As clients enter retirement, their entire financial planning picture shifts. People go from needing to accumulate assets to needing to understand how to best spend the money they spent decades carefully saving. They need to understand how to make investments last through this phase of life and ensure all their assets are well protected.
Retirees need to continue protecting their material assets like homes and cars. In fact, this coverage may need to increase in retirement if much of a retiree's wealth is held in the real estate they own. If anything were to happen to the property that wasn't covered by the right insurance, it could be difficult to financially recover from the loss without income from a job. (For more, see: Advisors: Tips for Providing for Older Clients.)
In addition to the right property and homeowner's insurance, retirees might want to consider an umbrella insurance policy. Mary Beth Storjohann, a financial planner and founder of Workable Wealth, explains that umbrella insurance offers additional liability insurance to existing policies. "Umbrella insurance steps in to cover the difference in all your policies to protect your net worth," she says. "It will cover property damage, bodily injury claims and legal costs. Typically, policies will start at $1 million in coverage for around $200 a year."
Protecting financial and material assets is important. But so is protecting the asset of good health. "The most over-looked and most used insurance in retirement is health insurance," says Jamie Block, a financial planner at Wealth Design Services. This becomes even more important to address if someone wants to retire early. "It's important to analyze all the costs of health care, not just the insurance premiums," explains Block. "These costs include deductibles, co-pays for services and prescriptions." She also suggests paying attention to the out-of-pocket maximum, and advises clients keep at least that much in an emergency fund. (For more, see: Advising FAs: Explaining Long-term Care Insurance to Clients.)
Some retirees should consider other types of insurance that would cover costs related to health issues. "Long-term care insurance is another insurance that has a high utilization rate, which partly explains why the premiums keep increasing," says Block. "Advisors need to determine if the cost of the policy is worth the benefits that are being paid." In helping retirees plan, she suggests considering whether they should self-fund and if they can afford the premiums on insurance or if Medicaid would present a better alternative. "Besides the cost of the insurance, there are many non-financial reasons to get these policies," Block explains. "The main reason is to fund extra care and be less of a burden on family members. Also, if you have the insurance, you are more likely to get the help earlier than without."
"The retiree's specific situation helps to dictate what type of insurance to own," says Alex Yeager of Everlong Financial, a fee-only registered investment advisor (RIA). "For an estate planning purpose, permanent insurance like whole life may be appropriate since the client may always be facing an estate tax issue," he explains. "For a retiree with a mortgage, term insurance may be appropriate and set to last until the mortgage is paid off." (For more, see: Estate Planning Tips for Financial Advisors.)
Yeager says life insurance makes sense for retirees in other situations as well. "If a retiree passes away and the couple was relying on both of their Social Security incomes for living needs, a life insurance policy may be needed. At death, the living spouse will either receive their Social Security benefit or their spouses, whichever is higher. This means that a portion of the couples Social Security benefits will be lost." He also says retirees with serious health issues that put a retirement portfolio at risk should consider life insurance to replace lost funds for a surviving spouse or dependent.
However, there are certainly cases where clients don't need this kind of coverage in addition to the other policies they hold. "If the purpose of insurance is to replace income or fund a goal if you are not here, then some retirees don't need any insurance," says Pamela Horack of Pathfinder Planning. "There are three things to consider," she advises. They are: enough regular income for a spouse, enough savings to cover healthcare concerns, and enough funds to cover final expenses. "Self-funding in this manner can allow [clients] to drop life insurance," she adds. (For more, see: Tips for Helping Clients with Life Insurance Needs.)
Health insurance is the primary insurance need for retirees, but depending on each individual or couple's situation, long-term care and additional property insurance may make sense, too. And while the initial assumption about life insurance may be that older individuals with healthy nest eggs no longer have the need for it, some situations merit a deeper evaluation of whether or not that type of protection could be useful. (For more, see: Financial Advisor Client Guide: Long-Term Care Insurance.)