Insuring A Secure Retirement

Retirement may cause the inflow of money to slow down, but expenses rarely do. Think ahead and invest in a life insurance policy to safeguard your financial needs after retirement and those of your dependants after you, advises Jay Sampat.

KEY POINTS:

• For retirees who have a dependent spouse or children, the dependants need to be protected from loss of income using life insurance.
• If an individual wishes to pass on his/her estate to family members and wants to ensure this happens, he/she could use life insurance plans.
• If the insurance cover is large, term plans are an ideal choice. However, if individuals are looking for inflow at periodic intervals, policies with cash back are a better option.
• It is advisable for retired individuals to avoid market-linked plans, as adverse market movements may defeat the purpose. Products offering guaranteed values are more likely to fit the bill.

It is a well-established fact that buying life insurance early in life proves cost-effective in the long-run. However, people tend to delay the decision in favour of various other commitments such as children's education and repayment of home loans. This leads to staggered buying of insurance policies and hence, higher premiums. Individuals need to give serious thought to the need for life insurance when they retire, as buying policies with a premium outgo extending beyond retirement is expensive.

An oft-debated question is whether one needs life insurance on retirement or not. Just because the cost of insurance for the elderly is very high, one shouldn’t conclude that retired people do not need life insurance. Presumably, most retirees would not have dependent children. However, their spouses could be dependent on them. Another point to consider is that among elderly couples, often only one of the partners gets a pension or a monthly income. If something happens to the individual who is earning a pension, the spouse may or may not get the entire pension for himself/herself as many people nominate their children or some other family member as beneficiary for the pension along with the spouse after their death. Moreover, if one of the partners needs medical attention, it is necessary to have a source to protect the income flow he/she enjoys. In such cases, a life insurance plan can help make up for the shortfall or loss of income for rest of the pensioner's life and/or for the surviving partner.

Life insurance is also a good way to bequeath one’s legacy. If an individual wishes to pass on his/her estate to family members and wants to ensure this happens, he/she could use life insurance plans. Although the assets can be passed on by means of a will, disputes often abound with regard to the settlement and problems cannot be ruled out. Also, while there are no estate taxes in India currently, this may not hold true in the future.

Another area where life insurance comes in handy is in the case of businesspersons under the proprietorship model or partnerships, who need to repay business loans.

In addition, life insurance is a great tool to provide for expenses incurred towards health and related costs in old age, shielding the family from a financial burden. One needs to ascertain whether life insurance is required for one’s spouse and oneself or for only oneself. Further, one must decide whether to buy a term plan or an endowment plan.

If the insurance cover is large, term plans are an ideal choice. However, if individuals are looking for inflow at periodic intervals, policies with cash back are a better option as they allow the policyholder to accumulate a corpus through investment in the policy as opposed to a term plan. For instance, whole-life policies will be an ideal choice in such situations, as the same would cover death risk almost till the age of 100. However, the premiums for such policies would be high.

Individuals would also need to decide upon the premium payment terms – a full payment term to a lump sum or a limited payment term. Where future cash flows are uncertain, cash-value based policies help as the premiums can be reduced or even stopped at a later date.

Lastly, it is advisable for retired individuals to avoid market-linked plans (like ULIPs), as adverse market movements may defeat the purpose. In such cases, products offering guaranteed values are more likely to fit the bill.

It makes sense to plan for your insurance needs ahead of time. However, this does not absolve you of responsibility as you age. It is in your interest to review your insurance needs even during retirement.