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Brad Bobb August 26, 2020
Life insurance tends to be a touchy subject. Some people don’t want to discuss death and others just “don’t believe in insurance.”
Most federal employees I talk to will carry life insurance in their younger days, but don’t plan on having any in retirement. But are those intentions well thought out?
As far as the “I don’t believe in life insurance” argument goes, there isn’t much time to be wasted here. Believe in? When I hear “believe in,” I think of my faith and maybe a few people, but “believing in” a product? Owning life insurance has nothing to do with believing in a product. It has to do with loving someone. If you love someone enough, then you may consider carrying life insurance to financially protect them in your absence.
Why carry life insurance in retirement is pretty simple. In the event one spouse dies, the surviving spouse could be left with significantly less income.
Here is an example.
Mr. Jones’ income
FERS Annuity = $4000
Social Security = $2800
Mrs. Jones’ income
Social Security = $1400
| Mr. Jones’ Income | Mrs. Jones’ Income | Total Household Income | Income at Mr. Jones’ death | |
| FERS Annuity | $4000 | $4000 | ||
| Social Security | $2800 | $1400 | $4200 | $2800 |
| FERS Survivor Annuity | $2222 | |||
| Total | $6800 | $3622 | $8200 | $5022 |
The Jones family’s current monthly income is $8,200. If Mr. Jones passes tomorrow, then Mrs. Jones is left with a monthly income of $5,022 (FERS survivor annuity of $2,222 plus $2800 Social Security). This comes out to a 39% reduction in income for Mrs. Jones. While expenses may drop a little at the passing of one spouse, the same 39% reduction in expenses isn’t likely. An income change of 39% would require some significant life changes for the grieving Mrs. Jones.
If the Joneses had a life insurance policy for 500k (an example) on Mr. Jones, then they could spend more freely. Having the life insurance policy gives them the security of knowing that Mrs. Jones will not take a reduction of 39% in income should Mr. Jones pass. Now they can spend more freely while they are both alive.
Don’t rule it out. Everyone is different so it’s going to depend on your financial situation as well as your wants and needs.
Life insurance is a bigger need for couples with large disparities in guaranteed income. A perfect example is the high earning federal employee whose spouse stayed home most of their life to raise kids.
Despite what some life insurance salesman may claim, insurance isn’t the answer to everything, but it does fit a need. Evaluating life insurance needs is another part of the financial planning process. If you are nearing retirement these are the types of things you need to be thinking about.
