Insurance is a key part of good financial planning. We can save and invest with an eye toward meeting our families’ financial needs through retirement and beyond, but there’s much we can’t control. An unexpected illness, death, disaster, or lawsuit could mean financial liabilities beyond what we’ve saved.
Knowing your family is protected against such hardships can be a compelling argument for many kinds of insurance coverage. During your working years, these could include health insurance to cover unforeseen medical expenses, life insurance to provide needed income in the event of a death, and liability insurance to protect against costs arising from lawsuits. Business owners might also consider insuring against an interruption of their income or the death of a partner.
But the situation can change as you enter retirement. Leaving the workforce might mean switching from employer-provided health insurance to Medicare, if you’re 65 or older. If you’ve built up enough savings, you may no longer need the income protections afforded by life insurance. And if you no longer have children living at home, you might consider scaling back your liability coverage.
As with any financial-planning question, there are no hard and fast rules. Everyone’s needs and risk-management preferences will be unique. But it makes sense to zero in on what’s essential.
Joseph Reyes, a Schwab Senior Financial Planner based in Phoenix, helps clients do just that.
“Any insurance in retirement is going to be very specific. It’s there to protect a clearly defined need,” he says. “The overarching question is: What event could come up that you need to protect against, and how can you do that with insurance?”
Let’s look at three hypothetical situations and how a planner can help address insurance needs.
Health-care and long-term care coverage
Jack and Jane are in a pretty good place. After years of saving and investing, they’re financially prepared to enjoy their golden years with enough wealth to pay for a nice retirement for two. They have no debts, and at 65, they’ll be covered by Medicare. Their youngest child has moved out, too—and not having a teenage driver in the house means they can reduce their liability coverage.
“Jack and Jane have all the money they need, so they have no income-protection concerns,” Joseph says. “But there are other issues to consider, such as extra health-care coverage and long-term care.”
Unfortunately, Medicare doesn’t pay for everything. It covered only about 60% of the health-care costs of beneficiaries aged 65 and older in 2012, according to the Employee Benefit Research Institute.1 Retirees had to pay out-of-pocket for about 13% of their costs, leaving private insurance and other sources to make up the difference. Having insurance to cover that shortfall can be a good idea.
Also, Medicare generally doesn’t cover long-term care or personal services, such as help with daily activities like bathing and dressing, or supervision for those with cognitive impairment. These services can be expensive.
A year’s stay in a nursing home cost more than $80,000 on average in 2013, though in some parts of the country it was twice that amount.2 The monthly cost of a one-bedroom apartment in an assisted-living facility can run anywhere from $600 to $11,250, according to a 2015 study by the insurer Genworth Financial.3 And the cost of both types of care has been rising, so carrying insurance to cover such services can be helpful.
Coverage for health care and long-term care is particularly important for single people, who don’t have a spouse to help them and might not have any children.
“I ask my clients to think of health care and long-term care needs as the base of the pyramid—everything else builds from there,” Joseph says.
Covering an age gap
Pat still works, but his wife, Carol, who’s 10 years younger, doesn’t. Pat has three children from a previous marriage. He wants to retire at 65 and has accumulated enough savings to support himself and his wife until he turns 90.
“Cases like this are more common than you might expect, and they raise a lot of issues where insurance can help,” Joseph says.
First of all, Pat may be able to collect Medicare at age 65, but Carol will still need health insurance coverage until she’s eligible. When she makes the switch to Medicare, the couple may want to consider supplemental health insurance to cover any shortfalls.
The age gap also raises questions about sustained income if both Pat and Carol live to age 90. If their savings are geared toward Pat’s life expectancy, Carol will still need money to cover her last 10 years of retirement. In that case, life insurance, which provides a specified cash payout during the period covered by the policy, might make sense.
“There’s also a question about long-term care,” Joseph says. “If Pat needs long-term care, will Carol be able to cover it? If Carol needs help after Pat is gone, will Pat’s kids look after her? Again, insurance can help alleviate some concerns around these issues.”
Insurance for business owners
Ben and Sarah own an independent bookstore. They’re planning to sell the business as they draw closer to retirement, but will continue working there to ensure a smooth transition. They’ll receive their payment over the course of a 10-year period.
“Most people announce their retirement, have a party and then leave. That’s the end of it,” Joseph says. “Things look a little different if you’re stepping away from your own business. You need to think about how you’ll manage the transition.”
Because Ben and Sarah expect to receive payment for their stake in the business over a set period, they’ll need to think about protecting that income. For example, they could consider key man insurance, which would allow them to take a policy out on the business’s new owner. If something happened to the new owner before they collected their full payment, they would still be compensated.
Retiring or retired business owners may also need to think about how much liability insurance they need, as they may still be exposed to legal risks if something happens on their property. Other forms of insurance can give surviving spouses the resources to buy out other business partners if the main partner dies.
Making sure you’re covered
The bottom line is that when you retire, some insurance needs go away, others remain. Even people who have plenty of savings may still find it worthwhile to carry insurance to protect against unexpected costs for health care or long-term care.
Again, it’s all about what you have to protect and what you’re protecting it against. So, talk with your Schwab Consultant to make sure you’re covering what’s most important to you. If you need help sorting through the thicket of insurance possibilities, planners like Joseph can help.
1 Paul Fronstin, Dallas Salisbury, and Jack VanDerhei, “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good,” Employee Benefit Research Institute, 10/2015.
2 America’s Health Insurance Plans, “Guide to Long Term Care Insurance,” 2013.
3 Genworth Financial, “Genworth 2015 Cost of Care Survey,” 2015.