Over the years most Canadians have bought various types of individual life, critical illness, or disability insurance, or they’ve participated in a plan with their employer that had some or all of these benefits. Some do it out of love for their families, some to protect their income or insure a debt, others as an “investment”. But whatever the reason, the role of insurance over the years hasn’t changed – it provides dollars on a timely basis when needed most. Die too soon, live too long, or become disabled along the way – there’s a type of insurance that solves those needs.
If you’re retiring in the next year or two, now is a good time to sit down with your life insurance agent or your Certified Financial Planner® Professional (CFP), and see if those older policies still make sense. Here we’ll discuss some ways that you can either save money by no longer paying premiums, or by making use of the value in those policies. Bear in mind that there are a few very good reasons to continue to hold insurance while you are retired. Just be sure that you take your current health into consideration, and not rush into changing or cancelling any insurance policy without professional advice.
The first step is to ask yourself this question about any insurance policy that you currently hold – “what was the original purpose of this insurance, and does this reason still exist?” Maybe you bought a life insurance policy many years ago to pay off your mortgage and/or provide capital to replace income if you died prematurely. But, the kids have moved out and you’ve paid off the mortgage. If so, the second question to ponder is, “do I still need this insurance?” Or, phrased another way, “is there another (new) reason why I should keep this policy?”
If there will be a need for cash on your death to help pay funeral expenses, taxes, estate administration fees, a lawyer and/or accountant, or even to leave a benefit to someone you love outside your Will, then keeping an older life insurance policy might still be the best course of action. Why? Because life insurance provides cash quickly when it is needed most – on death – eliminating the need to tap other sources like bank accounts, real estate, or investments. And, by naming a beneficiary on a policy, the proceeds bypass your estate and go directly to the person(s) or charity it was intended for.
What are your options if you really don’t need all of your existing life insurance in retirement?
You can out and out cancel the policy, but if it’s a permanent form of coverage – known as “whole” life or “universal” life, and you’ve owned it for some time, your policy will have valuable options. It will likely have a “cash value” that can be used for a few purposes. You can “surrender” the policy, that is, cancel it and take the cash to use for whatever purpose you wish. Be aware that some portion of that “cash surrender value” may be fully taxable as a “policy gain”, so ask what this will amount to before you proceed.
Alternatively, you can change your policy to “paid up” for a reduced amount of insurance. No further premiums are owed, but the cash value is used up to pay for future coverage. Or, you could use the cash value to buy yourself a monthly income via an annuity – a seldom used option, but one that you might consider if you need regular cash flow.
Let’s move on and look at the other forms of individual insurance that you may currently own – critical illness insurance and disability insurance – then we’ll finish up with your employer’s benefit plan.
As you age, and there is a greater likelihood of suffering a critical illness (CI), an existing CI policy may be an important one to hang onto during retirement. Conversely, you may feel that you are now in a financial position such that you can essentially “self-insure”, and have no need for the policy. And, continuing the cost during retirement when your income is likely reduced may not be financially viable. Like life insurance, Critical illness insurance can also take various forms, being either for a fixed or renewable term, or on a level premium, permanent nature to, say age 75. Some plans even include an option under which they refund premiums paid after 10 years if you have not had a claim. Notwithstanding your current health, and any emerging health issues, suffice it to say that you need to consult with your Certified Financial Planner® Professional before taking any action with a CI policy.
Disability insurance or “income replacement” insurance does just that – it replaces lost income if you are sick or injured. You may have short (aka “weekly income” insurance) and/or long term disability insurance (LTD) through your employer, but these will cease when you retire. Some of you, particularly the self-employed, may have an individual plan that serves the same purpose. If disabled, benefits under an individual plan will typically be paid until age 65, sometimes for life, but your plan may state that it will only pay for 2 years post-65 if you qualify. Remember, these plans replace lost salary or wages, so if you are no longer working, or only working part-time, it’s unlikely you’d ever collect when retired. There’s no point in paying for something you cannot collect on, so include this on your “review with my CFP®” list.
Along with your disability plan with your employer, you’ll also have health benefits (“Extended Health Care”) or dental benefits. With some large employers, particularly governments, you may have some version of ongoing health care when you retire, possibly dental, but for most of us our EHC and dental coverage under employer plans ends when we retire. Will you still need these two in retirement? It depends much on your personal situation — your attitude towards risk and ability to self-ensure. Provincial health insurance plans, e.g. OHIP in Ontario, do cover prescription drugs and provide basic hospital benefits. Supplementary plans that provide enhanced hospital benefits like semi-private coverage, as well as for paramedical services and others – even dental – are available through major insurers at a monthly cost. These post-retirement private plans are certainly worth looking into, but do so before you retire. Start early to avoid any interruption in your coverage. Some plans will guarantee that you will qualify medically as long as you apply within 60 days of retirement.
One final thought for those of you retiring from companies with employer benefit plans. As part of those plans, you may have “out-of-country” travel insurance coverage for 30-60 days while working. Unless you’re part of a plan that has this benefit for retirees, be sure to buy private coverage before leaving Canada. (We’ve looked at the importance of this coverage in a previous blog). While you may think you’ll take your chances, and “fly home if I need to”, you will not have that opportunity if you have an unforeseen illness or accident in a foreign country. USA health care costs in particular can be devastating financially. Remember the tag line for the old American Express commercial because it also applies to out-of-country travel insurance: “don’t leave home without it”.
Review your insurance programme before you retire. “Hidden dollars” could take the form of premium savings or value in your existing insurance policies. Then you’ll have a Worry Free Retirement Experience™!