Retirees, Schedule an Insurance Audit

A sound retirement plan is like a well-built house: Your savings form a solid foundation; retirement accounts are spacious rooms furnished with a balanced mix of stocks and bonds; Social Security and other guaranteed income provide insulation; and life, long-term-care and other insurance policies keep the rain out. But what if that roof starts to leak? Isn’t it time for a thorough insurance inspection?

While it’s always a good idea to review your insurance coverage every few years, a coverage check-up is especially important as you approach retirement. Perhaps a life-insurance policy that you no longer need can be transformed into a stream of guaranteed lifetime income. Maybe you’ve overlooked long-term-care coverage that could prevent a nursing-home stay from wiping out your savings. And if you’re not regularly shopping around for better rates, you may be missing out on big savings on homeowners, auto and other coverage. (We’ll save health insurance, which calls for an annual check-up, for a separate article.)

Of course, you can’t insure against every risk you face in retirement. The key is to sweat the big stuff. There’s “a hierarchy of insurance planning,” says Dave Evans, a former senior vice president for retirement and financial planning at the Independent Insurance Agents and Brokers of America, a trade group. “Start with the most catastrophic thing that can happen. Sometimes it’s dying. Sometimes it’s a disability.” Then make sure you have a cushy emergency fund so you can self-insure against smaller risks. If you drop your phone in the toilet, that’s something your emergency fund—not a pricey cell-phone insurance plan—should cover.

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Seeking out a strong but affordable safety net is all the more important as premiums are increasing for many types of coverage. Long-term-care policyholders have been plagued by steep premium hikes in recent years—the result of insurers underpricing these policies years ago. Many people holding older universal life insurance policies have been hit with double-digit premium increases as insurers contend with a long stretch of low interest rates. Even car insurance premiums are rising sharply, as more cars on the road, distracted driving and rising health care costs lead to more and pricier claims.

So pull out your policies and sharpen your pencil: It’s time to plug the leaks and find stronger, cheaper insurance coverage.

Life Insurance

As you approach retirement, a key question to ask about life insurance is a basic one: Do you still need it?

Maybe you bought the policy as protection for children and others who were financially dependent on you. But now the kids have grown, and you’ve paid off the mortgage and saved adequately for retirement, so your spouse will be financially secure without you. In that case, you may no longer need life insurance.

If you bought a permanent policy with the idea that it might be part of your retirement-income plan or estate plan, there’s a good chance you’ll want to hold on to it. But it still requires close monitoring. “You should be getting in-force illustrations on permanent policies every year,” which include a projection of the policy’s future value, says Scott Witt, a fee-only insurance adviser in New Berlin, Wisc. “The main thing you’re looking for is to see if the coverage runs out at some point.” Certain “permanent” policies can become not so permanent if interest rates are lower than expected or insurance costs or administrative expenses rise.

If you hold a life insurance policy that you no longer need, carefully explore your options before walking away. Contact an independent, fee-only insurance adviser for help. At EvaluateLifeInsurance.org, for example, you can get a policy analysis for $125.

In some cases, it makes sense to simply stay put. With level term life insurance, in which your premiums remain fixed during the initial policy term, “you overpay in early years, and you’re effectively underpaying in later years,” Witt says. In that case, he says, it can make the most sense to keep the policy.

If you have a permanent life policy and no longer need the death benefit, you may have an array of options. The policy remains in force as long as you pay premiums and lets you accumulate cash value. You could surrender the policy for the cash value—but you’ll have a taxable gain to the extent that value exceeds the premiums you’ve paid.

Before walking away from such a policy, consider its value as an investment. Glenn Daily, a fee-only insurance adviser in New York City, has a whole life policy that he doesn’t really need. But he hangs on to it because his cash value is growing at more than 4% a year—far better than what he’d get in conservative bond investments. “I see that a lot with existing whole life,” he says. Yet people are often tempted to back away from these high-return policies, he says, because “they think of it as an expense, not as an investment.”

If you’re sick of paying premiums, consider the “reduced paid up” option. You stop paying premiums but maintain coverage, albeit with a reduced death benefit.

Another option: Convert your life insurance tax-free into an annuity through a 1035 exchange. This can be a particularly good move if your policy is “underwater,” meaning you’ve paid far more in premiums than you’ve accumulated in cash value. Say you’ve put $120,000 into a policy that has a cash value of just $50,000. With a 1035 exchange, your cost basis and cash value carry over to the annuity, so now the first $70,000 of growth from the annuity will be tax-free.

Long-Term Care and Disability

Another option: Exchange a life insurance policy tax-free for another life insurance policy or an annuity with a long-term-care rider.

Sales of hybrid policies combining life insurance with long-term care have been brisk in recent years, as consumers were turned off by the steep premium increases and “use it or lose it” nature of stand-alone long-term-care policies. Hybrid policies typically require a single up-front premium, so you don’t have to worry about future premium increases—but you also give up the opportunity to earn a market rate of return on that lump sum. (Read Hybrid Insurance Policies Gaining Steam.)

Given the complexity of these products, it seems all but impossible for consumers to find the best long-term-care coverage bargain. But a new service being launched by Sutter’s Mill Valuation Services, a firm part-owned by Daily, aims to do just that. Based on a database of actual long-term-care claims by 2 million people, the firm built a model that helps estimate the present value of benefits policyholders can expect to receive in both stand-alone and hybrid long-term-care policies. By comparing that against the present value of premiums you can expect to pay, the firm can calculate a “money’s worth ratio” for each product, showing how much of your premium dollar you can expect to get back in benefits. The firm will charge about $450 to $500 for an analysis that walks consumers through their options, says Doug Bennett, an actuary and principal at Sutter’s Mill.

The analysis can help guide consumers through the maze of selecting products, benefit periods and inflation options—and the results can be counterintuitive. One 50-year-old client was weighing a life insurance/long-term-care hybrid product that offered a choice between a three-year and seven-year benefit period, Bennett says. Even though typical long-term-care claims are much shorter than seven years, the analysis found that the seven-year benefit period was the best deal for the client because the premiums were much lower relative to the expected benefits, he says.

Long-term-disability coverage should also be part of your insurance check-up. Disability coverage is worth investigating if you plan to work another 10-plus years and are banking on those future earnings for a secure retirement. As you near retirement, your earnings may be higher than they’ve ever been—but the likelihood that you’ll become disabled also increases as you age.

First, find out what coverage might be available through your employer. A group policy is likely to be much cheaper than anything you can get on your own. If you get sticker shock when shopping for an individual policy, consider extending the “waiting period”—the time between the onset of a disability and when benefits kick in—from the typical 90 days to six months or a year, depending on the size of your emergency fund. “That dramatically brings down the cost of the policy,” says Jennifer Fitzgerald, chief executive officer of PolicyGenius, an online insurance broker. And while a disability policy typically replaces about 65% of your gross salary, you might also save by dialing that down to 30% or 40%, so you at least have something to cover basic living expenses, Fitzgerald says.

These policies typically stop paying out around age 65. If you continue to work but have saved adequately, you may not need a disability policy.

Disability policies often require policyholders to work at least 25 to 30 hours a week. If you have coverage and shift to part-time work, “make sure you’re not paying for coverage you can’t use,” Fitzgerald says.

Property and Casualty

Even if you haven’t made any major changes to your home, it’s worth regularly reviewing your homeowners insurance. One key question is whether you have enough coverage to rebuild your home in the event of a total loss with comparable construction materials at current labor costs, says Michael Barry, a vice president at the Insurance Information Institute.

As more seniors start renting out rooms on home-sharing websites, standard homeowners coverage may fall short. If an Airbnb guest falls down your stairs, you could be liable. Ask your insurer about a separate rider to cover use of the house as a rental property. Some insurers, such as Allstate, are starting to offer coverage designed for home-sharing hosts.

If you’re planning a snowbird retirement, be prepared to do some extra homework. Some insurers are reluctant to cover homes that are unoccupied much of the year. Bob Hunter, director of insurance at the Consumer Federation of America, spends summers at his fishing camp in Maine, which is closed for nine months of the year, “and it’s hard for me to get insurance,” he says. “I have to go to companies that specialize in this type of thing.” Find an independent agent who can compare policies from multiple insurers at TrustedChoice.com, a site run by the Independent Insurance Agents and Brokers of America.

If you’re not regularly shopping around for homeowners coverage, you may be missing out on big savings. The disparity in premiums among insurers has widened in recent years, Hunter says, as more insurers turn to “price optimization”—using sophisticated computer models and data from social media and other sources to determine a customer’s sensitivity to price changes. Insurers “get data from all these sources and decide, ‘this person doesn’t shop around, and we can go ahead and jack the price up,’ ” Hunter says.

Shopping around is equally important in the world of car insurance. Auto-insurance premiums tend to drop as you age until you hit your sixties, but they generally tick up from there. The average annual auto insurance premium is $1,644 for 80-to-85-year-olds, compared with $1,185 for 60-to-69-year-olds, according to The Zebra, a car insurance comparison site. Almost all state insurance department websites offer tables comparing rates for various insurers and driver profiles, Hunter says.

If you’re cutting out a long commute when you retire, ask your insurer if you qualify for a low-mileage discount. Some carriers, such as Metromile, also offer usage-based coverage, with prices based on the number of miles you drive.

Many states mandate discounts for older drivers who take a safe driving course, says Taylor Tepper, financial planning analyst at Bankrate.com. AARP’s Smart Driver course is available online at www.aarpdriversafety.org.

If you’re willing to install a device in your car that tracks your speed, braking and other driving habits, you may be able to save even more. “Telematics” programs such as Allstate’s Drivewise and Progressive’s Snapshot reward safe drivers with discounts.

Improving your credit score may slash your premiums. Forty-seven states allow auto insurers to consider credit scores when setting rates. Paying off credit cards every month and reducing the amount of debt you carry relative to your credit limit will help boost your score. Monitor your credit report for errors: Get a free report from each of the three credit bureaus each year at www.annualcreditreport.com.

Check the total liability coverage provided by your auto and homeowners policies, and ask yourself if that protects all of your assets, says Jamie Hopkins, director of the retirement income program at The American College of Financial Services. If not, consider an umbrella policy—extra liability insurance—to cover your entire net worth. If you’re hiring in-home help, such as a caregiver or housekeeper, employment practices liability can be added as an endorsement to a personal umbrella policy, says Annmarie Camp, executive vice president for personal risk services at Chubb.

Umbrella coverage tends to be relatively inexpensive—perhaps $200 per year for $1 million of coverage—and it buys you a lot of peace of mind. One of the biggest financial issues for seniors, Evans says, “is to make sure they have enough limit to liability so their life savings aren’t at risk.”