Retirement Step 12: What About Insurance?
Insurance safeguards our assets and our family's income. Our policies save us from paying large out-of-pocket expenses on car or home repairs, medical costs, and other potentially disastrous events. Do any of those requirements disappear in retirement? Well, unless you neither plan to drive nor live anywhere after you retire, expect to keep paying auto and home (or renters) insurance. But for other forms of insurance, the answers aren't quite so cut and dried.
At retirement, life insurance usually becomes far less important than it was while we were working full-time. At this stage of life, the kids are grown and gone; potentially, we only need to worry about our spouses. Will we need insurance to maintain their standard of living after we're gone? For Fools, probably not, since our other financial planning should more than cover that income.
If so, you may only need enough life insurance to cover any final expenses and funeral costs, unless you're planning on leaving someone a large sum to remember us by. A bit more insurance might help the family 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, life insurance can definitely be pared back to the minimum.
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; our options for private disability insurance evaporate, leaving only Social Security.
If we retire at age 62 or older, we're already receiving a Social Security payment, so disability is moot. But if we retire younger than age 62, the disability coverage provided by the system may be important. Under Social Security, we can retire for disability at any age, provided we have worked and received 10 years (40 quarters) of credit and been covered under the system for at least 20 quarters (five years) out of the last 40 quarters (10 years), ending with the quarter in which the disability occurred.
Suppose I retire at age 50. I become disabled at exactly age 54. Looking backwards 10 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 10. Since I was covered for only 16, not 20, quarters out of the last 40, I'm not eligible for Social Security disability. Worse, I must wait another six years -- paying higher expenses to meet the needs of my disability -- before I reach age 62 and my Social Security benefits kick in.
In short, if you plan to retire well before age 62, you may want to keep enough disability insurance to tide you over until Social Security arrives.
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 at our own expense. 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 we initially desired. Be Foolish, and examine this issue closely prior to making a final decision.
When we reach age 65, Medicare coverage becomes available. However valuable, this coverage will not pay for everything, so we'll need supplemental insurance to make up the difference. These policies vary in cost and specifics, but they all conform to uniform coverage provisions. When we need that Medicare supplemental coverage, we must comparison-shop for policies to select the one that best fits our medical needs and budgets.
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 -- costs top $100,000 per year in some areas of the country. 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, on to Step 13: our big conclusion.