Life Insurance After 50: Worth The Cost?

Life insurance is a valuable financial tool that provides peace of mind and financial security for individuals and their loved ones. As people age and enter their 50s, their financial responsibilities and goals may evolve, making it essential to reevaluate their insurance coverage. At this stage, individuals may have fewer dependents, and their mortgages might be almost cleared, but life insurance can still offer significant benefits in the event of their death. Over-50s life insurance, also known as whole-of-life insurance, guarantees a payout to loved ones, helping to cover mortgages, debts, unpaid bills, and funeral costs, or simply serving as a gift. However, it's important to consider the potential drawbacks, such as higher costs and the risk of paying more in premiums than the eventual payout.

Inflation may erode the value of the payout

Inflation can have a detrimental effect on the value of a life insurance payout over time. This is because inflation erodes the purchasing power of money. In other words, the same amount of money will buy fewer goods and services as inflation rises.

For example, if you buy a term life insurance policy that pays out $500,000, this sum will not have the same buying power in 10 or 20 years. The same is true of whole life insurance policies, which can have a death benefit that remains the same unless it is linked to the insurance provider's investment portfolio.

As a result, your payout may not be sufficient to cover your family's expenses, such as groceries or rent, in the future. This is why it is important to regularly review your policy to ensure that your coverage is still adequate.

One way to mitigate the impact of inflation on your life insurance payout is to add a cost-of-living rider to your policy. This is an optional add-on that increases the death benefit in line with the consumer price index. As a result, your premiums will also increase. However, not all insurance companies offer this option, and the cost may vary between insurers.

Another way to account for inflation is to use an inflation rate that reflects your specific needs when calculating your coverage. For example, planning for an 8% annual inflation rate may be more realistic for short-term coverage that could pay out in a few years than for a policy that you expect to last 30 years.

It is also worth noting that, while inflation does not directly affect life insurance premiums, it can make them feel cheaper in times of high inflation, as your premium remains the same while the cost of everything else increases.

You could end up paying more than the payout

Over-50s life insurance plans can be poor value for money, as you could end up paying in much more than you get out. For example, if you take out a plan at 55 years old that guarantees to pay out £5,000 when you die, by the time you reach 76 years old, you will have paid in £5,040. For every year you live after that, you will be paying £240 for nothing.

The Financial Conduct Authority (FCA) has warned that some over-50s plan promotions are misleading people into thinking they are buying a policy that will cover funeral costs in full. In reality, the sum insured is fixed when the policy is taken out, and over time, increases in the cost of living can reduce its value. This is a particular problem if you take out your policy in your 50s and continue to live for another 30 years or more.

Most over-50s life insurance policies also have a waiting period of around one to three years before they will pay out, unless you die by accident. Therefore, it is important to check the terms and conditions before you consider buying, especially if you are terminally ill.

Over-50s life insurance might be a good idea if you are in poor health and don't expect to live a long life, as there is typically no medical check required when you take out the policy, and you are likely to pay in less money than you will get out at the end. However, there are other options for paying for your funeral or leaving a lump sum to your loved ones, such as putting money into a savings account or using the money in your current account.

You may get less out of the policy than you've paid in

Over-50s life insurance plans can be poor value for money, and you may end up paying in more than you get out. For example, if you take out a plan costing £20 a month at 55, guaranteeing a £5,000 payout when you die, by the time you reach 76, you will have paid in £5,040. For every year you live after that, you will be paying £240 for nothing. If you live to an average age, you will end up paying in much more than you get out.

The Financial Conduct Authority (FCA) has warned that some over-50s plan promotions mislead people into thinking they are buying a policy that will cover funeral costs in full. However, the sum insured is fixed when you take out the policy, and over time, increases in the cost of living can reduce its value. If you take out the policy in your 50s and live for another 30 years, the payout may not be enough to cover your funeral costs.

Most over-50s life insurance policies will not pay out straight away. There is usually a waiting period of one to three years before they will pay out, unless you have an accident.

Your cover will be cancelled if you stop paying premiums

Life insurance is a financial tool that can help your loved ones in times of need. It's important to understand the implications of missed payments to ensure your policy remains active and your loved ones are protected.

Grace Periods and Late Fees

Most insurance companies offer a grace period, typically 30 days, during which you can make your payment without penalty. This grace period gives you some flexibility if you're facing temporary financial difficulties or forget to pay by the due date. However, it's important to note that if you pass away during this grace period, your beneficiaries will still receive the death benefits.

If you don't make your payment within the grace period, your policy may lapse, and you may have to pay late fees and penalties to reinstate it. The process of reinstating a lapsed policy can be cumbersome, and some policyholders choose to buy a new policy instead.

Cancelling Your Policy

If you decide to cancel your life insurance policy, there are a few things to keep in mind. Firstly, check the terms and conditions of your policy, as some companies may charge fees for cancelling outside of a specific window of time, known as the "free look period." During this free look period, you can typically cancel your policy and receive a full refund of any premiums paid.

If you have a term life insurance policy, you can usually cancel by stopping your premium payments. However, if you have automatic payments set up, you will need to call your insurance company to end these transfers. It's a good idea to confirm the cancellation directly with your insurance carrier to ensure there are no further obligations on your part.

Maintaining Your Policy

To avoid missing payments and the potential consequences, consider the following:

• Set up automatic payments or activate auto-debit for your insurance premium to ensure payments are always made on time.
• Choose the right cover amount that meets your financial needs, but also ensure that you can afford the premiums without fail.
• If you're having trouble affording your premiums, consider reducing your coverage or finding a cheaper plan before cancelling your policy altogether.
• Review your policy regularly, especially if your financial situation or goals change, to ensure it still meets your needs.

In summary, while life insurance is a valuable form of financial protection for your loved ones, it's important to stay on top of your premium payments to keep your policy active. Missing payments can lead to lapsed policies, late fees, and the potential loss of coverage. By understanding the implications of missed payments and taking steps to maintain your policy, you can ensure that your life insurance remains a beneficial tool for your financial portfolio.

Some causes of death may not be covered

When considering life insurance, it's important to remember that not all causes of death are covered. Here are some scenarios where your life insurance policy may not pay out:

Extreme Sports or High-Risk Activities

Engaging in extreme sports or high-risk activities, such as skydiving or car racing, can be a reason for your life insurance claim to be denied. These activities are often listed as exclusions in your policy, and if your death is a result of participating in these activities, your beneficiaries may not receive the insurance claim. It's important to disclose any high-risk hobbies or occupations when applying for insurance to ensure you are covered.

Illegal Activities

Life insurance policies typically exclude coverage for deaths resulting from illegal activities or criminal behaviour. This includes car accidents caused by driving under the influence or drug overdoses. It's crucial to understand the limitations and exclusions listed in your policy to avoid any surprises.

Acts of War or Terrorism

After the events of September 11, 2001, life insurance companies incorporated provisions excluding coverage for deaths resulting from acts of war or terrorism. These events are considered catastrophic and create financial complexities, so insurance companies may deny claims if the death is related to these circumstances.

Moving Outside of the Country

Life insurance policies purchased in one country may not provide coverage if you relocate to another country, especially if it is considered high-risk or excluded by the insurer. It's important to review the geographic limitations of your policy if you are planning an international relocation to ensure you are still covered.

Suicide

Many life insurance policies contain suicide clauses, which means there is a waiting period before the company will make a payout if the insured person dies by suicide. This waiting period is usually the first two years of the policy, and the provider can deny the claim if suicide occurs during this time.

In summary, it's important to carefully review your life insurance policy to understand any exclusions or limitations that may affect your coverage. Being aware of these factors can help you make informed decisions and ensure your loved ones receive the intended financial support in the event of your death.

Frequently asked questions