It’s a well understood truth that the best deal on life insurance can be had when the client is young and in relatively good health. But just because the premiums on seniors are much higher, the need for insurance in your golden years may still make it a good deal.
There’s no shortage of worst-case scenarios, ranging from larger-than-expected tax liabilities to the failure of a pension plan.
Even good news can conspire against the client: with longer life expectancies and earlier retirements, there is a higher likelihood that medical and living expenses will consume retirement assets.
At the same time, it has become more common—even socially acceptable—to carry debt into retirement. A Harris-Decima poll for CIBC last August found that only 35% of Canadians in the 55 to 64 year age group are debt-free and that 8% of respondents believe that they will be in their 70’s before clearing their debts. Another 10% have no hope of ever becoming debt-free.
“In today’s environment—not like our parents environment—there are a lot of people retiring with a mortgage or perhaps a long line of credit or they’ve signed for their kids to get their house,” says Lee Mosley, president of Ottawa-based Lee Mosley & Associates and 29-year veteran of insurance brokerage. “There are a lot of reasons today for seniors to be worried. They don’t have a debt free environment anymore.”
Another common problem is that the estates of baby boomers’ may face unexpectedly high tax bills. In the stereotypical scenario, parents bequeath the family cottage to their children, along with a massive capital gain thanks to soaring vacation property values.
Some aim to shield beneficiaries from their debt, says Lorne Marr, CFP, founder of Markham-based LSM Insurance and 20-year veteran of insurance brokerage. “They want to make sure that debt is paid off when they pass away.”
Carrying debt to the grave and unexpected tax bills illustrate the importance of term and permanent insurance in a senior’s protection portfolio.
But not all insurers provide coverage at the top of the age brackets and for a broker with a large proportion of senior and pre-senior clients, this can affect the choice of insurers with whom to write contracts.
Tracking differences can be a challenge since there are over 2,400 life insurance products and variations, according to LifeGuide Professional software.
In the term insurance category, some insurers will not underwrite policies after the individual turns 65, Marr points out. However, many will renew term coverage up to 85 years of age when the policy ends, and a rare few will renew term coverage up to age 100.
Renewal costs on a term policy average four times the original premium—for those with additional risk factors, like tobacco use, that can rise to six times the original premium.
If the insured individual has remained in good health, the broker may be able to get an entirely new policy at a lower cost than the renewal cost.
“Applicants that are still in good health should look at applying for a new T10 with medical evidence, rather than just letting the (existing) policy renew on its own,” Marr says, adding that this process should be concluded before the old policy lapses.
However, changing policies means exposure to a new two-year term of incontestability and the suicide exclusion.
In the permanent insurance category, underwriting age limits vary between companies and product lines.
The number of companies providing T100 has decreased in recent years and some companies that currently offer it are expected to drop it from their line-up, since underlying costs have proven higher than originally calculated.
Selling insurance to a senior who is already concerned about their debt level might sound like a tough job, but demonstrating the effect debt and taxes will have on their estate can be highly persuasive.
Mosley also recommends reminding clients that survivor benefits on some pension plans provide only 60% of the original payment to the surviving spouse after the plan-holder deceases.
Given that the end beneficiary of the policy is often the senior client’s adult children, it might make sense for them to purchase the policy on their parents, to shield their inheritance on their parents decease.
“They own the policy,” Mosley says. “They can use it to pay the taxes or keep the cottage.”