When you retire, there are a lot of new considerations. From the fun questions like “Where am I going to travel next?” to the more serious ones, like “How much do funerals cost?” retirement requires you to assess your financial situation for a new chapter. A life insurance policy may give you the option to cash out to support your retirement, but this isn’t necessarily the best option. There’s no one-size-fits-all answer to whether you should keep or cash out a life insurance policy, so here, we provide some context to help you make the right decision for you.
Types of life insurance
There are several types of life insurance policies, each of which may offer different benefits. The two primary types are:
- Term life insurance: Temporary insurance that offers coverage for a specific period of time — usually between 10 and 30 years. If you stop paying premiums or outlive the term, then your coverage ends.1
- Whole life insurance: Permanent life insurance that stays active as long as you pay the premiums. These policies may carry the added benefit of cash value, which you can withdraw or borrow against in retirement.2
Life insurance may be offered as a benefit through your employer, in which case the employer typically pays part of the monthly premiums and you pay another. Otherwise, you can purchase private life insurance yourself in accordance with your specific needs.
Considerations for keeping or cashing out life insurance
There may be pros and cons to either keeping or cashing out life insurance depending on your specific circumstances. Some of the key considerations to bear in mind include:
Your policy status
Some people pay for life insurance through their employer as a benefit. Retiring typically causes you to lose this benefit. However, if you have an individual life insurance policy, retirement shouldn’t have an impact on your premiums. The decision of whether to buy a new policy or keep a current one active depends on your budget and personal considerations.
Outside income
Many live on a fixed income in retirement from a 401(k) plan, pension, or Social Security. But if you’re continuing to earn an income from investment dividends or other means, you may not need a life insurance policy in retirement. On the other hand, a life insurance policy with cash value can provide supplemental income to support your living expenses in retirement.
Final expense planning
The median cost of a funeral is $8,300, and that doesn’t factor in any end-of-life care expenses you may have had to pay before then.3 Between medical bills, funeral costs, and any debts still owed to a retirement community or nursing home, your final expenses can be significant. A life insurance policy can help offset these costs and reduce the financial impact on your life insurance beneficiary. If you’ve already allocated money for these purposes, you may not need a life insurance policy.
Estate taxes
On the subject of beneficiaries, your family will usually inherit your estate, including real estate assets, retirement accounts, and any other assets. However, inheritance is often subject to estate taxes, which can wipe out a portion of what you wanted your beneficiaries to inherit. While there are ways to reduce estate taxes, a life insurance payout is generally not taxable, so it can help offset taxes and provide a cushion for your beneficiaries’ inheritance.4 Cashing out a life insurance policy in retirement will reduce the death benefit paid to them.
Debts
In an ideal world, you’ll be debt-free by retirement. But that’s not a guarantee. Your children can inherit debts, so they’re an important consideration when deciding whether to keep or cash out a life insurance policy. If you think it’s possible you die with substantial outstanding debt, keeping a life insurance policy can help your surviving family pay off those debts. If you’re debt-free, cashing out your life insurance could provide supplemental income to enjoy your retirement a bit more.
The bottom line
Retirement should be more enjoyable than financially stressful. If your life insurance policy offers cash value, cashing out your policy may afford you more flexibility in retirement. However, cashing out will deplete the death benefit paid to your beneficiaries, so it’s important to budget for significant end-of-life expenses and ensured your debts won’t become an inherited problem for your surviving family. If you’re unsure, it’s probably more advisable to keep your policy active.
Sources:
1 Investopedia – Do You Need Life Insurance in Retirement? Updated August 16, 2024. https://www.investopedia.com/articles/personal-finance/010716/do-you-need-life-insurance-after-you-retire.asp. Accessed July 25, 2025.
2 Investopedia – How Whole Life Insurance Works. Updated May 7, 2025. https://www.investopedia.com/terms/w/wholelife.asp#toc-whole-life-insurance-cash-value. Accessed July 25, 2025.
3 Bankrate – Average funeral cost. Updated December 11, 2024. https://www.bankrate.com/insurance/life-insurance/average-funeral-cost/. Accessed July 25, 2025.
4 IRS – Life insurance & disability insurance proceeds. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds. Accessed July 25, 2025.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans – A68000 series: Term Life Policies: In Arkansas, Idaho, Oklahoma, Oregon, Texas, Pennsylvania & Virginia, Policies: ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68200, A68300 & A68400. In New York, Policies NY68200, NY68300 and NY68400. Whole Life Policies: In Arkansas, Idaho, Oklahoma, Oregon, Texas, Pennsylvania & Virginia, Policies: ICC1368100. In Delaware, Policy A68100. In New York, Policy NYR68100. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Not available in Delaware. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY, VA or VT. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
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Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211
