A Comprehensive Guide to Life Insurance for Seniors

Many older adults who do not already have a life insurance plan avoid purchasing one. This is due to the fact that, as you age, the monthly premiums for life insurance go up. However, this doesn't mean that senior life insurance cannot be a valuable addition to your financial plan. Life insurance can offer seniors added stability and financial security for themselves and their loved ones.

In today's guide, we'll break down everything you need to know about life insurance for seniors. We will cover the basics concerning how life insurance works, as well as the potential benefits and drawbacks of acquiring senior life insurance. Finally, we will discuss some of the different policies available and provide tips on finding the best life insurance to meet your needs. So, let's get started!

What Is Life Insurance?

Life insurance is a written, contractual agreement between you and an insurance provider that generally requires you to pay monthly premiums for the rest of your life or for a set period of time. Once you pass on, the insurance company pays out a lump sum to the beneficiary specified on the policy.

Term life insurance policies can last for a set number of years, with most of the shortest policies lasting between five and 10 years. Alternatively, you can choose a policy that pays out if you pass away before reaching a certain age. For example, you can purchase a term life insurance policy at the age of 55 and agree that it is paid out as a death benefit if you pass away before the age of 85. This way, you can customize the type of life insurance you want based on your monthly budget, your beneficiaries' needs, the period of time you plan to pay, and the total sum you expect in return.

Do Seniors Need Life Insurance?

If you have your finances in order with adequate savings for retirement and a financial plan to secure the future of your beneficiaries, you might not need a life insurance plan. However, if others (like a spouse or children) depend on your income, you will likely want a simple way to make sure that your loved ones have financial security if something happens to you. Life insurance can provide this.

It’s also important to note that you don’t have to take out a life insurance policy on yourself. You can also protect yourself from financial hardship if a spouse or someone you financially depend on passes away. You can take out an insurance policy, pay the premiums, and then collect the lump sum to help you manage your finances.

So, do seniors need life insurance? The answer really varies from one person to another. That said, there are many benefits to a life insurance policy:

• Enhanced financial security: Though the exact terms of your plan will depend on the type of policy you choose, life insurance offers a great way for seniors to leave behind large sums of money for their loved ones. Rather than only depending on retirement savings, investment portfolios, and similar financial vehicles, a life insurance policy essentially guarantees that beneficiaries will have money to use as they see fit. It is also a common way to add diversification to your estate planning.
• Tax-free death benefits: Many types of retirement benefits are taxable when you receive benefits or begin distributing funds, but life insurance is one of the few exceptions. Rather than paying on the death benefits, life insurance beneficiaries will owe nothing in taxes for the lump sum of funds. This provides even more financial security and ensures that you or your loved ones can take full advantage of the life insurance payout.
• Coverage for last expenses: Many seniors do not take the cost of funerals and other death-related expenses into account when planning their finances. A life insurance policy ensures that friends and family have enough to cover the expenses of the insured person’s final expenses. This way, beneficiaries do not have to pay out-of-pocket or go into debt just to pay for end-of-life costs.
• Supplement for retirement income and savings: It's always a good idea for older adults to diversify their investments and financial plan. A life insurance policy is one of the best ways to secure greater stability and supplement your existing retirement income. Some plans even allow you to accrue cash value and take out portions of the death benefits ahead of time to cover current expenses.

» Further Reading: Funeral Costs Calculator

Types of Life Insurance for Seniors

There are several different types of life insurance policies to fit your needs. Below are the four most common types of policies for seniors.

Term Life Insurance

As the name implies, term life insurance is a policy that designates a set amount of time during which the policyholder will pay premiums. Typically, the minimum is 10 years, though some insurance providers offer shorter terms. This means that you (or whoever is insured) will be covered for the designated period of time.

Term life insurance policies are generally cheaper and more flexible than other types of life insurance. However, it all depends on the fine print. If you purchase from a provider that does not allow conversions to permanent life insurance and you outlive your policy, you will have paid years of premiums without any death benefit. It’s important to carefully consider how long you want your term life insurance to last and discuss your options to switch to a permanent policy with your provider if necessary. If the insured person does not pass away during the preset term, one of two things can happen. Either the policy will end and any beneficiaries will not receive a payout, or the policy owner will have the opportunity to convert their policy to a permanent life insurance policy (also known as a whole life insurance policy).

Whole Life Insurance

Whole life insurance provides the insured person with coverage for their entire life. This means that the policyholder will pay premiums until the day they pass away. At that point, any beneficiaries will be eligible to collect the death benefits as outlined in the original agreement. Whole life insurance provides the safest and most secure option for seniors who can afford to pay monthly premiums for the long term and want to guarantee that beneficiaries will receive payouts.

However, whole life insurance premiums are more expensive, especially for older adults. If you start your policy during your retirement years, insurance companies will expect you to pay more every month because, as harsh as it may sound, you have less time to pay than someone much younger. At the same time, some whole life insurance policies allow you to accrue cash value based on current interest rates. Therefore, you may have to pay a bit more, but you get a guaranteed payout for your beneficiaries and a growth in total value, much like a traditional savings account.

Universal Life Insurance

Universal life insurance is a specific type of permanent life insurance that provides more flexible premiums. Universal life insurance offers both death benefits and potential cash value (plus interest) if and when your payments exceed the amount of the final payout. You also can withdraw funds against your policy if the need arises.

The flexibility of premiums is ideal for seniors who want to find the most affordable monthly payments, while the ability to accrue cash value is a very valuable addition. However, these benefits usually mean that, over the long term, universal life insurance is more expensive than term life insurance and even many whole life insurance policies. The ability to withdraw funds is also tempting, but it can increase premiums and reduce the final death benefit of your policy.

Variable Life Insurance

Unlike most other types of policies, variable life insurance invests funds to accrue cash value. It works much like a standard mutual fund, with the added bonus of a payout to the designated beneficiaries. Since variable life insurance policies use invested funds, they also take on more risk. For example, if the broader market drops, the cash value of your life insurance policy will drop as well.

In terms of monthly premiums, variable life insurance is one of the most expensive types of life insurance. This is due to the fact that it has the greatest capacity to grow in cash value. As a result, it is best for seniors who can start paying before retirement and afford higher monthly premiums. Since markets almost always trend upwards over the long term, it is better to get a variable life insurance policy earlier to ensure the highest growth in cash value. Just remember that variable life insurance is better for seniors who are in a position to take on more risk.

How to Choose the Best Life Insurance for Seniors

Now that you know a bit more about your life insurance options, it's time to examine some useful tips for choosing the best policy for you.

• Remember your budget: Term life insurance is generally best for seniors on a limited budget. It still provides large payouts, but since there is the possibility that you could outlive your policy, the premiums are much more affordable.
• Weigh price vs. peace of mind: If you want the greatest peace of mind and simplest policy, whole life insurance is probably the best option for you. As long as you stay up to date with your premiums, you can rest easy knowing that your designated beneficiaries will receive their payout as planned.
• Think about your needs for the funds: Universal life insurance is a good idea if you think that you might want to withdraw funds from the death benefit early. For example, many people with high medical costs use withdrawals from universal life insurance policies to help pay medical bills.
• Consider the risks: You should only choose a variable life insurance policy if you have the capacity to pay higher premiums and take on a certain degree of risk.
• Remember your beneficiaries' needs: Always consider the needs of the beneficiaries. Whether the beneficiary is you or someone else, make sure that the life insurance policy provides enough death benefits and/or cash value to make it worth your while.
• Read the fine print: No matter what type of life insurance you choose, always read the fine print and discuss your options with multiple insurance providers. In doing so, you can find the best life insurance policy for you and your loved ones.

How Much Does Senior Life Insurance Cost?

As with all types of insurance, the cost of life insurance varies from one provider to another. However, it is also affected by factors like your age, gender, lifestyle choices (like smoking), height and weight, and the total value of the death benefit.

That said, the average 20-year term life insurance policy (as of 2022) with a $500,000 death benefit costs:

• $2,520 per year for a 60-year-old male
• $1,788 per year for a 60-year-old female

This rate nearly triples if you are a smoker. Additionally, life insurance premiums do not remain stagnant over time. You can generally expect your premiums to increase by roughly eight to 10 percent every year.2

» Helpful Tool: Life Insurance Calculator