Golden Girl Finance
 
Banasha Shah
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Ask the Expert

Q&A: What kind of insurance do you need once retired?

July 16th, 2012 by
 

I recently retired and my husband and I have no children. I have a pension and some investments but I am wondering about the importance of retaining some of the insurance policies that I was carrying while I worked - such as Accidental Death and Dismemberment and Whole Life Insurance? Do I need this now? I also wonder whether you consider Critical Illness or other types of insurance that supposedly help cover private nursing home costs to be worth considering. It seems very costly and I wonder about its value? In summary, what kind of insurance would you think to be most important when you are retired?

Asked by Susan, Calgary, AB

 

Insurance needs change during different phases of our lives, so it's a good idea to reassess your entire financial plan - including your insurance program - as you enter retirement. I agree that some insurance products do seem costly now, but the price simply reflects the fact that as we get older, it's much more likely that there will be a claim and that it will happen sooner than for a younger individual. The insurance company's price therefore must reflect this increased risk.

In planning for retirement years, we have to look beyond our "active" years, and plan ahead for the years when we have to reduce activity and eventually need assistance and care. Some people choose to save for these eventualities, which would be considered "self-insurance", while others may choose to insure the cost of this risk. I will address the different types of insurance that can be considered important during retirement. Hopefully this information will help you be prepared for discussions with your insurance advisor. Your own plans for retirement and your desires for how you wish to live out your later years, along with your financial situation and personal risk tolerance, will factor into your decision as to whether these plans are worth considering.

1. Life Insurance

Most people can benefit from some form of permanent insurance in their retirement years. You mention you have whole life insurance, a plan that can provide you with insurance protection for the rest of your life and also likely has other valuable benefits that you can access during your lifetime. For example, whole life insurance often has cash values, and you may be able to access these in order to supplement your retirement income. You can either withdraw them, or take them as a loan, which allows you to keep the rest of the policy in force; there are tax implications, so make sure you are aware of them before withdrawing this cash. The cash value may also allow you to stop paying premiums on this policy and keep it in force, using the cash value to pay for the premium. Upon death, the insurance policy proceeds can be used to pay for your final expenses (funeral, accounting, and legal costs). It's important to note that life insurance proceeds are tax free and paid directly to the beneficiary. If you and your husband both have whole life insurance policies, when the first of you passes away, the beneficiary will receive the proceeds, and this can help offset a drop in income that will occur from a reduction in pension or government benefits (OAS and CPP). You should also be aware that most insurance companies in Canada offer a non-contractual benefit on life insurance policies, which will advance a portion of the proceeds in the case of terminal illness (usually defined as diagnosed by a physician as having less than one, or sometimes two years to live) The insurance company will loan a percentage of the death benefit, for example 50% up to a maximum amount of $100,000. This can be a tremendous help when additional funds are needed to care for a seriously ill person. In general, whole life policies offer a lot of valuable benefits beyond the death benefit, and these increase in value over time. I strongly recommend that you consider your whole life insurance policy as an asset and carefully review the features with your insurance advisor to see what benefits the policy can provide you with during your retirement years.

You also mentioned Accidental Death and Dismemberment coverage. In general , these policies rarely pay out, and usually expire at age 65 or 70. If the premium is not too high, you may wish to hang on to them until expiry, but remember that they will only pay out if death occurs from accidental means, or in very rare cases of loss of limbs, so review the contract details.

2. Critical Illness Insurance

Critical Illness insurance will pay the benefit amount upon the diagnosis of a critical illness. Most Critical Illness plans in Canada cover about 24 illnesses, the most significant of these being cancer, heart attack and stroke. Critical illness insurance can help offset the costs associated with recovery from a serious illness. If you currently do not own critical illness, it is more expensive to purchase in retirement. I feel it still offers good value if you are in your 50s; however, if you are in your 60s this type of plan is very expensive. The underwriting process is very rigorous so that if you have any health problems it will be difficult to qualify. Talk to your advisor about a plan that offers "return of premium" benefit (on both death or surrender). For example, you can purchase a plan that offers lifetime protection, but anytime after 15 years, assuming you have not made a claim, you can surrender your coverage and have all of the premium you paid into the policy returned to you (premiums would also be returned in case you died prior to making a claim). Another reason to consider critical illness in retirement is the "Loss of Independent Existence" feature. If you are unable to perform certain activities of daily living, then the lump sum will be paid out. This effectively provides you with a form of long term care insurance (which is described below).

3. Long Term Care Insurance

In planning for the later stages of retirement, we have to consider the costs involved when we are no longer able to care for ourselves. It is difficult to save specifically for this eventuality because the cost can vary so greatly from person to person. Some of us will never need to pay for care, while others may need it for many years. It is also difficult to predict the level of government benefits we may be entitled to. Most of us don't want to be a burden on others and want to maintain a certain standard of living throughout our life. Long term care insurance was designed to provide funds to pay for this eventuality. The benefit of long term care insurance is that it provides funds to pay for homecare or facility care without the need to deplete personal savings. This can be important for retired couples, to ensure that if one person needs care, the other person can still maintain a certain standard of living. It's important to remember that Long Term Care benefits are only payable when the person can no longer care for themselves, which is usually defined as: requiring assistance with 2 of the 6 activities of daily living, including bathing, dressing, eating, maintaining continence, toileting, and transferring, or having a certain degree of cognitive impairment. When selecting a Long Term Care policy, consider the following:

  • The benefit amount: How much would provide the right amount of coverage to pay for the type of facility or home care you desire?

  • Covered benefits: Do you want coverage for facility care only, or also home care?

  • The benefit period: Benefit periods can range from 2 years to a lifetime.

  • Guarantees on premium: Most plans reserve the right to increase premiums after the first 5 years.

  • Premium payment period: Is it payable for a limited number of years or for life?

  • Return of premium feature: If you die before making a claim, the premiums paid will be returned to your beneficiary.

4. Annuities

While most people would not consider annuities to be insurance, they protect against one of the biggest risks we face today - longevity risk, or the risk of outliving our assets. Since you have a pension that will provide you income for as long as you live, this may not be as important for you, however I mention it for other readers.

Ask the Expert

Q&A: Life annuities - explained

June 25th, 2012 by
 

I help my mother manage her retirement finances, and we have been advised to purchase a life annuity with a portion of her savings. What are some things we should consider in deciding if this makes sense?

Asked by Anonymous

 

An annuity allows you to take a sum of money, and convert it into a guaranteed income stream for the rest of your life. Annuities are available from insurance companies, and the amount of income that a lump sum of money will purchase depends on age at time of purchase, whether it's for a male or female, and if you want any optional features. Presently, a 65-year old woman with $100,000 can purchase a guaranteed monthly income of approximately $500, payable for life. While your financial advisor is best able to determine if an annuity makes sense for your mother's situation, here are some details on annuities which you might find helpful...

Firstly, there are some significant benefits to purchasing an annuity to provide retirement income; these include:

  • Guarantees: Once the annuity is purchased, the income amount you receive is guaranteed and will be paid for as long as you live.

  • Convenience: Rather than taking regular withdrawals from your retirement savings, annuity payments are made regularly, usually monthly, like a paycheque.

  • Protection from market risk: An annuity removes the hassle of managing the investment throughout retirement, which can become more and more difficult as you get older.

  • Longevity protection: Annuities can be considered insurance against outliving one's resources, as the income stream continues as long as you live. Considering all of these factors, a life annuity can provide significant peace of mind to retirees.

  • Tax advantages: Annuities may have preferential tax treatment, when compared to taking the money into income in other ways.

With that said, there are also some factors which make annuities unattractive for some people; these include:

  • Low returns: In today's low interest rate environment, the income amounts produced by annuities may look unattractive, and are significantly lower than the income that could have been purchased for the same amount of money 10 or 20 years ago. Compounding this, as people continue to live longer, insurance companies will be paying the income payments for a longer period of time, so this is factored into their calculations.

  • Inflexibility: Once an annuity is purchased, there is no access to your lump sum of money - for example, in the case of emergencies when you may need to access more than what the guaranteed income payments provide (although some do offer a cashability feature - see below).

While the standard form of annuity would be for a single life with payments continuing until death, it's important to know what options are available. The impact of selecting any of these optional features is to reduce or increase the guaranteed income amount that is purchased. These options include:

  • Guarantee period: Income payments continue for as long as you live, but a minimum number of payments will be guaranteed. For example, with a 10-year guarantee period, if you died after 5 years, the next 5 years of payments would go to your stated beneficiary.

  • Joint: An annuity can be purchased on two lives, and income payments will continue as long as one of the two people is alive.

  • Impaired annuity: If you are in poor health, you can ask the insurer to consider this and they may be willing to pay higher income amounts, on the basis that your life expectancy is lower than average.

  • Indexation: In order to protect against the effects of inflation, annuity payments may be indexed annually.

  • Cashability: An option which allows you to take a withdrawal from your annuity in excess of the regular payments.

I hope this helps in your decision-making process and in furthering the discussion with your mother's financial advisor.