Guides
Life insurance in retirement: keep, cut or cash out
What to do with life insurance after you stop working: keep, reduce, convert, sell or surrender it, and the tax and income traps on each path.
Retirement is when most people should review life insurance, not automatically drop it. The question for each policy is whether someone still depends on it: a spouse who would lose pension or Social Security income, an heir, a business, or an estate tax bill. If the answer is no, you can let a term policy expire or cut back a permanent one. If yes, keep it, and fix the cost before you stop earning a paycheck.
Who still needs coverage after you retire
Your needs change, they rarely vanish. Check each of these before cancelling anything.
| Reason to keep coverage | Why it applies in retirement |
|---|---|
| A spouse who would lose income | When one spouse dies, the survivor keeps only the larger of the two Social Security benefits; a widow or widower's benefit is up to 100% of the deceased's benefit at full retirement age, per the Social Security Administration. The smaller check disappears. |
| A pension that stops or shrinks | Single-life pensions end at death; joint-and-survivor options pay less while both live. Some retirees weigh a policy against the survivor option; get the numbers in writing first. |
| Final expenses | Funerals have a median of $8,300 with viewing and burial, per the NFDA 2023 study, before cemetery costs. |
| Debts | A mortgage, home equity loan or a co-signed loan that survivors would inherit |
| Taxes at death | Large IRA balances taxed to heirs, or an estate above the exclusion. The federal estate tax exclusion is $15 million per person for 2026, per the IRS. |
| A dependent adult child | A special-needs trust funded by a policy lasts as long as the need |
| A legacy goal | Equalizing an inheritance, leaving a gift to a charity |
If none applies, the premium may be better used elsewhere. Run a policy through the keep, surrender or sell your policy? before deciding.
Term policy ending or ended
Level term is designed to run out. When yours ends you can usually renew it year by year at sharply higher prices, convert it to permanent coverage if the policy allows and the window is still open, or let it lapse. An analysis by the Society of Actuaries found that when level term ended, 27% to 96% of policyholders lapsed, depending on the design, and those who kept paying died at a much higher rate than expected, because healthier policyholders left (SOA 2021 report). Plan before the end date:
- Check the conversion deadline. Many policies end conversion rights years before the term ends; see converting term life to permanent: how the conversion option works.
- Compare the cost of conversion with the renewal premium.
- If the need is smaller now, consider letting it expire. See what happens when your term life policy expires and renewing term life insurance after the level period ends.
- New coverage in your 60s or 70s costs much more, and health matters; see term life insurance at 60 and beyond and life insurance at 70: options and costs.
Permanent policy: five options
1. Keep it as is. If premiums are affordable and the benefit is still needed, this is the default. Confirm that a universal life policy won't lapse; its cost of insurance rises with age, and many older policies need a larger premium than the original illustration showed. Request an how to request and read an in-force illustration and read why universal life policies lapse, and how to prevent it.
2. Reduce it. Reducing the death benefit lowers the premium on universal life. On whole life, you can convert to reduced paid-up insurance, a smaller policy with no more premiums; see nonforfeiture options: reduced paid-up and extended term.
3. Use the cash value. A policy loan or withdrawal can supplement income. Loans are generally not taxable while the policy stays in force, but if the policy lapses or is surrendered with a loan outstanding, the gain can become taxable income with no cash to pay the tax; see how cash value is taxed: withdrawals, loans and surrenders and life insurance policy loans: how they work and what they risk. Try the policy loan calculator first.
4. Exchange it. A 1035 exchange lets you move a policy's value into an annuity or a long-term care product without immediate tax, according to 26 U.S.C. section 1035; see 1035 exchanges: swapping policies without tax. Combination life and long-term care policies are explained in hybrid life and long-term care policies. These products have their own fees and rules, so compare before you leave a policy with a good guarantee.
5. Surrender or sell it. Surrendering gives you the cash surrender value, and any amount above your cost basis (premiums paid, adjusted for dividends and loans) is taxed as ordinary income; see surrendering a life insurance policy: what you get and what it costs. A life settlement, selling the policy to an investor, may pay more than surrender value for a larger policy and an older or less healthy insured, but fees, tax and the loss of coverage matter; see life settlements: selling your life insurance policy. Selling is a one-way decision, so get offers and advice first.
Special retirement issues
- Medicaid. Cash value counts as an asset when applying for Medicaid long-term care, with limits that vary by state. Talk to an elder law attorney before spending down; see medicaid eligibility and life insurance cash value.
- Long-term care. A rider that accelerates the death benefit for care costs can make a policy do double duty; see long-term care riders on life insurance.
- Required minimum distributions. Taking IRA distributions starting at 73 (born 1951 to 1959) or 75 (born 1960 or later), per the IRS, can fund premiums, but the taxes on those withdrawals reduce what is left.
- Annuities. An income annuity covers living too long; life insurance covers dying too soon. They are opposites, and some retirees use both; see life insurance vs annuities: opposite tools for opposite risks.
- Group coverage. Work coverage may end at retirement. Ask about conversion or portability within the short window, often 31 days; see keeping group life insurance when you leave a job.
A hypothetical decision
Say a retired couple, both 68, hold a 30-year term policy of $500,000 on the husband that ends next year. They own their home outright and have savings that cover the wife's income needs if he dies, plus a smaller pension. They decide to let the term expire. Another couple with a single-life pension of $4,000 a month and a wife whose Social Security is smaller keeps a permanent policy to replace the pension if the husband dies first. The situation, not the product, decides.
Key takeaways
- Keep life insurance in retirement only for a specific purpose: income for a surviving spouse, debts, taxes, a dependent or a legacy.
- Plan for term expiration before it happens; conversion windows often close years earlier.
- Cash value can be borrowed, exchanged, surrendered or sold, but each path has tax and coverage consequences.
- A policy with loans that lapses can create a tax bill with no cash; check before you stop paying.
- A fee-only planner or tax professional can review a large policy; use the keep, surrender or sell your policy? first.