RETIREMENT PLANNING

What About Insurance?

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in-sur-ance (in shoor/ ans), n. 1. The act, system, or business of insuring property, life, one's person, etc., against loss or harm, in consideration of a payment proportionate to the risk involved.
-- The Random House College Dictionary

What role do you think insurance will play in your life after you retire? We all know its purpose. After all, we carry coverage on our homes, our cars, and on our bodies. We use it to safeguard our assets and our family's income. On more than one occasion we've had to make claims on our policies, and they have saved us from paying large out-of-pocket expenses. While working, we usually carry policies for life, disability, medical, home, and car.

Here's the big question: Do any requirements for insurance disappear in retirement? Here's the big answer: Possibly. So it might be Foolish to see what we can expect.

We'll still drive and we'll still live somewhere after we retire, so automobile and home insurance policies are a given. We pay the premiums now, and we must continue paying them after we retire. They stay.

Life insurance is a different matter. At retirement, life insurance needs are usually far less important than they were while we were working full-time. At this stage of life, the kids are grown and gone. Now the only person to worry about is a spouse. A spouse certainly should enjoy the same standard of living after we're gone as when we're alive. Will insurance be needed to secure that standard? For Fools, probably not. That's because we have already provided for that spouse in our planning. In retirement, the departure of either spouse should have no effect on the ability of the other to survive comfortably for the remainder of that person's life. If that is the case, then perhaps all that's needed in retirement is enough life insurance coverage to pay for all final expenses and funeral costs. Coverage beyond that amount is unnecessary unless we're planning on leaving someone a large sum to remember us by. If needed, we could carry more insurance so the family could pay any estate taxes due, but that's a matter for discussion with an attorney. In most cases we shouldn't need large amounts of coverage. At retirement, then, we definitely want to look at our life insurance needs so we only carry the minimum coverage needed.

While working, most of us carry disability insurance to supplement our income in case we lose work because of sickness or injury. Sometimes we pay for that coverage, sometimes our employers pay for it. It protects our family income. But when we retire, we have no job income to protect. Therefore, we cannot find private disability insurance protection. All that's left for that purpose is Social Security. If we retire at age 62 or older, we are already receiving a Social Security payment, so a disability is moot. But if we retire younger than age 62, the disability coverage provided by the system may be important. That's because under Social Security we can retire for disability at any age. We can, that is, provided we have worked and received 10 years (40 quarters) of credit and have been covered under the system for at least 20 quarters (five years) out of the last 40 quarters (ten years) ending with the quarter in which the disability occurred.

What's the importance of that? Say I retire at age 50. I become disabled at exactly age 54. Looking backwards ten years, I see I have been covered under the system for six years, so I can begin drawing Social Security right now, without having to wait until age 62. Take the same situation but change the disability age (the age at which I become disabled) to 56. Now I only have four years of credit in the last ten. This means that I was covered for only 16 quarters, not 20, quarters out of the last 40. Therefore I am not eligible for Social Security disability. Worse, I must wait another six years before I reach age 62, at which time my Social Security retirement benefits may begin. Is that important? This Fool thinks so. If disabled, my living costs go up, so that extra cash could make a big difference in my ability to survive comfortably.

While working, we typically enjoy medical and health insurance coverage through a group policy available from our employer. Leave that job, and by law we can continue that coverage for 18 months. After that, we're on our own. Absent retirement for disability under Social Security, Medicare coverage does not begin until age 65. If we retire earlier than that, we'll still need that medical coverage, but an individual policy will be enormously expensive. That drain on the pocketbook requires extensive research and investigation to ensure both the availability and affordability of health insurance when we retire. Some employers allow retirees to retain group medical coverage in retirement. A group policy available through an employer will almost certainly be the cheapest and most comprehensive insurance available, but employers do not have to provide this coverage beyond the 18 months specified in the law. Health insurance for younger retirees is a huge problem that must be addressed. In some cases, it could very well dictate a longer working career than initially desired. Be Foolish and examine this issue closely prior to making a final decision.

When we reach age 65, Medicare coverage becomes available. While valuable insurance, it will not pay for everything. Thus, we must supplement that with additional insurance. These policies vary in cost and specifics, but they all conform to uniform coverage provisions dictated by the National Association of Insurance Commissioners. When we need that Medicare supplemental coverage, we must comparison-shop for policies to select the one that best fits our medical needs and pocketbooks.

Some Fools may want to consider long-term care insurance. These policies come in many forms, but all have one thing in common: they are not cheap. But neither is nursing home care in old age -- the average cost is $37,000 per year. Long-term care coverage is another area that must be examined closely before purchase. Remember: the younger you are at first purchase, the lower the cost.

Of all the insurance issues we've covered, those dealing with medical and health insurance in retirement are the most important. Be sure and give these issues careful attention as you plan for retirement.

And now, The Final Act.

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