A Boomer Guide to Proper Insurance
The coverage you need changes with time. Here's what to look for in your 50s and 60s.
Insurance is an invaluable safety net against all kinds of costly calamities. Although a careful review of your policies is hardly anyone’s definition of fun, it’s a smart move in your 50s and 60s, primarily because insurance needs shift over time — chances are you've got too much coverage in some areas and too little in others.
“As people move through their lives, their financial risks change,” says Jonathan Guyton, a certified financial planner and principal at Cornerstone Wealth Advisors in Edina, Minn.
But before I detail the coverage every boomer should have, I want to share my four basic rules for buying insurance at any age:
- Buy insurance only from companies that are financially stable. You can find financial-strength grades of insurers on the websites of the major rating agencies, including A.M. Best, Moody’s Investor Services and Standard & Poor’s. If possible, stick with insurers that have also been around for a long time.
- Keep it simple. I’m wary of insurance policies laden with bells and whistles that make a policy more expensive and increase its complexity. Take life insurance, for example. I like plain-vanilla term life insurance because you get a death benefit — and nothing else. (It's also easy to do comparison shopping online.) At the other end of the complexity spectrum are variable universal life policies with mutual fund-like investments, flexible premium payments and death benefits you can raise or lower down the road. Eek.
- Focus on big risks — the kind of calamities that could wipe you out financially. For instance, a comprehensive health insurance policy will help pay the bills for everything from emergency care to chemotherapy. You’re wasting money if you also purchase a so-called "dread disease" policy that only pays out when a specific illness, like cancer, is diagnosed.
- Shop around. Don’t buy a policy until you, or an insurance agent, have compared prices and coverage from multiple companies.
Coverage in Your 50s and 60s
Now, let's focus on specific advice for anyone in their 50s and 60s in five major insurance categories: homeowners, auto, disability, life and long-term care:
If you’ve had the same homeowners policy for decades and haven’t updated it lately, take a fresh a look. Has the amount of coverage kept up with inflation? Does the policy protect you against loss or damage to valuable items you’ve purchased over the years? You may be underinsured and need to increase your coverage.
On the other hand, you may be able to trim your auto insurance premiums if your car is old but running fine. Of course, you’ll need to keep the liability coverage — and make sure you have enough. But you might consider reducing or eliminating collision coverage if the auto’s value is now so low that a major repair would cost more than the car is worth.
Many younger boomers don’t have enough disability insurance, a critical type of coverage at midlife. In essence, disability insurance provides steady income if you get injured or sick. Policies commonly pay benefits equal to about 50 to 60 percent of earned income. If you don’t have that much disability coverage, I strongly encourage you to buy it, even if you're self-employed; employees should see whether their employers offer disability insurance as a benefit.
The typical disability policy stops paying benefits at age 65, though. So if you have a disability policy, when you turn 65, check to see whether its benefits have ended. If so, cancel the coverage. (For a fuller review of disability insurance, get the Consumer Federation of America’s online brochure, "Long-Term Disability Income Insurance: Financial Protection for You and Your Family."
What about life insurance? Most of us buy a life insurance policy when we have children. It’s a way of ensuring that they’ll have a decent standard of living — including the financial ability to go to college — if we die young.
But if the kids are out of the house, building their own lives and raising their own families, your need for that protection may be over. If you have term insurance policies, you might consider reducing coverage or letting it lapse. On the other hand, if you and your spouse or partner are empty nesters in your 50s with term policies, you may want to hold onto some coverage. That way, if one of you dies, there’ll be a death benefit for the surviving partner.
What if you own permanent or “cash” value life insurance, which comes with a tax-sheltered savings account? You have a number of choices: borrow against the cash value, use the dividends to pay premiums or just leave the policy alone. An intriguing option older households should investigate is converting the policy into an immediate annuity. This way, the policy provides a stream of income you can’t outlive.
Long-Term Care Is Tricky
The biggest insurance question confronting aging boomers is long-term care. It’s also the hardest to answer.
The case for long-term care insurance is strong. One year in a nursing home runs an average of $87,235, according to the 2011 Market Survey of Long-Term Care Cost by the MetLife Mature Market Institute. Although most nursing home stays last less than one year, 12 percent of men and 22 percent of women entering nursing homes will spend more than three years there, according to Jeffrey Brown, professor of finance at the University of Illinois at Urbana-Champaign, and Amy Finkelstein, an economist at the Massachusetts Institute of Technology.
My problem is that long-term care insurance policies aren’t as compelling as the need. They’re complicated and expensive — annual premiums for 65-year-olds range from about $2,200 to $7,700, according to Brown and Finkelstein. And the benefits they provide may not justify the cost.
The decision seems simplest at the financial extremes: The premiums aren’t worthwhile for anyone with little savings who may be able to turn to the long-term care safety net of Medicaid. Conversely, families with significant wealth, say, more than $2 million, can typically afford long-term policies or pay for care out of their savings
For everyone else in the vast middle, the harsh reality is that long-term care insurance is often too costly. It's a tough decision. If you’re among this group, I think you’ll need to take a close look at your finances then determine whether to purchase a long-term care policy.
That brings me to my final point: Buying insurance, no matter what type, depends on your particular situation. Two families with similar incomes and assets can legitimately arrive at very different decisions about how much coverage to buy and which types of policies to own.
Regardless of your financial situation, the important first step is to take the time to comb through your insurance policies. An intelligent assessment will help you manage your risks properly at this crucial age.