How does life insurance for old people work?

Like the commercials Alex Trebek does for 80 year olds. Aren’t they basically guaranteed to lose money once the person dies?

No, insurance companies use Actuaries to calculate life expectancy and set their rates accordingly.

As long as they have sufficient numbers of insured folk, they are mathematically guaranteed a profit in practice.

They charge a lot for relatively little insurance coverage. They justify this to the customer by telling them they don’t need much insurance (“enough for a proper funeral” in the extreme case). They also scare the customer with statements like “buy insurance from us now while you still can” and skip over the whole question of whether the person even needs life insurance.

They also sometimes mix in investment vehicles to confuse the issue (so-called “whole life” or “universal life”).

The bottom line is that if a person is older with no dependents, they don’t typically need life insurance. If they are concerned about funeral expenses, they can take the money that would be spent on life insurance premiums and just pre-pay for funeral expenses.

I understand balancing risk, but I’m still puzzled.

For an insurance company to take on an 80 year old, it seems like the cost of the premiums would be so high as to be prohibitive.

This site says a 10-year $250,000 term policy for a 70-year-old woman would cost $2400 per year. Life expectancy for women in the U.S. is 81.6 years.

Does this add up to a safe bet for the insurer?

But what is the life expectancy of a 70 year old woman?

Life expectancy for an American woman in general is 81.6 years. Life expectancy for an American woman who has already reached 70 is higher than that. The overall figure includes the possibility of dying much younger, which drags down the average. But once someone’s reached 70, you know they won’t die young.

Insurance companies in Spain have started offering “funeral expenses insurance”, where the payback is supposed to be enough to cover the burial. They got to my mother (who will buy anything unless she dislikes the salesman), but thankfully she decided to ask me for my opinion. With her life expectancy and calculating that the prices went up 5% yearly, the amount she would pay within a year was already more than the projected cost of casket, transportation and burial (the family mausoleum is very much paid for) :smack:

Absolutely. Let’s say that her life expectancy was that 81.6 years: that would mean there’s 50% probability she’d die after 81.6, less than 50% probability she’d die before 80.But in fact the life expectancy of those women is higher; the percentage expected to get a payout is lower, and there will be more of them who will die later in the period (that is, having paid more) than earlier.

If it wasn’t a safe bet, they wouldn’t offer it. Insurance is about betting, but not about gambling.
If a single one of my female relatives, of my grandmothers’ generation or the previous two, had taken one of those insurance policies, she would have paid the complete premiums and never gotten a payout. Abuelita died early, aged 86. For families with worse health it may make sense to get such a policy; for mine it makes more sense to get a nice piggybank.

Yeah, I know people who just sell ‘final expense’ insurance. It’s not generally a great deal and can work against leaving as large a legacy as possible.

On the other hand…

I sell life insurance sometimes. I’m licensed to, at least, though I’m more a money manager than legacy guy. But one thing I have done to avoid taxes for my clients is to get them jumbo policies towards end-of-life. So if for some reason they’re concerned about taxes on what their heirs inherit - not usually a big deal but sometimes - we get them a policy that costs about what it pays out. So they put in $10 million and they get $9.99 million worth of insurance. Since life insurance payouts are non-taxable they’ve just converted their fortune into a tax-free transfer for their heirs.

But on the ‘insurance for the elderly’ routine? I feel certain they’re making money. But I’d want to look at the policy pretty carefully to make sure there weren’t exclusions or time limits or whatever.

Unless that person can’t afford the $200 a month that the funeral home is going to charge them for a $3000 cremation, and don’t mind paying $6000 for said cremation. If you can pay a lump sum for your funeral it is better to prepay, there are millions of seniors who can’t.

It’s more complicated than what you wrote by a lot.
I actually deal with this for a living. I’m one of the people Jonathan Chance refers to above. It’s not all I do (I largely do Medicare planning), and I like to think I’m one of the good ones, there are absolutely predators out there, but I do a lot of it. I can answer specifics.

Term for a person over 60 is foolish and probably insanely expensive if you can qualify at all. I am working with a 74 year old right now who has 10 years left of his mortgage and a wife in her 50s and is trying to get 10 year term to cover…it’s not simple.

You have to be fairly healthy to qualify for that rate. Looking further down the page, the particular rate you quoted corresponds to the “standard” rate class:

Even though that’s described as “average” health, those criteria are going to exclude a lot of 70 year olds. From the rates shown, we can determine that the insurance actuaries have calculated that a 70 year old woman meeting those criteria has a > 90% chance of surviving until she’s 80. With a 10-year $250k policy and a $2400/yr premium, the insurer will break even as long as they pay out < 10% of policies.

Statistically they will pay out less than 1% term is always a good bet for the insurance company.

Also while standard is not a great rate for a younger person, anyone in their 70s who qualifies for standard is in exceptional health. To have made it to 70+ with no significant health incidents is rare. Most at that age will get “table rated” if they get approved at all which increases rates from 25-300% depending.

So the trick with Colonial Penn is that they are 1) the absolute most expensive policy anyone can buy (roughly twice as expensive as their competitors) 2) don’t pay except for accidents in the first 2 years 3) market aggressively to people who are too youn or too healthy to need their type of policy.

My first full time job was with Colonial Penn. They had this act down way back in 1974. No salespeople or public offices, high rates, low payout, and counting on their customers to to stop paying before they die. Back then they would also buy up old insurance funds like the one covering the Spanish American War Veterans. When the last dependent of the last veteran died they kept whatever was left in the fund.

There are a lot of people ( salespeople as well as friends/relatives ) who are shocked that I don’t have life insurance. The salespeople of course try to sell it to me, although I’m not certain they would call them predatory. I don’t have it because I don’t need it , for multiple reasons.

  1. My pension provides 3 yrs pay if I die before I retire which has been enough to pay off the mortgage since we bought the house.
  2. My kids are grown and out of the house now, but even when they weren’t my husband’s income was enough for them to live on if the house was paid off.
  3. I’m not interested in paying $X per year so I can leave my children an inheritance when they are too old for it to be meaningful. I’d rather either save it for my own retirement or give it to them before I die, when it will actually make a difference to them.

But a lot of people don’t understand that not everyone needs insurance and I think that’s what robby is talking about.

And they underwrite the people who want to buy a policy, so they only write policies for healthy 70 year olds, whose life expectancy is significantly longer than the “average” 70 year old.

But the other thing going on is that at the high end, life insurance is a way to avoid paying taxes on the money without outright gifting it to your kids (until you are dead.) A lot of the universal life options are really investments, and you retain control of a lot of the money, but they have the feature that if you die unexpectedly the money passes tax-free to your heirs. That’s not as large a market now that the estate tax exemption is so high, but it’s still an important consideration for a lot of wealthier people.

Absolutely, not everyone needs life insurance. Usually when seniors are looking for life insurance it is to pay for final expenses, funeral costs and other things because they can’t afford to prepay with a funeral home and don’t want their kids to have to start a go fund me to pay for it.

But that’s not a situation that everyone finds themselves facing.

Here’s a part of the small print. The commercials don’t tell you how much insurance you’re getting. When they say $9.99/mo. or whatever, that $9.99 buys you a “unit.” That unit is based on actuarial tables and heaven only knows what else. For a healthy 70-year old woman, that $9.99 might buy a (numbers for example only) $5,000 whole life policy or a $10,000 10-year term policy. For an 80-year old heart patient, the payout might be only $1,000 or $2,000. Would you like $50K in coverage? Sure, but that will cost you X multiples of $9.99 to buy that many “units.”

And remember, insurance companies don’t just stuff their policyholders’ money in a big mattress and pass it back out as each person dies. They use it for investments, like real estate or stocks.

Yes, my wife’s employee benefit - insurance for spouse - simply stops covering me at age 65. If you need more than funeral expenses after that, it’s usually too late.

There is (or used to be) a “scam” based on owning life insurance policies on people who were soon to die. You weren’t cheating the insurance companies — they already knew the person had a fatal disease — the ploy was a tax shenanigan I think, perhaps to change ordinary income into capital gains. Does anyone remember the details?