Life insurance for seniors.
“What’s the appeal?” you may be wondering. “And could someone over 65 even be approved for life insurance?”
After all, the events that often motivate life insurance purchase (e.g., having a child or taking on a mortgage) are probably yesterday’s news for this group.
In reality, though, there are a number of common scenarios that make life insurance a wise purchase for seniors.
In this guide, we’ll cover:
- When to buy: Seven instances where seniors should consider buying life insurance
- What to buy: The policy types best suited to those over 65
- Who to buy from: The insurance companies with a track record of offering affordable coverage to golden-year buyers
Let’s dive in.
7 Reasons Seniors Buy Life Insurance
Below, we’ll review seven common motivations for senior life insurance purchases.
1. Existing Debt
Seniors often buy life insurance to avoid leaving their loved ones with debt.
These days, even financially responsible individuals can face large debts late in life due to unforeseen medical bills or co-signed student loans their children fail to pay.
In this case, the best policy is typically a term insurance policy where the term matches the remaining payment period of your debt.
Said another way, you should choose a policy that ends when you fully pay off your debt. This way, you avoid paying for coverage you don’t need.
2. Funeral Expenses
Another common motivation is to cover end-of-life expenses.
You may know this coverage by its popular nickname (“burial insurance“), but remember that these policies are just life insurance by a different name.
As mentioned above, this coverage is designed to cover one’s funeral expenses. Therefore, death benefits are generally under $20,000 and monthly premiums are similarly low.
As with scenario #1, buying coverage gives you the peace of mind that your passing won’t result in financial hardship for your family.
3. Maintaining Income
With pensions and social security falling well short of seniors’ medical and day-to-day expenses, more and more people working into their 70s and 80s.
When expenses are funded by income and not savings, seniors incentives to buy life insurance are the same as those younger than them.
If someone depends on your income, it’s probably a good idea to have life insurance.
4. Providing For Dependents
A similar reason is to provide for a disabled child who requires expensive, ongoing medical care.
For situations like these, a second-to-die policy is worth considering.
This type of policy pays out a death benefit only if both parents pass away. This makes it significantly cheaper than insurance covering one or the other parent.
5. Estate Planning
In this case, the motivation is estate planning.
When a person passes down a large amount of wealth, their heirs owe taxes on their inheritance (very) soon after receiving it, sometimes within six months.
Since inheritances often come in the form of non-cash assets, like jewelry, property, or businesses, heirs can be left facing a seven-figure tax bill without the cash resources to pay it.
Their only option would be to sell assets to buyers they could quickly locate and reach agreement with. This usually means selling the asset at a steep discount (e.g., 50% of market value).
In this case, seniors may buy life insurance to ensure that their heirs have enough cash to meet their tax bill.
Without the payout from your policy, your loved ones might have to rush to sell your assets (at an unfavorable price) to generate the cash Uncle Sam demands.
6. Donate To Charity
Although less common, some seniors do buy life insurance to leave a charitable legacy.
Rather than making annual donations of $10,000, you can use these funds to make premium payments on a large (e.g., $500,000) life insurance policy.
If structured properly, this can be a win-win for both you and the organization you have in mind.
7. Return On Investment
Finally, many seniors hold cash-value insurance policies as financial investments, for 3 reasons.
1. They pay higher interest rates than alternatives, like bank savings accounts (currently ~3% higher on average)
2. The interest you earn is tax-free
3. And finally, your cash value grows tax-free (as long as you hold onto the policy until death)
In short, no income tax and no capital gains tax on what comes out of that policy.
Recent Purchasing Trends Among Seniors
Despite longer life spans, increases in medical care costs, and the specific motivations listed above, life insurance purchases among seniors have declined for the past several decades.
What’s causing this decline?
There are likely many factors, but survey data shows that the biggest one relates to price. In these surveys, seniors overestimated the cost of life insurance by 200%, on average.
What makes this worse is that people tend to view life insurance purchasing in binary terms, similar to their day-to-day purchases.
(If you think that a sweater is too expensive, you choose not to purchase it. You don’t ask for the price of half of it…)
In the case of life insurance, this is exactly what you would want to do though.
If you can’t afford the coverage you want, it’s often better to start with a smaller policy vs. shut the door on coverage entirely.
If your circumstances change and you can afford the original policy, you can increase your coverage amount at any time (even mid-policy year!).
Choosing The Right Type of Life Insurance
Seniors can access a variety of policy types within both term and permanent life insurance:
- Term insurance, with rising or fixed premiums
- Permanent life insurance, including variable life insurance, universal life insurance, and graded whole life insurance
Ultimately, most seniors opt for term life insurance with level premiums. This option is straightforward, affordable, and can be tailored to your needs in both amount and term.
The most important factor to consider is often the amount of coverage needed.
Seniors who are retired and expect to have sufficient savings to support dependents may look to cover only burial expenses.
On the other hand, those who are employed and have dependents who rely on that income may need more coverage to absorb the financial shock of their passing.
The application and underwriting processes are no different for seniors than other applicants.
The life insurance company will ask primarily about your:
- Demographic information (age and gender being the most relevant)
- Lifestyle habits (smoker vs. non-smoker)
- Family history
In most cases, they will also require a medical exam to check blood pressure, height, weight, cholesterol, and other common risk factors.
For smaller policies (e.g., coverage under $50,000), however, some companies make the medical exam optional.
In these cases, you will receive two quotes. One premium that assumes you you take and pass the medical exam, and a second, slightly more expensive option if you choose to opt-out. Sounds pretty fair.
Conclusion & Next Steps
Armed with this information, the next step for those in their Golden Years would be to translate these factors into numbers and make an objective decision.
At a high level, you would need to:
- Estimate your family’s future financial need (10x your annual income through retirement is a good rule of thumb)
- Gather quotes from multiple companies for a variety of policy options. E.g., for term life, you could get quotes for a range of coverage amounts and term lengths. (Price comparison sites make this a breeze)
- Estimate what you can afford on a monthly basis and choose the policy that most closely meets your needs
This may sound like a lot, but you’ll have a good sense of where you stand in minutes by using the rule of thumb above on a comparison site.
And that time spent may be a lifeline for the people you love most when you’re no longer there to care for them. As my Mom loved to say, “hope for the best, prepare for the worst!