Whether
it's to leave money for your heirs or to pay off debts, buying life insurance
later in life can make a difference
by Bryan
Borzykowski |July 25, 2018
Three years ago my
father-in-law moved nearly 1,000 miles from Winnipeg, Manitoba to our home in
Toronto after a cough he’d developed following a trip to Florida turned out to
be something much worse than a common post-vacation cold.
He’d been diagnosed
with cancer and the prognosis wasn’t good. My wife and I wanted to take
care of him during his treatment.
As it turned out, he
was also taking care of us.
My father-in-law, a
lawyer who kept working until the day he died, never talked about what could
happen. But he did share that he was paying over $1,000 a month in life
insurance premiums and that, no matter what happened, he wanted to continue
making those payments.
He wanted to ensure
we’d be able to pay any taxes due on his estate and have money left over to
leave to his children and grandchildren.
I was surprised that
he had life insurance at all, let alone the high priority he put on maintaining
such a high-cost policy.
I thought life
insurance was mostly for young parents, like my wife and I, who still have
children at home dependent on their income, not older people whose offspring
already have independent lives and, perhaps, families of their own.
As I learned from my
father-in-law, though, life insurance can be much more than an income
replacement tool.
The reasons for
taking out a policy typically change as people age, but can include wanting to
leave your spouse, children, or charity a bigger chunk of money than you have
in savings or, if you have a mortgage or other debts, enough cash for your
heirs to pay them off after you die.
The tradeoff: A
bigger legacy doesn’t come cheaply, since life insurance costs substantially
more as you age than when you probably first bought a policy decades ago.
Is coverage at this
stage of your life worth the steep price tag? Here’s what you need to know to
decide.
To renew or not to
renew?
Like many people, I
bought my first policy a decade ago, just after my oldest child was born. And
like most parents of young children, I bought term insurance, which covers you
for a specific number of years and pays a pre-set amount to your beneficiaries
if you pass away while the policy is in place, known as the death benefit.
Because a term policy
isn’t guaranteed for life, it’s relatively inexpensive, especially if the
policyholder is reasonably young and healthy, says Jeff Cutter, founder of
Cutter Financial Group, a financial planning firm in Falmouth, Mass.
For instance, Cutter
took out a 20-year term life policy with a $1 million death benefit in 2003 and
pays about $58 a month.
“I’ll
be happy when my term policy expires—it means I never had to use it.”
Jeff
Cutter, financial planner Cutter Financial
Group, Falmouth Mass.
The policy will
expire in five years, when Cutter is 55, and he has no plans to renew. His
children will have finished college by then and he expects they’ll be
self-supporting.
He’s also saved
enough that when he passes away, his wife will be taken care of. He says, “I’ll
be happy when my term policy expires—it means I never had to use it.”
Others may want to
buy more life insurance, but not for income replacement reasons. Most Americans
who are older than 55 use life insurance to leave an inheritance, help their
family pay for estate taxes, or to give money to charity.
Which type to buy:
term vs. permanent insurance
Once you’re in your
50s, though, you’re usually better off with permanent insurance, such as a
whole life or universal life policy, instead of term, says Ted Quillen, a
director at WSFS Wealth Investments in Greenville, Del.
That’s because,
unlike term insurance, permanent coverage doesn’t expire as long as you keep
paying your premiums. If your goal is to leave money to your beneficiaries,
Quillen says, then don’t buy a policy that can run out before you pass away.
Another drawback to
term: While you can try and renew once the policy is up, you may not be
approved if you’ve had a health setback, such as a heart attack, cancer, or
another serious medical issue.
Then too, many insurers
stop selling coverage to customers of a certain age (commonly, age 75 and up),
while some start restricting the length of the term once you’re in your mid-50s
or 60s.
Many life insurers
stop selling coverage to customers of a certain age.
When term still makes
sense: If, in case you pass away, you need a set amount for a specific period
of time to cover a mortgage or support your family’s day-to-day needs—in other
words, for the same reason you were likely to buy it when you were younger.
With people starting
families and buying homes later in life, Quillen says he is seeing more people
55 and older buying term. He says, “It was always a 30 to 45 [year-old] kind of
thing, but now with people taking out 30-year mortgages at 50, they need money
to cover at least some of [that debt].”
If your goal in
buying life insurance, though, is to leave a legacy or money to charity, whole
life makes more sense, says Paul Golden, a spokesperson for the National
Endowment for Financial Education, a non-profit focused on financial education.
In addition to the
permanent nature of these policies, they also have a savings component, known
as the cash value, which builds over time and adds to the final value of the
policy.
Premiums are fixed
(unlike those in a different kind of permanent life insurance known as
universal life) and, if needed, you can borrow against the cash value for, say,
daily living needs.
Be prepared to pay
up—and up
Whatever type of life
insurance policy you take out, the older you are when you buy it, the more
expensive it will be.
Term will still be
the least expensive. According to Quillen, a healthy 55-year-old male who
receives a “premium” rating would pay around $800 a year for a 20-year $250,000
policy with a top-rated carrier. A 60-year-old male would pay about $1,450 a
year for the same policy.
If you’re not in peak
condition, the costs are even steeper. A less healthy 55-year-old with a
“standard” rating, for example, might pay $1,400 or so annually for that $250,000
term policy, while the 60-year old will pay around $2,300.
Still, that’s cheap
compared to what permanent insurance will cost. For a $250,000 whole life, that
healthy 55-year-old would pay about $6,000 a year, while the 60-year-old would
pay more than $8,000. And costs go up from there as health declines.
Additional charges to
be aware of: Whole life policies often have high fees, commonly around 5%,
especially in the early years. That eats into the cash value, although the fees
tend to drop the longer a policy is held.
And if you want to
cancel the policy in the first few years—which is not uncommon, as some people
find the steep premiums hard to keep up with—you’ll typically also pay a
surrender charge, although this fee gradually declines over time.
In other words, life
insurance as you get older is certainly not for everyone.
But in my case at
least, I’m grateful that my father-in-law had the foresight to buy a policy
when he did.
His illness came on
so suddenly, and he passed away only a few months later. The thoughtfulness of
the legacy he left helped us get through some tough emotional times.
And on a practical
note, it’s helped my wife and I save for retirement too. That’s a lovely gift
to remember him by.
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