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How Seniors Can Use Life Insurance

Jeff Brown

Anyone with dependents needs life insurance, we're told. Policies on parents can provide food, shelter and education until children can provide for themselves. Husbands and wives can get policies to make a survivor's later years more secure and comfortable.

But what about people in their 50s, 60s or beyond? Many seniors have never had life insurance. Some had term policies that expired after the children grew. Some drop their coverage because they thought their investments had grown big enough and then find things aren't working out.

[See: 10 Financial Perks of Getting Older.]

So what are the ins and outs of getting a policy later in life?

Several purposes. Insurance experts say older people may need life insurance for a variety of reasons:

-- Provide for a surviving spouse or young children from a second marriage.

-- Pay estate taxes.

-- Help with long-term care expenses.

-- Help heirs pay taxes they will face from inherited IRAs and 401(k)s.

Many seniors also have business interests, says Kenneth Pendley, a long-time insurance executive who is national marketing director for Atlanta-based Habersham Funding, a life settlement provider that converts policies to cash or income streams.

"In such circumstances, life insurance may be necessary or helpful to hedge against business interruption upon the death of a business owner or key employee or partner," Pendley says.

The website Quickquote.com shows that a 65-year-old non-smoking man in good health could get a $500,000 20-year term life policy for about $5,300 a year, compared to about $275 for someone who is 35.

Options for policies. Though a policy may be pricey for a senior, chances are you could find one, says Anthony Martin, owner & CEO of the Choice Mutual agency, a Citrus Heights, California, firm specializing in life insurance for seniors.

"It's very uncommon for someone, senior or not, to be flat-out declined for any sort of underwritten life insurance," he says.

Age, health and smoking history affects the premium, and he warns that advertising typically lowballs the cost.

While there are many types of policies with different names, all fall into one of two categories. Term policies are cheapest because they last for a specific number of years, and cost more for longer periods. Permanent policies can be much more expensive but last for life, so no matter how old you are when you die your survivor gets the death benefit.

Regardless of the type of policy, one with a bigger death benefit is more expensive than one with a smaller benefit. But even though premiums are larger for older policyholders, the math can work out, says Chris Huntley, owner of Huntley Wealth & Insurance Services in San Diego.

"A healthy, non-smoking 70-year-old female could purchase a lifetime guaranteed policy with a $250,000 death benefit for as little as $4,982 per year," he says, referring to a type of permanent insurance. "Assuming she lives to age 86, her life expectancy based on the (Social Security Administration) actuarial life table, she will have spent just $79,712 in premiums."

[See: 10 Costs You Can Eliminate in Retirement.]

It would take an unlikely 12.49 percent return for those premiums to grow to $250,000 over the same period in an investment, he says.

A matter of taxes. Years ago, people later in life bought life insurance to help pay estate taxes. But in 2017, the first $5.49 million of an estate will be exempt from this tax, so many people don't have to worry about it.

But for those who do, many choose a survivor life or second-to-die policy, types that pay off only after the second spouse dies. This is cheaper because a couple, compared to an individual, has twice the chance of one living longer than average, says Chris Acker, owner of CB Acker Associates Insurance Services in Palo Alto, California.

"While seemingly expensive, the premiums on a life insurance policy designed for estate tax funding are usually a very good return on investment for the families involved," Acker says. "It's typically much less expensive to buy life insurance than to liquidate assets to pay taxes at death."

Policies for estate taxes are typically purchased within an irrevocable life insurance trust, so the benefit is not counted in the taxable estate, he says.

Life insurance can also help heirs pay taxes that will be due on tax-deferred retirement accounts like traditional IRAs and traditional 401(k)s even if there is no estate tax, adds Nancy Butler, author of "Above All Else, Success in Life and Business," and owner of an advisory firm of the same name in Waterford, Connecticut. Butler teaches continuing education courses in life insurance.

"Many heirs loose over 45 percent of the tax-deferred assets left to them," she says. "Without proper planning, a large percentage of the money you worked your life to build could be lost to income taxes rather than being passed to who you want it to go to."

Additional uses. Yet another purpose for life insurance late in life is to replace pension income that may dry up after the beneficiary's death, she adds.

Often, Martin says, seniors get life insurance for specific purposes such as paying off a mortgage or other debts, funeral expenses or caring for an adult child with a disability. In these cases, a term policy large enough to cover the expected cost may be cheapest.

But Acker cautions that it can be difficult or impossible to get a term policy after 60 or 65, while permanent policies may be available for people as old as 90.

He says some permanent policies offer riders to fund long-term care, and can be a better deal than ordinary long-term care policies.

"With the life insurance policy/long-term care rider option, people tend to feel confident that this policy will be used," Acker says.

Seek expert help. While you can shop for policies on your own online, many experts recommend using an insurance broker who represents many providers and knows details you might not easily find online, like whether given medications will get your application denied or boost the premium. Term life is pretty straightforward, but permanent policies have so many provisions it's hard for an amateur to make apples-to-apples comparisons.

"Above all else, the advisor needs to be an independent agent," Martin says. "I cannot stress this enough."

He also recommends agents who specialize in life insurance and don't do policies for cars and homes. A good independent agent should represent at least 10 carriers, he says.

[Read: 5 New 401(k) and IRA Rules for 2017.]

Butler points out that premiums can be lower if you pay once a year rather than several times or monthly. And she says shoppers should look for "break points" where a larger policy becomes cheaper than one that is only slightly smaller.

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