Retirement is such a loaded subject when it comes to needs versus the ability of one’s disposable income to satisfy those needs. Retirement as a concept seems idyllic, especially when accompanied by the dreams of spending more time visiting the grandkids or doing all the things (and going to all the places) we didn’t previously have the time or resources for.

Though, cash flow problems are often intensified after retirement. It is at this time that our clients look for ways to increase their disposable incomes to be able to meet immediate needs and as a result are tempted to cancel costs that they do not get immediate benefit from, such as short-term insurance and death cover contracts.

Reasons that clients often give as to why they feel life cover can be justified as one of the first costs cut, is because they believe that:

• life cover was taken to settle debt upon their death – and often debts are fully settled by the time they retire and so the cover is no longer seen as a necessity; or
• capital and/or income built up for retirement will be sufficient to cover income for their surviving spouse and so additional capital will not necessarily be needed.

The importance of life cover extends well beyond just those matters though and could be the difference between financial stability and financial disaster for your beneficiaries.

Life cover should be considered as an essential tool for your estate planning; ensuring that there is sufficient liquidity in your estate for your executor to settle any outstanding debt, taxes, funeral costs or estate-related costs such as estate duty and executor fees. The availability of capital upon death means that assets (such as the house your spouse lives in or the car that they drive) do not have to be sold to cover costs such as the above.

Maintaining life cover is also a relatively affordable means to ensuring that you can leave a legacy (inheritance) behind for those that you wish to ensure remain cared for, alternatively, the amount paid out upon death could be used to help generate a future annuity income for your beneficiaries. Once that contract becomes cancelled, that legacy is lost.

At retirement, clients generally have two options available to them:

• A living annuity – this is essentially an investment product that fluctuates with the market and pays out a retirement income at an annually determined ‘draw-down rate’. A suggested draw down rate is usually around 4% per annum of the total investment value, in order to ensure that capital remains preserved. At death, this product can be left to beneficiaries and thus has the ability to last in perpetuity. However, few people have sufficient capital to only draw down at 4%. Higher draw downs lead to capital depletion. In those instances, a life cover pay-out on death is often needed by the remaining spouse to maintain income levels.
• A life annuity – which enables individuals to earn a guaranteed pension income that has annual guaranteed increases. However, this does not address the need to leave a legacy as capital is generally not returned upon death (unless a Capital Preservation option is chosen which also has a death pay-out – however results in lower annuity income).

Another option that could be considered is life cover that remains in place without having to contribute premiums. In short—some institutions offer life cover (albeit at an elevated cost) that will remain in place when reaching a certain age. The thinking here is that during our working career, we can afford these elevated premiums, and when retired, the premium obligations fall away.

This affords you the ability to ensure that even if you experience cashflow difficulties upon retirement, your life cover will remain in place in order to ensure that your estate remains liquid and that you can leave a legacy to those that matter most to you.

This is a worthwhile consideration if you consider the following scenario, which is a typical example relevant to many retiring individuals:

- Life cover contract purchased at the age of 42;
- Premiums are paid for 23 years until age 65 when retiring;
- Life cover gets cancelled to increase disposable income available; and
- 23 years of premiums essentially go wasted…

One final consideration, if you were not in a position to have chosen life cover that remains in place and should you experience severe cashflow difficulties upon retirement is to give your beneficiaries (your children, for example) the option of taking over premium payments in order to ensure that the capital from a policy is not lost to them.

In summary, consider all options available to you and be careful not to cancel your life (or other risk) policies too quickly after retirement as the implications to those that remain behind may be material. And, if you are able to, consider the option of cover that will remain in place throughout retirement, without having to pay for it. If you would like to discuss your options, please contact us.