As Baby Boomers approach retirement they often ask the questions: Should I continue to keep my life insurance policies? Should I continue to pay for my long-term disability insurance policies? Is there somewhere else that these premiums would be better spent? There is no simple answer to these questions, but a good start is to look at the reasons why you purchased the policies in the first place. Examining insurance policies is an important piece of every financial plan.
The first and most common reason to have life insurance is to provide a lump sum of money to one’s family to replace a deceased’s income stream. This lump sum can provide income to the family to help pay bills and allow its members to maintain the lifestyle they have grown accustomed to. The second reason may be to pay off such liabilities as mortgage and/or student loans. Perhaps you want to make sure college is paid for in full should you pass away. The third reason may be to provide liquidity to your estate in order to pay estate taxes. Lastly, you may want to insure the inheritance of your children or grandchildren.
Depending on the type of policy you have and your health situation, you may have several options to simply dropping the policy. If you have a permanent policy, you may be able to sell it and receive compensation for it. If you are charitably inclined, you can possibly gift your policy to your charity of choice. You may want to discuss any options with your children (as they may choose to pay the premiums to ensure they receive an inheritance).
The reason for disability insurance is simple: To provide you and your family an income stream in the event you become sick or injured and unable to work. While a disability can be more financially devastating than death, especially at a young age, as you get closer to retirement the need for this type of insurance decreases. Many long-term disability policies pay only to age 65 and you typically need to be working in order to collect the benefit. So if you have retired early, you typically don’t want to continue to pay for disability insurance.
Like most Baby Boomers approach retirement, many of these reasons to hold life or disability insurance are gone. College has been paid for and the kids are now independent. A mortgage may no longer exist and you have accumulated enough assets that your spouse can live without your income. If this is the case, should you continue to pay these premiums? The answer may be no to life insurance or long-term disability insurance, but another type of insurance becomes a “must” buy.
The good news is we are living longer today – and the bad news is we are living longer today. While most Baby Boomers struggle with retirement and making sure their money will last them a lifetime, they sometimes overlook the potentially devastating effect of a long-term care need. Long-term care is the process of caring for a sick or disabled person over an extended length of time. Unfortunately, not only is the potential cost of this care extremely expensive but the emotional and physical toll it can take on a spouse or child can be overwhelming. While many people say “Don’t worry, I will take care of you” this is often an overly optimistic and unrealistic statement. The truth is people who need long-term care usually require either someone to come into the home to provide this care or the services of a long-term care facility. While most people believe this will never happen to them, consider the consequences if it does. Who would take care of you? Who would pay it? How would your spouse live? Are you prepared to spend your hard-earned money on this and leave your children and grandchildren nothing?
The cost of long-term care can range from approximately $5,000 – $11,000 per month, an amount that can destroy any sound retirement plan. Many people wrongly believe that Medicare or Medicaid will help pay for this. Unfortunately, this is considered custodial rather than medical care, so Medicare typically pays very little. Medicaid will only pay if you are completely indigent, which can leave your spouse with little to maintain their lifestyle.
You can protect yourself and your family by purchasing long-term care insurance. This type of insurance provides monies to pay a facility or qualified caregiver in the event you can no longer independently manage two of the five activities of daily living (ADLs) – feeding, dressing, bathing, toileting, and transferring (moving oneself from a bed to a chair). Each policy can be designed differently in terms of the amount of money it provides, the length of time the money is provided, and when it will begin paying. While the cost of this insurance is not insignificant – it can cost from $3,500 to $9,675 annually for a couple – the “cost” of not having it may be prohibitive.
How do you pay for this type of insurance? Examine your current life insurance and disability insurance and the reasons you have for them. If those reasons don’t exist anymore, it may be time to transition these monies to long-term care insurance. While every situation is different, this may be a better way to help “protect” the assets you have worked so hard to accumulate and take the emotional and physical burden of long-term care of your family.
Editor’s note: This post was originally published in September 2018 and has been updated for accuracy.