A lone income earner of 60 year old with 2 dependents: Should he buy Term or Permanent Insurance?

Question

Question: Should my uncle continue with Permanent Insurance, change to Term Life Insurance, or does he not need any life insurance (but see 4 beneath)?

Details:

1. My uncle is 60 years old, and intends to keep working beyond 65 as long as possible.

2. His wife's disability prohibits her from working. Still in school, his daughter will not start work until 2024 at the earliest. Thus only he earns income for the family: $40,000 CDN annually.

3. His (wicked?) insurance agent insisted that Term Life Insurance would be expensive at my uncle's age and thus suggested Permanent Insurance. In July 2014, he purchased Permanent Life Insurance (NOT a Participating Policy & NO dividends) payable for 20 years, with $125,000 as the benefit amount, and a monthly premium of $370. Thus as at 25-Mar-2016, he has already paid $360 x 20 months = $7200 to Sun Life.

4. His insurance agent confirmed that there are no fees for terminating the policy, and that as at 25-Mar-2016, the Cash Surrender Value is a petty $13.

5. kanetix.ca quotes a 20-year Term at $130/month.

Here are the reasons for my uncle's purchase:

6. My uncle is very healthy, but if he dies, then (see 2) his wife and daughter will have no income or money besides the family's total savings of $30,000. Thus insurance seems compulsory?

7. His total monthly payments (= 12 months x 20 years x $360 = $86 400) are less than his Benefit Amount, and thus this insurance seems profitable.
   But he is not sure how to adjust for interest and inflation.

Answer 1

Term insurance is definitely expensive at 60 but so is permanent insurance. Let's think about why people buy each one:

• Term -- makes sense if you are worried about death during a certain period of time but not afterward. Often this is young people trying to get out of debt, have young dependents, etc., who expect to have more money later in life and less need for insurance.

• Permanent -- makes sense if you want to ensure that your dependents get paid (tax free) at your death even if you die at an age when you are basically uninsurable. These plans make sense if you hold them forever but if you get out of them early, there are often large fees that will make it a pretty bad deal.

The fact that your uncle is already in a permanent plan makes me think it might make sense to continue. Check the details to see how large the fees on getting your money out early would be. Given that he has a disabled wife, having a permanent plan may make sense, especially if her disability is not one associated with dying younger.

Having said that, I can see an argument for term insurance if your uncle is primarily concerned with providing for his daughter and won't be concerned about it after she's out of school.

The answer really depends on:

• How much your uncle is concerned about providing for his wife after 2024 versus his wife and daughter before 2024
• How large early termination fees are
• How much financial distress is associated with the extra cost of permanent insurance versus the term alternative.

Answer 2

If your uncle is looking to maintain life insurance coverage for specific shorter period of time he may want to look into hybrid life insurance.

If you buy a hybrid universal life policy, the premium and death benefit can be guaranteed to last until any age.

Since, most permanent policies focus on cash value accumulation it is hard for most people to find cheap whole life or affordable universal life. Consumers only looking for a longer duration have a more flexible choice with a new hybrid product that combines elements of both term life coverage and universal life.

Hybrid universal policies are much cheaper then other permanent coverage such as whole life coverage because they do not emphasize cash value accumulation. However, the premiums and death benefits can still be guaranteed to a specific age (i.e. 85, 90, 95, 100). So, premiums can be scaled to coordinate with your desired budget and the face amount required for your family.

Typical universal life and whole life insurance contracts only allow for lifetime coverage. However, hybrid universal life offers a much smaller premium because the coverage can be dialed into a specific age. If the policyholder does live beyond the originally selected age, the death benefit will simply begin getting smaller, while the original premium will continue to remain the same.