The virtues of life insurance are well known and well established. Like buying life insurance early in life proves cost-effective in the long-run. However, the need for individuals to provide for their children's education and marriage, home loan and other liabilities, quite often leads to buying too many policies and hence, a very high coverage. Such individuals need to give a serious thought to the need for life insurance when they retire.
In the last few years, I have come across many people who have life insurance policies with premium payment term extending well into their post-retirement life.
Many may ask whether one needs life insurance on retirement or not. Well, this is not an easy question to answer as the same depends on the needs of the individual. It would not be right to say that retired people do not need life insurance, only because the cost of insurance for the elderly is very high. Some may need life insurance even when they have retired. And some such situations are discussed below.
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Most retirees, one would assume, do not have children who need to be provided for. However, their spouses could be dependent on them. Amongst elderly couples there are good chances that only one of the spouse earns – by way of pension or any other monthly income. Then, if something happens to the spouse who is earning, say a pensioner, the other spouse may or may not get the entire pension for himself/herself. Because many may nominate their children or some other family member as pension beneficiary along with the spouse after their death.
Here, the spouse may find it difficult to adjust to lesser resource. Thus, it is necessary that the spouse be protected from the loss of income. If one of the spouses need more medical attention or have a high standard of living, it is necessary to have a source of protecting the income flow he/she enjoys.
A life insurance plan, in such cases, can help make up for the shortfall or loss of income for rest of the pensioner's life and / or for the surviving spouse.
Life insurance is a great tool for estate planning. If an individual wishes to pass on a part of his estate to any of his loved ones and wants to be sure about the same, he / she could use life insurance plans.
Although the assets can be passed on with the help of a Will, any dispute / ambiguity with regards to the same cannot be ruled out. Also, currently there are no estate taxes in India. And the same cannot be said about the future.
Life insurance proceeds, received on death, are capital receipts in nature, which are exempted from income tax. Thus, life insurance policies can be really effective and valuable for elderly individuals.
A retiree may have a specially-abled, dependent child or sibling, who needs to be taken care of after him/her. Here, the important need is to provide for the dependent's financial security, after the retiree. Life insurance provides an excellent medium to provide for these needs by passing on the money to the person concerned with minimum legal involvement, unlike in case of a Will.
Individuals having their own businesses under the proprietorship model or partnerships may also be required to make available or pay lumpsum to meet business liabilities or repay business loans. These should not act as a burden on the businessman's family after his death. Hence, the businessman should be covered by life insurance. The exact sum assured needed to provide for these contingencies or liabilities can be worked out with the help of a professional.
In addition, life insurance is a great tool to provide for the expenses incurred towards health and related costs towards the end of one's life or even funeral and other religious rites. This ensures no financial burden on the family post an individual's death.
Retirees, depending on their financial and family needs, would need to chalk out if life insurance is required on either lives or only on one. Further, the policy type has to be selected namely term plans or plans which have a cash value attached.
It is advised that if the insurance coverage required is huge, term plans would be an ideal choice. But if individuals are looking for more than just covering the risk of death, then policies with cash values are better-off. Cash value policies are those which provide for payment of bonuses periodically and help the policyholder accumulate a fund through investment in the policy, as opposed to a term plan. For instance, whole-life policies will be an ideal choice in such situations, as the same would cover death risk till almost the age of 100. Of course, the premiums for such policies would be high.
Based on the above, individuals would also need to decide upon the premium payment terms - a full payment term to a lumpsum or limited payment term. Where future cash flows are uncertain, cash-value based policies help, as the premiums can be reduced or even stopped at a later date in such policies.
Lastly, it is advisable for individuals to avoid market-linked plans (like Ulips) for the choice of cash-value plans, as adverse market movements may defeat the purpose. Products offering guaranteed values also work. Lastly, do not forget to review your insurance needs even during retirement.
The writer is a certified financial planner
