How to protect your retirement with insurance
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The common wisdom is that insurance in retirement is a waste of money. But there are situations where you may need insurance to protect your financial security. The relative importance of different categories of insurance is likely to be different compared to your working years, and it is important to assess your own circumstances carefully to determine your need for insurance in retirement. Here are some circumstances where insurance is recommended.
For income replacement
Life insurance may be relevant in retirement if income from a second career forms a significant portion of the retiral income. This is typically the case in the early years of retirement. It is important for the person earning the income to have life insurance, so that the income being earned in retirement is compensated in the event of death. In some cases, the retirement income may be from a pension, which may reduce on the death of the primary pensioner. Life insurance will help replace the lost pension so that the household can continue to manage its expenses. If you have financial responsibility of your children or grandchildren even in retirement, it becomes necessary to have adequate life insurance to meet their needs when you are not there to take care. Again, if you are paying off a large debt in retirement, say a house loan taken late in the earning years, you may consider an insurance policy to the extent of the outstanding loan so that your family is not left with that obligation in the event of your death.
To offset health costs
Health-related costs have the highest potential to derail your retirement finances. It is good to be prepared for such expenses, even if there are no health concerns at the start of retirement. Make health costs an item you prioritize, when determining the costs to be met in retirement and the corpus you have to accumulate in your working years. Given the uncertainties associated with health and health costs, insurance is an efficient way to meet these expenses in a planned way. However, obtaining health insurance later in life may be difficult and the costs are likely to be higher as you grow older and health issues crop up. One way is to lock yourself into a health insurance policy when you are healthy, so that you are not rejected on grounds of health conditions, or the existing conditions are excluded, or you are charged a prohibitively high premium when you may need insurance. Do this as preparation for retirement even when you are covered by an employer-provided insurance in your working years. Select the insurance policy that takes care of your specific health needs. For example, if there are existing health conditions, then look for policies that have a lower cooling-off or exclusion period, or that may cover pre-existing conditions with lower cooling-off period with a co-payment option. If you need procedures such as dialysis, which require day-stays in hospital, then look for policies that cover multiple hospital admissions of less than 24 hours. Use top-ups and riders to make the most cost-effective and suitable health package for your needs. Personal accident insurance is something you need to consider if you intend to contribute to retirement income, with a second career in retirement. In the event of an accident, such policies compensate you for the period you are unable to work and earn an income, and to meet any out-of-pocket expenses that may not be covered by your broader health insurance policy. Long-term care is another area of old age that falls under the health-needs umbrella. Make sure your corpus provides for the costs associated with providing care and assistance at the stage when you may not be able to take care of all daily-living activities on your own.
For leaving an inheritance
Life insurance can be a tool for estate planning and managing the costs related to end of life. Life insurance policies can be used as a means to transfer wealth to the next generation, for individuals with a low risk appetite. Premiums are paid through the life of the insured and on their death, the proceeds go to the beneficiaries. Insurance policies allow the person to plan the bequeaths well ahead, accumulate the wealth over a long term and pass on the corpus. There are tax benefits at the time of paying the premiums and the corpus is tax-free too. This boosts the returns from this source, as compared to other investments that are typically used to accumulate wealth for the next generation, such as securities and real estate; where there may be capital gains and other taxes. Remember, life insurance should be part of the overall wealth transfer strategy and should be used in conjunction with other assets. The proceeds from a life insurance policy provide stability and liquidity to the inheritance while the other assets may be illiquid and have volatile values. The effectiveness of using life insurance for inheritance planning will also depend on the cost of the cover. To get the best premiums, it is important to plan ahead and make an early entry into insurance products. Make sure that you don’t overreach. If the premiums are too high for your retirement income to bear, you may not be able to service the policy and lose the benefit for which you have paid for. Another use of life insurance policy is to meet expenses related to care and medical expenses not covered by health insurance at the end of a person’s life. The beneficiaries of the policy will be responsible for meeting these expenses as they arise, and on the death of the person they will be compensated from the proceeds from the policy.
To protect assets
You need insurance to protect your assets. This includes auto insurance to compensate for any damage to your vehicle, along with third-party liability coverage to protect you from any claims against you as a result of a motor accident. A third-party liability insurance is essential to ensure that your other assets are not put at risk by a liability claim, and it is also mandatory for motor vehicles. Your home, typically your biggest asset in retirement, requires protection that an insurance policy can provide. The contents of the house can also be insured for a small sum and should be considered to protect against theft, burglary and destruction.
Your need for insurance in retirement will be different from the pre-retirement stage and keep evolving through the retirement years. For example, the life insurance policy intended to protect the income for a spouse or to support a loan being paid off is no longer relevant if the spouse passes away or the loan is paid off.
Just as you would periodically assess your income needs and make changes to your investments accordingly, you should monitor your insurance needs periodically to ensure that you have the protection you need at the most efficient cost possible.