If you died today, your spouse would still be faced with daily living expenses—for 10, 20, or even 30 years. Without life insurance, would he or she be able to pay off your obligations, maintain the lifestyle you have both worked so hard to achieve, and pass on something to your children and grandchildren?

For example, depending on the size of your estate, your heirs could be hit with a large estate tax bill after you die.   Tax would be payable on your non-exempt estate, and could be significant,  depending on your State’s inheritance taxes. Enter life insurance.  Life insurance proceeds are generally free of income tax, and can be set up so they avoid probate. As a result, your life insurance policy can potentially pay out immediately upon your death, allowing your heirs to pay those estate taxes, as well as funeral costs and other debts, without having to liquidate other assets.  And if your life insurance policy is properly structured, the proceeds from it will not add to your estate tax liability.

Moreover, if your circumstances change and you no longer have anyone who would need the proceeds of a life insurance policy, you may be able to surrender the policy and supplement your retirement income with the funds that have accumulated in the policy’s “cash value account.”

So, how much life insurance do you need as a retiree? That depends on how much your family will need to meet general obligations upon your death (such as medical costs, funeral expenses, and estate settlement bills) as well as how much future income your family will need to sustain them.  The latter is tricky to calculate, because it involves calculating the present day value of future needed cash flow streams.