Life Insurance: Age-Related Expiry And What You Need To Know

Life insurance is a crucial financial safety net for many people, but it's important to understand the different types of policies on offer and how your age can affect your options. Generally, the younger and healthier you are when buying life insurance, the more money you'll save. As people age, they are at an increased risk of developing health conditions, which can result in higher mortality rates and, in turn, higher life insurance rates. So, what are the options for seniors?

Term life insurance policies

Term life insurance is the simplest form of life insurance. It is a contract between the policy owner and the insurance company. The owner agrees to pay a premium for a specific term, usually between 10 and 30 years, and in return, the insurance company promises to pay a death benefit to the beneficiaries upon the insured person's death. The death benefit is usually income tax-free.

There are several types of term life insurance policies:

• Level Term or Level-Premium Policy: This is the most common type of policy, with a fixed monthly payment for the life of the policy.
• Yearly Renewable Term (YRT) Policy: These are one-year policies that can be renewed each year without providing evidence of insurability. The premiums increase each year as the insured person ages.
• Decreasing Term Policy: These policies have a death benefit that declines each year according to a predetermined schedule, while the premium remains fixed.

The main advantage of term life insurance is that it provides substantial coverage at a low cost. It is ideal for people who want to ensure their dependents are taken care of in the event of their death. However, term life insurance premiums increase with age, and there is no payout if the policy expires before the insured person's death.

When purchasing term life insurance, it is generally better to do so at a younger age, as premiums will be lower. Additionally, as people age, they may develop health problems that make insurance more expensive or even disqualify them from coverage.

Permanent life insurance policies

When considering a permanent life insurance policy, it is important to weigh the benefits of lifelong coverage and the cash value component against the typically higher cost compared to term life insurance. Permanent life insurance is particularly suitable for individuals seeking long-term financial protection, those who want to create an inheritance for their heirs, and those who want a tax-advantaged way to save for the future.

When is the best time to buy life insurance?

In terms of the type of insurance, term life insurance is the best option for most people as it is simpler and cheaper than permanent life insurance. Term life insurance covers you for the term of the policy, which could range from 10 to 30 years, and the premium is established when you buy the policy and remains the same every year. Permanent life insurance, on the other hand, has a cash value aspect, which means that holding the policy for longer lets that cash value grow over time. So, if you want to purchase a permanent insurance policy, you need to own it long enough for the cash value account to grow.

Another thing to consider is whether you have dependents or anticipate having them soon. If your passing would make finances difficult for your dependents, then you should consider taking out a life insurance policy. This could help them pay the bills, cover the cost of hosting a funeral, or pay for things like a college education.

Finally, if you are thinking of buying life insurance, it is important to shop around for the best deal. Get quotes from a few insurance providers and make sure the coverage provides your desired death benefits. Check policy exclusions or limitations that might limit payouts and be aware that some companies have upper age limits on when you can get covered. While it is possible for people in their 60s or 70s to buy term life insurance, the premiums will be much more expensive.

How does age affect the cost of life insurance?

Age is one of the primary factors that influences life insurance premium rates, regardless of whether you're seeking a term or permanent policy. The older you are, the more expensive life insurance becomes, as the cost is based on actuarial life tables that assign a likelihood of dying while the policy is in force. The younger you are when you buy life insurance, the better, especially if you can lock in a low rate.

The premium amount typically increases by about 8% to 10% for every year of age, and this can be as high as 12% annually if you're over 50. For example, a 45-year-old male will pay on average $1,125 for a new 20-year term policy with $1,000,000 of coverage. The same policy purchased at 46 will cost $1,225, and $1,345 a year if purchased at 47.

The reason for this increase is simple: every birthday puts you one year closer to your life expectancy, and thus, you are more expensive to insure. This increase in premium cost with age is also due to the higher mortality risks associated with older individuals. Insurance companies consider older people to have a higher likelihood of experiencing health conditions or passing away, leading to increased premiums to compensate for the higher potential payout.

In addition to age, life insurance rates can vary based on factors such as gender, health, existing health conditions, and other demographic factors.

Term life insurance policies typically offer lower premium rates compared to permanent life insurance. With term life insurance, your premium is established when you buy the policy and remains the same every year. With some permanent life insurance policies, the premium rises annually.

While there is no single "best age" to buy life insurance, it is generally recommended to purchase it as soon as possible, especially if you have dependents or plan to start a family soon.

What happens when term life insurance expires?

Term life insurance is a temporary product with an expiration date. When term life insurance expires, your coverage ends, and you stop paying premiums. If you die before the expiration date, your beneficiaries receive a death benefit from the insurance company. If you die after the expiration date, your beneficiaries don't receive a payout.

Term life insurance offers fixed rates that last 10-40 years. For example, if a 40-year-old buys a $500,000 20-year term policy for $30 per month, the cost remains $30 until it expires at age 60. Ideally, you buy term life insurance to financially protect your loved ones during their most vulnerable years.

When term life insurance expires, you have several options:

• Buy a new policy.
• Convert the policy into a permanent one.
• Renew your term coverage.
• Go without life insurance.

If your health hasn't changed much, buying a new term policy will be the least expensive way to continue coverage. You don't need to buy the same coverage amount or term length as your original policy. For example, you could buy an additional 10-year term policy to ensure all your children are independent and no longer relying on you financially.

Converting your term policy into a permanent one will increase your premiums drastically. However, you won't have to go through underwriting or take a medical exam, and you'll maintain the original health rating from the term policy. Additionally, you'll get life insurance coverage for your entire lifetime.

Many insurance companies offer renewability options, meaning you can extend your coverage term year after year without re-qualifying. However, the catch is that renewable premiums are far higher than your initial fixed premium. For example, if you purchased a $500,000 20-year term life insurance policy at age 30 for an annual cost of $244, you can choose to renew the policy at age 50 to extend the coverage for another year. However, the annual premium for the renewal year will be $2,989, and these premiums will continue to increase each year.

If your situation and stage of life are such that you no longer need life insurance, you can simply let the coverage run out. This may be the case if you've paid off your mortgage, have no significant debt, have no financially dependent children, your spouse does not rely on your income, and/or you've retired (or are about to retire) with sufficient savings.

Frequently asked questions