Enjoying a secure retirement means more than just hitting your investment goals. It also requires planning ahead for certain financial obstacles that could potentially make your later years a little less golden.
Having the right kinds of insurance can go a long way toward helping you combat potential blips on the radar. The difficult part is figuring out which type of coverage you need and how much is enough.
Understanding the problems each insurance policy is designed to protect against can help you decide where they fit in the financial picture. If you’re not sure which kind of coverage is best, here are four policies you may want to consider.
Start with life insurance. Life insurance is designed to cover burial expenses and pay off any debts owed by your estate when you die. If you’re married, however, it can serve a different purpose.
Rather than having to draw down savings you leave behind, your spouse can use the proceeds from a life insurance policy to cover basic expenses and maintain their standard of living. That would leave any retirement nest egg the two of you have saved intact until it’s actually needed.
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The challenge is deciding how much coverage you’ll need. Eric Meermann, a certified financial planner with Palisades Hudson Financial Group’s Scarsdale office, outlines two ways to approach it.
“The first option is the income replacement method,” Meermann says.
In this scenario, you’re creating a lump sum figure that represents how much you expect to earn over the rest of your life, assuming a normal life expectancy.
The second method focuses on what’s needed to maintain a specific standard of living.
“Rather than looking to replace every dollar you would have earned, you look at the lifestyle you want to provide for your beneficiaries after you’re gone,” Meermann says.
The goal is to make sure your policy provides your spouse with enough money so that they can still enjoy a comfortable retirement even when they no longer have your income.
Death isn’t the only eventuality you need to plan for. While the possibility of dying before you’ve had a chance to build up a sizable retirement fund is less than encouraging, a disability has the potential to be just as devastating.
If you become temporarily or permanently disabled, your ability to work may be hindered.
That’s what makes disability insurance so important, particularly for someone who’s rearing a family, says Robert Chewning, head of wealth insurance services with Wells Fargo Private Bank.
“Your paycheck is what pays the mortgage, puts food on the table, contributes to a 401(k) and pays for a college education,” Chewning says. “Disability insurance is meant to insure against a disability preventing you from working and earning a living.”
If you’re planning to get disability coverage, it isn’t something you should put off until you’re older, says Nahum Daniels, a certified financial planner and independent wealth advisor in Stamford, Connecticut.
“Disability insurance is something anyone under 65 years of age should strongly consider,” Daniels says. “Having this coverage could mean the difference between financial survival and financial catastrophe.”
Long-term care insurance can shield against high medical costs. Poor health can present a substantial threat to retirement savings if you require long-term care.
The U.S. Department of Health and Human Services puts the average cost of a nursing home stay in a semi-private room at $6,235 month. That’s more than $72,000 per year that could siphoned away from your retirement accounts. Long-term care insurance is designed specifically to help you avoid having to spend a lifetime of savings on medical care.
Jimmy Lee, a certified fund specialist and CEO of Las Vegas-based Wealth Consulting Group, says that long-term care insurance is critical to maintaining your retirement lifestyle, especially for married couples.
“This insurance provides money to pay for home health, assisted living and nursing home care,” Lee says. “I’ve seen people who care for their sick spouses lose years on their retirement trying to take care of their loved ones.”
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Daniels cautions people to remember that long-term care services aren’t covered by Medicare or disability insurance. Because of that, he believes long-term care insurance is extremely important for most retirees.
“You need to ask yourself, ‘If my spouse were to need care for 18 months, would there be any money left for me when I’m finished paying for that care?'” Daniels says.
Insuring yourself against personal liability is also important. It seems silly to think that a car accident could send your retirement skidding out of control but depending on where you live, it could be a reality.
In a handful of states, California most notably among them, individual retirement accounts aren’t protected against creditor lawsuits to the same degree as a 401(k) would be. If you’re sued following an accident, it’s possible that some of your retirement savings could be attached to satisfy a judgment.
Purchasing an umbrella liability insurance policy can insulate you against big losses, says Timothy G. Wiedman, a now-retired associate professor of management and human resources at Doane University in Crete, Nebraska.
“Imagine being the only driver who receives a traffic ticket after an accident in which several people are injured,” Wiedman says. In the worst-case scenario, he says, a million-dollar lawsuit could be a possibility.
According to Wiedman, the typical coverage in an automobile policy wouldn’t provide nearly enough to cover the claim, which means your personal assets would be at risk to make up the difference.
An umbrella policy could be a lifesaver if the liability limits of your homeowners or automobile policy are exhausted after an accident.
Be clear about what you need and what you don’t. Insurance can be an ace in the hole but it not’s the right fit for every situation, says Lee.
“If someone has enough assets to replace lost income in a long-term disability or premature death situation, then they’re self-insured,” Lee says.
Chewning suggests asking yourself the right questions as a means of gauging what your insurance needs truly are.
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“Have you considered the financial impact if your parents don’t have long-term care? How important is it to leave a legacy to your children and grandchildren?” Chewning says. “Have you created wealth that’s exposed to estate taxes and transfer costs? Have you built a successful family business you hope will stay in the family? These are just some of the milestones in many people’s lives where proper insurance planning may mitigate the financial impact of real-life events.”