For many, life insurance is just a safety net to protect loved ones if the unexpected happens. But in retirement, it can be so much more. When integrated thoughtfully, life insurance can offer far more than just protection—it can be a strategic tool in a well-rounded retirement income plan.
According to Jen Sias-Lyke, State Farm® Insurance Agent, “Life insurance… helps loved ones recover from financial risks and unexpected costs, increasing their chances of reaching long-term goals and achieving dreams. Thinking about financial protection and retirement can seem overwhelming, but as your life changes, so does your financial situation.”
With the right type and amount of life insurance, retirees can address multiple financial needs at once. It can safeguard income, provide tax-free cash flow, help manage taxes, and offer peace of mind to families—all while enhancing overall portfolio returns. Here are a few strategic ways to make life insurance a valuable part of your retirement plan:
Protect Your Income in Retirement
According to James J. Meehan, MSM, Managing Partner of 1847Financial, “Life insurance needs to be the foundation of any solid retirement plan if your family is depending upon your retirement income. You can’t invest your way out of an untimely death.”
When one retired spouse passes away, the surviving spouse often faces financial strain. While expenses may decrease, they rarely drop enough to offset the loss of income. At a minimum, one of the couple’s Social Security benefits will disappear, creating a significant gap.
For many couples, life insurance provides a critical safety net, ensuring there is enough money to replace lost Social Security or other retirement income. This strategy allows the surviving spouse to maintain their current standard of living throughout retirement.
Keep Your Retirement Savings on Track
Beyond protecting your income, life insurance can also safeguard the retirement savings you have worked so hard to build. “In the 10 years leading up to retirement, many couples find themselves playing catch-up on their retirement savings,” says retirement income expert Curtis V. Cloke, CLTC, LUTCF, RICP®. “During this period, if one spouse dies, the surviving spouse could end up being severely short on retirement savings.”
To safeguard against this risk, Cloke recommends purchasing a 10- to 15-year term life insurance policy for both spouses before retirement. These policies help protect a couple’s retirement savings plan by ensuring financial security in the event of an untimely loss. Cloke notes that premiums for term policies are typically affordable, minimizing any financial strain.
Additionally, he advises considering a policy that can convert into permanent coverage. A convertible term life insurance policy helps preserve insurability, providing flexibility in case future life insurance needs arise—especially if health conditions change.
Improve Your Investment Asset Allocation and Returns
With interest rates near historic lows, traditional fixed-income investments like bonds and CDs may not be as attractive for retirees. However, maintaining a portion of safe, stable assets remains essential in any retirement income portfolio.
Tom Hegna, CLU®, ChFC®, CASL®, a renowned retirement planning speaker, author, and host of the PBS special Don’t Worry, Retire Happy!, suggests using life insurance as a strategic substitute for bonds. “Right now, bonds have very little upside. They are only paying in the 1 to 3 percent range, yet the risk of holding bonds is very high. If interest rates rise, the downside risk to bonds could be 20-30 percent or more.”
To mitigate this risk, Hegna recommends that retirees consider whole life insurance as a bond alternative. “A whole life policy can provide bond-like returns of 3 to 5 percent without the interest rate risk of a bond,” he explains. By incorporating whole life insurance into a retirement income strategy, retirees can enhance stability while preserving growth potential.
Manage Your Taxes
Life insurance offers unique tax advantages that can enhance a retirement income plan, according to Russ DeLibero, CFP®, ChFC®, CLU®, PhD in Financial and Retirement Planning. “When properly structured, life insurance can provide tax-deferred growth, tax-free cash flow, and a tax-free death benefit,” he explains. “The tax-preferential treatment provided to life insurance allows an individual to have greater flexibility over which dollars to use during retirement. Depending on the type of policy, it can also serve as a non-correlated asset, adding diversification to a portfolio.” So, basically, because life insurance isn’t directly tied to stock market performance, it can add stability to a portfolio, reducing overall risk.
With tax rates constantly in flux, life insurance can also act as a hedge against future tax increases. “The tax-preferential treatment of life insurance can be especially advantageous for individuals in a higher income tax bracket or as a safeguard against a rising tax environment,” says DeLibero. “As taxation rises, tax-free cash flow becomes even more valuable.”
By strategically tapping into cash value tax-free, retirees can supplement their income while effectively managing their overall tax burden.
Bottom Line
Life insurance isn’t just about protecting your loved ones during your working years—it can be a powerful tool in retirement as well. Whether it’s safeguarding your income, keeping your savings on track, improving investment returns, or managing taxes, the right life insurance strategy can strengthen your overall financial plan.
Not everyone’s needs are the same. Some may benefit most from term life insurance, while others might find permanent policies more suitable. Some retirees may not require additional coverage, while others risk being underinsured and leaving financial gaps for their spouse or heirs. Regardless of your situation, evaluating your life insurance needs is a crucial step in securing your retirement.
As Jen Sias-Lyke points out, “Key life events, such as marriage, moving or buying a home, having a child, changing jobs, and retiring could signal the need for changes to a financial plan. Life insurance should be an important piece of that conversation.” Unfortunately, many people wait until a major life event—or worse, a crisis—to consider their coverage.
Not sure where to start? Begin by assessing your needs and exploring your options with a trusted insurance specialist. A well-structured life insurance plan doesn’t just provide peace of mind—it helps ensure financial stability and flexibility throughout retirement.
Are you curious about another life insurance benefit? Check out our article on life insurance policies with long-term care benefits.
Life Insurance Questions?
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This article was updated on 3/13/2025.