Is Life Insurance Still Needed In Retirement?

By the time we reach retirement, most if not all of our debt would have been cleared. Children will likely be finishing education or started work, which means they are financially independent. So why would life insurance be needed in retirement? 

Insurance, together with mortgage and overdraft facility, are 3 essential checklists in my Retirement Canvas. Unlike medical insurance, which becomes increasingly critical in later years, the purpose of life insurance may have outlived itself by retirement. Is it worth carrying on the monthly/annual premium payment?

Insurance is a tool to mitigate life’s contingencies so our family, loved ones and dependents are not burdened with financial stress. The most important point in having life insurance is to enable loved ones to go on with their lives, with minimal financial disruption and compromise to their quality of life. 

Reasons For Life Insurance

By most accounts, the reasons for life insurance are:

• Ensure financial wellbeing of dependents and family members. 
• Income replacement to cover living expenses, outstanding mortgage and other debt (eg education loan) to ensure continuity. 
• Replacement for pension income for surviving dependents.
• Provide for living expenses in case of total permanent disability (TPD).
• Provide for critical illness coverage through riders.
• Provide for tax obligations and estate settlement for beneficiaries. For example in the Netherlands, an inheritance tax must be settled in order to receive the inheritance. 
• Provide for expenses of final rites, especially if assets are tied in illiquid assets like property. Life insurance pay-out is very prompt upon submission of documentation proof.

Term Life vs Whole Life Insurance

1. Term life – coverage for specified duration, typically income generating years, eg up to 65 years. Policy ceases beyond that age with no pay-out entitlement. Due to this no-frills feature, term life is highly affordable.
2. Whole life – coverage up to death or very old age, with a cash/savings component, some even come with investment-linked products. Due to this cash/investment component, whole life premiums are many times higher than term life. 

For childless couples like me and my husband who are comfortably retired, life insurance is merely to lessen the sting when the unthinkable happens. While no longer earning salaried income, our investments provide good retirement income. We have no children to bequeath and relatively low debt compared to assets. Hence, we don’t necessarily need to have life insurance as our wealth and other assets can more than provide for our retirement. 

Despite that, I still see the benefits of keeping a life insurance, especially for the TPD and critical illness cover. Plus we have a mortgage for our property portfolio. 

Personal Circumstance

So instead of terminating my life insurance policy, I made 2 changes to reflect my situation and needs just before I retired:

• Cashed out my whole life policy and switched to term life, with coverage up to age 70. 
• Pared down coverage to half the value of my whole life policy. 

My whole life policy was bought right after graduation and having landed my first job. Buying insurance was a rite of adulthood in my culture. I decided on a whole life policy as I had harboured wishes of parenthood and a whole life policy would provide financial legacy to heirs. I had zero clue about investing then and wanted to focus on my career so leaving it to the experts made sense. And whole life policy premiums remain fixed from the age bought so the younger, the cheaper. 

Change Rationale

Life as it goes, has panned out with unexpected developments bringing other options while sweeping away unfulfilled dreams and plans. Having had a great career, picked up useful investment skills along the way and ended up 1 half of a DINKie, whole-life insurance has outlived its purpose by the time I near retirement. 

Switching to term life plan means saving on premium while giving me the freedom and flexibility to invest the difference as I see fit.  This concept gives rise to the popular term ‘buy term and invest the difference’.

Simple put, it means to buy term life plan and invest the difference to whole life premium to reap investment returns yourself. Even if you are not savvy about investing, using 1 of these 2 simple investment strategies into a broad market ETF or index fund like the SPDR or VTSAX, can compound your savings at 8% per annum. And at a fraction of the cost. It may not be for everyone, it works for me.

Reducing the sum insured was due to lack of dependents and heirs. My husband and I intend to wind down our real estate investment portfolio over time so the mortgage for our investment property will be repaid from the divestment. Even though real estate is our favourite asset class, it requires the most time and effort compared to other streams of retirement income. In later years, we prefer to be more care-free and live with less hassle.

Periodic Review

Even if not planning to retire soon, it still makes sense to review your insurance portfolio every 10 years or when you reach 1 of life’s milestone: marriage, parenthood, divorce, retrenchment, death of a partner…Because life has a funny way of not turning out as planned, contingency plans need to be updated to stay relevant. Periodic reviews ensures life situation and financial needs are properly met for maximum coverage effectiveness.

If planning for retirement and pondering the need to continue with life insurance, the list of questions below may help guide your decision.

• Are you working part-time to supplement living expenses in retirement? If so, does that income need to be replaced?
• Will financial situation of family members be compromised? 
• Do you want to leave inheritance to beneficiaries? Can your cash/investment provide this?
• Will your beneficiaries have the means to settle applicable inheritance tax obligations?
• Can your pension income be passed on to your spouse? 
• Do you have enough savings/wealth to cover living expenses for your dependents?
• Do you have outstanding debt to clear, eg mortgage, education or car loan?
• Do you have other insurance covering TPD, assuming your life insurance policy includes this benefit?
• Do you have other insurance that covers critical illness, assuming your life insurance policy offers this as a rider?
• Can your final rites be covered without financial stress to family members?

Where the answer is affirmative, think about whether term life can serve that need. You will reap significant savings in premium and if cashing out a whole life policy to switch to term life (like me), you will end up with a tidy sum of money for self-investing or to keep as emergency fund.

“Life insurance is a combination of caring, commitment and common sense”    ~ Howard Wright 

 

Insured and assured, 

Savvy Maverick

Disclaimer: Information and data are correct at time of presentation and will not be updated thereafter. The views expressed here are drawn from my own experiences and do not constitute financial advice in any way whatsoever. Nothing published here constitutes an investment recommendation, nor should any data or content be relied upon for any investment activities. It is strongly recommended that independent and thorough research be undertaken before making any financial decisions, including consulting a qualified professional.