Should I change my life insurance when I retire?
Anyone planning to retire should be thinking about making new plans for the future. There are a lot of decisions to make, but chief among them is choosing how you want to spend the years ahead.
There is often a lot of excitement – and possibly trepidation - about beginning a new stage of life. For some it may mean fulfilling long-held ambitions of sailing round the world. Others may choose to start a new career in a completely new area or take up a new hobby.
For many, retirement is a time to wind down, catch up on reading and viewing, or pottering in the garden. But it’s important to also get on top of your finances, so that they’re fit for your future.
Take another look at your life insurance
If you took out a policy some years previously, maybe now you feel you need less cover.
If you think back to the decision you made when you started your policy, important things you would have considered as part of your financial planning were mortgage payments or future expenses related to children.
You probably took out a policy to ensure that if the worst happened to you, your mortgage would be paid off or there would be enough money to cover your children’s education.
In short, life insurance is about the peace of mind of knowing that those left behind won’t be put into financial difficulties.
It means that your family would be financially protected if you were no longer around to provide for them.
Life insurance as a safety net for your family
Without the effective safety net of life insurance, those you leave behind may struggle to keep financially afloat, which could cause them even further anguish and upheaval.
But it may be that your mortgage will be paid off by the time you retire.
Or maybe your children have left home so they may not need so much financial support (although many parents will tell you that the financial commitment never ends!).
Mortgage life insurance
Many life insurance policies are designed to finish when your mortgage is paid off, as that debt is the biggest one you’re likely to ever have.
These are known as decreasing term policies and they have a specific term, often 25 years, that is designed to match the length of your mortgage.
The payout amount on a decreasing term policy will fall as you gradually pay off your mortgage – this is because the amount you need to cover decreases.
If you’ve moved home and taken out a new mortgage, you may have increased the amount of payout covered in your insurance to match the higher debt.
Another type of life insurance policy is a level term policy. With level term, the payout remains the same throughout the term of the policy period and you may have been advised to take one of these if you had an interest-only mortgage.
If you had either of these types of policies, it may have already stopped if you’ve already paid off your mortgage.
Whole of life insurance
But you may have another type of policy that continues to offer cover right through until your death. Known as whole-of-life cover, it’s ongoing, and lasts as long as you keep on making the payments. However, it tends to be more expensive than term policies.
It’s an expense you may think you don’t need once you’re retired. But don’t rush to ditch it. Instead think about how it could be useful.
If you still have debt, for instance, then you’ll want to ensure that it’s paid off and not left giving your family a problem.
Don’t believe that old saw about debt dying with the person, it’s not strictly true.
Debts are applied to someone’s estate, which means that if you die and have some money or assets, before it can be passed on to your family, debtors get to grab their chunk of it. It can be a problem if your only asset is your home and you die with debts.
It can lead to the home having to be sold to meet the debts, even if it is half-owned by a spouse. That’s why a whole-of-life policy can a real benefit in covering any debts or inheritance tax bills that your loved ones may face.
Getting the right life cover
If you don’t already have a policy by the time you retire, then setting up a new one will be more costly, as your age will be an important factor.
If your life expectancy is shorter, then the payments will be higher. That effectively means the earlier you can sort out the right cover for your needs, the better off you will be in retirement.
In short, the sooner you make a decision about life insurance, the better off you will be.
Simon Read was the last personal finance editor at The Independent newspaper and now reports on finance matters for the BBC, The Evening Standard, The Daily Mirror and The Sun. He champions consumer rights and is a commentator on a range of tv and radio shows, such as Watchdog on BBC1, Sky News, Channel 5 News, Radio 5 Live, LBC and Talk Radio. He was a money expert on three series of the BBC1 TV show Right On The Money and presented a BBC Radio 4 documentary on fraud as well as battling for fair treatment from companies for two years in his Moneywise Fights For Your Rights column.
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