Ramesh, a retired bank manager from Mumbai, and his wife, Meena, were recently contemplating whether to continue their life insurance term policy. With their children well-settled abroad and a substantial savings corpus, they wondered if it was worth paying the premiums.

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Life insurance is often seen as a necessity during one’s working years, providing a safety net against the financial loss resulting from the death of the earning member of the family. However, as individuals retire, should one continue their life insurance policies? While taking a new policy at a younger age, should the coverage extend well into retirement years or not?

We delve on this in detail in this article.

Financial Support For A Spouse

Even in retirement, life insurance can provide critical financial support for the surviving spouse. In the event of Ramesh’s death, Meena would need a reliable income source, especially if the couple’s savings were to be used for unforeseen medical expenses or other emergencies. Life insurance ensures that Meena can maintain her standard of living without becoming financially dependent on her children.

According to a study by the Insurance Regulatory Development Authority (IRDAI), 70 per cent of Indian retirees do not have sufficient savings to support their spouse for more than 10 years post-retirement.

The MWP (Married Women’s Protection) Act provides for ring fencing the life insurance proceeds from being used to repay loans or payables of the testator. This adds another layer of protection for the surviving spouse.

Easy Transfer Of Assets To The Next Generation

In India, the process of transferring assets can be complex and subject to various costs and paperwork. Whole life money-back policies provide a hassle-free, tax-efficient way to transfer wealth to the next generation.

Under Section 10(10D) of the Income Tax Act, the death benefits from life insurance policies are tax-free. The nominees can receive the full amount without legal complications.

Preserving An Estate

Ramesh and Meena wish to enjoy their retirement by spending on travel and leisure. They know that this may potentially deplete their savings leaving nothing for the children. A life insurance policy can act as a financial safety net, ensuring that there is still an estate to pass on to their children.

A survey by the Life Insurance Council of India found that 55 per cent of retirees planned to spend a significant portion of their savings on leisure and travel.

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Covering Final Expenses And Paying Off Outstanding Loans

Many Indian retirees have their wealth tied up in properties or other illiquid investments. In the event of their death, their families may struggle to cover final expenses and pay off outstanding loans, if any. Life insurance can provide immediate funds to handle these costs, preventing the need for a distress sale of assets.

Life insurance proceeds are not subject to probate, ensuring quick access to funds for covering immediate expenses.

Compensation For Loss Of Pension Income

For retirees dependent on pensions, the death of the pensioner can lead to a substantial reduction or complete loss of income for the surviving spouse. Many pension plans in India do not offer full benefits to surviving spouses, leading to financial difficulties. Life insurance can provide supplementary income, compensating for the lost pension benefits and ensuring financial stability for the surviving spouse.

Anita, the wife of a retired army officer, faced a significant reduction in her pension income after her husband’s death. The life insurance policy they had taken out provided the necessary funds to maintain her lifestyle.

The PFRDA reports that survivor benefits for pension plans in India often provide only 50 per cent of the original pension amount.

The Cost Of Long-Term Life Insurance

While these benefits are invaluable, the premiums for long-term life insurance coverage can be higher.

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Conclusion

Although traditional views on life insurance focus on its role during one’s earning years, the need for coverage extends well into retirement. Life insurance provides crucial support for surviving spouses, facilitates easy asset transfer, preserves an estate, covers final expenses, and compensates for the loss of pension income. For many Indian retirees, the cost of maintaining life insurance is a worthwhile investment in financial security and peace of mind.

The author is a certified financial planner and co-founder and head of financial planning at House of Alpha Investment Advisers Pvt. Ltd.