Part 2 of Series
There is no doubt that the amount of insurance we need throughout our lives change as circumstances change. I know this firsthand as a father who just added a teenage driver to my auto policy! As income grows and wealth accumulates, we need to make sure we are managing risks to properly cover changing needs. At some point, the type of insurance we require also changes. A good example is when we transition from our working years into our retirement.
In part one of this series, I discussed how the need for life insurance may change as financial circumstances do. The fact is, however, that we are more likely to suffer from an illness or injury during our careers than die prematurely. This is why, on a relative basis, the premiums on disability income insurance tend to be higher than those on a term life insurance policy.
When Earned Income Goes Away
Would you continue to pay auto insurance on a car you sold? (not a trick question… the answer is “of course not!”) We apply the same thinking to disability income insurance when we retire. Instead of a car, the asset we’re protecting here is current and future earnings. When we reach the point of retirement, we can assume that our earned income from work has gone away and we’re living off of retirement income sources such as pension, deferred compensation and social security. We can further assume that our savings and investments moving forward will provide for our living expenses as well.
Let’s take it a step further since retirement is looking different for everyone these days. What if I am financially independent but continue to work out of choice versus necessity? In this case, I would also argue that the need for disability income insurance has gone away. While you’d qualify for coverage based on your age and income, you may be wasting money on premiums if you’re already financially independent.
Protecting Against the Costs of Disability Post-Retirement
Most disability income policies have an age limit as to when policies can be issued and when policy benefits will be paid through. Normally this falls around age 65 when retirees begin to qualify for Medicare and have already qualified for Social Security benefits. At this point, the insurance needs begin to shift from protecting earned income and toward protecting against the cost of an illness or injury that wouldn’t be covered by retiree health insurance or Medicare. These are commonly referred to as long term care expenses.
Long term care insurance (LTCi) is one tool to consider when we transition from protecting income toward protecting against care costs. We’ve talked extensively about these potential costs in our “You and Your Aging Parents” webinars. While not inexpensive, an LTCi policy may provide a good source of funds to cover these expenses. There are traditional (pay as you go) policies or single premium “hybrid” policies to consider which may be linked to life insurance benefits. Long term care insurance, like disability income and life insurance, requires medical underwriting and has lower premiums for younger and healthier applicants, so it doesn’t pay to wait too long to consider this option. It’s good to think about long term care insurance in your 60’s, but if you’re 70 or older, it may be cost prohibitive.
If you retire from an employer, most benefits such as group disability and group life insurance goes way (ie, it’s not “portable”) Assuming you retire before age 65, you may want to consider surrendering your individual disability income insurance policy if you own one. Again, this would assume you are financially independent. The idea is to proactively review the coverage you have versus what you need. The insurance carrier will continue to collect premiums unless notified that you no longer need the coverage.
With long term care insurance, policy holders have been challenged with premium increases on in force coverage. This shouldn’t automatically trigger a decision to get rid of a policy you’ve paid into for years. Again, the best remedy is to evaluate what you have relative to its economic value and perhaps modify the coverage to mitigate some premium increase while maintaining important benefits.
Insurance needs change throughout life, and even more so as we transition into retirement. An unbiased review of your coverage is vital to make sure your risks are covered and you’re not paying for something you don’t need. As a fee-only wealth advisor, we do not sell insurance or have any motivation other than making sure our clients understand their options with regard to managing these risks.
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