“Old age isn’t so bad when you consider the alternative.”
– Maurice Chevalier
“Am I too old for life insurance?”
We get this question a lot, surprisingly, often from people who are only in their 50’s or 60’s. However, there are many seniors getting life insurance policies—even in their 70’s or beyond. You’re probably not too old for life insurance, particularly whole life insurance.
Most mutual insurance companies will insure people up to age 85 with a whole life policy. Health is more important than age when it comes to determining whether or not you will qualify. But many people over age 60 or 70 qualify for life insurance, even with a past health crisis.
Let’s explore why many seniors ARE buying life insurance, along with some of the pros and cons of doing so. This article is for you if you:
- wish to leave an inheritance for children or grandchildren
- want to protect your significant other
- desire the flexibility and liquidity that whole life provides
- are a middle-aged adult considering whole life insurance for a parent.
A 70-year old might assume that life insurance makes no strategic sense. Will there be enough time to build up cash value to use later? A healthy 70-year old likely has 20, even 30 years to benefit from a policy. That’s plenty of time!
“I wish I knew about this when I was younger!” is another comment we have heard. We especially hear this after someone finds out about “family banking” strategies using life insurance, or reads one of our books:
- Live Your Life Insurance is a perfect introduction to whole life insurance; a quick read emphasizes the living benefits of life insurance and creative ways to use a policy.
- Busting the Life Insurance Lies is a more detailed book which addresses many common misconceptions of both consumers and advisors.
Of course, you must be able to qualify! We’ll address potential qualification issues later in this article. First, let’s consider why you might consider getting life insurance in the first place.
Six Reasons People Buy Life Insurance after Sixty
ONE: Seniors buy life insurance to pass more money to their spouse, heirs, or favorite charity.
Typical financial advice tells people, “You won’t need life insurance once your children are grown.” That advice leads people to buy only term insurance when they are younger that often expires in their 60’s—if not sooner.
Yet even when your children are independent, many older couples find themselves either wishing they had saved more, or looking for strategies to leave more to loved ones and causes they care about and less to Uncle Sam!
Life insurance is an excellent way for people to leave more money for a surviving spouse, child, partner, or even a sibling. Life insurance multiplies your premiums into a larger death benefit that is paid to the beneficiary income tax free. The death benefit is paid in a lump sum, and if desired, can be converted into an immediate annuity to provide a safe and guaranteed future income for the beneficiary.
TWO: You can obtain “three in one” coverage for health emergencies, long-term care expenses and life insurance.
Many people purchase long-term care insurance and never use it. But with the proper life insurance riders, your dollars are used more efficiently, providing multiple protections! Now long-term care riders are also being offered that allow the insured to use a hefty portion of their own death benefit for long-term care expenses after waiting periods are satisfied.
Life insurance companies also offer special riders that allow the insured to convert a portion of their death benefit into living benefits, should they be diagnosed with a terminal disease or even a serious or chronic illness. Combining such life insurance riders allow the insured to combine different types of coverage in one cost-efficient policy.
THREE: You can add stability and liquidity to your portfolio.
Most portfolios are largely comprised of stocks and other equities. As people near retirement, they become more risk averse, placing a high value on preserving and protecting assets.
Life insurance is one of the most stable assets around. It does not roller coaster ride like stocks. It is not leveraged like bank deposits. Whole life insurance has nearly a two-century history of paying claims and honoring guarantees, even during the Great Depression.
You might think the cost of this stability is rock bottom returns. The truth is that whole life insurance returns are tax advantaged and equate to higher returns than most people realize, when compared with taxable investments. Additionally, many investors use their cash value accounts to build new assets, such as leveraging a policy for a down payment on a cash-flowing piece of real estate.
FOUR: You can decrease your taxes and increase your future income.
Many seniors trade in their stocks for bonds as they approach retirement. However, there is a strategy that works much better from both a cash flow and net worth (value of estate) perspective. In a presentation for the Network of National Estate Planners, financial software expert Todd Langford illustrates why it pays to trade in your bonds for a whole life insurance policy. Watch the presentation: “More Money in Retirement.”
Seniors “living off their interest” often pay higher income taxes than necessary. Many can reduce taxes by sequencing their income streams to include non-taxable and tax-free sources, including converting a policy to a tax-advantaged immediate annuity or keeping a policy in place and utilizing life insurance dividends.
FIVE: Life Insurance gives you a “permission slip” to spend other assets such as investments and home equity.
Do you have assets that you are afraid to spend down? Most retirees do. Surveys show that fear of running out of money is the top fear for many seniors! What if you live longer than you expect? What if your assets and your social security aren’t enough?
There are strategies you can use to stretch your assets using life insurance. It can give you more options to:
- spend assets and still leave an inheritance
- insure that a surviving spouse is provided for
- create a new income stream in your later years (annuitizing your policy) or
- sell your policy for cash in your 80’s or beyond (this is called a life settlement).
Permanent life insurance is like a “permission slip” to spend the assets they were intending to preserve and leave for heirs, such as homes and investment accounts. Five such strategies are outlined in Live Your Life Insurance.
One such strategy is to reverse mortgage your home, which actually turns your home into an income stream. A reverse mortgage can help seniors in several ways. First, if they had a mortgage payment, it disappears. Secondly, they are paid an income stream. Thirdly, the income is tax-free.
Now, when you add life insurance to the mix, the asset can be preserved! Heirs can use the money to pay off the reverse mortgage, or they can choose to keep the money instead of the house, if that works better for them. (Many adult children don’t want the family home and it may be a burden for them).
Contrary to public opinion, your home does not need to be free and clear. You just need a good portion of equity in it (generally, 50% or greater).
SIX: Use life insurance to “repay” adult children who may make sacrifices to assist aging parents.
Even when seniors have adequate assets and income to support their basic needs, they may find that as they age, they need help with driving, shopping, cooking, cleaning, or gardening. Hiring out and paying for these services can deplete assets quickly, as well as create other headaches. Adult children often step in to assist, when possible. Some even become full-time caregivers. Life insurance is one way to repay those who have given of their time or money to assist you.
Increasingly, adult children are purchasing policies on their own parents. In this way, they can “fund their own inheritance” as well as recoup some costs that may have been lost while caring for a parent.
Pros and Cons of Life Insurance for Seniors
In spite of the advantages, there are also times when it’s not possible or advisable for seniors to purchase life insurance. Here are some considerations to keep in mind.
PRO/CON: It may be harder to qualify for a policy… but there are alternatives.
People in their 60’s, 70’s and 80’s are often not as healthy as they were in their younger years. If this is true for you, especially if you have had serious or chronic illnesses in the last ten years, you might be declined. Your policy could also be “rated” due to health issues and your premium could be very high.
If your health is not good, here are some options to consider.
Can you take a policy on a healthy relative? If you want to utilize the savings portion of the policy and intend to leave an inheritance to a spouse, child, or grandchild, you may be able to insure them. You would be the owner and typically beneficiary of the policy. The cash value and dividends would benefit you. You could also transfer ownership to them at some point, which has some advantages. (Many people insure spouses and children even when they have their own policy.)
What about a guaranteed acceptance policy? You could take a modest policy for final expenses and/or a small inheritance through a “guaranteed issue” policy. The pricing will not be advantageous, and we encourage people to apply for “regular” whole life first if there is a chance they may be approved. However, a guaranteed issue policy could serve a purpose if you are concerned that you would otherwise be leaving loved ones in a bad situation.
Can you improve your health first, then qualify? Proper nutrition and exercise and self-care can make a big difference in your health and your ability to qualify. Of course, non-smokers and people at a healthy weight qualify more easily. Even people who have had cancer or other health concerns in the past are surprised to learn they can obtain life insurance if they have been healthy for the past ten or so years.
PRO/CON: You can borrow against the cash value to finance major purchases. But should you?
One reason people obtain whole life insurance and fund it with maximum paid-up additions is to have an asset they can easily borrow against as needed for emergencies or opportunities. This allows savings to keep growing and compounding in a tax-advantaged environment without having to liquidate it when a need arises.
If you wish to use a policy in this way, there are two things you should know. First, be prepared to fund it for a few years to build the cash value before you start borrowing. It takes time for cash value to build up. Think of life insurance as your long-term savings vehicle, not a short-term financing solution.
Second, if you wish to borrow money for a purchase or expense, always look for the best way to borrow. For example, if you can finance a new car for 2.9% through a credit union, that’s a better choice than using a policy loan that may charge around 6% interest. However, if you need equipment for your business, an equipment lease may equate to 20% interest or more! In that case, you’d be far ahead using a policy loan. You may also be able to borrow from a bank using your policy as collateral.
PRO/CON: Premiums are more expensive, but there is a silver lining—more cash value!
Life insurance is more expensive the older you are. When you are younger, you have longer to live and the life insurance company has more years to invest your premiums to try to cover the death benefit they will pay one day. The base premium for a $100k policy may be ten times more expensive for a 60-year old man than a ten-year old boy. While this demonstrates an advantage to obtaining life insurance on younger generations—premiums are affordable and will never rise with a whole life policy—cash value builds up much faster when premiums are higher. It’s difficult to build meaningful cash value on a child, much easier on an older adult!
Cash value accumulates at any age. In later years, the internal rate of return will be a bit lower than a policy on a younger person, but you’ll typically still be beating bank rates over the long-term, while putting additional protection in place.
The important thing here is to make sure you can afford the policy. If you don’t have cash flow to fund the premium (base premium plus paid-up additions, if you want to build cash value faster), life insurance may not be for you. If you need more income now from your current assets, contact a Prosperity Economics Advisor for other recommendations.
Whole Life Insurance Past 60, 65, 70, even 80!
If you are not yet 85, you’re NOT too old for life insurance. The decision and ability to get it is less about age and more about your health and your financial situation.
At almost any age, life insurance is the best possible asset for passing wealth and for long-term saving (10+ years). A whole life policy gives you great flexibility to replenish, replace, or preserve assets.
Prosperity Economics Advisors specialize in whole life insurance and alternative investment strategies. We are here to help you make informed choices about life insurance and appropriate investments. If you need an advisor, reach out to us for assistance.