It’s no secret that life insurance becomes more expensive as we age. Premiums are related to the mortality rate and the decrease in our life expectancy as we get older is reflected in the increased premiums. What you may not realize is that this risk is not represented by a linear line. If you graph the probability of death from an actuarial life table, you would notice that the probability of death increases exponentially as we age. What this means for term insurance is that renewal premium also rises exponentially, such that they become unaffordable during retirement. While the simple solution would be to cancel the policy, it’s not the only option. So, what are your options for your term insurance policy as you head into retirement?
Renewal or partial renewal
Before you renew your policy at the increased rates, you should confirm how much you have to pay by reading your policy. Rates are guaranteed at the time of issue, so the policy that you put in a safe place all those years ago will show the premium at each renewal. By the time you reach retirement in your 50s, 60s or 70s, your renewal premium may have reached unaffordable heights. For example, a term-10 policy for $500,000 of coverage for a 55 year old non-smoking male costs $133.2/month (1). Ten years later, it increases to $962.1/month, an increase by a factor of more than 7!
The problem with renewing your policy in retirement is that there is no guarantee that it will pay out before it expires. Most term policies expire at age 80 or 85, and there is a good chance of living beyond this age for newly retired individuals. You could be paying $2,791.8/month from age 75-85, only to have the policy expire at age 85, leaving you with no coverage.
Instead of renewing the entire amount, perhaps you only need a portion of the coverage since your insurance needs have decreased. Diminishing insurance needs is a common occurrence for people in retirement, and insurance companies permit the flexibility of renewing only a portion of the policy. The premium will be proportional to the amount you retain, which will result in a more affordable price.
Cancel the coverage
If renewing even a portion of the policy is not appealing to you, then you can simply let the term policy lapse. This option is reserved for if you absolutely have no need for life insurance in retirement, which may occur if you have paid off your mortgage and built up a sufficient nest egg.
Be advised that you should be certain you no longer need life insurance before cancelling. If you want to reinstate an old policy, you will have to provide medical evidence of good health in order to do so. This may not be a problem for people in their 20s, 30s and 40s, but health issues may have crept up over the years, preventing you from qualifying for reinstatement in retirement.
It may sting for you to cancel the policy with nothing to show for it after paying for protection for so many years. If you want your policy to increase in value as you age, or if you prefer to have permanent coverage, perhaps you should consider a permanent policy.
Apply for new coverage
Instead of reinstating a lapsed policy, you may be able to qualify for a new one at a reduced rate, provided you display good health. In the example above, instead of renewing the policy for $962.1/month at age 65, he could apply for a new term-10 policy for $404.1/month. This represents savings of 58%! One of the conditions of this option is that you must be in good health. Otherwise, you may receive a rated policy that costs even more than the renewal premium.
An important note to remember is that you should never let your old coverage lapse before getting the new one in force. If there is a gap in coverage even for a day and you pass away on that day, your beneficiaries will receive nothing. The importance of continuation of coverage cannot be overstated.
Convert into permanent insurance
The final option, which may be the option that most people choose, is conversion into permanent insurance. Having some permanent protection will be important as estate planning goals become the point of focus in the later stages of life. Permanent insurance is often used for estate preservation, charitable giving and estate equalization strategies.
It may be difficult to project that far into the future during the early stages of retirement. But by converting your existing term policy into permanent insurance, you will be able to save the trouble of purchasing life insurance during the late stages of life.
The need for life insurance in retirement is still a point of contention for many people, with the main reason being that it becomes more of a want than a must have at that stage of life. By figuring out your risk management goals in retirement, it will be much easier for you to choose the option for your term insurance policy that is most suitable for you.
1. Quote from Canada Life. Rates are current as of November, 2014.
Image courtesy of Rhoda Baer