For retirees, buying insurance late in life can seem like an added expense that they don’t need. If their retirement account is doing well, they may not see the need for insurance.
It’s a short-term view that could get them in financial trouble.
“Many if not most insurance needs still exist in retirement,” says Rob Drury, executive director of the Association of Christian Financial Advisors, a nonprofit network of financial professionals.
Most insurance needs should be met as part of a comprehensive financial plan with a financial planner and insurance specialists, Drury says. AARP and other senior organizations offer discounts and help with insurance.
Here are six insurance considerations for retirees:
When nearing retirement, many people are likely to have paid off their mortgage. But that’s no reason to drop homeowners insurance. “In fact, having homeowners insurance is especially important in retirement when you’re not receiving an income from a job anymore,” says David Leinecker, owner of Brightway Insurance in Jacksonville, Fla.
If your mortgage is paid off, ask your agent to remove the lienholder from your policy. If your premium is paid in escrow each month as part of your mortgage payment, change it to “self pay,” he recommends. If you’re no longer paying a mortgage, you won’t be paying the bank that has an escrow account for your homeowners insurance premium either, so you’ll need to pay it yourself.
Leinecker also recommends reviewing Coverage A in your homeowners policy to ensure it truly covers replacing your home. “Replacement cost” is different than “market value” and can be much higher, he says.
Replacement cost should provide enough money to remove debris from the lot if the home is declared a total loss in a claim, such as from a fire, and to rebuild it.
“It may be tempting to lower your Coverage A in return for a lower homeowners premium” Leinecker says, “but that’s a bet you probably don’t want to make, especially in retirement.”
If you’re not driving to work anymore, you may get a lower rate for “pleasure” use and having lower mileage. If you have an older car that’s paid for, you may want to consider dropping physical damage coverages of comprehensive and collision, Leinecker says.
You can also save by raising the deductible if you file a claim. Just make sure it’s an amount you can afford. Also, some insurers offer mature driver discounts for older drivers who take a driving course aimed at them.
If you have more assets than your home or auto insurance policies cover you for, then an umbrella policy is worth considering.
For example, if your home is worth $400,000 and someone falls on a walkway to your front door and hurts themselves, they could sue you for their medical bills — which would likely be covered by your homeowner’s policy — and they may also sue for pain and suffering for up to the value of your assets.
An umbrella policy should be equal to your net worth, including, for example, $250,000 in retirement funds, says Jason Silverberg, vice president of financial planning at Financial Advantage Associates in Rockville, MD. If you cause a car accident, own a home with a pool or have stairs to your front door, then an umbrella insurance policy could help protect you against lawsuits by people injured by you or your property, Silverberg says.
“Especially in today’s society, you want to have one that extends your liability,” he says of umbrella insurance.
Long-term care insurance
“Long-term custodial care can destroy a nest egg in a heartbeat,” Drury says.
About 70 percent of people turning 65 can expect to need long-term care at some point, at an average cost of around $350,000, according to LongTermCare.gov. “LTC insurance should be regarded as an absolute necessity,” Drury says.
As life circumstances change, insurance needs adapt to help people meet specific objectives, Drury says.
For example, the cash value of a life insurance policy can be used to supplement retirement income. “While this may be a very valid use of life insurance, and a reason to have a policy in force through retirement, the policy must be obtained much earlier in life to be cost effective,” Drury says.
“The primary purpose of life insurance is to provide income to dependents in the event of one’s death,” he says. Some people believe this should only be done during child-raising years because later financial objectives can be met with savings and investments, he says.
Policyholders can still have dependents later in life, including a spouse who relies on a pension or Social Security income that will terminate or be dramatically reduced upon the other spouse’s death. There may also be special needs children or family who can’t fend for themselves.
Life insurance can be used to pay off major debts for dependents, such as mortgages, car loans and student loans.
Permanent life insurance such as whole life insurance is often best for retirees, Drury says, because of the guarantees it offers and because it can help with estate planning.
“Anyone who refers to term insurance as an estate planning tool is ignoring the fact that term is not guaranteed to be in force at the time of the insured’s death,” he says. “In fact, it is ideally designed not to be.”
For retirees who aren’t on Medicare and are in relatively good health, registered investment advisor Mathew Dahlberg of Main Street Investments in Kansas City recommends a High Deductible Health Plan (HDHP) combined with a Health Savings Account (HSA).
There’s a potentially huge tax savings for contributions to the HSA and the flexibility of being able to use the money, Dahlberg says.
“We’ve had clients that have slowly built HSAs over the years and which now contain tens of thousands of dollars,” he says. “Considering the fact that most elderly couples will end up spending roughly a quarter million dollars on healthcare expenses late in life, HSA is frequently a no-brainer.”
Some health costs are covered by Medicare for retirees who are eligible, but there are many costs that aren’t covered, Leinecker says.
Talk with your insurance agent about Medicare coverage gaps and get a policy that covers them with additional benefits, he recommends.
With these insurance strategies in mind, retirees should be able to at least start a conversation with their financial team so they can have a few less things to worry about in retirement.