When money gets tight, it can be tempting to ditch some insurance coverage to balance your budget. However, that could leave you high and dry. Instead, figure your premiums into your income plan itself.
You have probably seen TV commercials recently where:
A retired couple decides to drop their life insurance policy in order to create some extra cash.
An ex-quarterback talks about health insurance to supplement basic Medicare.
A recognizable mustachioed actor touts the advantages of tax-free cash through a reverse mortgage.
Evaluating the products and the companies offering them is absolutely critical before you make any decision. However, the real challenge for you may be whether or not you can find income elsewhere to:
Pay the life insurance premiums instead of deciding to drop the policy.
Pay the higher health care premiums for the more generous Medicare Supplement plan.
Purchase longevity insurance to complement the reverse mortgage draw downs. (Longevity insurance is the opposite of life insurance; it pays you income if you live, which means in this case it could continue the cash flow from reverse mortgage draw downs beyond a certain age.)
As I always advocate, it is better to create a plan for retirement income first, and then figure out whether you can afford the premiums on the insurance protection you believe you need. That allows you to afford all the pleasures and necessities — including insurance — that best fit the needs of you and your family, with less worry and much more flexibility.
By unbundling the income and insurance elements of your plan, you can adjust them to reflect market conditions, the change in the personal circumstances of you or a spouse, or a change in situation of a child or grandchild. And your initial planning has all the flexibility of the individual components.
The value of staying the course
The older you are, the more likely you are to need the benefits of insurance (especially during pandemics). That means the value of each policy increases as you age. You may be able to lock in annual premiums that will remain unchanged; however, for many policies, prices will continue to grow annually. Whatever the circumstances, some people stop paying the premiums, which makes the insurance worthless when you need it. So, continued insurance premiums — whether increasing or not — have to be figured into your income plan. Fortunately, you can build an income plan that allows you the flexibility to choose the best insurance policies for you and that fit your budget.
It just takes a little homework …
What type of insurance?
You may want life insurance, for example, that will fund a financial legacy for your heirs. On the other hand, perhaps you may only want enough to cover your funeral expenses, because you have taken care of the kids in other ways. You may consider long-term care insurance a necessity to prevent you or your spouse from having to sell the family home if either or both of you require a stay in a long-term care facility or need to hire an aide for home care.
Perhaps a Medicare Supplement policy will pay expenses that Medicare doesn’t. Or you hope to stay in your home and a reverse mortgage will help you do that. There are lots of options here, so you want to know what you can afford.
Different companies will offer terms that you can analyze to make sure they offer what you need. If you don’t understand the terms, find an agent or agency to help you interpret them. If you still aren’t clear, look for another insurance adviser.
Your retirement income plan
A mix of stability and reasonable market risk is the best way to create income during retirement. I favor allocating a portion of your income to annuity payments as a way to provide guaranteed income, combined with dividends, interest and IRA withdrawals, along with Social Security payments and a pension, if you are lucky enough to have one. Allocating your income among major income sources provides a reliable stream of cash and gives you the opportunity to continue to adjust to market conditions.
Happily, you can take advantage of certain tax benefits offered by income annuities and insurance products if you design the income plan and insurance purchase separately. You may not get the best tax treatment if you purchase a hybrid insurance product that combines multiple protections.
Plan to create the income to pay for your insurance needs. Consideration of flexibility of the products and transparency about how they work is equally important.
President, Golden Retirement Advisors Inc.