Choosing the best life insurance can be tricky at any age. The complexity of the industry makes even the idea of shopping for policies stressful, and if you have reached an advanced age it becomes even more complicated. As with most other situations, well-informed is well-prepared, and researching the different types of insurance and their various benefits and drawbacks will help you to make the best decision for your family.
What is life insurance for?
Understanding the purpose of life insurance is a very important step in the process. Many people hold the mistaken belief that life insurance is simply a way to leave some kind of inheritance to your loved ones. This misconception can lead to the purchasing of much too expensive policies that put strain on the household unnecessarily, or to putting off enrolling in the hopes of being able to afford a larger payout.
The truth is that the end of your life tends to be the most expensive part of it, and the role of life insurance is to protect your family from excessive medical bills and the high cost of funeral services. Ideally your life insurance policy should be able to cover those expenses, as well as any debt that will be passed on to your loved ones.
If your family members are dependent on your income, whether from retirement or continued participation in the workforce, it should offer them a window of continued support while they find a path to financial independence. If you have children who are on their way to college, including an amount to cover some or all of their education is a reasonable use for life insurance.
The only time that a life insurance policy should exceed the costs listed above is in the event that you will be leaving behind a property or inheritance large enough to warrant a significant estate tax bill. This will apply to almost no one, but if this is the case you should try to investigate the percentage you will be expected to pay and include that in your calculations.
Different types of life insurance
- Whole or Universal Life Insurance
These permanent life insurance options are significantly more expensive than most other policies because the company will inevitably wind up having to pay out, unless the covered individual happens to cancel or cash in their policy.
One of the features that set this type of coverage apart is the fact that the company invests a portion of your premiums, keeping them in an account. During the lifetime of the policy you can decide to borrow against that account, or even to cash it in and take the money.
These are also the most difficult coverage to qualify for, since the company has a vested interest in only covering people who are healthy and therefore more likely to cash out rather than having a claim.
- Guaranteed Acceptance Insurance
This is the easiest life insurance policy to purchase, as the name suggests. Regardless of your health, age, or lifestyle you can and will be accepted if you apply for this type of coverage. Unfortunately these policies are quite expensive and the payout generally won’t exceed $20,000.
- Term Life Insurance
Term life insurance is the most popular variety, as well as the most affordable. It covers the individual for a period of time that is specified in advance, usually around twenty years. In the event that you outlive your term life policy, you will have the opportunity to re-enroll, but will not be refunded any of your premium.
Which insurance policy should you choose?
- Whole life insurance
While this is an expensive way to go, it is the only guarantee of coverage. Insurance shouldn’t be treated like an investment in the market, but the added liquidity that comes with many of these policies is beneficial in certain situations. If you are one of the few people who will leave behind a significant estate tax bill to your loved ones, this policy may be a great option.
- Guaranteed acceptance insurance
While the guarantee sounds appealing, these policies are very expensive, and for many people the limited benefit is not going to outweigh the initial costs. Still, if you already suffer from a serious medical condition, or if you only need a policy to cover your last expenses, these policies may be the only, and therefore the best available option.
- Term life insurance
This is the ideal life insurance option for most people, and term policies come in a wide variety. Many are specifically tailored to seniors, offering specific income replacement, medical and funeral costs, and terms that are designed to last long enough to cover most policy holders. They are relatively affordable and offer the most reliable coverage for older customers.
This post was contributed by Amanda Jensen who currently writes for AAMI.com.au