Retirement planning or using your investment allowances is often at the forefront of financial planning, but there is also a great need to ensure that our clients have the right protection in place to preserve their wealth for their beneficiaries on their death or to protect their income in the event of serious illness or injury.
During working lives, employers may provide death in service benefits or access to income protection and critical illness plans which provide cost effective protection. However, in retirement, protection is often overlooked and policies can lapse or company benefits stop. But is there still a need?
Protection needs in retirement
Protection continues to be a need in retirement, particularly nowadays with growth of borrowing and debt among retirees. Generally the older you are, the more expensive life cover is likely to be – but if you get suitable plans in place as soon as possible, you can get the protection you need at a manageable cost and give yourself valuable reassurance and peace of mind over the long term.
The benefits of life cover
Making sure that your wealth and income is protected can benefit you and your chosen beneficiaries. We welcome clients to invite their children or relatives to attend advice appointments when we are reviewing protection needs and future plans.
In retirement, protection needs can include:
1. Covering your dependants – For example, you should consider the consequences of your death on household income and lifestyle for your spouse/partner and other dependants.
More young adults are staying in the family home. For people aged 20 to 34 this has risen from 19.48% in 1997, 2.4 million people, to 25.91% in 2017, 3.4 million people. You may also have older dependants who live with you as well and it is important to consider how their death may impact you financially, as this highlights a protection need. If you do not have the right protection in place for you and your dependants then household income can be vulnerable to death or serious illness of you or your dependants.
If you have dependants – a partner or children, or even a parent that you care for – then life insurance is not a luxury, it is a necessity. Without it, your loved ones may struggle to repay the mortgage and other debts after you’re gone or provide the capital to provide the income required to meet the family living costs.
2. Covering debts/liabilities/mortgages – Average debt levels amongst retired people are rising and research by Prudential found average debt for people retiring is £33,900. The Centre for Economics and Business Research (CEBR) has seen debts for over 65s rising from £70 billion in 2016 to £85 billion in 2018.
Some of this debt is as a result of the growth in equity release plans being taken out to access funds held in a property – but these rising debt levels do highlight protection needs in retirement. Without protection in place, these debts will be taken from the estate on death which will reduce the inheritance passed to beneficiaries and can also cause anxiety as the beneficiaries may not have access to the funds required to repay these debts.
3. To pay an Inheritance Tax (IHT) bill – As the nil-rate band has been frozen at £325,000 since 2009/2010, despite the introduction of the main residence nil rate band at £150,000 in tax year 2019/2020, more estates are subject to Inheritance Tax.
HM Revenue & Customs latest figures confirm that in 2016/2017 over 28,000 estates paid an Inheritance Tax bill. The average bill was £179,000 and the proportion of estates liable rose from 2.6% in 2009 to 4.6% in 2016/2017. Total IHT receipts reached record levels of £5.4 billion in 2018/2019.
If there is an Inheritance Tax liability, the estate often has to raise the funds before assets can be released. This can cause additional distress and can even force the sale of assets, including the family home. A whole of life policy can be used to meet the IHT liability on death, removing the worry of having to raise these funds from personal sources.
Our advice recommendations
There are a range of protection options offering peace of mind should disaster strike, including life insurance which provides protection (cash) in the event of death, and critical illness policies which provide protection (cash) in the event of serious illness or incapacity. If you continue to work, you may also consider income protection.
There are 8.5 million people without life cover policies in the UK. Critical illness policies are even less common, leaving people exposed if they are diagnosed with a condition that limits their life expectancy or capability. Having the right protection plans in place can help you avoid losing your home, avoid destroying your future family wellbeing and help reduce financial problems and worries.
Ask your Origen Adviser to review your protection needs. Having the right insurance in place can be a small price to pay for providing reassurance to you and your loved ones, reducing the impact of financial worries in the event of a long term illness or death. It is also worth reviewing existing policies from time to time to ensure that the payments are competitive and that the cover reflects yours and your family’s changing needs.