Life Insurance and Retirement Income

Life insurance can help maintain financial stability when a loved one dies. Some provide a death benefit with a cash value that can be used to cover any financial needs upon death of the life assured. An insurance policy with a death benefit can give you comfort and peace of mind in tough times. However, life insurance may not be the most suitable way to look after your dependants’ retirement income or other income needs after you pass. Life insurance policies can be complicated and expensive, so it’s important to understand how much you might pay and your potential alternatives.

There are a number of types of life insurance with different levels of coverage. In this article, we will discuss the different types of life insurance policies, their relative benefits and potential drawbacks.

Common Types of Life Insurance

Here are some types of insurance that retirees and employed retirement savers commonly consider:

• Level term insurance. This insurance lasts for a period of time agreed at the outset, and the insurer pays a cash benefit if you die within that agreed term. Some people use this type of cover to pay off a fixed debt—such as an interest-only mortgage—or to provide a lump sum for surviving dependants. Level term insurance is relatively simple and potentially useful for those with dependants.
• Decreasing term insurance. This insurance is designed to help pay off outstanding debts such as repayment mortgage, credit card balances or loans. The cover lasts for a fixed number of years, which usually matches the length of your outstanding debt, and pays a cash value if you pass away during that fixed period. Each year that you make loan payments in excess of interest, the loan amount should decrease. Similarly, the potential pay-out for this type of insurance decreases each year as it was designed to cover loan repayments. This type of policy is cheaper than level term insurance since the sum assured and potential pay-out for the insurance company generally reduces over time.
• Whole life insurance. This insurance covers you for life instead of a fixed period. The insurance company agrees to pay your dependants a cash benefit when you die—regardless of when. Because the time limit is uncertain, a whole life policy can be more expensive than a term life cover. These policies may be used to cover funeral costs or other costs upon you death.
• Family income benefit insurance. Rather than receiving the death benefit in a lump sum, the policy’s beneficiaries receive the cash benefit in ongoing payments for the remainder of the policy term. If, however, the policyholder dies late in the term, payments still will last only until the end of the policy term. This type of policy can give you peace of mind knowing your dependants will be able to cover monthly outgoings for a certain period if you pass away unexpectedly.

Also, you should consider whether a single life policy—only covering one person—is better for you and your family than a joint life policy, which insures two people at the same time. Generally, joint life policies pay out once when the first partner passes away. However, at the time you open the policy, you may have the option of receiving the pay-out on the second death.

Life insurance can be considered for your retirement planning and protection especially if dependants rely on your retirement income. But it may not always be the best way to ensure your dependants have enough money after you pass away.

If one spouse passes away in retirement, the surviving spouse may struggle to meet income needs. While outgoings may be lower, the reduction in expenses may not offset the drop in income. For some couples, life insurance can help ensure there is enough money to replace any lost retirement income. Though insurance products provide guarantees and protection, they may incur high costs and may not be affordable depending on your current health, personal situation and desired coverage.

Investing vs. Purchasing Insurance for Retirement Income

While life insurance products can be effective for some people, some forms of insurance may simply be too expensive for the cash benefit you are likely to receive. Costs will vary based on coverage, so it is sensible to calculate your requirements first and then ask the price. Consider alternative ways to provide a cash benefit to your survivors.

To provide for their dependants, some retirees or workers may be better off investing rather than relying on life insurance. If necessary, you may consider combining some life insurance with a diversified investment portfolio as part of your long-term retirement strategy. But relying on life insurance alone to provide for dependants may be misguided.

With insurance you pay a premium against an eventuality that may not happen at the right time for you to receive full benefit, and you risk potentially receiving little or no value for that premium. Alternatively, you may be able to save some of that money and other retirement savings in an investment portfolio to cover your long-term financial needs. In a diversified investment portfolio, you may also be able to gain greater returns to offset the cost of inflation.

You might consider a diversified, balanced and professionally managed investment portfolio that is appropriate for your personal situation, long-term investing goals and risk tolerance. With sound professional advice and management, you may be able to create a personalized portfolio aimed at helping you reach your longer-term investing goals and provide for your loved ones in the future. You may also have more flexibility to withdraw from an investment account for emergency expenses, which could be a valuable and helpful option.

Retirement Insurance

Life insurance may be able to help you cover outstanding debts and income needs of dependants, which is particularly valuable if you pass away early on in the policy term. Various types of insurance are available—some more costly than others—but insurance can be ineffective and expensive in certain situations. A sensibly managed investment portfolio may be able to provide for dependants and cover liabilities in the event of death. This alternative can also be cheaper than insurance and may better offset the costs of inflation.

Before you purchase a life insurance policy in retirement, consider the costs and what best matches your personal situation and longer-term goals. Call Fisher Investments UK to learn how we can help you analyse your situation and come up with a personalized investing plan.