Insuring Your Retirement Plan

The essence of the word plan suggests that you need to formulate a strategy ahead of time. According toBusinessDictionary.com a plan is a "Written account of intended future course of action (scheme) aimed at achieving specific goal(s) or objective(s) within a specific timeframe. It explains in detail what needs to be done, when, how, and by whom, and often includes best case, expected case, and worst case scenarios." 

In retirement planning, it means constructing an investment strategy that will help you meet the needs of a time when you no longer want to work - or at least work in the same capacity you have for most of your life. You make assumptions about that period of time and incorporate those into the plan: accumulating wealth, managing debt, staying healthy, paying off mortgages are just a few of the examples of acting to ensure that those assumptions have a chance of coming to fruition.

You approach retirement planning with a certain degree of optimism. Otherwise, why bother? But adulthood can leave us far more pragmatic and because we know things can go wrong - investments can sour, housing can lose value, our health can take a turn for the worse, and debt can be created with the simplest of financial mishaps - and all with unforeseen results.

So we insure. We insure our property against lose, our health against illness and sometimes our investments as well. And we insure our personal contribution to the rest of the people in our lives with life insurance.

Insurance, particularly life insurance is bought when we feel responsible for those around us in a way that we can't really explain. We want these loved ones to continue on without us but to do so without financial hardship that our lives have prevented. We want them to continue on with their lives allowing our children to reach their potential (such as college) and our spouses to be able to live in a way that is supportive of our children.

There is no clear answer to how much is enough. If you were asked how much you would need to live comfortably without ever having to work again, say through a lottery winning, you would probably answer $2-3 million. Yet when we shop for insurance, we often think in terms of a fraction of that.

Insurance is part of a good retirement plan. Too much or the wrong type of insurance can put pressure on your ability to invest enough to get to a comfortable retirement. Not enough, and your family will not be able to survive financially should your income suddenly disappear.

The least expensive insurance is term insurance. It offers the most coverage for the smallest premium but comes with one caveat: it ends after a certain period of time. In other words, if you never use it (and both you and the insurer hope this is what happens), you lose it. Often sold in 20-year increments, it does what it is supposed to do and if you are fortunate, it will never be needed.

Whole life insurance is exactly that: it is a policy that lasts a lifetime provided you keep it long enough and pay the premiums. It builds up a cash value which acts as an investment of sorts and will, after a period of time, begin to pay the premiums for you. But the coverage for the same amount as a term life policy is often much lower and if you want a lot of coverage, the premiums are much higher.

If you are contemplating buying whole life do so only if you are on firm financial footing and can keep your retirement accounts fully funded. Buy term if you are younger, building a family and are likely to face financial hurdles in the coming years. The vast majority of those who buy whole life insurance end up selling the policy after a certain period and if they buy insurance again, they buy term.

Term life insurance is the least expensive when you are young and you can get the most coverage as a result.

You do need to keep two things in mind when buying any insurance product: be truthful and forthcoming with as much information as possible when buying the policy. Although, according to the insurance industry, almost all claims are paid without question, 0.05% of the remaining claims are challenged.  In all cases, be prepared for the fight that might ensue (an example can be found here) if the policy you are using was recently bought. And, always buy from a company whose name you recognize, is rated highly and will be around for the term of the policy.

Paul Petillo is the managing editor of BlueCollarDollar.com and Target2025.com