How life insurance can help with retirement planning
[social_share]Life insurance can be a good tool when looking at retirement planning, although many people seem to assume that it does not have a place.
Many people believe life insurance and retirement are mutually exclusive. After all they use the same discipline, that of the actuary, but for different purposes. With life insurance the actuary tries to work out how likely it is that a person will die within a certain period of time, while with pensions, particularly annuities, an actuary tries to work out how long a person will live.
However there are reasons for considering life insurance during retirement. The first is to cover a partner. In most cases during retirement there’s an option to accept a lower pension to cover the surviving partner after the pension holder’s death, which will have the same effect as purchasing life insurance. However not all policies offer that provision, and some of those will limit who they accept as a partner. This can mean that even when a person has retired, there may be another person who is dependent on the income.
There is a similar situation if the pension holder passes before retirement, in that although the pension fund may transfer to the surviving partner, the partner may not be able to access it until a set date. This shortfall can be covered by some life insurance policies.
Another reason for including life insurance as part of retirement planning is to cover adult children upon whom the pension holder may have some dependency. For example although there may be a degree of financial dependency, there’s more likely to be dependency for work around the house such as caregiving or heavy work in the house or garden. In this situation, if the son or daughter were to die then someone would need to be hired to perform these tasks. This extra expense can be covered through life insurance.
Another use for life insurance in retirement planning, although it is not seen as this, is the use of reverse mortgages. A reverse mortgage pays the homeowner a certain proportion of the value of the home in return for a lien on the title. Interest then accrues on the loan, although none is charged to the homeowner. When the homeowner dies, the mortgage, interest, and fees are paid off, usually by the house being sold. This is a form of reverse life insurance, and many of these mortgages are offered by life insurance companies. The payout received is calculated in reference to the life expectancy of the homeowners.
