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April 28, 2002 at 08:00 PM
Life Insurance: Why Its Important To Seniors
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Most seniors are concerned about a retirement plan and do not realize that life insurance can be an important part of such a plan.
In fact, many states feel that it is misleading to use retirement and insurance in the same sentence. Nonetheless, life insurance has always been a valuable component of retirement plans. Lets discuss why.
Given the roller coaster ride that the stock market has gone through over the last few years, a traditional or universal life insurance plan with a rock solid 4% guaranteed interest rate can be very appealing. Contrast this to interest earnings on certificates of deposit, which were a significant source of income to seniors before the Federal Reserve forced interest rates to near historic lows.
Of course, many people still want to use life insurance to provide a lump sum for a spouse or child. But in todays world, many seniors have children who are financially independent and who may also be living in a different state.
To sell a life policy to such seniors, the producer needs to take those circumstances into account–and realize that the sale can be much easier if the contract allows the senior to obtain money from the policy for use while still alive.
Traditionally, the policy loan feature has been the primary way policyowners could do this. Today, it still is a valuable policy benefit.
However, some of todays policies have fixed policy loan interest rates of 6% to 8%. That is not as good a bargain as it once was (when policy loan rates were, say, 4%). And life policies offering variable policy loan interest rates also do not compare favorably, when short-term interest rates dip as low as they have in recent months.
An additional avenue that has arisen during the last few years are the so-called “life settlements.” These expand on the concepts used in “viatical agreements.”
Viaticals are contractual agreements in which companies arrange to buy the life policy of an terminally ill insured. The insured then uses the money as desired. Since death is only a few years away (generally two or less), the policys purchase price is well in excess of the cash value.
In the newer approach– life settlement agreements– the insured does not have to be terminally ill to sell his or her policy but does need to be a senior, typically in the early 60s. An insured who is suffering from a major illness or experiencing other costly events might value such an agreement–because he or she can sell the life policy and use the money to pay the expenses. If the persons health has deteriorated, then again the present value of the death benefit can significantly exceed the policys cash value.
