One of the things that seniors think about a lot is life insurance. And the reason is because they do not want to be a burden to their loved ones when they pass. I know from first hand experience as I have had this conversation with my father on more than occasion about the pros and cons of whole life insurance.
You see, many seniors don’t have a lot saved up. This means that if there isn’t enough money to bury them, which is why they are thinking of life insurance, sometimes called “final expenses”. While there have been plenty of articles written about the pros and cons of whole life insurance in general, there haven’t been many written specifically for the senior population.
It is to that end that I wanted to give as much information as possible so that seniors know what they are getting. First and foremost, if you are buying any of the policies you see advertised on TV, like the advertisement below, you are buying whole life insurance…
- Policy for those 50 and over
- Guaranteed Acceptance
- You cost never goes up
- Your benefit never goes down
When you hear those, you know you are talking about whole life insurance. Sounds great, right? Well, yes and no. There are some things that you need to know about whole life insurance, even if it might be the only game in town for seniors looking for life insurance.
Why do I say that? Because there are two basic types of life insurance…
- Term life insurance
- Whole life insurance
(Note: whole life insurance is part of a slew of financial products known as “cash-value” life insurance which have a savings element attached to them. For the purposes of our discussion, however, it is not really that important)
Term insurance is a life insurance policy good for a finite period of time…10 years, 20 years, etc…The policy then expires, like your auto insurance does every year. But the maximum age at which you can get a term life insurance policy is around age 75, depending upon the company.  This means that seniors who are in that age range or beyond cannot get a term life policy. Which is why I said earlier that whole life insurance is the only game in town.
But still, you need to know what you are buying, so that’s why it is important to understand the pros and cons of whole life insurance for seniors, and while I am writing this from the perspective of someone in their 80’s or beyond, the pros and cons really do apply to anyone…
Pros and Cons of Whole Life Insurance
Lifelong Coverage – As the name suggests, you are covered for your entire life as long as you pay the premium, unlike a term life policy which is set to expire after a certain number of years.
Fixed Premiums – the premiums are the same for your entire life, unlike some life insurance policies. For example, an ART (annual renewable term) life insurance policy goes up every single year. With a whole life policy the amount you pay is the same your entire life.
Savings element – there is a savings element to a whole life policy, where an amount builds up over time. However, as I will explain later, this in actuality is a horrible investment so the benefits of the “forced savings plan” are more than outweighed by the negatives (see below)
Tax benefits – there are certain tax benefits to the savings account mentioned above, so the money can grow tax-deferred.
Confusing – a whole life insurance product adds elements of confusion because it is two products in one. It is the insurance part and the savings part. Term life insurance policies are far simpler because a term policy works like your car insurance. It is insurance if you get in an accident. In the same way, a term policy is protection if you die.
The savings element, which in reality is not your money (more on that in a minute) adds to the level of confusion to a whole life policy.
Expensive – for each “unit” of insurance (a unit = $1000 of coverage) you will pay anywhere from 2x to 10x MORE with a whole life insurance policy than a term policy. So for the younger generation, those in their 20’s to 40’s, a term life policy is FAR more cost effective in taking the money that they saved on insurance and investing the difference.
It’s not your money – one of the most ridiculous things about whole life insurance is the way the forced savings plan is marketed. In the commercials above, you are told that the policies build up “cash value that you can borrow from”.
You are paying 2x-10x more for this insurance policy. And the primary benefit is the “savings plan” that you can then “borrow from”? Wait a minute. If you are paying that much more for the insurance policy and the benefit is the savings plan, isn’t that your money? Why the hell would anyone pay so much for a policy to have to “borrow” their own money? And then pay interest to the insurance company on the money you borrowed from yourself?
Sound confusing? Yes it is. Sound expensive? Yes it is. So why are you paying so much more for a whole life policy per unit over a term policy?
Fees and Commissions – someone has to pay that insurance agent across the table from you, and that person is you. The agent gets about 10x the commission on a whole life policy as opposed to a term policy
So why am I writing about the pros and cons of whole life insurance and not just recommending term insurance? This is what I said earlier. For seniors over the maximum age for a term life policy the whole life insurance policy is the only game in town. But it is still important to know what you are buying…