Life Insurance for Empty Nesters

Summary: Life insurance remains crucial for empty nesters, offering financial protection for spouses and supporting adult children, while also serving as a tool for preserving retirement savings and estate planning. There are two primary types of policies: term life insurance and permanent policies. As priorities shift in this stage of life, maintaining the right insurance can ensure financial stability, ease healthcare costs, and help preserve a family’s legacy.

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The right coverage can help protect your retirement

Life insurance can be essential for protecting your family’s financial well-being – particularly when you have young children. What many people don’t realize, though, is that life insurance can play a key role in your financial planning long after those children grow up and leave the nest as they say.

There are two basic types of life insurance: term and permanent

Term life insurance

Term life insurance offers an economical way to help make sure your family has financial cover if you should pass away unexpectedly.

Permanent policies

Permanent policies, such as Whole Life Insurance and Indexed Universal Life Insurance do cost more than their term life counterparts, but you also get other benefits.

Eight ways life insurance can be helpful during empty-nest years

These are ways a good life insurance policy can help you as you transition into your empty-nester years.

1. Help for a surviving spouse.

When a life partner passes away, the surviving spouse can be left with a lot of debts to pay, without the means to meet those obligations. Life insurance proceeds can help your surviving spouse pay off the mortgage and any other large debts, as well as help cover any funeral expenses. This helps ease financial worries and offers house security, giving your spouse time to figure out the next move without being forced into decisions they’re simply not ready to make.

2. Continued nest egg savings.

If someone dies in the time after the kids are grown and out of college but before hitting retirement age, a lot of nest egg potential may get lost. Those are the prime “catch up” years for building retirement funds, when you’re normally at the peak of your earning potential, your child-related expenses have usually disappeared, and the limits on plan contributions are expanded.

Permanent life insurance policies can help make up for those lost retirement contributions, so your spouse may not have to forgo the dream retirement you both had planned.

3. Support for adult children.

It’s increasingly common these days to see adult children move back home, relying on their parents for at least a portion of their financial support. In fact, research shows that about 1 in 3 adults age 18 to 34 live with their parents.¹

In addition, many families include special-needs children, who may never be able to take care of themselves financially. When you still have people counting on you for support, life insurance can be a critical part of your family’s overall financial plan, helping to ensure that their needs are always met.

4. Seed money for heirs.

You want your heirs to be financially independent, and entrepreneurship can set them on that path – but it can be difficult to launch or buy shares in a business when funds are limited. Bank loans and other traditional financing methods can cripple the cash flow for a start-up or growing small business. Ample life insurance proceeds (or prudent loans and withdrawals from a cash value policy) can allow your heirs to open or invest in a business of their own, paving the way for future financial success without the constraint of overwhelming debt.

5. Estate tax assistance for beneficiaries.

Help your beneficiaries to pay estate or inheritance taxes – which can affect estates worth less than $1 million in many states – without selling off family heirlooms. While federal estate taxes don’t pose a problem for most families (it only kicks in for estates valued over $13.61 million in 2024),² state estate and inheritance taxes can substantially drain your legacy.

Properly structured permanent life insurance policies (and this might take some professional guidance) may be wholly exempt from inclusion in your estate and not subject to those taxes, giving your family the resources they’ll need to pay a potentially sizable tax bill.

Note: Find out if your state imposes any estate or inheritance taxes with this map from the Tax Foundation.

6. Back-up retirement income.

When one spouse passes away, the other might see a drastic reduction in pension or Social Security payments … and in some cases, may even lose that relied-upon income completely. When one spouse dies, the surviving spouse continues to receive only the larger of the couple’s Social Security payments, not both benefits. Whether a surviving spouse gets pension payments depends entirely on how those benefits were set up in the first place, and all too often those payments stop coming when the spouse who had the pension dies.

Permanent life insurance may help maintain that retirement income for your surviving spouse, making sure they don’t face a sudden budget crisis.

7. Preservation of access to top-notch healthcare.

$315, 000. That’s how much an average 65- year-old couple will pay in healthcare costs during retirement, and that doesn’t even take potential long-term care costs into account.3 In fact, long-term care can increase those expenses by $130,000 (on average). Maintaining sufficient life insurance could help you protect your surviving spouse against the burden of skyrocketing healthcare costs and preserve access to top-notch medical care.

8. Supplemental retirement income.

Depending on the type of life insurance you choose, your policy may be able to provide supplemental or “safety net” retirement income while you’re still alive. Should you need this additional income, cash value policies may offer two distinct ways to help you make ends meet: policy loans and withdrawals.

What’s more, tapping into insurance policies may not increase your tax bill … unlike every dime you take out of standard retirement accounts. *Plus, policies like Indexed Universal Life Insurance can offer an advantage that your traditional retirement savings plans may not be able to match: the opportunity to benefit from rising markets without bearing the risk of major losses if the market declines.

* Taking loans/withdrawals from your life insurance policy will decrease the policy benefit.

For federal income tax purposes, tax-free income assumes (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); and (2) the policy does not become a modified endowment contract. See IRC §72, 7702(f)(7)(B), 7702A. This information should not be construed as tax or legal advice. Consult with your tax or legal professional for details and guidelines specific to your situation.

Sources:
1 Pew Research Center (2023) Young adults in the U.S. are less likely than those in most of Europe to live in their parents’ home
2 Investopedia (2024) Estate Taxes: Who Pays? And How Much?
3 Fidelity (2024) Keys to Covering Health Care in Retirement