Is Senior Life Insurance A Costly Mistake?

Is life insurance worth it for seniors?

Life insurance can be worth it if you have dependents or outstanding debts such as a car loan, mortgage, or unpaid credit card. The best life insurance for seniors allows you to safeguard the financial security of your loved ones without relying entirely on your savings.

Unfortunately, these promises didn’t materialize for Raymond Ellis, who was featured in a 2012 article in the Toronto Star. Mr. Ellis, who was then 81, was stuck with a permanent life insurance policy that cost more than $3,000 per year, and which had absorbed more in premiums than it would ever pay out in benefits.

How did this happen? Are bad deals simply the norm for seniors’ life insurance? In this article, we discuss how to evaluate your life insurance needs, avoid buyer's remorse, and use permanent life insurance.

Life insurance for seniors can make sense if…

Regardless of your age, the most important factor guiding your life insurance decisions should be need. Here are the three biggest questions to ask yourself:

1. Do I have any dependents? Children, spouses, partners, and other loved ones who rely on you financially could struggle if you pass away.
2. Do I have any outstanding debts?  Business loans, car loans, credit card debts, and mortgages may fall to your family members if you pass away.
3. Do I have enough to cover final expenses? Remember, your savings and assets can also cover the cost of a burial or cremation.

To get an idea of how much life insurance you need, add up the cost of covering these two expenses and subtract the value of your assets and savings. If the result is negative, you may be not need life insurance.

Our expert take

According to the Toronto Star, Mr. Ellis purchased a life insurance policy with $45,000 in coverage at the age of 55. At that point, the mortgage for his Midland home was likely paid off, and if he intended to leave something to his wife at an elderly age, he had more than enough time to save, as each of his parents lived well past 80.

These details tell us Mr. Ellis likely didn’t consider–or wasn’t encouraged to consider–the reality of his needs and financial situation.

Life insurance for seniors can be a costly mistake if…

Buying life insurance for any reason other than need can lead to costly mistakes. Beware of life insurance companies or sales pitches that:

• Don’t encourage you to calculate the actual cost of supporting your dependents or paying off your debts.
• Encourage you to buy out of fear, such as by citing inflated funeral costs.
• Encourage you to apply for no-medical life insurance before checking the price of a fully underwritten policy.
• Market life insurance products as investments based on overly optimistic projections.
• Promise large amounts of life insurance coverage in exchange for suspiciously low premiums.

Remember, if a deal seems too good to be true, it probably is. Life insurance is a tool that should be tailored to your needs and budget, not a get-rich-quick scheme.
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Our expert take

Mr. Ellis bought his life insurance policy in 1986, at a time when interest rates spiked to 20%. The projected payment schedule he was shown assumed interest rates would remain at 9.5%, but when they fell to 2-4%, his savings underperformed and his premiums increased drastically.

Following consumer backlash and legal action, life insurance companies have since revised their presentation of payment schedules and are now more conservative in their projections. However, it remains good practice to check whether your new policy’s premiums are guaranteed level (and for how long) or tied to interest rates, investments, or other external factors that could suddenly change.

Is term or permanent life insurance best for seniors?

In our book, the choice between term and permanent life insurance is fairly simple. If your financial obligations are temporary, choose term, and if they’re lifelong, choose permanent.

From a senior’s perspective, term is often the best life insurance because it’s simple, affordable, and you can convert most products into a permanent policy later if you lose your good health. Converting term life insurance generally doesn’t require providing updated health information or proof of insurability.

Term life insurance premiums are also usually guaranteed level for the entirety of the term, while permanent life insurance may tie your premiums to the performance of a savings or investment account. Watch out for yearly renewable term life insurance, which lasts for one year and tends to increase rapidly in price from year to year.

^{* Cost reflects the approximate average monthly cost for a fully underwritten, 15-year or permanent life insurance policy with $50,000 in coverage for a 60-year-old female non-smoker.
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Our expert take

The Toronto Star doesn’t mention the type of coverage Mr. Ellis purchased, but given the fact that it included a self-directed savings account, it was likely universal life insurance. Unlike a traditional savings or investment account, missing a payment could cause Mr. Ellis to forfeit the entire value of his universal life policy, which is why he felt obligated to continue.

“Universal life insurance policies can be risky for a reason. They’re the most complicated type of policy, and even if they allow you to change what you pay, too few people understand what they’re getting into. If your investments don’t perform as expected, your premiums can eat up the entire value of your policy.” — Erik Heidebrecht, Customer Service Manager & Licensed Insurance Advisor

How much does life insurance for seniors cost?

Life insurance costs tend to be higher for seniors due to their elevated risk of mortality, but it can also depend on the amount of coverage, type of policy, and length of term.

For example, the average life insurance premiums for a fully underwritten, 10-year term policy with $50,000 in coverage start at $36/month for a 60-year-old, non-smoking Canadian woman. But for a 70-year-old, smoking man seeking a no-medical, 15-year policy with $2 million in coverage, it could cost over $8,000/month.

Your choice of life insurance provider also matters, as we can see in the table comparing the industry average life insurance rates with those from PolicyMe:

^{* Table displays the approximate average monthly cost of a 15-year term life insurance policy with $100,000 in coverage for non-smokers living in Canada.}

Our advice is to try the application process for a fully underwritten life insurance plan. Full underwriting (which may include a medical exam) results in a more accurate picture of your health and generally more affordable life insurance rates, even if you have pre-existing conditions.

For example, PolicyMe term policies are fully underwritten and offer lower rates than the industry average for no medical life insurance:

^{* Table displays the approximate average monthly cost of a 15-year term life insurance policy with $100,000 in coverage for non-smokers living in Canada.}

^{** Table displays the cost of a no-medical term life insurance policy with the same term length and coverage amount, and for the same type of applicants, averaged across all products contained in our study.}

For most families, term life insurance is the most affordable and practical option. Permanent coverage can make sense when protection is needed for life.

^{* Table displays the approximate monthly cost of a life insurance policy with $100,000 in coverage for a 60-year-old living in Canada.}

Are life insurance premiums level or changeable?

One more advantage of term life insurance is that your premiums are generally guaranteed to remain level throughout the entire term. If you opt for a permanent policy with a cash value, your premiums may depend on how your savings and investments perform–a common mistake that can trap you in a high payment schedule.

It’s important to pay attention to the payment schedule outlined in your policy and whether your premiums are guaranteed level for 10 years, 20 years, the whole term, or for life. PolicyMe’s life insurance premiums are guaranteed for your term, and contain a 30-day money-back guarantee so you can review your paperwork and make an informed decision.

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Our expert take

In Mr. Ellis’s case, his life insurance premiums were tied to the interest rates in the attached savings account; as they fell, his premiums increased. He also admitted he did not read his paperwork closely enough and missed the explanation that his payments were guaranteed for 10 years, after which they would rise until he turned 100.

FAQ: Is life insurance for seniors a costly mistake?

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