Life insurance is a topic we would rather put off but delaying just means the premiums will be higher once we finally address it. The key is knowing your ‘why,’ because not everyone needs life insurance. It may be to pay off a mortgage to simplify a surviving spouse’s life, or to pay off left-behind medical bills and funeral expenses. (Acting thoughtfully.) Maybe it is just because you want to leave a financial legacy to your loved ones or your favorite charity.
Once you have decided to get life insurance, the next question is ‘term insurance’ or ‘whole life insurance?’ The arguments for term insurance are plentiful, starting with it being far easier to understand. But buying it intelligently means knowing much more than that. Let’s begin here.
How term insurance works is simple: it only pays beneficiaries if the death of the insured happens during the ‘term’ of the policy. (Coverage is temporary.) Terms tend to run from one to 30 years, with 20 years being the most popular length. If the insured lives on beyond the end of the term, or if the policy lapses for non-payment, there is no refund or residual value. These policies offer no other benefits, such as a savings aspect or cash value of the policy.
The premium, or the cost of your insurance, is based on your age and health at the start of the term. Premiums are often locked in for the duration of the term so, the longer the term, the higher the premium. (Premiums are higher because the further the policy carries you into older age, the greater the risk the insurer might have to pay out on the policy.) While standard terms may be 5, 10, 20 years or more, as a senior you may find the length of available terms shortened. Many insurers will not insure you beyond age 80, so at age 70 the longest available term could be 10 years.
However, according to Social Security, a man and woman age 65 today can expect to live to age 84.3 and 86.6, respectively. One quarter will live past age 90, and one-tenth will live past age 95. This is important because many term policies only cover to age 80 and you could easily ‘age out’ of your insurer’s age of maximum coverage.
Life insurance is typically purchased to replace your financial contribution to spouse or family when you are gone. Even if you are not bringing in work-related income, you may be supporting loved ones with Social Security and pension income, which will be reduced by your death.
If you buy insurance in your early years, when the risk of death is low, term insurance is very inexpensive. As you get closer to average life expectancy age, premiums will accelerate. However, if you do not have insurance and want it, with a little research and detective work, you can find a policy that works for you.
Term insurance comes in four variations, each of which presents valuable advantages:
Renewable: These plans allow you to renew at the end of a term, regardless of your health and without proof of insurability (which would require new medical exams and questions about your health). While the premium will likely increase upon renewal, if your policy does not have the renewable option, you may find yourself uninsurable if your health has deteriorated dramatically during the term of the policy.
Convertible: Convertible plans allow you to exchange your term plan for a permanent plan during a specific window, called the conversion period. (Permanent insurance covers whole life and universal life insurances.) By converting within that time frame, you typically avoid having to give information about your health, and the insurer uses the health class rating you were given when you first bought the term plan. This is vital since a health concern may be the reason you are considering converting to a permanent life plan. However, your new premium will likely be linked to your age at the time of conversion.
Level vs decreasing face value: Most of the term policies sold are ‘level’ policies, where the face value (or amount of the death benefit) of the policy remains constant for the duration of the term. In ‘decreasing’ policies, the face value decreases each year, so premiums can be somewhat lower because the payout is smaller the older you get. (Decreasing policies are most commonly linked to a mortgage whose balance also decreases over time. In case of death, the mortgage can be paid off.)
Level vs adjustable premium: Level premiums do not change during the entire term of a policy, so insurers make a conservative calculation up front to cover the full term, calculating a higher premium the farther out the policy goes because their risk of paying out benefits also rises. With an ‘annual renewal’ plan, for example, your premium will increase each year as you renew, calculated on the statistical probability that you will die within the next year as if your policy would end then.
On all policies with adjustable premiums, because the insurer has the right to change the premium in the future (within any limits stipulated in the contract), premiums are lower in the early years. However, premiums will be relatively higher in later years, perhaps at a time when you can least afford them.
Other provisions: Term life insurance policies can offer some additional provisions as part of the policy or as add-on ‘riders.’ As an example, they can include accelerated death benefits, where a terminally ill person can receive a substantial part of the death benefit while still alive, or disability waiver of premium, where premiums are waived when the insured suffers a long-term disability. Be sure to ask what other riders are available to customize your policy.
Insurers have added another feature to term life policies, called ‘return of premium.’ Normally, if you do not collect on a term policy during its term and the policy terminates, you receive nothing. This harsh reality leads to customers’ quiet frustration. As a solution, the return-of-premium feature raises the cost of premiums significantly but will return part or most of the paid-in premiums at the end of the term. The condition is that the policy must be held for its entire term.
Your insurer cannot cancel a term life insurance if you continue to pay all the premiums due. If you miss a due date, you typically have a 31-day grace period to pay the premium. If you fail to do so, your policy will be terminated. However, your policy remains in force during that grace period. Also, as long as you pay, your policy cannot be terminated due to a change in health status throughout the term of the policy.
Finding the right amount of insurance needed for your situation – while keeping the premiums affordable – is what requires the greatest investment in research and in the time to obtain multiple quotes, because different insurers may offer significantly different prices for the same coverage. Two companies can look at identical health information and give you totally different health class ratings.
Having the right term life insurance policy means being able to:
- Provide ongoing living expenses for a surviving spouse;
- Pay off a mortgage, whether to lower costs for a spouse or other heirs;
- Remove a burden by paying off all last debts, such as medical bills and funeral expenses;
- Cover any estate taxes that might be imposed on your estate;
- Contribute to a favorite charity or passion of yours; and
- Provide for grown children and grandchildren, in case they are facing financial needs.
In short, having a term life insurance policy allows a senior who can afford it to leave a financial legacy of one sort or another
Decisions regarding term life insurance are based on price, coverage and ease. For example, you want to know how much the premiums will be, how easy it is to enroll in the plan, what coverage is available, when your plan goes into effect and how accessible the customer support team is when you need it.
Once you have gone through the first level of questions, you will want to know more about the intricacies of the policy: if a medical exam is required, maximum available coverage, maximum age coverage, if terminal illness riders exist, what is excluded and if premium rates will increase.
The two major factors in selecting term life insurance are affordable price and qualifying for coverage. Being a senior adds new dimensions and limitations to availability and drives up costs. If you have a financial advisor (preferably a fee-only one who does not charge a commission on a purchase like your life insurance), you may want to take advantage of any available advice, whether as part of your standard retirement planning or not.
Benefit amount and term: Death benefits, or what your beneficiaries will receive, can be as low as $25,000 or as high as hundreds of millions of dollars. The value you select is a function of your finances and your personal needs. Buy however much your spouse, or family, would need if you were no longer there to contribute. Over time you may choose to lower the benefit to reflect changes in your life status: your kids and grandkids become financially stable, your house is paid off or you have ample savings in place.
However, as you start getting quotes, you may need to adjust the benefit amount you first estimated because of how your premium was affected by your personal information: your occupation or lifestyle, where you live, your health and your gender. (All else being equal, women pay less because they live longer.)
Medical exam, medical questions or nothing: Because people with health issues may die sooner and cost insurers more, insurers want to know what risk they are insuring against. That is referred to as underwriting. Some insurers insist on medical exams, some are content with medical questions and some ask you nothing.
However, unless you have serious health issues, policies from insurers who require medical exams may offer lower premiums. While this sounds contradictory, it is not: insurers who do not require medical exams have to raise their premiums to cover the unknown, whereas if they had full knowledge, they could charge less.
Medical exams usually cover your height, weight, medical history, blood pressure, blood test and urine test. You will be asked extensive questions, possibly twice: when you apply for coverage with the agent and when the paramedic conducts your medical exam, often in your home.
If an insurer is content with just asking questions, be aware that they will still do checks of different databases to confirm your answers. If you are found to have lied on the application, the insurer has a window (usually two years) in which it can investigate and deny a claim. As for ‘no question’ insurers, these offer low face value policies called ‘guaranteed-issue’ plans which have an extended waiting period (typically two years) before benefits are available.
Type of term insurance: Determine what type of term insurance you think you prefer: renewable term, convertible term, level term (vs decreasing term) or adjustable premium, as described above. While you may adjust your decision after talking to an advisor or insurance agent, familiarity with the different concepts is an important place to start.
List of candidate companies: Particularly with the growth of the over-55 demographic, some insurance companies have focused on finding profitable ways to offer cost-effective policies to seniors. An online search will bring up names of companies purporting to serve the seniors market. Identify 5-6 candidate companies.
Vetting the insurers: Two groups of insurers will likely make it onto your list: well-known, traditional insurance companies and smaller, more creative insurers. To have the peace of mind of knowing that your insurer will be solvent and able to pay out the benefits to your beneficiaries when the time comes, you want to check the Financial Strength Rate (FSR) of each company on the A.M. Best website. Experts suggest a company should have at least an ‘A’ Excellent or ‘A+’ Superior rating of their ability to meet their future insurance obligations.
However, smaller and newer insurers may have programs that better fit your specific needs but do not have an A.M. Best rating. Use your judgment, ask questions and research those companies well. Cheap life insurance can be a very bad deal if the insurer is not financially strong enough to pay the benefits when the time comes. The important thing is to know what you are purchasing.
Customer satisfaction: An online search of ‘J.D. Power + life insurance ratings’ will lead you to an annual analysis of insurance companies. See if the company you are leaning towards is listed and what kind of experience its customers have had. While online reviews and testimonials of insurance companies are valuable, it is not always easy to compare one company with another.
Cost savings: Your target is to develop a list of 3-4 potential insurers. Visit the websites of those companies to see what cost savings they might offer. When you speak to an agent to request a quote, be certain to ask about all possibilities, whether cited in their website or not. You will not receive any break you do not request. Some possibilities include:
- multiple policies with the insurance company (or bundling);
- paying premiums annually instead of monthly;
- paying electronically by automatic deduction;
- memberships with certain associations or professions; and
- having benefits paid out in yearly sums, over time, rather than a lump sum.
With all this information in mind, you are ready to contact insurance companies, either directly online, on the phone or through an online ‘aggregator’ site that allows you to access multiple quotes after you fill out one application. Offline, you may go to an independent, multi-line agent who will have more options than a captive, single-line agent, and will basically be a ‘no-fee’ broker who matches the best company to your needs. A single-line agent is married to one company, probably has local offices that need to be paid for and benefits from the insurer’s massive advertising campaign. You will somehow pay for all that.
In any case, you will want to have a conversation with one of these intermediaries, where you can ask questions and customize a policy to your specific needs. Ask exactly what is included in standard coverage and what is available as separate add-on ‘riders.’
Life insurance is different for seniors, particularly because of the impact of health issues and remaining longevity. Yet, it could not be more important to take care of than it is today. Two factors that stand out for seniors are age-friendliness and health-related value.
Age friendliness: This measures how easily a service adapts to your changing needs as you get older. In the case of term life insurance, having various ways you can communicate with the company is important, as is having friendly, supportive assistance from its customer service team. The insurance provider’s website should be intuitive and easy to navigate. Its procedures for bill-paying and claims-processing should be clear. Even though you have little flexibility with a policy once you have purchased it, company representatives should understand how aging might affect your insurance needs and how available changes to your policy might help keep your premiums affordable.
Health-related value: It is critical to have your life insurance policy in place while you have the best possible health, as diminishing health limits your options more and more.This fact reinforces the choice of renewable term or convertible term policies, as you can extend your coverage without having to prove insurability or undergo medical exams.
The primary fee is the premium. The quotes you receive will reflect your personal factors and should reflect all possible cost savings. The insurer will calculate the premium based on the fundamental concepts of mortality, interest and company expense. Since these factors differ for each company, you will receive varying quotes although you may be quoting the identical coverage.
An insurer provides insurance coverage by bringing a large group of people together to share the risk of death in that year, and by calculating how much must be charged to make a profit if the insurer’s calculations are correct. The company uses a mortality (or actuarial) table, based on statistics and experience, for those calculations.
The premiums you pay are invested in various financial instruments by the insurer. The interest they expect to earn on those invested funds will also be used to help calculate the premium they will charge you.
The expenses incurred by the insurance company to operate – for salaries, commissions, overhead, advertising, etc. – must be covered in the premiums charged. They can vary dramatically based on each company’s efficiency and business strategy.
About the only aspect, you can affect is your choice of premium model: whether you pay annually, semi-annually, quarterly or monthly. The more frequently you pay, the higher the cost to the company. However, if you decide to prepay annually to save some money, you should first ask what happens if you decide to terminate your policy. Will the company refund the prorated balance of your paid-in premium? If not, the slight upcharge for monthly or quarterly billing may be worth paying.
As you start filtering through possible life insurance providers, you will want to examine premiums, how easy it is to purchase the plan, what can be covered, if there is any waiting period and the quality of the company’s customer support.
Cost: It goes without saying that your term life insurance must be affordable, as it will be terminated if you fail to pay a premium and go beyond your state’s prescribed grace period (often 31 days). You may have to work with your selected insurance provider to adjust the benefit value to fit the monthly premiums within your budget. That benefit should be a realistic reflection of your need for life insurance, covering any end-of-life expenses and gifting your beneficiaries as you choose.
Ease of enrollment: Although simpler than permanent insurance, term life insurance is not that easy to understand, particularly the older you get and the more you have difficulty with the subtle differences in offerings. You want your insurer to recognize this and make your researching and purchasing process as easy as possible. The company should provide several ways for you to sign up, including via website, by email and by phone to match the comfort level of its senior customers.
Coverage: While the typical coverage of a term life insurance policy is a payout to beneficiaries upon the insured’s death, you will want to determine the level of that benefit, as well as any add-on offerings that are not part of a standard policy, but rather are available as ‘riders.’
Waiting period: Most term life insurance policies become effective immediately upon approval and receipt of first premium payment. Most have a 2-year period of contestability: the policy can be contested during that time if you gave false information. Also, suicide is often only covered if it occurs after two years.
Customer service: Elements a policyholder considers when evaluating a company’s customer service include how friendly the company’s website is, how available detailed information is to help you decide, and how easy and trouble-free the enrollment and the bill-paying process is. The variety of communications tools also counts, whether a senior wants to talk on the phone or process a payment using a smartphone app.
For seniors, even if purchasing at age 55 and above, term life insurance is a good choice to cover financial responsibilities or wishes after they are gone. Premiums are usually lower than for other types of insurance, such as whole life. The downside is that term insurance is for a set period, and you may outlive that period unless you have chosen renewable or convertible insurance. Even then, the maximum age of coverage needs to be considered.
A hybrid form of insurance is growing in popularity in its newer format. It is called Guaranteed Universal Life, or GUL. It costs a bit more than term life, but less than whole life because it does not have a savings aspect and does not build cash value. Its greatest appeal is that your policy can outlive you as you can select the maximum age of coverage, often between 90 and 120. (Compare that with term insurance that usually caps out between 80 and 90.)
Premiums are said to be level on GUL policies, so seniors are less likely to face budget-busting rate increases at each renewal as with term life policies. This can put extraordinary pressure on a budget that is fixed and relatively tight. However, as important as it is to always read the fine print on an insurance contract before signing, it is especially so with GUL policies to be certain there are no embedded requirements to maintain the premiums level.
In short, when researching term life insurance policies, you might want to ask different insurance providers if they offer GUL policies as well.