Should You Own Life Insurance Over Age 60?

December 19, 2019

If you conduct a Google search on the topic of whether or not you should own life insurance over age 60, you might see some of the following opinions:

“According to financial expert Suze Orman, it is okay to have a life insurance policy in place until you are 65, but after that, you should be earning income from pensions and savings.”

“Term life insurance is the best option for most people, including seniors, because it provides the most coverage at the lowest price.”

Unfortunately, the people that made these comments have no idea what they’re talking about. They’re wrong. Here are common reasons why you should own permanent (as opposed to term) life insurance over age 60:

Income replacement. Many people are still working over the age of 60; the average retirement age has been increasing over the past few years.
If you have children or grandchildren who are dependent on you.
You want to leave a family legacy.
If you have a complicated marriage or relationship situation. In some cases, a person is not eligible to receive their partner’s pension should they die. Insurance can fix that.
Pension maximization. Many people still have defined benefit pension plans (state and federal government employees typically do). When they retire, they often have two options: choosing a high monthly income that terminates upon the death of a retiring employee or choosing a lower monthly income that will continue for the life of both the retiring employee and their spouse. If you already own a permanent life insurance policy, it’s an easy decision to take the higher monthly income.
Pension maximization.
‍Example 1: the daughter is running the family business. The son, who is not in the business, wants to sell it when Dad dies. How do you fairly split the family estate? Life insurance is a great solution. The son could get the death benefit when Dad passes while the daughter gets to keep the business. The split is more equitable.
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Example 2: upon the mother’s death, the daughter wants to move and live in the family home. The son just wants to sell the house and split the proceeds with his sister. In California, if a child moves into the home of a deceased parent, the child can continue to pay the same property taxes the deceased parent was paying (daughter gets the home with a huge discount in property taxes). The solution here: life insurance.

Clearly, owning permanent life insurance over the age of 60 is the right choice, and the smart move is to buy that permanent life insurance policy when you’re still young and healthy. Life insurance requires underwriting, and if you wait until age 60, it’s going to be a lot more expensive. Plus, many older individuals find that they don’t even qualify for the policy that they can afford.

But do you know the most important reason that everyone should own a permanent life insurance policy over age 60?

The ever-increasing cost of long-term care.

Just look at the numbers: according to the U.S. Department of Health & Human Services, the odds of an individual needing long-term care are 630 in 900. That means that 70% of people in the United States will need long-term care at some point in their life.

What does life insurance have to do with long-term care?

Virtually every major life insurance company offers a permanent life insurance product with long-term care (LTC), chronic illness, or critical illness riders. These products are often referred to as “hybrid long-term care policies” or hybrid LTC.

Why wouldn’t you just buy a traditional-long term care policy?

As of today, only a handful of life insurance companies still offer a traditional long-term care policy, and you don’t want to buy one of these policies. Here’s why:

The premiums are not guaranteed.
The premiums will likely increase over the years, and if you don’t have a long-term care event, you wasted all your money, so you and your family receive nothing in return.
In many states, there’s only one carrier offering a competitively priced traditional long-term care policy.

Traditional LTC policies have been around since the 1970s, but they didn’t really catch on until the late 1980s and early 1990s. As soon as policyholders started filing claims, the insurance carriers realized they had mispriced these products. The original actuaries that designed the first traditional LTC products underestimated the increases in healthcare costs and the percentage of people filing claims. They also overestimated policy lapse ratios, since most insured individuals were paying their premiums every year and keeping their policies.

If you own a traditional LTC policy, you are very motivated to file an LTC claim because that’s the only way you can get anything out of the policy. The policy has no cash value and no death benefit, so the only worth it has is in regards to long-term care.

Carriers started dramatically increasing premiums or reducing benefits, and the majority of the carriers got out of the traditional LTC business. The few remaining insurance carriers still in this space certainly have a better understanding about the pricing of these products, but anyone buying a new traditional LTC policy today should expect their premiums to increase at least two times over their lifetime.

With a permanent hybrid long-term care policy, you get both the long-term care protection and the death benefit protection. One way or another, these policies will pay off.

Life insurance has been around for hundreds of years, and combining it with a long-term care rider makes financial sense for not only the insured individuals but also the insurance carriers. The pricing on these products is much more accurate due to extensive mortality data available and the fact that the claims experience is very different from a traditional LTC policy. An LTC claim on a hybrid policy is typically a pre-payment of the death benefit. The death benefit is often reduced, dollar for dollar, for the insured individual’s long-term care expenses. Many people that could file an LTC claim on a hybrid LTC policy don’t because they can easily afford a minor long-term care event and they want all or most of the death benefit to go to their heirs.

So, when should you buy a hybrid LTC policy?

Today! Because it will never be cheaper than it is right now. Hybrid LTC policies require underwriting. Next year, the same policy will be more expensive, simply because you’re one year older. And if you get sick or injured in the future, it’s possible that you’ll never even qualify for a hybrid LTC policy.

Many people qualify for a standard life insurance policy, but they don’t qualify for the long-term care rider. Why? Because both mortality and morbidity underwriting are typically required for hybrid LTC policies. Common issues that prevent people from adding an LTC rider to their life insurance policy include: back, knee, hip, or joint pain; use of narcotic pain medication; a history of anxiety or depression; uncontrolled diabetes; or persistent forgetfulness or memory loss. Additionally, many insurance carriers require people to pass what’s called a “Senior Assessment” before they can qualify for a hybrid LTC policy, which many senior individuals can fail. But if you apply for an application while you’re still young, you never have to worry about that Senior Assessment, and the insurance carrier can issue you a preferred policy.

How much long-term care protection do you need?

At the low-end, a long-term care event costs $180,000 for a woman, and it costs $107,000 for a man. At the high-end, a long-term care event costs $380,000 for a woman and $225,000 for a man. The discrepancy in cost is because, on average, women need long-term care for 3.7 years, while men need it for 2.2 years. Nationally, the median cost for long-term care ranges from $47,616 to $102,200 per year, according to a 2019 cost of care survey.

How much will long-term care cost in the future?

In 20 years, a four-year long-term care event in Los Angeles is projected to cost approximately $577,000. There are multiple free long-term care calculators on the internet that will estimate the current costs and the projected costs in most major U.S. cities.

Even very wealthy people, who can easily afford any potential long-term care event, are buying hybrid LTC policies. It just makes financial sense. Instead of paying dollar-for-dollar for an LTC event, for just pennies on the dollar, you can get some level of protection without depleting your estate assets, since LTC benefits are paid out tax-free.

If your long-term care expenses are $10,000 per month, what assets are you likely to sell first? Often, people are pulling money out of their IRA, their 401(k) plans, or selling a rental property at the wrong time. You will pay taxes first and use what’s left to pay for your long-term care expenses. This can decimate your estate, destroy your lifestyle or your spouse’s lifestyle, and eliminate any legacy going to your kids. Thankfully, you can avoid all of these terrible outcomes with a hybrid LTC policy.

How much does a hybrid LTC policy cost? Female Age 45, Preferred Underwriting
Example:

Hybrid Long-Term Care Policy

Annual Premium: $1,508
Death benefit / LTC Benefit: $250,000
Pre-tax IRR at life expectancy: 7.65% *
Probability policy will pay claim: 100%

Hybrid Long-Term Care Policy

Annual Premium: $1,153
Death benefit: $0
Pre-tax IRR at life expectancy: 0%
Probability policy will pay claim: 70%

20-Year Term Insurance Without Long-Term Care

Annual premium: $297
Death benefit: $250,000
Pre-tax IRR at life expectancy: 0%
Probability policy will pay claim: 3.40% (probability insured will die within 20 years)

* The taxable equivalent internal rate of return on the death benefit at normal life expectancy (30% tax rate). In other words, the annual return required on premiums paid into a hypothetical taxable account for it to be worth $250,000 at normal life expectancy.

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