Life insurance in retirement: when a spouse dies, the household's Social Security income will decline. This is but one retirement risk that life insurance can address.

With another tax season behind us, now is a good time for Americans--particularly baby boomers--to consider some of the longer-term implications of tax decisions to their overall retirement planning.

Life insurance is an area of confusion for many pre-retirees as they ponder whether they will need life insurance in retirement, and if so, how much. While it is not possible to offer a one-size-fits-all rule, the scenarios below can help with an assessment of one's needs and, in consultation with a skilled professional, help one determine the best course of action.

Life insurance is sometimes sold on the basis of there being a certain need for one's entire life. For some, though, life insurance needs diminish over time. As they pay down their mortgage, as their children graduate from college, and as those children assume financial independence, some people's need for replacement income due to death arguably decreases. The current federal estate tax exemption of $2 million means many individuals will not have to worry about estate tax. Assuming Congress does not act to reduce the exemption, many individuals may not need life insurance for estate-planning purposes.

While we can overestimate our life insurance need, we also can fail to see where it may be needed at older ages. Baby boomers are bearing some of the financial burden of caring for their parents, and life insurance may be a way to provide for those parents if the child predeceases them. Life insurance also can be a way to provide for heirs (particularly from a previous marriage) without disinheriting a current spouse. Parents with a special-needs child also may continue to need life insurance to ensure that child has a continuing source of funds to pay for living expenses.

Perhaps the most common--and frequently overlooked--need for life insurance in retirement is to replace the lost income benefits upon death of a spouse. This is particularly true for Social Security benefits; upon the death of a spouse, the survivor will be entitled to the greater of his benefit or that of the deceased spouse. However, the lower benefit ends, and the result will be an overall loss in household income. Assumptions that the cost of living will also decline after a spouse's death ignore several factors. First, the cost of housing, property taxes, utilities and other regular expenditures likely will remain the same or even increase due to inflation. Second, the health-care costs of the surviving spouse will almost certainly increase as he or she ages. And, third, the loss of the lower Social Security benefit will become more significant over time due to inflation (that is, the lost income would have been adjusted annually for inflation, and that inflation hedge is lost). Life insurance, then, can be used in retirement to help replace the lost Social Security benefit income stream upon the death of a spouse.

These reasons for why life insurance may or may not be needed in retirement demonstrate how complicated retirement planning is and how one needs to carefully evaluate his or her unique situation. If there are any simple rules to retirement planning, they might be: Start as soon as possible, save as much as possible, and consult with financial, tax and legal experts as needed.

Contributor Robert A. Fishbein is vice president and corporate counsel tax department, for Prudential Financial He may be reached at [e-mail].