Do You Need Retirement Protection Insurance?

A couple of weeks ago, I explained why Ben and I meet with a financial advisor. One of the benefits was learning about Retirement Protection Insurance. I checked with my disability broker and found out that I could get it through my provider.

I mentioned the insurance to several other people because it seemed like such a great policy. But a lot of people don’t know much about it. So today I want to highlight what Retirement Protection Insurance is and why you might consider getting some.

 What is Retirement Protection Insurance?

As the name implies, this type of insurance helps mitigate some of the risk that you will have to stop contributing  to a retirement account because you become disabled. Your contributions may stop because (1) you need earned income to contribute to a retirement account, and (2) you may not have the extra cash to contribute without your ordinary income and extra medical expenses.

If you do become disabled, this insurance replaces the contributions that you and your employer were making towards your retirement account. The benefits become payable to a trust account that can then be invested at your direction.

The policy that I applied for is non-cancellable and guaranteed renewable until age 65.  That means that whatever coverage I qualify for can’t be changed or cancelled, even if I decide to leave my job and/or stop contributing to my retirement account. I just have to keep up with my premiums. You can also purchase a Cost of Living adjustment rider to make sure your benefits keep pace with inflation.  

Some Pros

The main advantage of this policy is that you can still build a nest egg if you become permanently disabled. Most long-term disability policies stop benefits at age 65. At that point, you would need other means to fund your lifestyle. Considering the minimal amount of social security that you can earn, contributing to a retirement account may be the only way to cover the rest of your expenses.

In addition, the coverage is fairly cheap. I’m able to insure the maxing of my Roth 401k ($1500/mo currently) plus and additional 2% match from my employer for $37 a month.

Lastly, if you die before age 65, the money in the trust will be distributed to your estate or your beneficiaries, so that you don’t lose the money that you have built up.

Some Cons

One downside is the benefits are based on what you are currently contributing to your accounts. Unfortunately, many people are falling short of where they should be. A guard against this could be to purchase a Future Increase Option (FIO) rider that will allow you to adjust your coverage as you increase your contributions.

Plus, the waiting period for benefits is six-months. The majority of people who become disabled will likely recover within that time frame. So you may not ever need this type of policy (which is not a bad thing).

Lastly, it seems pretty hard to find.  It’s a relatively new type of coverage, so many companies don’t even offer it. However, through the company that I use, Guardian, you can purchase the retirement protection policy on its own, rather than as a supplement to your disability policy.

Should You Do It?

Whether you should get a policy depends on your financial circumstances and your ability to cover the cost of another insurance premium. However, I’m of the mindset to hope for the best and plan for the worst. And $37 a month is a good tradeoff for me to mitigate some of the risk of something terrible happening to me. While I don’t think it falls under the five essential types of insurance, it’s an important one to have.