Elderly Life Insurance

Age and mortality are two subjects that go together. Similarly, life insurance and mortality go together. Transitive logic would seem to suggest a connection between age and life insurance. Advanced age can contribute to both the acquisition of life insurance and the loss of life insurance.

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Traditional Insurance Need and Elderly Life Insurance

The purpose of life insurance is to substitute cost for risk. Possession of an insurable risk is called insurance need. Certain traditional risks motivate the purchase of life insurance. These traditional risks are not commonly associated with old age.

The classic insurance risk is the need to replace the income of a breadwinner.  Breadwinners provide living expenses for spouses and children, fund the future education of children and amortize mortgages. This insurance need disappears when the mortgage is paid off, the kids grow up and educated and retirement begins – which typically happens before old age. The time to insure the breadwinner’s life is in youth, when all these obligations remain to be fulfilled. In this case, the standard mode of insurance is term life insurance, which offers relatively inexpensive, temporary insurance designed to expire when the insurance need does.

The rule of thumb is that age tends to gradually divest households of those traditional insurance needs that are temporary in character. This will tend to be true regardless of whether the household meets its needs with standard term policies such as level-premium term or annually-renewable term or more specialized types such as decreasing term life insurance. Eventually, the temporary needs will begin to vanish. When they do, the insurance will vanish along with them.

Specialized Insurance Need and Elderly Life Insurance

Expiration of traditional insurance need does not foreclose the later purchase of life insurance. Various specialized insurance needs may arise. These normally require the purchase of permanent insurance, such as whole-life or universal life insurance. One such need is provision for final expenses, particularly burial and funeral expenses. The uncertainty of the death date is one conclusive argument in favor of permanent insurance. The second argument is that, by the late date in life at which final-expense insurance is purchased, term life insurance has undoubtedly become more expensive than permanent insurance anyway. The death benefit is payable upon presentation of a certified death certificate; the amount should cover funeral and burial expenses and a small legacy besides.

The elderly can purchase permanent insurance in the form of guaranteed-issue policies, which are whole-life insurance sold without the requirement of a qualifying medical examination or health-related questions. Insurance companies presume the applicants are either too old to pass medical muster or possess a pre-existing condition that would rule out the issuance of a standard policy. Premium rates are set accordingly high. Benefits are graded; that is, limited to premiums-paid-plus-interest in the first year of the policy and perhaps 50% of the face value of the policy in year two, with full face value being paid thereafter. Policy values are strictly limited, with either $25,000 or $50,000 being the upper limit.

In principle, the alternative to insurance is self-insurance – accumulation of wealth in sufficient quantity to offset risk. The demand for final-expense insurance suggests that accumulated wealth is insufficient to fill this need. The wish to provide a legacy will reinforce the demand. Insurance can instantaneously guarantee a sum that it would take years of saving to accumulate. (Benefit gradation will delay full realization of the guarantee.)

The existence of estate taxes creates a second potential insurance need late in life. One way to cope with the threat posed by an estate exceeding the estate-taxation threshold is to carry life insurance with a face value sufficient to pay the incipient taxes. Again, the uncertainty of the death date dictates that permanent insurance be employed.

Another specialized insurance need associated with advancing age is met by the use of cash-value insurance as collateral for loans. The loans are used to generate tax-free income for consumption purposes. This strategy uses permanent insurance because it carries the cash value necessary to command collateral value. The reason why the strategy is associated with advancing age is that the death benefit will probably repay the loan.

Permanent insurance is an expensive form of life insurance and guaranteed-issue is the most expensive form of permanent insurance. Thus, this is a highly expensive way to get a loan. It would be better to utilize a whole-life policy acquired earlier in life and better still to convert a previous term-life insurance policy to whole-life upon expiration of term, when the need for insurance protection has ended. Many term life policies contain just such a conversion option.

Is the Need for Elderly Life Insurance Avoidable?

It is worth noting that, in each of these cases, the insurance need is unforeseeable. That is, it may or may not arise and cannot be planned for. Perhaps wealth accumulation will avoid the need for final-expense insurance, but the only way to find out is to live your life, then buy permanent insurance if the need arises. Maybe your estate will grow large enough to threaten you with the prospect of estate taxes, but you can’t avoid the issue by (say) buying term insurance earlier in life – you just have to see how your life develops, then buy permanent insurance if and when the need arises. This is further confirmation that the “either-or” dichotomy between term and whole-life insurance is misdirected. Both temporary and permanent insurance have their place and depend on the stage of life and particular circumstances in which people find themselves.


The elderly see their need for the traditional forms of temporary life insurance gradually disappear. Thus, their term-insurance policies mature and end. This does not necessarily end their need for life insurance, however. Specialized life insurance needs such as a desire to fund their final expenses or estate taxes in advance may create a demand for permanent insurance. They can satisfy this demand with whole-life or universal-life policies. Since these late-life insurance demands tend to be unforeseeable and depend on the turn of events and circumstances, this tends to refute the notion of an “either-or” dichotomy between term-life and whole-life insurance. Each form of life insurance has its time and place.

The general rule of thumb is that traditional, temporary insurance needs are associated with youth. These gradually drop off with age but may be replaced by more specialized demands for permanent insurance late in life, depending on circumstances.

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