How does life insurance for old people work?

Factual Questions
81

Yes, the discussion is simple

  • a kid does not need insurance, except maybe to cover his funeral (and what are the odds of that??).
    -a senior needs coverage for a funeral if they haven’t planned ahead; that would be what? $10,000? $20,000 at the outside. The kind of family that thinks a funeral needs to cost $20,000 is probably the same sort of family that never saved for it and never planned ahead.

-a younger family, the traditional spouse and 2.3 dependents type, needs a helluva lot more than that. Where I used to work, the group benefit options were 1x to 5x annual salary, for salaries that started from at least $50,000 (probably much higher now). And as a group benefit policy, for 20 to 55 year olds, it was pretty cheap. (My wife’s policy for 55-plus gets expensive, and cannot be used for over 65 spouses) Up to 5x might cover outstanding mortgage (maybe) and perhaps the other debts, and give the stay-at-home spouse (if so) time to get established in the workplace.

So with whole life someone is either seriously underinsuring their 25-55 responsibilities, or seriously overpaying and over-insuring in their 60’s and beyond when they (usually) have no dependents and have their financial future and retirement income already mapped out. You sure as hell don’t need the equivalent of two or three years’ salary to pay for a funeral, unless it’s an open bar and your friends are a lot younger than you.

This is why the argument - skip whole life. Depending on how much you select, it either pays nowhere near enough when you need it, or way too much when you don’t and most likely your ex-dependents don’t. The difference between whole and term is better spent saving for and spending on retirement instead.

Another note about funerals. They are different today. My recent experience is that a lot of people live into their 80’s and 90’s. Someone who is 90 is probably less mobile, and many of their friends are gone already, and the majority of attendees at the funeral will be family - if they are not spread all over the country. Any friends are possibly sufficiently old too that getting to the funeral is a difficulty; co-workers are a distant memory. The huge funerals of years gone by were for those who went early - 60’s or 70’s - when they still had a large circle of active friends and people who knew them from assorted activities, to fill a church.

82

Most of you are missing the point. At age 21 the kid gets a policy paid in full, (no premiums to pay ever), 100k death benefit he admittedly doesn’t need, but also a dividend stream that he can spend, or reinvest or plow back into the policy, plus the cash value that accrues tax free that he can use as collateral on a loan. Or cash in the policy and take a vacation. Or he could roll it over into Universal Life or Variable Life. Will there be cake?

I’ll admit the whole “buy the kid a policy thing” is a bit quaint. It’s a bit like buying a savings bond. The best thing would be if he forgets about it and then decades later gets a chunk of change and thinks fondly of his old Gran (who he hasn’t thought of in years) as he collects his cash value. It’s a nice gesture, it’s what my mothers family did a very, very, very long time ago.

More relevant, what happens if he wants a student loan? Will the policy count against him on a needs test?

83

Thread: TL;DR.

But there’s a Colonial Penn commercial on now. I thought I’d look them up. Link

So that sawbuck a month might get you as little as $500. If you pay for more than – what, four years? – they make money and your family gets next to nothing.

84

IDK if it would matter for student loans, but I do know that they can be counted as an asset for welfare and Medicaid benefits, as can a paid-for cemetery plot.

85

Ok, going to try to not get totally into the weeds here

Dividends in life insurance work like this. They are based, more or less, off what you have paid in. So you earn based, sort of on the policy cash value and sort of on the cost basis of the policy and its a little fluid and, admittedly not super transparent. Legally dividends are a form of profit sharing and are therefore not guaranteed and also difficult to calculate with much accuracy after a few years. The company in question is ultra conservative and has paid a consistent dividend rate since the 1910s but that is decidedly not true of most companies that offer dividends still, and most don’t.

For the policy in question its essentially 4% of the policy cash value.

The cost of insurance is going to vary person to person company to company. The best I can give you is a ballpark figure and I’ll need to know male/female, age, smoking status and if they are in excellent health, good health, fair health or poor health.
As for the specific rate of return needed I know hkw t I calculate it but it takes more math than I am typically comfortable with and I would usually contact an actuary to run that if someone needed it. Again, it would vary based on COI.
Once a policy is issued it is set and simplified issue policies don’t vary it by person they just assume poor health and run with it.

Nope.

86

Good idea! :wink:

According to which law?

By “consistent” do you mean the same dividend rate? If yes, then that’s unbelievable. What is the dividend rate that they’ve paid and how is it calculated?

So, if the cash value in the first year is, say, $1,000, then the policy owner will receive $40? Is that right?

Sorry, my question was ambiguous. I’m not looking for the exact cost. I’m wondering about the cost component of the premium. For example, if the premium is $1,000 for a specific Whole Life policy (taking into account male/female, age, smoking status and health), can you tell me the portion of the premium that is used to pay for the insurance cost?

So it’s not 4%.

Thanks.

87

Sorry, I see that I’m implying that the rate of return from the dividends should be the same as the rate on the excess of the premium over the insurance cost. I realize that it is not.

Participating Whole Life is complicated and not transparent.

88

No this is true, I think I said that in my last post at some point. If I didn’t I intended to. Non participating whole life is very straight forward though.

Again, talking insurance for old people, par whole life isn’t going to be on the table much, and it’s absolutely not going to be about the participation. You don’t have to have a participating policy in order to get decent value of of a whole life policy if you are looking too it as a way to pre pay final expenses. Which again, is the primary reason people buy it.

89

I don’t have children or dependents so I don’t see the need for life insurance - term or whole. If I were a parent, I’d get it until my kids over the age of 18 (a little later/older but not much). I’d get enough so that my spouse wouldn’t have to worry about finding a job that pays twice what she now earns while she’s in the middle of arranging a funeral and dealing with judges, lawyers, and bill collectors, in order to take care of family. There are two reasons to get insurance of any kind: 1) the law or regulations require that you do, and 2) to protect yourself against catastrophic expenses or losses. If neither applies to you, don’t get insurance of any kind - at all. Expect to pay for some things in life - you buy insurance so that you don’t lose your house.

90

Exactly. This is like when organizations look at risk matrices. Insurance is good for events that are unlikely to occur but catastrophic if they do occur (like the early death of a young breadwinner with dependents). The cost for the insurance coverage is relatively low (because it is unlikely to be paid out to a given policyholder).

A poor use of insurance is an event that is likely to happen with relatively low consequences when it does happen. An example of this would include the death of an elderly person with no dependents. Because an elderly person is much more likely to die than a younger person, the cost of any life insurance premiums will be high and/or the death benefit will be relatively low.

I understand that the relatively low death benefit is marketed to older people as a way to pay for a funeral, but there are surely better ways to fund a funeral than buying life insurance – almost by definition. Insurance companies don’t offer policies on which they predict they will lose money.

91

Again, this is a fundamental misunderstanding. They don’t offer policies they think will lose money in the aggregate. For every policyholder that dies early, their actuaries tell them they’ll make up the difference on others. Individuals do not have the ability to pool the risk of loss except by buying insurance. If you are an old person with $10K in the bank, you don’t need a life insurance policy to fund a funeral. But life insurance is the only way to make sure your funeral will be funded regardless of when you die.

92

But we are talking about old people, that is, people at the end of their life. To make sure they don’t lose money, even in the aggregate, the insurance company is going to charge a high premium for a small policy on these people, and even more if they are in poor health.

Why not just take the money that would be spent on these high premiums and put it aside for funeral expenses instead?

FWIW, I just looked up some quotes for an 85-year old person looking for $10K in coverage for final expenses, and came up with about $200/month. If the person put that same amount of money in a money-market account that made 3% APY, they’d have $10K saved up in less than 4 years. Now I understand that the person will do better financially if they die before this time. On the other hand, if they do live 4 years, they’ll have the $10K in hand, and they won’t have to keep paying insurance premiums.

Also consider what happens if they buy the insurance and find they can no longer afford the premiums after a couple of years – the policy lapses and they have nothing. If they had saved the money instead, they’d have about $5K saved up, which is better than nothing. Maybe they can only afford $150/month at that point, so they reach the $10K mark at the 5 year point instead of 4 years.

Note that the Social Security Administration estimates life expectancy for an 85-year old at about 6 years for a man, and 7 years for a woman.

Another potential problem is if the person gets a term policy (say 10 years) and outlives the term. At that point, the person will have spent a lot of money on premiums that could have been saved up instead.

Also note that this is the extreme case, because my understanding that it is difficult or impossible for a person over the age of 85 to obtain life insurance. The numbers work out better for a younger person, who has more time to save up for final expenses. For an 80-year old, a $10K policy would run about $135/month. It would take about 6 years to save up $10K in a money-market account earning 3% APY. (Life expectancy for an 80-year man is about 8 years, and for a woman is about 10 years.)

I’d be curious to get some some numbers from NAF1138. How much would a $10K permanent life policy cost for an 80-year old and 85-year old, and how long would the premiums need to be paid?

93

I left out some words here. In my second-to-last paragraph above, this should read:

“…For an 80-year old, a $10K policy would run about $135/month. If they had saved the money instead, it would take about 6 years to save up $10K in a money-market account earning 3% APY.”

94

So, first, seeing an 80+ year old is an usual thing for me in the first place (though, honestly, people in their 80s would benefit a lot from reviewing their Medicare options but most really don’t want to). Seeing an 80+ year old who wants to discuss final expense planning is even rarer. When they do its usually because they are concerned that they won’t hit life expectancy because their health is bad already. Most insurers will not write a policy on anyone over the age of 81. They are inherently a bad risk because there isn’t enough time for the risk pool to balance itself out. It takes about 5 years for an insurance company to turn a profit and if your average 81 year old is only going to live 5 years that’s a losing bet. Because of that insurance for people in their 80s is massively over priced. I can run rates but it’s rough because options become very slim.

That said, your assumption of why people buy life insurance is still off.

Yes, at the rate you posted IF the person lives 6 years and manages to earn 3% in their savings account (what bank is offering that right now? I need to switch) and manages to start saving voluntarily for the first time in 80+ years then they will win at the end of the 6 year period.

But if they die in 5 years at 84, a pretty reasonable proposition, especially if they are already in poor health, they lose.

If you know when you are going to die you don’t need life insurance. If you don’t you might want to manage the risk. Maybe you managed the risk by actually saving and planning before you turned 80. That would have been a better choice. But if you didn’t, you have to work with the options you have.

Most people 85 and over are better off going to a funeral home. The only choices they are going to have for life insurance are very bad unless they are in as good a health as your average 30 year old.

95

OK, so the “old people” you are writing policies for are younger than 80 years old, which means even more time to save up some money for final expenses instead of buying life insurance.

You mentioned upthread that “A decent final expense plan will run the average healthy 60 something non smoker 50-60 bucks a month. That really isn’t out of reach for most people. Forking over 10k in a lump sum is.”

You say later in the thread that the $60/month needs to be paid for the rest of the person’s life (for a $20K policy). While I agree that one advantage is that such a policy pays out immediately if the person dies early, a big downside is that the policy lapses and is cancelled if the person finds that they can no longer afford the premiums 10 years down the line. Another is that if the person lives longer, they could find themselves paying much more in premiums (and lost opportunity cost) than the $20K death benefit.

Again, as was asked of you previously, why not just put the $60/month in a savings account for final expenses? A 60-year old man has a life expectancy of 21.5 years. If he saves up $60/month for the rest of his life he’ll have $21K saved up after 21 years (assuming 3% return). He’'l have enough for the funeral ($10K) after just 11.5 years.

Actually, I misspoke a bit. I opened up a money-market savings account and set up a Certificate of Deposit (CD) for the first time in my life just last week at our credit union. The money-market savings account is currently earning 0.80% APY. It was the CD that is earning 3.25% – the minimum deposit is $50 and you can make additional deposits at any time. Both of these accounts are paying far more than our savings account is (only 0.25%).

Well no, they don’t, because they can save up $10K for funeral expenses by saving just $155/month for the 5 years (assuming 3% return compounded monthly). Or if that return is unrealistic, they need to save $163/month for 5 years (assuming a 1% return).

The bottom line is that it seems to me in most cases that savings is a better option than life insurance for most people to cover funeral expenses. YMMV.

96

Canada Pension Plan has a one-time ( :smiley: ) death benefit of $2500 paid when the recipient dies - as I understand it, specifically to help with funeral costs. Is there nothing similar in the US Social Security>

97

There is a lump sum death benefit, but it’s much smaller (currently $255) and is only paid to spouses and minor/disabled children.