I have millions of dollars of life insurance (term through my work, term purchased on my own, and permanent life insurance).

    My wife and I both earn high income, and have 2 kids aged 7 and 9. If I pass first, I told my wife I want to give her the option of never having to work ever again if she doesn’t want to, and the option of doing wonderful things in life if you are not burdened with making a living. My youngest son is also autistic, so I have factors that you and your family do not.

    In any case, every night that I lay down and sleep, I know that if I don’t wake up the next day, my family may be emotionally a wreck, but financially they will be okay.

    Cardinal93

    • retirebyforty September 17, 2015, 11:21 pm

      Thanks for commenting! Great job looking out for your family.

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