The virtues of life insurance are quite well known and it is well established by now that an early start to life insurance, whenever needed, definitely proves cost-effective in the long run.
The need to provide for children’s education, home loans, liabilities, etc lead to high levels of insurance coverage. But, a serious thought needs to be given to the need (or otherwise) for life insurance during retirement. During the last few years, when I have counselled retired people for structuring their retirement corpus, I have observed a number of people having life insurance policies with their premium payment term extending well beyond retirement.
Whether one needs life insurance on retirement is not always an easy question to answer, as the same (still) depends on the needs of the individual. It would not be totally right to say that retired people do not need life insurance, just on the grounds that the costs for insurance at this stage is quite high. Some of the reasons that may make life insurance necessary for retired people have been outlined here under.
Need to provide for partner
Most retirees do not have young children who need to be provided for, however spouse continues to be dependent. Many retired couples depend on one of the working spouse’s pension, and not every pensioner enjoys the benefit of continuity of 100% pension to the spouse on his / her death. In such cases, since income belongs to only one person, post death, the other spouse may find it difficult to adjust with lesser resources left. Thus, it is necessary that the spouse be protected from the loss of income, even during retirement. In families, where the other spouse needs more medical attention or likes to enjoy better standard of living, it necessitates a stronger need for income protection.
A proper life insurance plan, in such cases, can help make up the shortfall related to the loss of income for the pensioner’s balance life for the surviving spouse.
Bequests on death
If an individual wishes to bequeath a part of his estate to any of his loved one’s and wants to ensure the same, then life insurance is a great tool for estate planning. Although the assets can be passed on with the help of a Will, any dispute / ambiguity in relation to the same cannot be ruled out. Also, currently there are no estate taxes, however the same cannot be said about the future.
Life insurance proceeds, received on death, are capital receipts in nature, which are exempted from income-tax. Thus, life insurance policies, with the help of a proper structuring, can be really effective and valuable for a retiree.
For retirees, who have children or close relatives with special needs to be taken care of, then it is important to provide for their financial security, in case of untimely death of the retirees.
Life insurance provides an excellent medium to provide for these needs, especially since it can help an individual feel more independent and minimise legal involvement.
Individuals operating own businesses under the proprietorship mode or partnerships may also be required to make available lump sum cash to meet any liabilities due towards the business or to repay any loans from business. These should not act as a burden on the family post death and hence should be covered with a life insurance policy. The exact sum assured needed to provide for these contingencies or known liabilities is best worked out with the help of a professional.
In addition to the above, life insurance is a great tool to provide for the expenses incurred on any medical expenses towards the end of one’s life or even the funeral and other religious rites costs. This ensures no financial burden on the family post an individual’s death.
Choice of policies
The retirees, depending on their financial and family profile, would need to chalk out if life insurance is required on either lives or only the main pension earner. Further, the policy type has to be selected namely term plans or plans which have a cash value embedded in it.
It is advisable that in cases, where the insurance coverage required is large, term plans should be an ideal choice, but in other cases, where individuals are looking for a more permanent cover, then policies with cash values are better-off. Cash value policies are those which provide for payment of bonuses periodically and help the policy holder to accumulate an investment component in the policy, as opposed to a term plan, which only covers risk. For eg: Whole-life policies will be an ideal choice in such situations, as the same would cover the risk of death till almost age 100. No doubt, the premiums for such policies would be higher.
Based on the above, the individual would also need to decide upon the premium payment terms – choices ranging from a full payment term to a lump sum payment or a limited payment term. Where future cash flows are uncertain, then cash-value based policies help, as the premiums can be reduced or even stopped at a later date in such policies.
Lastly, it is advisable for individuals to avoid market linked plans for the choice of cash value policies, as any adverse market movements may defeat the very purpose of the policy. Products offering guaranteed values are also welcome. Last word, do not forget to review your insurance needs even during retirement.
The author is the chief planner at Dreamz Infinite Financial Planners.
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