Here's why extended life coverage in retirement is a big no

Rethink retirement coverage: Are you planning to extend your life insurance coverage into retirement? While some may believe in leaving a financial legacy for their children, financial experts argue against opting for an extended life cover beyond working years.

"Paying additional term life premiums in retirement beyond the working years may not be a financially prudent decision," said Arpit Suri, CA, personal finance expert.

Suri explains that life insurance, particularly term insurance, is designed to provide financial support to dependents in the event of the policyholder's death. However, as highlighted by financial experts, continuing a life cover into retirement may not be a wise choice. The misconception often arises from beliefs that life insurance serves as legacy money for children. The primary purpose of life insurance, though, is to mitigate the financial risk faced by the family during the earning years of the primary breadwinner.

In retirement, individuals typically have fewer financial liabilities, well-settled children, and a sufficient retirement corpus. Even if one chooses to work beyond the age of 60, it is often driven by personal preference rather than financial necessity. Therefore, the argument against maintaining life insurance coverage beyond the regular working years gains strength.

Extended coverage expenses

One drawback of opting for a long-term life cover in retirement is the escalating cost. Premiums for life insurance increase substantially with age. For instance, a 35-year-old individual purchasing a Rs 1 crore term plan may end up paying 32 per cent more if the coverage is extended until the age of 70 and 68 per cent more if extended to 85. This increase in premiums holds true across various insurance providers, with some experiencing even higher percentage hikes.

The cost of rising premiums is attributed to the basic principles of insurance companies, which operate on probability and the law of averages. Mortality tables are employed to assess the likelihood of policyholders dying at different ages, with higher premiums reflecting the increased mortality risk associated with advancing age.

Premiums vs potential

In addition to the financial burden of higher premiums, experts emphasise the opportunity cost of investing the additional premium in alternative options. "Choosing a shorter term for life coverage, until 60-65 years of age, allows individuals to save on premiums, providing an opportunity to invest those savings for a substantial period. This strategy can result in a significant corpus that can be utilised for sustenance and healthcare costs during retirement," Suri added.

Considering the advances in medicine and healthcare that have increased average life expectancy, the focus on retirement should shift from a longer life cover to building an adequate financial corpus for independence.