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Senior Couple Sitting On Sofa Using Digital Tablet
In several other articles, we talked about pros and cons of life insurance for kids. But there is another demographic that should be discussed. Those are the “Seniors”. We can use the arbitrary age of 65 and over to define that group.
Insurance Generally
Any kind of insurance is fundamentally about risk. Risk can be defined as the chance of financial loss due to an unexpected event. Insurance is the transfer of risk from an individual or entity to an insurance company. The insurance company pays compensation for the loss if covered by the policy.
Any kind of insurance, including life insurance, is for protection. Specifically, life insurance is protection against premature death. Although everyone will die sometime, no one knows when. Therefore, insurance is purchased to protect against obligations that may exist at death.
Life Insurance Specifics
A life insurance policy insures the life of a human being. A life insurance policy is a “valued policy.” That means that it is bought in a stated amount, for example, $100,000. That is called the “face amount” and which is ordinarily the amount paid upon the insured’s death. Sometimes, the full face amount may not be paid, such as when there is an unpaid policy loan on a whole life insurance policy.
In contrast, most property policies are “non-valued policies.” That means that the amount payable is determined based on the extent of the loss. An example is the collision coverage on a car. It pays the reasonable cost of repair of a car that is in a collision. The amount paid will vary based on the extent of the damage.
The loss insured against by a life insurance policy is the premature death of the person whose life is insured. As we will discuss, life insurance can be used in different ways, so the meaning of “premature” is different depending upon the circumstances of the individual who buys it. Briefly, though, “premature” can refer to death when there remain financial obligations for raising a family, for paying debts, or financial obligations to business partners.
Who are the Parties to a Life Insurance Policy?
Like other insurance policies, the parties to a life insurance policy are the “insured” and the “insurer.” The insured is the person whose life may end while the insurance policy is in force. The insurer is the company that assumes the risk of paying the face value of the policy if the insured dies when the policy is in force.
While not, strictly speaking, a party to a life insurance policy, the “beneficiary” is an important part of a life insurance policy. A beneficiary is a person or another recipient of the proceeds of it. The beneficiary is usually specified when an application for the policy is made. Usually, but not always, the beneficiary can be changed at any time before the insured dies.
What are the Kinds of Life Insurance?
There are 2 broad categories of life insurance, and several variations of each. The broad categories are:
- Term life insurance. Term life insurance is designed (and priced) to last for a fixed period of time. The duration of the policy is established at the inception of the life insurance policy. Specifically, the buyer of the policy applies for one to last for a stated period of time. Insurers that issue term life insurance policies may offer them for periods ranging from 1 to 20 or more years.
The face value of a term life insurance policy is payable if the insured dies while the policy is in force. A term life insurance policy will not be in force if (a) the term of coverage expired and has not been renewed before the insured dies or (b) the policy lapsed due to non-payment of premium. Also, the cause of death must not be excluded by the policy. - Permanent life insurance. Permanent life insurance is also called “whole life insurance.” A major characteristic that distinguishes it from term life insurance is that it accumulates “cash value.” Cash value can be broadly compared to a savings account built into the insurance policy. It is not a savings account as that term is usually used, but there are some similarities. In general, here’s how it works:
A portion of each premium payment is applied to the cost of the indemnity benefit. That refers to the mathematically determined amount that the life insurance company must collect to pay the death benefit of the policy. Another portion of each premium payment is deposited into a separate account that we can call the “cash value account.”
Life Insurance Considerations for Seniors
In the past, an individual of 65 or older had raised his or her family, retired from work, perhaps had a secure pension and a fully-paid house. Therefore, the need for life insurance was different. Now, fewer “Seniors” fully retire at 65 so there may be a longer need for it.
Economic pressures due to unemployment to school loans may cause a child to remain at home. Sometimes, older adults wind up supporting them, grandchildren and themselves. Therefore, savings can be depleted or mortgages don’t get paid off as early as intended. Life insurance can become a part of the metric in several ways.
- First, permanent life insurance can provide a tax-deferred source of income through its cash value. The policy may allow cash value to be withdrawn similar to an annuity by providing a stream of income. If the Senior is insurable (mostly, by age and health status) and has the means to do so, he or she can make a lump-sum premium payment and accomplish this goal.
- Second, although a term insurance policy provides a death benefit only, its advantage is that it is usually more affordable. Upon death, proceeds can be used to provide for a surviving spouse, children who remain at home, and whatever other financial needs the Senior has.
- Third, depending upon circumstances, both permanent term and permanent life insurance policies can be sold to third parties. The amount for which they are sold will be less than the face value, but the quicker(er) cash may help. There may be tax or other implications.
Both types of life insurance can be used as part of an overall estate-planning strategy. Age and health status play major roles in the availability of life insurance for Seniors, but there do exist life insurance companies that cater to their special needs. Seniors who are considering the maintenance or acquisition of life insurance as part of their financial or estate planning strategy should always consult licensed professionals for guidance.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
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