Who knows in the history of life insurance where the debate of what is the best life insurance for seniors began, but it still continues today.
It doesn’t seem there is an argument against having life insurance but of what life insurance instrument is the most efficient way of delivering the fruits of life insurance.
In order to have the argument settled in one’s mind, there needs to be a clear understanding of what an individual is looking for in retirement. Several considerations need to be addressed–and the sooner the better for a potential retiree because there are some things which need to be done that require the element of time.
- How much money will be required to maintain a chosen standard of living?
If you want to continue with the standard of living you have established for yourself during the course of your life, you need to have assets which can be used to replace the monthly paycheck. A good retirement calculator will be helpful to you: https://www.calculator.net/retirement-calculator.html. A point of emphasis–this will only work if you are willing to discipline yourself to do it. Right now, half of single adults age 65 and older can’t afford the basics, nor can around a quarter of households with two adults age 65 and up. It is a truism the only difference being an old man and an elderly gentleman is how well you prepare for the future. Plan well.
- Think about objectives to achieve in retirement.
Some have not done this and consequently have not made the psychological adjustments to this event in their lives. Where will you find your human worth now that it is not measured in the ability to earn a living? It has been observed that approximately the first 30 years of your life can be considered the learning years of your life, the next 30-35 years are the earning years of your life, and the balance are the yearning years of your life; so you will want to have a clear objective as to how to spend those last 25-30 years of your life. Will volunteer work satisfy you, or will you pick up a part time job? Where will you live? What will you do if you become a widow or widower, for you most likely will? Can you count on children to maintain your lifestyle?
- How will you handle finances?
One of several concerns a senior citizen has revolves around their finances, with much concern that they may outlive their resources. Many are not so concerned about the rate of return as they are about the stability of their investments. Finding someone or an institution you are comfortable with and can trust in assisting you in your financial decisions could be a real stress reliever. When one is younger, the thrill and challenge of determining where to invest is appealing, but one gets to the point where the thrill and challenge becomes drudgery. It would be nice to let someone else accept the challenge. Starting early with a financial advisor could give you the advantage of experiencing financial assistance and the time to build a rapport so the person knows how you think and what you want to have accomplished in your financial affairs. The downside to having an individual do this for you is that person may depart sooner than you, leaving you to find someone else to assist you. Here is where an institution like a bank with a trust department could be a plus. Several people may be familiar with you so there is the possibility of continuity in how things are managed. A large law firm may fill the same role for you.
- What will be the sources of your income?
This is the real issue regarding the type of income sources available for a retiree and the best kind of life insurance for seniors to have. How impactful is each of the sources when it comes time to retire? According to a 2014 Survey of Income and Program Participation and the Social Security Administration Supplement on Retirement, Pensions, and Related Content, 6.8% of those age 60 and up who work less than 30 hours per week get money from Social Security, pensions, and workplace retirement (401k); 40.2% receive income through Social Security alone; 14.9% have no pension, savings, or social security, and the use of social security alone rises from 52.9% at age 60 to 65 to 85% of those age 66 to 75 and is 84% of those of age 76 and older.
It is also reported half of single adults age 65 and older can’t afford the basics of life nor can around a quarter of households with two adults age 65 and up (ibid).
If the three main sources of income, social security, pensions, and workplace retirement funds are generating these revealing figures, what’s wrong? How can it be that so much of the population reaches retirement without sufficient income to take care of themselves? What happens to buy term and invest the difference strategy for retirement?
Some thoughts of why this dilemma would include the general attitude of procrastination, misunderstanding how investing works, misguided or faulty investment advice from professionals, and incomes insufficient to care for immediate needs with enough left over for future needs.
Unfortunately, most of the human population doesn’t have the savings mentality of bees, squirrels, bears, or dogs who all put away a portion of today’s earnings for tomorrow’s use. We have the attitude that we will get around to it–but that extra car, fancy boat, luxury vacation or some other pleasurable pursuit takes priority right now. Pretty soon our earning power years wane and we are left trying to figure out how we will take care of ourselves in retirement.
Most of us don’t understand how investing works and so we don’t consistently reap the benefits of a well planned investment strategy.
Liz Ann Sonders, Charles Schwab Senior Vice President and Chief Investment Strategist, suggested in an interview with Yahoo Financial “the biggest mistake investors make is the all or nothing approach with a ‘get in and get out mentality.’ Investment should never be in the moment, that is gambling.” It is also important for investors to recognize the market doesn’t always yield 8% each and every year. Some yields are way down, like 2008 S&P 500 losing 37% of its value in a single year.
Then there are some financial advisors who fail to educate their clientele regarding various avenues available to them to put away funds for retirement. They don’t acknowledge the pitfalls people confront when making financial decisions. Too many times a Cadillac plan is promoted when a Chevy plan may be better suited for the psyche of the investor.
Such is the case revolving around the type of life insurance best suited for seniors. Reluctance to learn how to invest, how to manage investment and market nuances makes it so a permanent plan of life insurance may be just the answer to at least doing something toward retirement. The buy term and invest the difference model has just not caught on with most seniors. If it had, they would not be in the financial straits they are in.
Some advisors like Dave Ramsey and Suze Orman must be working on the premise that you buy term insurance because you are planning on reaching a point where you will no longer need life insurance. May be a good concept in theory but it fails in the light of reality. We actually never outlive the need for life insurance. It only changes from being an estate building tool to an estate preservation tool.
They raise their combined voices in objection to whole life insurance having a place in any person’s financial portfolio preparing for retirement due to its slow growth. They argue life insurance was never intended to be an investment and when used as such a grave mistake is being made. Buying term insurance and investing the difference should be the course to follow.
They then usually use an example of taking the premium you would have used for whole life insurance, replacing it with the premium you would pay for term insurance, and using the difference to invest. A conservative rate of return on investment then is used to show how those excess premiums will grow to an amount far greater than the guaranteed cash values of a whole life policy. Depending on the projected rate of return illustrated on your investment will greatly skew those differences.
They also use an illustration where the term life insurance premium reflects coverage for 20 to 30 years and then terminates, the assumption being that your investments will be sufficient to replace your needs of daily living expenses in the event of an untimely death, cover your expenses when you no longer are gainfully employed, or replace lost earning power due to disability.
They also avoid addressing the issue of your investments going bad in the event of an economic downturn. Case in point is what was experienced in the 1929 stock market crash and in the 2008 downturn when the market lost 37% in one year. Not a good thing. If you were retiring in that period you would have major economic strain on your budget. Even with all the safety nets built into the stock market now like the SEC oversight, stocks being automatically stopped from being traded when the market gets too hot, financial prospectus required so investors can be aware of the market risk, volatility risk, etc., there is still the possibility of investments going sour. Probably the only way to keep your investment money from loss exposure would be to get a coffee can, fill it with your money, and bury it in your backyard with a map showing where you buried it.
One of the major advantages a permanent life insurance policy has over investment growth is its immediate contractual benefit of a guaranteed cash value. Any year you can see the guaranteed growth projected in the contract. There is no need to check the stock market activity nor a need to change your investment portfolio. Having said all this, the author of this article is not suggesting those two financial planners are against life insurance. It’s just that they see preparing for retirement with a different mix on where retirement funds will come from.
Term insurance is a pure cost which has to be recognized when determining the rate of return an investor makes in the marketplace. This cost increases over time as the insured ages, causing a need for the rate of return on other investments to go up to offset that expense. Whereas, permanent insurance, though appearing to be more expensive at the beginning, in the end–due to guaranteed cash reserves and possible dividends paid along the way–has a positive impact on overall financial strategy. Moreover, when those cash values are accessed they come to the insured income tax free until more is paid out than premium paid in. Not a bad source of income to assist the other social security, pension, or workplace plans which all are taxable upon activating them.
Both term and permanent insurance share another advantage over other investments in that they both create a roof over your investment goals by the death benefit which is payable at any given time along the way. You may set out to have a nest egg of $1,000,000, but what if you are not allotted the time to accumulate it. Permanent life insurance is the only financial plan which does not run the risk of terminating just when you may need it the most. It starts with the end objective in mind.
When a person then asks what is the best kind of life insurance to have when you retire, a pretty good case can be made for permanent life insurance to play a major role in where you will get proceeds to help you retire.
Having said and having written all the above, the most astute observation about which is the best kind of life insurance to have is the kind in force when it is needed the most, the day you die.
Glen B. Marks, CLU, being the author of the above article, takes full responsibility for its contents, acknowledging it is for educational purposes only and is not intended as professional or legal advice.