Wage earners of age ≥ 60 with dependents: What Life Insurance, if any, should they buy?

Question

_{Source: p 336, Personal Finance For Canadians For Dummies (4 ed, 2006; but a 5 ed (2010) exists) by T. Martin, E. Tyson}

[Insurance Agent alleges:] “You won’t be able to afford term insurance when you’re older.”
[1.] As you get older, the cost of term insurance increases because the risk of dying rises.
[2.] But life insurance is not something you need all your life!
[3.] It’s typically bought in a person’s younger years when financial commitments and obligations outweigh financial assets. Twenty or thirty years later, the reverse should be true.

[4.] When you retire years from now, you won’t need life insurance to protect your employment income, because there won’t be any to protect! You may need life insurance when you’re raising a family and/or you have a substantial mortgage to pay off,
[5.] but by the time you retire, the kids should be out on their own (you hope!), and the mortgage should be paid down.

I abbreviate a working senior citizen (someone of age 60-80) to WSC. Suppose that:

6. assumptions 3-5 above fail for a WSC with dependents with an inferior life;

7. 1 remains true and that insurance companies refuse Term Life Insurance to people of age ≥ 70.

contrary to 3, 4, 5 respectively:

8. the WSC's financial commitments are LESS than financial assets
9. she still has employment income (≤ $35,000 CDN) that must be protected.
10. the WSC's kids still depend on this WSC and the mortgage has not been paid totally.

My Question: Then what should WSCs do about Life Insurance? 9 appears to invalidate and rebut 1's suggestion of Term Life Insurance.

Answer 1

The problem above is actually a pretty good list of the concerns around life insurance. While there is no correct answer to the question as posed, this will vary among different WSCs, there is a simpler way to think about insurance in general that may make finding what is right answer for you easier.

Buying life insurance, like almost all insurance, is on average a money losing purchase. This is simply because the companies selling wouldn't offer it if they couldn't expect to make money on it. Think about buying insurance (a warranty) on a new cell phone, maybe if you are particularly prone to damaging cell phones it can be in your favor, but for most of the people that buy it will lose money on average.

People, of course, still buy insurance anyway to protect themselves from unlikely but very bad consequences. The big reason to make this trade off is if the loss will have big lasting consequences. To stay with our cell phone example having to replace a cell phone, at least for me, would be annoying but not a catastrophic event. For myself, the protection is not worth the warranty cost, but that is not true for everyone.

Life insurance is a pretty extreme case of this, but I find the best question to ask is "if you (you and your spouse) were to die will your dependents lives become so much worse that you really dislike the idea of not being insured?"

For some working seniors, they already have enough saved to bridge their kids/spouse to adulthood/old-age that insurance makes no sense. For some, their children/husband/wife would be destitute and insurance is an obvious choice and an easy price to pay even if it is very high. The example you suggest seems on the border and good questions to ask are:

• Would it be ok if the survivors were able to live well enough if not perhaps at the same level of expenses?
• What does the situation after the loss really look like?
• Would some survivors be able to pick up some (part-time) work to bridge the difference?
• Would partial protection be enough?

Thinking about those questions may help you understand if the protection offers is worth the cost.

Answer 2

Without knowing the WSC's objectives, priorities of those objectives and affordability we cannot determine which type of insurance is best.

Life insurance for seniors is very expensive if you examine the per unit cost (e.g. cost per $1000 of death benefit). Therefore affordability is a critical deciding factor for WSC.

Let's assume that we know the WSC's affordability and therefore the monthly premium is a fixed determined number, then there is a inverse relationship between the length of coverage and the amount of coverage. We have to achieve a balance between these two factors to best meet the WSC's objective.

If the proposed plan is not affordable then the WSC must leave out his/her objectives with lesser priorities out of the total coverage amount.