Senior Life Insurance

The category of senior life insurance refers to life insurance designed for and purchased by people whose age exceeds a certain threshold level. The specification of that level is mostly arbitrary. Years ago, seniority was defined as having passed 65 years of age – the age at which most people retired. Today, the christening of senior citizens occurs at age 55 – or sometimes earlier. This is ironic, because life expectancy has increased markedly even as the beginning-age of seniority has decreased.

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The point is not academic to the subject of life insurance. Annually renewable term insurance is a benchmark product in which premium rates increase annually to reflect the actuarial reality of higher mortality risk. The difference between the rates for 55-year-old and 65-year-old applicants is very substantial. Current convention points to 55 years as the crossover point, but allowance should be made for the sharp upward trajectory of risk and premium rates beyond this point.

Rationale for Senior Life Insurance

The rationale for life insurance at any age is insurance need – the demand for a product that will transfer risk from individuals or households to a company specializing in risk-bearing. The classic insurance need stems from the desire to replace income that is lost due to the unpredicted death of a breadwinner. This replacement income pays daily expenses and tuition for children, monthly mortgage payments and living expenses for a surviving spouse.

By age 55, most of these needs are either met or no longer relevant. Children grow up, graduate and leave the household to earn their own income. Mortgages amortize, wholly or partly. Retirement, the time when the surviving spouse would have received no earned income from the breadwinner anyway, is drawing nigh. With these major insurance needs either gone or drastically reduced, why does the topic of senior life insurance arise?

Many specialized insurance needs confront the senior citizen. Among these are included:

  • Final Expenses – Dying is an expensive undertaking, and the bills don’t stop once the plug is pulled and the death certificate signed. Funerals generally run several thousand dollars even for a simple casket and burial. If the deceased had any debts to liquidate, the final-expense tab can mount rapidly. Applicants for senior life insurance want to pay the bill in advance. They want not only to avoid depleting resources available to their survivors, but also to provide the necessary liquidity. Because the date of death is unpredictable, final-expense insurance should be permanent insurance – either whole life or universal insurance. Because permanent insurance tends to be expensive, there is no point in purchasing it any earlier than necessary. This explains why the demand for final-expense insurance emerges only at an advanced age.
  • Retirement and Tax Planning – The cash value of a permanent insurance policy can provide tax-free income to policyholders as well as beneficiaries. By serving as collateral for loans against the cash value of the policy, the permanent-insurance policy supplements the policyholder’s income in retirement. Meanwhile, the loan can be paid off during the insured’s lifetime or liquidated by the value of the death benefit.
  • Estate Planning – Federal taxes on estates exceeding $3,500,000 in value can be paid by the death benefit of a permanent-insurance policy. The policy can be owned by a trust or the adult children of the insured in order to keep the face value of the policy from adding to the estate’s value.
  • Gifting – Since life-insurance proceeds are tax-free to beneficiaries, a permanent-insurance policy is an effective way to avoid taxes on gifts to children and grandchildren.
  • Final-illness Income – A policy option or rider offering “accelerated death benefit” will pay off to the insured upon a determination that his or her illness is terminal. This can be added to either a term or permanent-insurance policy.

Alternative Payout Structures in Senior Life Insurance

The beneficiary of a senior life insurance policy can receive the death benefit in a lump sum. The specialized nature of senior life insurance provides the beneficiary with a number of alternative options. One is “joint and survivors” or “second-to-die” insurance, which pays off to the last remaining survivor of a joint insurance policy. Married couples often find this arrangement convenient. A “joint life” policy reverses the order of priority by paying off on the death of the first of two individuals. It may even be possible to acquire a policy that pays out the death benefit in annuity form – lifelong payments calibrated to the life expectancy of the beneficiary.

Anti-fraud Measures

Insurance companies employ standard tools to deter fraud, which is a recurring problem to them. One of the few valid reasons for refusing to pay a death benefit is the discovery of fraud committed by the insured during application. Insurance policies commonly carry an exclusion for suicide within either one or two years after the policy commences. Guaranteed-issue policies, often purchased as final-expense insurance, sometimes feature gradation of benefits – return of premiums plus interest in the first year, 25-50% of the death benefit paid in the second year, normal payout thereafter.

Summary

Although many of the largest and best-known insurance needs are temporary, senior citizenship presents many life-insurance opportunities, ranging from final-expense insurance needs to estate planning to gifting. Unlike temporary insurance needs, these are typically handled with permanent insurance, due to the uncertainty of death and the need to create cash value. Another common rationale for permanent insurance is tax planning; loans against cash value of permanent insurance can provide tax-free income to policyholders. Payout structures for senior insurance can usually be tailored to accommodate the special needs of older beneficiaries.

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