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.

Still another approach to accessing life policy funds is to “accelerate” payment of some of the policy death benefit. This can be done if the policy has an acceleration rider or policy provision in the contract.

Under such a rider, the death benefit is paid out earlier than death as a result of a benefit trigger. The most common of these riders, and the one that should have the most appeal in the senior market, is the long term care rider.

Such riders typically provide up to 2% or 4% of the life insurance policys death benefit per month, to pay for nursing home and/or home health care expenses. Most of them are reimbursement contracts, meaning the death benefit is used up only to pay expenses actually incurred.

However, more riders are being developed that accelerate on a so-called per diem basis. These offer greater simplicity than the reimbursement designs.

Under the per diem approach, a chronically ill insured will get a monthly payment of 2% or 4% of the death benefit without having to submit claims to the insurer. While simpler, such riders are slightly more costly, because the full 2% or 4% is paid each month.

While a person can buy a stand-alone LTC policy, the acceleration riders are considerably cheaper. This is because of the either/or situation whereby either the death benefit is paid upon death or upon becoming chronically ill. If the insured dies before 100% of the death benefit has been accelerated, the reminder of the death benefit is paid to the beneficiary.

These riders provide a wide variety of benefits, though an insurer rarely offers more than two or three.

Some so-called extended benefit riders even pay up to double the policy death benefit for LTC expenses.

If the LTC rider is designed and structured as a qualified LTC rider, then all accelerated payments are exempt from income tax. Thats a major benefit to the policyowner, especially if contrasted to the tax treatment of alternative investment selections.

Every senior citizen is aware of the possibility of needing a nursing home at some point. And, surveys point out the overwhelming desire of seniors to remain at home. Furthermore, seniors certainly realize that being able to pay for LTC is essential to their retirement planning.

The fact that life insurance can be used to help meet such needs means purchasing a life policy is an important component of a retirement plan.

, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. E-mail him at caryl@actstrat.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.