Key Takeaways
- Whether you need cover in retirement will come down to your debts, dependants and estate goals – not just your age alone.
- Death benefits from super can be taxed for adult children, so plan your nominations and structure as soon as possible.
- Lump-sum payouts rarely influence the pension income test, but invested proceeds can impact the assets test.
Seniors Life Insurance in Retirement
Deciding to get life insurance in your 60s, 70s and beyond is less about your birthdate and more about your balance sheet and the people who rely on you. Life insurance for seniors can still make sense – sometimes for protection, sometimes for tax-smart estate planning. But also, sometimes not at all.
Thankfully we’ve got a few tips to help you decide if you need life insurance in retirement, when retirees should keep life insurance, what to watch for if you have cover inside super and more.
Start with the basics (and what changes in retirement)
Life insurance in Australia is essentially a lump-sum life cover (paid on death or terminal illness). You might also have seen things like TPD (total and permanent disability), trauma/critical illness and income protection – but in retirement, TPD and income protection will phase out or at the very least become less important. If you have cover through super, speak to your fund as some benefits will stop when you hit a specific age, and default insurance can be cancelled after extended period of inactivity.
- Inside super: Insurance premiums are paid from your super account, which can be cash-flow friendly. However, lots of group policies end or are limited at older ages (e.g. income protection usually goes up to 65 and the same for TPD; some death cover ends around 70 – make sure you read the PDS). Default insurance in super can also be cancelled after 16 months of no contributions or rollovers unless you deliberately decide to keep it.
- Outside super: You hold ownership and are in charge of deciding on beneficiaries. Plus, premiums are paid from your bank account, not your retirement savings.
Top tip: Relying on life insurance through your superannuation alone can leave you financially stranded when you need it most – so it’s worth considering your options.
If you do need to make a claim, the process can be much more complex compared to having outside super. You need to go through your super company to get the life claim, which can be both time- and headache-inducing.
3 instances when keeping cover still makes sense
1. A spouse or other financial dependant still relies on you
If a surviving partner would depend on your super or investments for the mortgage, living costs, aged care, etc. then setting up an appropriate sum to be insured can protect their quality of life. APRA regularly publishes insurer-level data showing most life claims are paid, and the Moneysmart’s life insurance comparison tool also lets you compare acceptance rates and time-to-pay across providers. That’s helpful reassurance if you’re deciding whether to keep your cover.
2.You want to equalise an estate or cover final expenses/taxes
Life cover can be used to ‘balance’ inheritances (e.g. leaving the family home to one child and a matching cash benefit to another). If your super will be paid to adult, financially independent children then part of that super (the taxable component) will be liable for taxation when they receive it – whereas a personally held life policy paid to them is generally tax-free.
3. You want flexibility for aged-care funding
A lump-sum benefit can help fund accommodation deposits or give your loved ones liquidity without forcing them into an asset fire-sale. Get professional advice here, as aged-care funding is quite complicated and means-tested.
3 instances when it might be time to reduce or cancel your cover
1. Debts are gone and no one depends on your income
If your home is paid off, the kids are financially independent and you’ve got plenty of cash in your emergency reserves, continuing to pay life insurance premiums might not really be enough to buy you meaningful protection.
2. The premium-to-benefit trade-off no longer stacks up
Plenty of seniors have large sums insured out of habit. In later life, a smaller benefit could still give you the peace of mind you want but at a much more sustainable cost. Also be wary of expensive niche products like funeral insurance.
3. The cover type doesn’t fit your stage
It should be obvious but we’ll say it anyway: income protection doesn’t make sense if you’re fully retired. TPD definitions and expiry ages can also limit this type of cover’s usefulness after age 65.
Inside super versus outside super
One retirement-planning issue you might not have considered is who receives your super and how it’s taxed when you die.
Super death benefits paid to a tax dependant (e.g. spouse or child under 18, or someone who’s financially dependent on you) are usually tax-free. Payments to non-tax dependants (e.g. financially independent adult children) will incur tax on the taxable part of your super.
If your main goal is leaving money to adult children, a modest personally owned life policy can sometimes be better than relying on the taxable component of super. We recommend speaking to a professional for financial advice before you start doing any restructuring.
Age Pension and how payouts are assessed
If you get a lump-sum life insurance payout, it’s unlikely to be not counted as income for the purposes of Centrelink payments. But what you do with the money afterwards does matter.
If you put it in the bank or invest with it, it suddenly becomes an asset and will be deemed to earn income under the income test. Your pension rate can change if your assessable assets increase in value. The good news is that your family home remains exempt from the assets test (up to allowable rules). Always check the current thresholds as outlined by Services Australia.
Should retirees keep life insurance?
As you’ve probably already realised, there isn’t a one-size-fits-all answer. Keep it if someone you love would face financial hardships without you or if you need to equalise your estate. But it might be worth scaling it back, or cancelling it completely, if you’re debt-free, nobody depends on you for money and the premiums are putting a strain on your retirement budget.
Conclusion
Want a quick review of your cover from a real expert?
Get in touch with us today, and we’ll walk you through your options and help you decide what to keep or change.
FAQ's
Personally owned life cover is paid tax-free to beneficiaries. Super death benefits might be taxed for non-tax dependants on the taxable component.
A lump-sum payout itself isn’t usually counted as income. But if the proceeds are kept as financial assets, they can impact the assets test and be deemed to earn income, which will most likely change your rate.
In most cases, but there are some group policies that reduce or end when you hit a specific age. Also, default cover can be cancelled after 16 months of inactivity.
Compare Life Insurance
Disclaimer
Fair Health Care Pty Ltd trading as “Fair Health and Life” ABN no (86 622 966 303) and its advisers operate as authorised representatives of Ingenious Brokers Pty. Ltd. ABN 53 656 735 956 Australian Financial Services LICENSE 538868. Fair Health Care Pty Ltd are authorised through Ingenious Brokers to advise and deal in Life Insurance products only, including Term life, Total and Permanent Disability, Income Protection and Trauma Insurance.
Any information or advice contained on this website is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on any information or advice on this website, you should consider if the product is appropriate for you in regards to your own objectives, financial situation or needs and, if a current offer document is available, read the offer document before acquiring products named on this website. Please note our advice does not include independent financial, legal and taxation advice prior to acquiring a product. Prior to acquiring a financial product, you should obtain the Product Disclosure Statement relating to the product. The product Disclosure Statement contains the terms and conditions of the relevant financial product. You should consider the information within the Product Disclosure Statement prior to the purchase of a financial product.
Product Disclosure Statements are available within the quoted product emails that we send to you directly.
Not all providers of insurance on the market are included in our comparisons. The amount of any savings will depend on your circumstances. The financial products compared on this website do not necessarily compare all features that may be relevant to you. Comparisons are made on the basis of price only and different products may have different features and different levels of coverage.
Compare Life Insurance, Income Protection, Total and Permanent Disability and Trauma to find a competitive rate for your situation by providing you prices for all products on our panel. Fair Health Care Pty Ltd aims to save its customers money, time and effort through its innovative rate comparison website designed specifically to cater the needs of the Australian market. Do an online comparison today or if you would like to call us, we have trained professionals ready to help you with your enquiry.
The products/services offered by our Health Insurance service or referrals to Home Loan comparisons are not authorised by Ingenious Brokers Pty Ltd and Ingenious Brokers Pty Ltd is not responsible for the advice/services provided by our health insurance business or external partners.
