During our 50s we’ve spent close to thirty years working and accumulating capital. It also is an opportune moment to review the value of any insurance policies that were necessary when we were younger, more indebted and had children who depended on us as parents. As we get older, the cost of insurance becomes exponentially higher and can impede our retirement returns. Here’s three things to consider when reviewing insurances and planning for retirement .
Life Insurance
The premise of life insurance is to cover an individual in the event of a premature passing. The need to life insurance usually embodies extinguishing a mortgage, replacement of income for school fees and to provide for any expenses to a young family.
As we age this dynamic changes. Our superannuation balances are greater, and we’ve had time in the market to grow our retirement savings. In the event of a passing this sum invested is still likely to be paid out to a spouse as a lump sum, and may in may cases be sufficient in its own right to pay off a mortgage and provide a sum for the kids to get a deposit on a first home. The need may warrant a review.
Total Permanent Disablement Cover (TPD)
This is where insurance strategies tend to get a little tricker. A TPD policy is there to ensure if you can not work due to your training, occupation and experience. The majority of TPD claims occur later in life and are predominantly cancer related. It’s also pertinent to keep in mind, if you TPD after 60 the proceeds and any income drawn are tax free as the life insured has met a condition of release according to the SIS act.
When reviewing your TPD needs, it centres on ensuring your retirement capital if something adverse where to happen and that you’re not in a position where you could be reliant on social security.
Income Protection
The average income protection claim lasts for 2 years and most policies tend to expire at age 65. Depending on your financial situation and age, your income need could vary. If you’re in your early 50s, there should still be a need, however, as you age and have superannuation assets to fall back on, the need for income protection may reduce.
Critical Illness Cover
A critical illness policy is designed to pay a lump sum in the event of a medical emergency such as cancer, heart attack to stroke. As we age the probability of claim on these types of health issues are greater than when we’re younger. Similar to TPD insurance, this form of cover is to provide a stop gap should anything happen which may hinder your retirement capital.
Case Study
John (55) was reviewing his personal insurances. He has recently been diagnosed by his doctor with high blood pressure (not life threatening). His situation is summarized below:
Home: $1,200,000 Mortgage: $200,000
Cash: $150,000
Super: $550,000
Inv. $800,000 Inv. Loan: $300,000
Property
Current Insurances Premium:
Life Insurance = $1.5M $3,000
TPD insurance = $1.5M $3,500
Critical Illness = $150,000 $2,800
Income Protection = $120,000/a $3,000
90 Day Wait / To Age 65
After reviewing the need, John realised that he no longer needed life insurance, both of his kids are now at university, his wife was also working throughout having children and had also accumulated a significant superannuation portfolio.
He decided to cancel the life insurance policy as his cash savings and super would extinguish the debt; saving him $3,000 per annum. This compounded over 10 years added $55,000 to his retirement capital.
His objective for TPD was to extinguish any debt on his investment property and mortgage, reducing the cover to $500,000. In this case he could rely on the rental income from the property and an income protection policy until he turned 60. The decision was made to reduce the benefit period on his income protection policy to 5 years, in the worst case scenario he could access his super and rely on the rent from a property to fund his lifestyle objective of $60,000 per annum.
In conclusion, by making these changes it resulted in $5,000 saving every year; all of which would be compounded in his superannuation account for his eventual retirement objective of retiring at 65 on an income of $60,000.
NB: It’s important to consider that this is a hypothetical situation, its paramount that you consider the cost of your premiums and individual needs before making a decision.
In conclusion, as we get older insurance still has a role to play in our finances particularly in our 50s. It’s about balancing the trade offs and the cost to our retirement savings and prioritising your objectives while also managing risk and ensuring that you’re getting utility from a policy.
