Making decisions about life insurance for the elderly can be confusing. There are a wide variety of policies and it's difficult to tell them apart and know what your parents need.
Determining if your aging parents are adequately insured is an essential part of planning for their (and your) financial future.
It can be an uncomfortable topic to discuss but financial and legal planning shouldn't be postponed or ignored.
It's as important as addressing medical and health issues.
If your aging parent(s) passes away, would the loss of income create financial hardship for other members of the family?
Costs related to death (funeral, medical and burial) can be expensive and life insurance can prevent a rushed and stressful sale of assets to pay for taxes and other costs.
The basic idea is that life insurance for the elderly policies provide survivors with a lump sum of money upon the death of the insured.
However, it's not always as simple as that. Insurance companies have taken this idea and created a variety of different products - each with their own advantages and disadvantages - such as adding a savings/investing component.
But before we talk about the different types, let's review who is involved:
It's easy to become confused with all the different types of life insurance for the elderly.
Insurance companies use different names and marketing materials to differentiate their products from the rest but there are essentially only two main types of life insurance for the elderly: term and cash value insurances.
Term life insurance for the elderly is the most common and most cost effective way, in the short run, to buy a given amount of insurance for the majority of people.
The policies are just as the name implies, they are for a set period of time, generally from 1 to 30 years.
The insurance company pays the death benefit to the beneficiary if the policy is in effect when the insured dies. It can be used to cover burial expenses as well as mortgage debt and other obligations.
Term policies can be renewed on the expiration date to maintain coverage but premiums may increase based on the age of the insured. If the insured has health issues, they may not be able to renew the policy or will pay increased premiums.
Some term life insurance for the elderly policies can be converted into another type of elderly life insurance such as a cash value or universal life at a later date.
Examples of Term policies and Features
Guaranteed Renewable Feature - Allows the life insurance for the elderly policy to always be renewed and premiums will only increase based on age and not health related issues.
Term to 100 - Guarantees the annual premium will remain the same until age 100. In addition, if the insured individual lives past 100 the premiums will stop but the coverage will continue. This type of life insurance for the elderly policy generally offers one of the highest death benefit for the premium dollars spent.
This is where things can really get confusing as insurance companies have created a variety of different products combining life insurance and savings/investment components.
Cash value life insurance for the elderly have both a life insurance component as well as a savings/investment component. Similar to a term life insurance for the elderly policy, they pay a lump sum once the insured person dies.
These policies have a variety of names including whole life, universal life, blended whole/universal, interest sensitive whole life, variable life, variable universal life and variable blended whole/universal life.
They are designed to be permanent - it remains in effect as long as the premiums are paid. The savings/investment feature allows for cash values to build up and be accessed prior to the insured person's death.
Annual premiums are initially higher than term life insurance policies because a portion is going to the insurance and the other portion to the savings/investment aspect.
While the insured individual is alive, the cash value portion belongs to the insured and not the beneficiary. After the insured dies, the remaining cash value is included in the death benefit.
The rate at which the cash value portion accumulates depends on the return earned on the funds invested. Most policies guarantee a minimum rate of return between 2-5%.
Whole Life - Is the most common cash value policy and it combines a death benefit with cash value accumulations (savings/investment component). With this type of life insurance for the elderly policy, the face value amount and the premiums remain constant. The face value amount is the maximum amount payable for the death benefit.
At retirement, some people use the accumulated cash value to supplement their retirement income. However, this reduces their death benefit. In addition, the insured may obtain loans from a whole life policy as well as receive dividends.
Universal Life - A policy in which the individual(s) pay premiums at any time and virtually any amount. The cash value amount depends on both the premiums paid and the interest earned. The insurance company subtracts money from the life insurance for the elderly policy every month to cover expenses.
Variable Universal Life - Provides death benefits and cash values according to the investment returns of stocks and bonds managed by the insurance company.
Limited Pay Policies - Are set up so the owner can stop paying the premium and still continue with the coverage. These carry a higher premium to reflect that they will stop at some point. The cash value portion continues to accumulate - but at a slower rate because a portion goes towards covering the premiums.
Participating Policies - These are policies that pay insurance dividends that reflect the difference between the premium charged for the policy and the actual cost to the company for providing the coverage. Non-participating policies do not pay dividends. The dividends often remain with the insurance company to earn interest.
Burial Expense - These are whole life insurance for the elderly policies designed to cover funeral costs and final expenses. There is usually no medical exam necessary and coverage is available for ages 50 to 85 and the death benefit ranges from $2,500 to $30,000.
Joint Life Insurance Policies - It is possible to have 2 or more individuals on one life insurance for the elderly policy.
First to Die Policy - Are just that, they pay the policy when the first person dies. The policy then expires.
Survivorship Policy (or Second to Die Policies) - Pays when the second person dies. Often used when there are concerns about paying estate taxes.
So now we know the basics - life insurance for the elderly allows families to meet their financial needs after death and some policies can provide a source of income before the insured dies.
Life insurance needs vary depending on the individual or family situation. Marriage often involves a financial responsibility for each others spouse. Having a family also increases financial responsibility and life insurance needs but as children grow older and leave the home, insurance needs often decrease and sometimes are not needed at all.
The basic idea is that an individual should have life insurance for the elderly if their financial needs are greater than their financial resources after death.
Determine the total financial needs and compare this to the individual's or family's financial resources. This will give you an indication as to if your aging parents are over, under or adequately insured.
Funeral and Burial Expenses - Typically cost $7000-8000 and more. Many individuals also want to pay for travel and accommodation for those that attend which increases the costs further.
Income Replacement Needs - Often times when an individual dies there is a loss of income for the living partner or family. While raising a family, this loss of income can be severe. As the individual and family ages, the income lost reduces and sometimes eliminates the need for insurance. However, if the insured has a financial responsibility for a family member who is disabled or dependent, then they may have an insurance need.
Dept Repayment - Some individuals have various depts that will need to be dealt with after they die, including mortgage, credit card or other loans. This may be a concern for some individuals depending on their financial situation and needs.
Taxes, Legal Fees and other Estate Expenses - These can add up and should not be overlooked.
Equalize Benefits Among Family Members - For example, if the family cottage is given to one member, then cash may be given to the other members.
Business Partnerships - May require cash so the business partner can afford to buy out the other share of the business.
Individualized Needs - Some individuals or families want to provide financial donations to charities.
Listed above are most of the financial needs after death. Below are potential sources that could meet these needs. If they do not, it may be beneficial to consider life insurance for the elderly.
Existing Insurance - Many individuals and families already have life insurance for the elderly. How much is it and what are the features of the policy?
Existing Assets - What does the individual or family own that can be used to pay for the financial needs after death. This includes property as well as cash and investments.
Benefits - Many individuals have some type of government benefit plan whether it's Social Security, Canada Pension Plan or through military service. Many have several sources of benefits depending on their career and service. These benefits may decrease significantly if the partner holding the benefits dies.
You will have to do the above financial need and resources for each parent as it will differ depending on their individual income, benefits and financial needs.
This will give you a clearer picture if your aging parents are over, under or adequately insured.
Review and monitor their life insurance situation periodically.
They will have less life insurance for the elderly needs as they will not have to ensure that dependents (spouse or child with a disability) have their financial needs met after they have died.
They may simply need enough finances to cover funeral and burial expenses, loans and other financial needs (such as donations to charities and inheritance for their children).
Life insurance for the elderly varies as there are a wide variety of policies to choose from and insurance companies assess each person individually.
Someone with no significant health issues and a healthy family history will pay less than someone who has health issues and a family history of poor health.
Policies can be available for as little as $15 a month. However, these inexpensive policies offer a low death benefit, but for some every penny counts.
Guaranteed life insurance does not always require a health exam, which makes it available to many individuals.
It's important to get quotes from multiple companies so you pay a fair price.
Some life insurance for the elderly policies require a medical exam, others do not. Some insurance companies will insure someone for amounts of up to $30,000 or more without requiring medical exams.
If you are healthy and have a healthy family history, it is in your best interest to provide as much information to the insurance company as this may lower your premiums.
When the insured period is up, and coverage is still desired, a whole new life insurance for the elderly policy will need to be taken out. Some term life insurance for the elderly policies have a renewal option where it can be automatically renewed.
Generally, a medical exam, answers to a new lifestyle questionnaire, and a raise in the premium will also be needed in order to renew. Additionally, ask whether the premiums are fixed for the full term or whether they adjust. Many insurance policies for the elderly have premiums that adjust every few years, which can increase the amount that will need to be paid.
As with all other legal and financial matters, it's important to be organized. Find out what policies your aging parents have and the details for each policy such as: who the policy covers, type of policy, face value amount, owner, beneficiary, cash value, dividends, premium and any other relevant notes. All this information will be on the declarations page for each policy.
It may also be helpful to have the insurance agent they purchased the policy from to provide what is called an "in force" illustration which outlines the current and projected cash value accumulations.
If you've decided to cash out or cancel the policy, remember that you may not be able to purchase a policy in the future or the premiums may be significantly higher.
Whereas life insurance for elderly covers financial responsibilities after your aging parents death, long term care insurance covers financial costs associated with long term care while they are alive.
With more and more individuals living past 85 years old, the need for long term care is a real possibility that is also very expensive.
It is important to keep these up to date as there may be issues if the beneficiary predeceases the insured. If the beneficiary is the "estate", it will likely be subject to probate tax and creditors could make a claim on the amount.
The advantages of naming a beneficiary include: death benefit paid directly to the beneficiary, payment is made quickly (usually within 30 days of proof of death), the benefit does not go through the will so is not subject to probate tax and is protected from creditor claims.
The insured can often stop paying the premiums - and continue being covered - if they are considered disabled or terminally ill.
It may be financially beneficial to pay the premiums on your aging parents life insurance for the elderly policy. If you have loaned them money, this may be one way to obtain some or all of it back through the death benefit.
These policies combine life insurance for the elderly with long term care insurance. The basic idea is that if the insured needs money for long term care, they can withdraw money from their death benefit. When the insured passes away, the death benefit is equal to the balance after withdrawing money for long term care.
There are also products that combine LTC riders with annuities and disability income policies. Annuities are financial products that pay a set amount of money on a regular basis (usually monthly or annually).
There are some situations where your aging parent may need additional money before they die, such as paying for living expenses or they simply cannot afford to continue paying the premiums.
There are several options to access funds:
Basically, the insured agrees to pay the insurance company a lump sum or series of payments over time. In exchange, the insurance company makes a series of payments back to them after a period of time.
As opposed to a life insurance for the elderly policy which pays once the insured dies, an annuity pays a benefit while the person is alive.
The annutiant is the person who owns the annuity. A beneficiary may also be named and will receive the payments should the annuitant die.
The insured can access the cash value by choosing one of the nonforfeiture options:
This option is available on some policies and allows the insured to receive payments prior to their death.
They usually have to meet certain criteria such as holding the policy for at least 2 years, living in a nursing home and/or having a life expectancy of less than one year.
Some plans allow the insured to withdraw 2% of the death benefit a month to pay for long term care or home care. However, this does not go on indefinitely and is usually for a set period of time.
The basic idea is that the life insurance for the elderly policy is sold to a company who then becomes the beneficiary of the policy.
The company provides either a lump sum payment or payments over time to the policy owner in exchange for receiving the death benefit when the individual(s) dies.
This option is typically only available to individuals who meet the following criteria: only one or two more years to live, have a terminal illness or permanently move into a long term care facility, agree to allow the viatical company access to their medical records, and that the beneficiary agrees to the viatical settlement.
For people expected to live no more than two years, the viatical company will pay between 50-80% of the policy's death benefit. This is usually not taxed if it is used for medical expenses such as nursing home costs.
Similar to a viatical settlement, the insured sells their life insurance for the elderly policy to a life settlement company for a lump sum payment. The life settlement company continues to pay the premiums and receives the death benefit when the insured dies.
This may be useful for individuals who do not want to continue paying the premiums, do not need a lump sum death benefit and/or their financial needs or resources have changed from when they purchased the policy.
Instead of cancelling the policy, it may be beneficial to sell the life insurance policy to a life settlement company.
The claims process is similar to other insurance claims. The beneficiary notifies the insurance company, provides proof of loss and requests payment.
In this case, the proof of loss is a death certificate. which is provided by the funeral director a few days after death.
This process takes 1-2 weeks.
The death benefit is the amount that will be paid upon the death of the insured.
It is not necessarily the face value as there may be additions and subtractions.
Additions include: accumulated dividends, premiums paid in advance and interest from the date of death to the payout date.
Subtractions include: outstanding policy loans, unpaid premiums and advanced living benefits.
The insured usually selects a preferred settlement option at the time of purchase but the beneficiary can also change this to their preferred method at time of payout.
There are several options:
1) Lump Sum - Just as it sounds, receive the death benefit in full.
2) Interest Income - Leave the settlement sum with the insurance company and receive interest payments. At any point, the beneficiary can request a lump sum. The death benefit is also part of the beneficiary's estate and payable to their heirs.
3) Income for life - The insurance company provides an income for the remaining life of the beneficiary. They calculate this based on the beneficiary's life expectancy and the rate of return on the funds. With this option, the payments will cease with the beneficiary's death and will not be passed onto their heirs. If the beneficiary expects to live longer than expected, this can be an attractive option.
4) Income for a Specified Time Period - The beneficiary can choose to receive an annual income for a certain period of time. The insurance company calculates the income that would provide for equal payments over the determined time period so that all the money and interest is exhausted by the end of the period.
5) Specific Amount of Income - The beneficiary can choose a specific amount of income to receive per year from the death benefit. The insurance company calculates how many payments it will take to exhaust the death benefit and interest with this payment schedule. Should the beneficiary die before the payments end, then the remaining money would be part of the beneficiary's estate.
Determining which option is best for your parents will depend on your financial situation. It may be beneficial to discuss these matters with your accountant, financial advisor and/or lawyer.
There are several ways to protect the death benefits from being taxed but this is beyond the scope of this article. You will want to discuss these with your financial planner, accountant and/or lawyer if tax liabilities upon your death are a concern.
There are ways to protect the death benefit from being taxed such as creating a trust and having the trust pay the premiums and receive the death benefit.
Most countries, provinces and states protect death benefits from the claims of creditors.
Another way of protecting life insurance death benefits from creditors is to form an Irrevocable Life Insurance Trust
An individual can set up a trust that provides income for their life time and then pays out the remaining assets to a charity. The benefit is you can donate to a charity and receive a charitable deduction to reduce taxes.
It can also be taken one step further to leave money for the insured individual's family by creating an Irrevocable Life Insurance Trust. The money saved with the tax deduction is put into a trust and then the trust purchases a life insurance for the elderly policy on the insured individual's life. The insured's heirs and the charity receive money when the insured dies.
There are situations that will require more in depth analysis and will benefit from consulting with your parents financial planning experts (accountant, financial planner and/or lawyer).
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