Undoubtedly, the most cost-effective life insurance for seniors today is term life insurance. Albeit, the consensus among consumers is to keep expenses down, and a term life policy is up to five times cheaper than a whole life policy. Realistically, more seniors are able to buy a term life policy, but many purchase wasteful products because we never analyze which policy fits best within our lifestyle.
Analyzing Life Insurance Needs
In simple terms, life insurance for seniors is basically financial protection for your family. Given the diversity of families and circumstances, there are many options. The role of life insurance is to provide a lump sum of money (the "death benefit") that will help your family:
- Cover your debts, including your mortgage
- Provide an income for your loved ones
- Provide a nest egg for your family
- Make sure your children have money for their post-secondary education
- Provide money to pay for the funeral and other final expenses
Remember, your values and needs are not the same as those of your neighbors. This is why there are different types of life insurance for different types of people.
Term Life versus Whole Life
The basic difference between term life and whole life insurance is this:
Term life policies offer a temporary promise of a one-time lump sum payment, and it effectively protects your family from the aftermath of financial burdens, and on-going family needs. Yet, a term life policy unambiguously offers the face amount for life coverage only.
Furthermore, term life policies have changed quite a bit. Years ago, term life insurance was renewable on an annual basis, which meant the premiums could be raised often. Nowadays, seniors are able to lock-in a long-term rate for the life of the policy, so there are no surprises and you know how much you must pay.
On the other hand, there's an insurance policy that combines the benefits of a term life policy with an investment component -- whole life insurance. Generally, the investment is in stocks, bonds, and money markets. The policy increases in cash value you can borrow against, but it takes years to accumulate the cash. Many of these policies have high upfront costs and commissions that drain the cash value.
So why does anyone purchase whole life policies? Whole life certainly has some advantages for many people. The four most common reasons a whole life policy is recommended include:
- This life insurance lasts for the period of your lifetime, so you do not have to worry about renewals or conditions that increase your life insurance premiums
- You can use whole life insurance as an investment for retirement and the kid’s college fund
- Provides additional monetary cushion for your surviving family members
- The cash value grows tax-free, and the earnings are non-taxable.
Although these policies can be a bit pricey, they remain in the spotlight. The truth is consumers tend to purchase whole life insurance policies to take advantage of long-term tax benefits like protecting an inheritance and large estates from tax payments. The policies are safe and reliable, and typically overlooked by consumers dazzled by the promise of forced savings with high returns. But if the last few years have taught us anything, it is safe and reliable are not guaranteed.
The bottom line is term life insurance for seniors is more affordable and still relatively flexible, and when properly set up term life insurance can diminish unnecessary risk while offering great coverage.
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