What Happens to Income Protection Insurance After Retirement?

At a glance:

• Income protection insurance usually does not continue after retirement, as it’s tied to earning an income from employment.
• It ends because most retirees have no income to protect, and typically rely on savings, superannuation, or the Age Pension.
• As you approach retirement, review your policy and assess your financial situation to decide whether to keep or cancel it.
• While some income protection policies can extend if you work past retirement age, premiums are higher, and benefits may be limited.

Income protection insurance has become an inevitable part of life for Australians, given the various risks that may prevent them from working and earning an income. This safety net provides the needed financial security for the insured and their family when factors such as illness and/or injury prevent them from having a regular income.

But what happens to your policy when you’ve reached retirement age? Are you still eligible to claim benefits? Or should you opt for other types of insurance for a safer future?

In this article, we’ll explore what happens to income protection insurance after retirement and what options you have to maintain financial security in later years.

Does Income Protection Insurance Continue After Retirement?

No, income protection insurance does not continue after retirement. The sole purpose of this policy is to provide you with a portion of your regular income when you’re not able to work due to health or accidental issues. Once you retire and are no longer receiving an income from employment or self-employment, you can no longer claim income protection benefits.

In general, most Australian income protection policies offer a maximum benefit period aligning with the policyholder’s end of working life. It only lasts until they reach a certain age, usually between 60 and 70. 

After retirement, you may instead need to live off retirement savings, superannuation, and government support like the Age Pension. 

Why Does Income Protection Insurance End at Retirement?

Income protection insurance is directly linked to your ability to work and earn an income. You don’t need insurance to replace lost income after retirement for these reasons:

No income to protect: When you retire, you’re not working anymore, which means there’s no income that needs protection with an insurance policy. 

Retirement Savings: By retirement age, most people have accumulated savings through superannuation, pensions, or investments to cover living expenses. 

Government Assistance: After retiring, retirees also receive government assistance. For instance, retirees in Australia receive an age pension that is enough to cover basic expenses.

Reduced Financial Commitments: The majority of retirees have reduced financial commitments, such as mortgages or dependents, which diminishes the need for income replacement.

What Should You Do With Your Policy as You Approach Retirement?

Once you’re close to retirement, you should review your financial needs and determine if income protection insurance is still necessary.

Here is what you can do with your policy when you approach retirement.

Review Your Policy Terms

Before you make any changes to the policy, read through the terms and conditions of your income protection policy. Examine the upper age limit to determine when coverage will end and the circumstances under which benefits will be discontinued. 

Certain policies will end automatically at a specific age, while others will continue on changed terms. Make sure you’re not still paying premiums as your cover nears its expiry, so you don’t waste money on insurance you can no longer claim on.

Assess Your Financial Situation

Assessing your financial position is a primary factor in deciding whether to retain or terminate your income protection cover. Ask yourself if you have adequate savings, superannuation, or another form of assets to meet unforeseen expenses as you near retirement.

Also, consider any monetary obligations incurred, such as mortgage payments or dependents who will still need your financial assistance. If you have strong economic support, income protection can be avoided, and the money invested in premiums can be directed elsewhere.

Explore Alternative Insurance Options

If income protection is no longer required, consider switching to other types of insurance that provide coverage even after retirement. There are a few alternatives, including Trauma Insurance, which pays a lump sum for conditions like cancer, stroke, or heart disease and Accidental Death Insurance, which pays a lump sum to the beneficiaries in case of an accidental death of the insured. These policies may provide you coverage after retirement, but it’s important to confirm with your insurer before purchasing them.

Can You Keep Income Protection Insurance Beyond Retirement?

While income protection coverage normally ends upon retirement, some policies include provisions that provide for the continuation of coverage under specified conditions. If you plan to continue working beyond the average retirement age, read on to find out how to maintain your policy intact.

Extended Policies for Post-Retirement Work

Some insurers offer income protection insurance up to age 70 for individuals who are still employed and earning an income. It is more applicable to self-employed professionals, consultants, or business owners who have not fully retired. Since they are still earning their income, they may still need protection in case of illness or injury.

Higher Premiums for Extended Coverage

If the insurer is offering you income protection even after retirement age, expect to pay much more in premiums than you would otherwise. As you get older, the likelihood of getting sick or disabled is greater. Insurers take that into account, so premiums increase exponentially from working-age policies. So, before you sign up for an extension, consider whether the cost is worth what you might receive as coverage.

Limited or Restricted Benefits

Even if you’re able to renew your coverage after retirement age, the policy’s benefits may become limited. Certain insurers cut the proportion of income covered, shorten the period of benefits, or add stricter claim terms as you age. This means that you’ll have protection, but the payout might not be as big or as flexible as it once was.

Key Considerations When Planning for Retirement

When you’re moving toward retirement, it’s essential to adjust your financial protection policies so you can still enjoy security and stability. Taking active steps ensures that you are adequately covered and not making payments on policies that are no longer beneficial for you.

Consult a Financial Advisor: A financial advisor is able to align your retirement plan with your long-term personal and financial goals. They will also be able to advise you on whether or not to keep, change, or end your existing insurance policies based on your financial situation.

Understand Your Cover: Review your income protection policy to ensure clarity regarding when and how it will end. Knowing a specific age limit, benefit periods, and exclusions will help you make informed decisions before retirement.

Explore Flexible Policies: If you will continue to work past the standard retirement age, consider flexible insurance policies. Some insurers offer additional income protection coverage, while others provide alternatives like trauma or accidental insurance, which may better suit your evolving needs.

Should You Cancel Income Protection Before Retirement?

If you’re close to retirement, you may wonder whether to cancel your income protection policy to save on premiums. The decision will largely depend on your future and present finances.

If you still need income and retirement is far in the future, having the policy is crucial to protecting yourself financially in the event of illness or accident. But if you have a trauma cover, accidental insurance, health or life insurance, you may not need income protection as much.

Additionally, if you have substantial savings and can do fine without income protection, you can self-insure your lost income instead of premium payments on a policy that may expire within a few years.

Aspect Underwriting offers tailored insurance solutions to help Australians safeguard their financial future. If you’re unsure about the best coverage for your needs, speak with an insurance specialist today.