Life insurance in retirement

It is fine for the answer to be no

Most life insurance is bought to solve problems that end. The mortgage gets paid. The children become independent. The income that needed replacing stops being earned.

When those problems are gone, the coverage that solved them has done its job. Continuing to pay for a large death benefit because you have always had one is not automatically sensible, and concluding that you no longer need it is a legitimate outcome rather than a failure.

The useful exercise is to work through the reasons it might still be needed, and if none apply, act on that.

Where it still earns its cost

A survivor’s income would drop sharply. This is the reason most often missed. Some pensions pay a surviving spouse a reduced amount, some pay nothing, and the reduction can be substantial. Canada Pension Plan survivor benefits are modest and are subject to their own rules. If a partner’s income would fall materially on your death and their own savings would not cover the gap, that is a live need.

Check what your specific pension does. People frequently assume a full continuation and find otherwise.

The estate faces a tax bill it cannot pay in cash. Death triggers a deemed disposition of capital property, so a cottage, a rental property or a non-registered portfolio with large gains can produce a bill with no money attached to it.

Registered plans deserve particular attention here. A RRIF left to a spouse or common-law partner can generally roll over on a tax-deferred basis. A RRIF left to adult children is generally brought into income in the year of death, and on a substantial plan the tax can be very large. Many people do not realize this until they model it. See permanent insurance in estate planning.

A dependant will still need support. An adult child with a disability is the clearest case, and it is a need that has no end date.

Final expenses, where there is no liquid money readily available and you would rather your family not arrange finance or wait for probate. See final expense insurance.

You want to leave something specific. An equalising gift between children where one is inheriting a property, or a charitable bequest. This is a preference rather than a need, and it is a perfectly good reason.

Working through it

Four questions, and if the answer to all four is no, you probably do not need coverage.

Would anyone’s standard of living fall if I died tomorrow?

Would my estate owe money it could not pay without selling something my family wants to keep?

Is there anyone who will need support after I am gone?

Is there something specific I want to leave that I cannot fund from savings?

If you decide you no longer need it

What you do next depends on what you hold, and surrendering is rarely the only option.

A term policy. Simply stop paying, or cancel it. There is no cash value and nothing to recover. If it is nearing the end of its term, check the end-of-term options before letting it go, in case a conversion right is still live and worth using.

A permanent policy. Do not surrender it without asking about the alternatives first, because there usually are some.

Reduced paid-up converts the policy to a smaller amount of fully paid coverage with no further premiums. You keep a death benefit and stop paying. For a retiree who wants to stop the premium but not lose everything, this is frequently the better answer and it is rarely offered unprompted.

Reducing the face amount lowers the coverage and the premium while keeping the policy.

Surrendering ends it and pays the cash surrender value, and the gain above the policy’s adjusted cost basis is fully taxable as income in that year. That tax bill catches people out, so ask for the projected figure before deciding. See surrendering a permanent policy.

Before cancelling anything

Two cautions.

Ask what would happen if you wanted coverage again later. Buying at 74 after cancelling at 68 is considerably more expensive and depends on your health then.

And if anyone might be relying on the policy, including a former spouse under a separation agreement, check before you act. See after separation or divorce.

The tax questions here depend on your own situation and should be confirmed with an accountant rather than settled from a general page.