Is Your Insurance Ready for Retirement?

Congratulations -- you've made it! But are your insurance needs met? Photo: Steven Depolo

Congratulations, you made it! Your life is about to change — and your insurance might, too. Photo: Steven Depolo

Retirement is probably the most anticipated and planned-for milestone of our lives. When it finally arrives, it does so silently like an overnight snowfall that, even though it was expected, renders a once-familiar landscape alien.

Retirement planning lends itself to metaphors that reference nest eggs and shedding the chains of responsibility. When it comes to insurance and retirement, the underlying landscape is familiar but different, like your backyard covered with fresh snow.

Not everyone retires at the same age, and some never retire. The sliding scale that retirement age represents begins around age 55, which is when you should first start thinking about how your current and future insurance needs are changing.

Auto Insurance

Long before you’re ready to retire, you probably noticed that you got senior discounts at the supermarket and elsewhere. What most people don’t realize is that there are discounts for older drivers as well. Relatively speaking, you should pay less at 60 for comparable car insurance than you did at 40. That is why you should take the time to shop your auto insurance at least every other year once you pass age 55.

Age-based pricing isn’t the only thing to affect the cost of auto insurance. Ask about discounts based on the number of miles you drive. This is easily overlooked by new retirees who are used to commuting by car. Many insurers will offer extra savings for vehicles that are driven less than 10,000 miles a year.

More savings can be found in dropping collision coverage if you drive an older car. Finally, make sure that only current drivers are listed on your policy. Grown children are not automatically removed from your policy; keeping them listed may raise your premium.

Consider funneling some of your savings from discounts toward increasing your liability coverage limits, especially if you have state minimums. Liability protects your assets in the event of an accident that results in bodily injury. This is essential because, contrary to what most people believe, retirement savings such as 401(k)’s are not protected from civil judgments.

Homeowners Insurance

One of the singular joys for many retirees is the end of mortgage payments. In the euphoria of burning or shredding loan documents, they fail to consider home-related expenses such as insurance.

Continuing to pay insurance can be expensive, starting with mortgage insurance that’s no longer needed. While this type of policy is not always required, many homeowners carry it as a means of paying off the mortgage separately from other life insurance benefits. If you have this coverage and your mortgage is paid off, drop it and pocket the savings.

For many retired homeowners, the homeowners insurance payment habit means they haven’t reviewed their coverage for years, even decades. Coverage has changed over time and your policy may no longer provide enough protection.

One area of particular trouble is contents protection. By the time we retire, we have spent a lifetime accumulating stuff — jewelry, art, collectibles, a wealth of personal possessions — and your policy may not adequately protect what you have if you set it up 20 years ago.

Life Insurance

The primary purpose of life insurance is to provide financial resources for loved ones if you should die prematurely. For many, that means by the time retirement rolls around, the kids are grown and have left the house, the house is paid for, and there is no longer any income that needs to be replaced –so dropping life insurance coverage is the correct decision, right?

The answer is a resounding maybe.

There are several factors to consider before cashing out or canceling life insurance policies in retirement:

  • Final expenses: There is no escaping the fact that the exit door from retirement is death, and even a modest funeral and burial can cost $7,500 or more. Keeping at least enough insurance in place to cover your final expenses is probably a good idea. Rather than cashing out a larger whole-life policy and purchasing an inexpensive funeral policy, ask your insurer about using your cash value to purchase paid-up life insurance. This will eliminate your expense and provide more than enough money for a proper send-off.
  • Debt: Even if your mortgage is paid off, you may still have other debt that will pass on to your spouse or estate. For example, if you plan on buying a new car every few years for the foreseeable future, having life insurance in place to pay off those loans when you die relieves your family of the burden.
  • Pension income: Not all pensions have a survivor benefit for spouses, which means even though you no longer have work income to replace, your death will result in a loss of income to your spouse.
  • Estate taxes: In most cases, the life insurance proceeds are not subject to estate taxes, which makes life insurance an ideal means of providing a way to pass on your entire estate without a portion of it having to be liquidated to pay taxes. Talk to a certified estate planner or CPA to determine if your heritable assets are large enough to incur estate taxes.

Annuities

Annuities can be a thorny issue, as evidenced by the insurance industry expression, “Annuities aren’t bought, they’re sold!” The reason for this saying is that, in most cases, annuities are of more benefit to the insurance company than to the insured.

There are several different types of annuities and the decision to buy one should only be made after carefully considering the pros and cons.

  • Immediate annuities: These start making payments almost immediately after you buy them. They usually require a single lump-sum payment to start them and run for a fixed period of time such as five, 10, or 20 years. Your payments are based on the amount you spent to buy it and the total anticipated interest earned over the life of the annuity.
  • Deferred annuities: This type of annuity is most often purchased before retirement and works the same way as a fixed annuity, with the difference being that payments start at some future date.

Of the many pros and cons of annuities, the most important thing to understand is that many annuity contracts end upon the death of the annuity owner. That means that if you purchase a $100,000 annuity and die after receiving only six monthly payments, the remaining balance is lost. Some annuities allow for balances to pass to a single heir, usually a spouse, before being lost upon death.

Long-Term Care Insurance

A common point of confusion for many people is the difference between long-term care insurance and disability or health insurance.

While disability insurance replaces lost income if you become disabled, it does not pay for care. Health insurance may pay for short-term care while you recover from an injury or illness, but is usually limited to a few weeks or months. Long-term pays for care that ranges from part- or full-time in-home care, respite care, or assisted living and nursing home costs.

The decision of whether or not to purchase long-term-care insurance should be based on the amount of assets you wish to protect. The reason for this is that Medicare will only pay for long-term care after your personal assets have been exhausted.

Making a decision about the value of long-term-care insurance is often best made in consultation with a financial planner who can help you evaluate your financial situation and provide cost projections. If you choose to consult a financial planner, it is best to choose a fee-based planner who charges by the hour rather than one who works on commissions from the sale of long-term care insurance.

Health Insurance

Your age at retirement will go a long way to determining what type of health insurance you need. If you retire before you are 64 years and 9 months old and are not disabled, you will need to keep your current health insurance plan or apply for a new one.

Even if your former employer allows you to remain a part of your pre-retirement group, you should still shop for coverage comparing the benefits, deductibles, co-pays, and premiums side by side.

If you have taken early retirement and your employer is not providing health insurance coverage as part of a retirement package, you may elect to continue your current coverage via the COBRA program.

There are a couple of very important things you should know about COBRA: First, it can be expensive because you will not receive any premium contribution from your employer. Second, COBRA only lasts 18 months. This is fine if you are within 18 months of Medicare eligibility, otherwise the sooner you consider private insurance the better.

Unlike some other types of insurance, there are no discounts for age; in fact, you can expect your costs to increase each year. If your early retirement income is limited, you may be eligible for premium assistance from the federal government in the form of tax credits that can be used to lower your premium costs. To determine your eligibility for premium assistance, visit www.healthcare.gov and submit an application.

Medicare

Once you reach 64 years and 9 months old, you are eligible for Medicare, a federally administered health insurance program for senior citizens. Eligibility requirements other than age include at least 10 years of payroll contributions to the program. Medicare payroll contributions refer to the 1.45% of your income (up to $117,000) that is withheld from your pay as part of FICA. The Medicare tax that you paid while working helps to reduce the cost of Medicare when you become eligible.

Medicare coverage is broken down into four parts; A, B, C, and D. Parts A and B are sometimes referred to as original Medicare and Parts C and D are provided by private insurance companies through the Medicare program.

Part A: For most people, there is no cost for Part A, which covers medically necessary hospital, skilled nursing facility, and home health and hospice care. The only time a premium is required for this part is if you have worked and paid FICA taxes for less than 40 quarters (10 years).

Part B: This covers most doctor’s visits, preventive care, medical equipment, tests and X-rays, mental health, and more. There is a monthly premium associated with this coverage that is based on your income. The cost for most people in 2015 will be $104.90 per month for individuals with income less than $85,000 per year and married couples with less than $170,000 in joint income. Premiums rise incrementally to a maximum of $335.70 for individuals with more than $214,000 in income and married couples with more than $428,000 of annual income.

Part C: This is Medigap or Medicare advantage coverage, which we’ll get into below.

Part D: This is commonly called the prescription drug plan and is only provided through private insurance companies. Part D coverage can be part of a Medicare Advantage or Medigap plan, or it can be a stand-alone plan if you only have original Medicare (parts A & B).

Part D premiums range from zero to $50 per month and pay from 50% to 95% of your outpatient prescription drug costs over $325 per month up to about $3,000. After that, it stops paying until you reach $4,750, when it kicks back in with catastrophic coverage and pays 95% of your costs. This gap in protection is known as the “doughnut hole.”

Medigap Insurance

Alternatively referred to as Medigap or Medicare Advantage Plans, Medicare Part C coverage is provided by private insurance companies that contract with Medicare to provide part or all of your Part A & B benefits and sometimes Part D prescription drug coverage.

These plans can be an important part of your retirement health care because Medicare Parts A & B have substantial deductibles and copayments that can add up to thousands of dollars in out-of-pocket costs.

The cost of Medigap or advantage plans starts at about $50 per month and can go as high as a few hundred dollars a month depending upon the level of coverage you select. Fortunately, comparing plans and costs is simplified by the fact that plans are segregated into 10 standardized policies that are assigned letters A through N. That means every A plan offers the same benefits from one insurer to another, making a cost comparison simple.

The most notable advantages of having a Medicare Advantage Plan are lower out-of-pocket costs and the convenience of having all your health insurance needs covered by a single provider. This simplifies tracking your out-of-pocket costs and managing your health care finances. As with all health care insurance, an important consideration is whether or not your doctor and preferred hospitals and providers are part of your plan’s network.

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