When our parents were growing up, they went to school, got a job, got married, had kids and eventually retired from the job. Maybe they got a watch and a pension. Accompanying that traditional life path was a growing life insurance policy, usually paid for by the husband’s employer. ‘Everybody’ had one, or at least it seemed they did.
Since then, the percentage of ‘insureds’ has dropped. Just in the 15 years between 1992 and 2007, the number of covered families fell from 34.8 percent to 23 percent. Why? Because insurance options got too complicated, employers stopped paying for insurance and other financial instruments became sexier. The question is: if you haven’t bought permanent life insurance by your mid-50s, does doing so now make sense?
A little historical perspective might be useful. Originally only term and whole life policies were available. ‘Term’ was less expensive, but only covered you for ‘x’ years. ‘Whole life’ cost more but covered you until death, provided you paid the premiums. The 1980s brought universal life, variable life and variable universal life, which were variations of the traditional whole life policy. The 1990s brought several riders to existing products, making selection much more complex.
Term insurance is not covered here, but let’s look at the various whole life options:
With traditional whole life, both the face value (death benefit) and the premium are designed to remain level throughout the life of the policy. However, the cost of insuring a person increases each year with age. Instead of charging less during youth and more in old age, the premiums are higher than necessary in early years, so they can be lower than necessary in old age. The early overpayments are invested and generate cash. After a certain amount is accumulated to cover future premiums, the balance becomes available to the policyholder as ‘cash value’ in a savings vehicle, paid to you if you decide to quit the policy.
With universal (or adjustable) life, the early overpayments are invested and pay money market rates of interest. Accumulated savings can be used to lower your agreed premiums if, for example, you fall on hard times. While useful, you must be certain the savings money is not all used up, and you don’t fail to cover a premium payment. As with other whole life policies, yours is only valid while premiums are being paid.
With variable life, the early overpayments can be invested in stocks, bonds and money market mutual funds. Your policy’s value may grow faster, but you have more risk. Poor performance could result in lower cash value and lower death benefit, although some policies guarantee a minimum death benefit.
With variable universal life, you get the investment ‘risks and rewards’ aspect of variable life, plus you can adjust your premiums and death benefit as in universal life.
With most permanent life policies, the policy somehow accumulates cash value. However, this is not ‘free money.’ If you borrow against the policy and die with a loan outstanding, the amount of the loan and any interest and charges will be subtracted from the policy’s death benefit. More important, something many people overlook: when you die, the insurance company keeps the policy’s cash value. It does not go to your beneficiaries. It only served to give you some extra financial flexibility.
As for the overall popularity of the different types of life insurance, LIMRA’s 2016 Life Insurance Sales Report showed that traditional whole life policies accounted for 36 percent of total life insurance premiums. Universal life policies came in at 21 percent, term life at 21 percent and variable universal life at 6 percent. Other types made up the difference.
If you didn’t take steps to put life insurance in place starting in your 30s, at the age most advisors recommend, it is not impossible to do so once you’re in your mid-50s or above. The analysis comes down to whether the cost and benefit of a policy make sense to achieve whatever goal you are targeting.
For seniors, having the right life insurance policy can mean:
- Being able to pay off last debts, such as medical and funeral expenses;
- Providing life income for your surviving spouse or a special-needs situation;
- Covering estate taxes and other costs related to your estate;
- Paying off a mortgage, so your house is free and clear for heirs;
- Repaying adult children who will take care of you in later years;
- Leaving a legacy to a favorite cause or passion of yours; and
- Helping grown children and grandchildren, whether for need or pleasure.
In most cases, the predictability is appealing: premiums can be stable for the duration of your life, or until the plan is funded. Beneficiaries will receive the death benefit no matter when you die, provided the required premiums are paid up. The policy builds cash value, which grows tax-deferred and offers a bit of financial flexibility. In some cases, you may even be able to pay future premiums with the built-up cash.
Should you decide you no longer need or can afford the policy, you can surrender it to the insurance company for the cash value or sell it to third parties through a ‘life settlement.’
However, these policies are far more complex than term life insurance, carry far higher premiums and require a level of sophistication to understand all the nuances fully. Yet, with our ever-increasing life expectancy, they do solve one major issue with term policies: we don’t outlive our permanent life insurance.
Choosing whole life insurance focuses primarily on price, coverage and ease. You would want to know the premiums you would have to pay, the ease of enrolling in the plan and what types of insurance are available. In addition, whether there is a delay before the plan goes into effect and how supportive the customer support team will be when you need them.
In assessing possible insurance candidates, you will want to look at whether medical exams are required, how low or high the death benefit can be, what the policy does not cover and the company’s financial strength.
The ultimate questions are: what does it cost and how much does it pay? The first depends on what you can (and want to) afford. The second depends on your purpose for wanting the death benefit. If you are working with a financial advisor, preferably a neutral, fee-only one who does not make a commission on this kind of purchase, consider reviewing your decision to buy life insurance. Advice on tax and other implications could prove invaluable. Keep in mind that an agent somewhere will make a high commission for selling you the policy, so watch for pressure tactics.
List of candidate companies: Whole life insurance policies are available through more and more channels today, with insurers selling through independent brokers, captive agents, broker-dealers, online aggregators and directly from the company. Whatever way you choose your candidate companies, you might want to start with 5-6 so you can have 2-3 by the time you run them through these filters.
Type of permanent insurance: You will first select between traditional whole life, universal life, variable life and variable universal life (and variations) as described above. Your choice will depend on the amount risk and flexibility you want in the long term.
Benefit amount: The death benefit is the amount your beneficiaries will receive. On small policies, that can be as low as $10,000. (These policies are usually taken out to cover funeral expenses and offer guaranteed acceptance with a 2-year waiting period before accessing full benefits.) Coverage can go up into the hundreds of millions of dollars. The value you select is up to you, but one simple exercise is to estimate what needs will exist when you’re gone. Subtract from that what assets you have available, and you have the minimum amount your policy should cover.
You may find you have to adjust the death benefit amount once you get preliminary estimates and see what the premiums will be. You may also have to adjust when you go from preliminary quotes to final quotes with an insurer, once all the information is factored in from a full application and your medical exam. Estimates will always start with the best scenario.
Medical exam, medical questions or nothing: Underwriting is the procedure that determines what risk the insurer is taking, based on your health issues and other factors. Some insurers insist on medical exams, some are content with medical questions (simplified issue) and some ask you nothing (guaranteed issue). Virtually all permanent life insurance policies with a larger face value will require full underwriting.
By your 50s, you may already have some health issues, but that doesn’t mean you should avoid policies that require full underwriting. In fact, full medical exams and lengthy applications often result in the lowest premiums. The explanation? The insurer does not have to raise premiums to cover the unknown if it has full information.
The medical exam will review your height, weight, blood pressure and medical history. A blood and urine test will be included to identify specific medical problems. 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.
Different databases will be accessed to confirm your answers. Misleading or omitted information can lead to claim denial. Underwriters may review your medical records to get a complete assessment and may consult staff physicians before deciding.
For applicants over 50, additional tests may be required, including an electrocardiogram and treadmill stress test. Men may be asked to take a Prostate Specific Antigen (PSA) test. Existing mammograms and colonoscopies may be examined.
Rate of return on cash value: One characteristic of permanent life insurance policies is that they offer a ‘cash value’ savings account. Part of your premium payment is invested in an account which grows slowly on a tax-deferred basis. (The rate of growth depends on whether your policy is traditional whole life, universal life, variable life or variable universal life.) You can borrow against the cash value, but the death benefit will be reduced by the outstanding loan if it has not been repaid. You may be able to buy more coverage with the accumulated cash. Lastly, that accumulated cash is what you will receive if you opt to surrender your policy to the insurer one day.
An insurer will provide you with examples of how each policy’s cash value could perform over time. Be sure to confirm which parts of the example are guaranteed. The minimum growth rate on the cash value is usually guaranteed but do check if calculations are using non-guaranteed dividend payments, for example.
Riders: These are add-on coverage features available with different policies, often at an extra cost. Identify the riders you want to be included in your policy and be sure the insurers you are considering can provide them. Typical ones include:
- living benefits riders, which gives you access to some of the death benefit while alive to cover different costs: a Terminal Illness Rider when life expectancy is short, a Long-Term Care Rider for when you lose your ability to care for yourself and a Critical Illness Rider for a one-time medical condition that is expensive, but not ongoing;
- a disability waiver of premium, which lets you skip some payments if disabled without putting your policy at risk;
- a term rider, where you can add some term insurance to your permanent life policy to bump up coverage for a short period at a lower cost;
- an additional purchase option, where you can purchase additional coverage in the future without having to prove insurability;
- a cost of living rider, which enables you to purchase more insurance each year to help offset increasing insurance needs due to inflation; and
- an accidental death benefit which pays an extra death benefit, usually equal to the face value of the policy, if you were to die because of an accident.
Vetting the insurers: Buying permanent life insurance is a long-term thing, and you want to know your insurer will be there for your beneficiaries when the time comes to pay out on the policy you paid into over the years. One resource is to check the Financial Strength Rate (FSR) of each company on the A.M. Best website. Experts feel a company should have at least an ‘A’ Excellent or ‘A+’ Superior rating of their ability to meet their future insurance obligations. Others recommend a minimum Comdex ranking of 90 (out of 100). These ratings can be found easily through an online search.
Customer satisfaction: Three resources exist for you to check customers’ satisfaction with individual companies. One is to do an online search of ‘J.D. Power + life insurance ratings,’ which will lead you to an annual analysis of insurance companies. See if the candidate companies you are considering are included and check the customer satisfaction rating.
Another resource is to check online reviews and testimonials where you can look for any red flags. Consider, however, that large companies will likely get more complaints than small ones. Lastly is an online search for ‘National Association of Insurance Commissioners.’ Here you can see each insurer’s complaint ratio score with state regulators, adjusted for market share. This resource sets the national median at 1. Any score higher than 1 says the company has received a larger number of complaints for its size. Look for scores as close to zero as possible.
Cost savings: Life insurance rates are standardized and regulated at the state level, so differences come from what rate class each company puts you in. Note that your preliminary quote is just that: preliminary. The quoted premium could be at the top rate class, but once you submit your detailed information and go through underwriting, you could drop down a rate class or two, and your premium will go up. Very few discounts exist. Any discount for bundling (or holding multiple policies) will not come from the life insurance quote; it will come from the other policies you have with the same company.
Any cost savings you do get will typically come from the mechanics of your policy, that is, the means and timing of payments. Some possibilities include:
- paying premiums annually or quarterly instead of monthly;
- paying electronically by automatic deduction; and
- having death benefits paid out to beneficiaries in yearly sums, over time, rather than as a lump sum.
This information will prepare you to contact possible insurers online, whether through their direct websites or through an online ‘aggregator’ website that lets you access various quotes through one application. Ideally, you want a ‘no-fee’ broker who matches your needs to the best company for you, although any fee will be built into the commission structure and the product price. Your concern is the net cost to you for what you are purchasing, both today and long-term.
Offline, if you go to an independent, multi-line agent, you will have access to more options than through a captive, single-line agent representing just one company.
Rates for whole life insurance vary tremendously, so it is vital to do your homework and go through some sort of comparative process.
Two factors that stand out for seniors are age-friendliness and health-related value.
Age friendliness: How a company interacts with you as you age is particularly important since with all forms of permanent life insurance the relationship will likely be for the duration of your life. Easy communications on policy status, payment issues and access to the policy’s cash value are critical. The insurer’s website should be intuitive and easy to navigate, especially if this is how you will monitor your policy over time. Bill-paying procedures should be clear and consistent. Even though a policy is considered ‘permanent,’ you do have flexibility over time in how you use its cash component. 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: You want to get your life insurance in place while you have the best possible health, to maximize your choices and minimize your costs. However, even at an older age and with some health issues, insurance is available. The issue is its cost, and whether the premiums (and their impact on your everyday finances) are worth what you are trying to achieve with your death benefit.
The primary fee is the premium: its monthly amount and how long it must be paid. Typically, the amount is the same for as long as you are alive. However, some policies allow you to pay your premium in a single installment, or over a shorter period, while still providing coverage for life. (Such premiums will be higher since they are made over a shorter time.) Other policies allow dividends – which are not guaranteed – to help pay for some or all scheduled payments at some point.
While the information you provide to each insurer will be the same, each company will use different underwriting guidelines and ‘rate’ you differently. Then, each company has different operating expenses – for salaries, commissions, overhead, advertising, etc. – that must be covered in the premiums charged. These expenses can vary dramatically with each company’s efficiency and business strategy. Companies will also have different levels of success in how well they invest the premiums collected.
So many factors go into calculating the premium that selecting an insurer for permanent life insurance absolutely requires full comparative quotes, not just preliminary quotes, even if it means going through underwriting more than once.
In addition to premiums, you should also ask about the cost of accessing the cash value that accumulates in your account, in the form of withdrawals or loans on your policy, plus the interest rates charged on the loan itself. Check on any management fees, including any annual investment fees, and early surrender charges.
As you sort through the potential candidate companies, you want to look at premiums, ease of purchase, coverage types, waiting periods and how good the company’s support team is.
Cost: Your premiums must be affordable over the long term. While we cannot predict what the years will bring, this is vital since your policy will be terminated for non-payment. In that situation, you will have access to the policy’s ‘surrender value’ – based on the accumulated cash value – or you may be able to sell the policy on the ‘life settlement’ market – but you will lose the death benefit that was your original reason for investing in the policy.
Ease of enrollment: Because of the number of options available in permanent life insurance, in its various forms, you want your insurer to make your researching and purchasing process as easy as possible. (If you have a trusted advisor, that is someone you will want to call on for confirmation that the policy makes sense with your other retirement and estate decisions.) An insurer should provide various means to purchase such an important financial asset, to match the comfort level of its potential customer
Coverage: Even if your primary goal is the death benefit to be paid to your beneficiaries, your choice among the various types of insurance (whole, universal, variable, etc.) can affect other aspects of the policy you select. While the differences may seem complex, it is important for you to understand what you are purchasing: the risks and the rewards. Remember that the differences primarily affect the financial flexibility offered by the policy during your life since the cash value rarely affects your beneficiary. The insurance company keeps it.
Waiting period: Most policies go into effect upon approval and receipt of the first premium. Waiting periods are typically only related to guaranteed-issue life insurance, which are smaller policies where full benefits are not available during the first two years. (Instead, paid-in premiums are usually returned in case of death during that period.) However, another form of waiting period is that most companies only cover suicide after one or two years. They also may have a contestability period in which they can review for misrepresentations or omissions in your original application if you die within that period. This would lead to denial of a claim.
Customer support: A potential policyholder will look at how friendly the company’s website is, how easy it is to find detailed information to help in decision-making, and how easy and trouble-free the enrollment and bill-paying processes are. The variety of communications tools also counts, whether a senior wants to talk on the phone or process a payment using a smartphone app.
To assess the wisdom of purchasing permanent life insurance requires a review of the impact of federal and state taxes, possibly by your financial advisor, as the insurance sales representative will have no idea what your retirement and estate planning look like. Typically, the increasing cash value of your policy is not taxed as it builds. And, if you surrender a policy for its cash value, only the excess you receive over what you paid in as premiums, minus dividends, is taxable. However, possible income, estate and gift taxes could be consequential.
If you find that traditional whole life insurance seems too costly, and you fear you could ‘age out’ of term insurance, there is a hybrid form of insurance 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 cash value component. Its greatest appeal is that your policy can outlive you since 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. 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 hold the premiums level.
So, when you are researching different types of permanent life insurance policies, you might want to ask different insurance providers if they offer GUL policies as well.