The beginners guide to retirement part 9:Do I need life insurance?

Life insurance deserves a topic of its own as it is such a large amount of money. The cost of life insurance grows at a rapid rate once we hit the age of 50. Many of us don’t question this cost though. Yes, we know it is increasing, but many of us don’t believe we can do anything about it because we must have the insurance.

 

But do we need it?

Some of us may have been contributing for 20 plus years into a life insurance policy. If we cancel when we approach retirement, then we are wasting all the money we have spent towards life insurance already right? This is known as the sunk cost fallacy. It is a cost that has already been incurred and cannot be recovered. The more cost we spend on something, the harder it is to abandon. Even if we don’t need it anymore. So we end up spending far more than we actually need.

We can’t look at it as a waste. In our younger years, we are paying life insurance in case something bad happens to us and those that we are financially responsible for will be taken care of. It is necessary spending when we have dependents.

The decision whether to have life insurance in retirement should be made in isolation based on our current situation. Not what has happened previously.

You would be a strong candidate for life insurance if:

  • The loss of your income would impact substantially on someone close to you

  • You have 1 dependent or more

  • You have a large estate or business that needs protection

  • You don’t have enough in savings to cover those impacted by your loss.

  • You still have debts

  • You have no income

If you have dependents that rely on your money AND your income/assets are less than the value of those future expenses, then you should have insurance to make up the difference. No more, no less. We should be protecting what we work so hard for. If you can’t afford to replace it, you need it insured.

The key is to ask the question. Whether you need the policy or not. And if so, how much. As we age, we generally save more. This means that we will need less cover as we age for two reasons. We have more of our own money to cover our loss, and the period for which dependents need cover shortens. Review your policy to see if you can have a smaller premium.

It may seem counter-productive to give up life insurance after ‘paying out’ for so long, but the truth is, you may no longer need it. If you have no income to replace, no debt, no dependents and no grand plans to leaving an estate then chances are you can cancel your policy.

If you are the person in the household that makes most financial decisions I recommend communicating with your significant other. They should know exactly where all your assets are located and where to invest them should you pass away. If the surviving spouse has no idea about money then it will not go far.

Finally, if leaving your children a large inheritance is a reason for continuing with your insurance premiums, then I would encourage you to look at alternatives. Quite often the insurance expense in your twilight years is so high that you would be much better off saving the money yourself. The money earned from your savings can be significantly more than the pay-out from the insurance. The insurance companies are not in business to lose money. They know the odds and set them in THEIR favour, not ours.

The decision is a very personal one, with the answer depending on the person who is asking. The decision to have life insurance is not just a financial one either. There are also personal factors to consider. We are all different with different situations and I encourage seeking independent advice. Most insurance advisers are paid by commission, so make sure to find out how they get paid. If they get paid a higher commission from one insurance company over another, or only get a commission from one or two companies, then you should know that as it is influencing their decision for you.

An adviser should be able to tell you how much your return at different ages would be from your insurance investments. From that you will know the age at which it is no longer viable to pay for life insurance. This advice can save you thousands of dollars.

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

Have you experienced a rapid rise in your insurance premiums? Do you regret either cancelling a policy too soon or keeping a policy too long?