Retirees, it's not too late to buy life insurance

Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.

  • By David Rodeck,
  • Kiplinger
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Think you won't qualify for life insurance in retirement? Guess again.

"It's easier to qualify than in the past as underwriting has gotten better," says Rafael Rubio, president of Stable Retirement Planners in Huntingdon Woods, Mich. "There are options available in your later years," says Paul LaPiana, a financial planner and head of MassMutual's U.S. products.

You may wonder why you should care. After all, hasn't life insurance outlived its usefulness once the kids are grown, the mortgage is paid off and the policyholder is retired? Not necessarilly. These days, life expectancies are longer, the cost of long-term care is higher, and that mortgage isn't always retired when you are. A life insurance policy can ease the burden of an outstanding mortgage for your survivors and provide other estate-planning benefits.

The policies don't come cheap, and just because you qualify for life insurance doesn't mean you should get it. Life insurance only makes sense for retirees who use it in estate planning and can afford to keep paying the premiums, which can be thousands of dollars per year. Otherwise, the policy will lapse, coverage will end, and you will have wasted your money.

Your health risks and the type of life insurance, whether term or permanent, affects your premium as well as your chances of qualifying. Because medical underwriting differs by insurer, you should have some idea of what companies look for in applicants before shopping around for a policy.

Different ways to use the policies

When the Setting Up Every Community for Retirement Enhancement Act passed in 2019, life insurance took on greater significance by becoming the new stretch IRA. The legislation eliminated the option for most heirs to "stretch" distributions over their lifetime. Now, most heirs other than a spouse must empty the IRA within a decade of the original owner's death, forcing them to take larger distributions than they would for a stretch IRA and potentially pay more in taxes if the money pushes them into a higher bracket. Those distributions are generally taxed as income for beneficiaries, whereas the death benefits from a life insurance policy are income-tax-free.

If most of your assets are in qualified retirement accounts, like a 401(k) or IRA, and you don't need the required minimum distributions, put the RMDs toward a life insurance policy, says Rubio. This bolsters what you leave for your heirs and helps them cover the taxes on an inheritance from a qualified retirement plan.

Although the life insurance payout is considered part of your estate, the money is taxed only if the estate's total value exceeds $11.7 million. The policy can also be used to cover funeral costs, medical bills and probate court fees after you die.

Life insurance doesn't just support your heirs but can also be used to pay for health care. "Some life insurance policies offer chronic care and terminal illness acceleration riders so they can be part of a long-term care planning strategy," says LaPiana. A policy with this extra feature pays out while you're still alive to cover expenses for long-term care or a chronic illness.

Buying life insurance can also boost a surviving spouse's income, particularly if one Social Security check is unlikely to be enough. It could make even more sense if you have a pension. When retirees start taking their pension, they have to decide if payments should continue for their spouse after they die. "Selecting the survivor benefit reduces the pension payments by about 10%," says Greg Klingler, director of wealth management at the Government Employees' Benefit Association in Fort Meade, Md. "For a pension paying $100,000 a year, this survivor benefit costs $10,000 a year -- $200,000 over a 20-year retirement." If your spouse outlives you by many years, then adding the survivor benefit to your pension was a good move; otherwise, there's no financial gain. By buying life insurance, however, you can choose the larger, single-life pension, knowing that if you pass away first your spouse gets the insurance payout.

Getting past underwriting

Life insurance may be easier for seniors to get, but it's far from assured. Most policies require health underwriting, with the insurer reviewing your medical history to determine if you qualify and at what rate. This often scares people away from applying.

Unless you are terminally ill, you have a reasonable chance of qualifying, even with a health condition, Rubio says. But you'll probably pay a higher premium. A 70-year-old male in excellent health might pay $3,293 per year for a policy with a $100,000 death benefit, while an applicant with a health issue like controlled diabetes might pay $5,449 per year, Klingler says.

Before applying, LaPiana recommends proactively managing your health. For example, if you have high cholesterol, bring it down through medication and diet. "Be sure to follow and document treatment plans as insurers often look at one's behavior," LaPiana says. Insurers will consider if an applicant is trying to live their healthiest life, which can make the difference between qualifying or not, he says.

The life insurance company you choose matters because each one has different guidelines, says Klingler. For instance, one insurer may think diabetes is less of a risk than another company or define smoking differently. "One company may classify someone who smokes a cigar a week as a nonsmoker while another may consider this person a smoker, which entails much higher rates," he says.

An insurance broker who represents multiple companies often knows the nuances of each company's guidelines and can match you with the best fit. Another option is to apply directly with multiple insurers for quotes, though this takes more time. Some financial advisers also specialize in life insurance and can help you navigate the market.

If you're unsure that you'll qualify, experts recommend still applying. "Even if it's a 50/50 shot, why not try if you need coverage?" asks Klingler. It doesn't cost anything to apply, and if you aren't happy with the offer, you don't have to accept it. One of Rubio's clients even found the health review valuable because it uncovered a medical condition. "Thanks to the medical review, he was able to get it treated and then he qualified for insurance."

Term or permanent life insurance?

There are two main categories of life insurance -- term and permanent -- and the one you choose can determine whether you will qualify for the policy. Term life insurance provides a death benefit for a specific time, such as 20 years. When the term expires, so does your protection. Term policies tend to have a maximum age limit, typically 85 years old, says Klingler.

Term policies are also less expensive and make sense for temporary needs -- for instance, if you plan to work part-time for the first decade of retirement and want to protect that income for your spouse. A term policy is generally not a good fit for protection meant to last your entire life and beyond, such as covering end-of-life expenses or leaving an inheritance.

By contrast, permanent life insurance policies won't expire as long as you pay the premiums. These policies can include additional benefits to pay for long-term care and a critical illness, which a term policy typically won't cover. Permanent life insurance is also more likely to accept older applicants, with some companies selling policies to healthy applicants up to age 90.

There are variations of permanent life insurance, depending on the premium and benefits. For example, universal policies let you adjust the premiums each year whereas whole life premiums are inflexible.

You'll have a better shot at qualifying if you set up permanent life insurance as a second-to-die policy. This means that the death benefit won't be paid until you and your spouse die. If your goal is estate planning, these policies can help you qualify for a lower rate and more coverage because a joint life expectancy is longer than just one person's.

If you have serious health issues, you could sign up for guaranteed issue life insurance. As the name implies, these policies generally can't turn you down no matter what your health is like. But they charge higher premiums for smaller death benefits and impose restrictions. For instance, the policies won't pay out if someone dies during the first two years. Still, if you need life insurance but can't qualify for other options, Rubio says this type of policy may be your best option.

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© 2021 The Kiplinger Washington Editors, Inc.
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