“Old age isn’t so bad when you consider the alternative.”
- Maurice Chevalier
Recently, a Partners4Prosperity reader asked,
“How well do ‘income for life’ type programs work for people within 5 years of retirement? Are these programs more for younger people who have time to let them grow?”
(Note: “income for life” is the term coined by The Palm Beach Letter folks for utilizing cash value life insurance as a strategic tool. Similar strategies may be better known as “infinite banking,” “privatized banking,” “family banks” or “circle of wealth” strategies.)
This is a question we hear often, generally from people over 65, but we also get it from people in their 40′s and 50′s. They hear about the benefits of whole life insurance – the compounding of their cash value, the safety, the liquidity and flexibility, the cash value component as well as the death benefit, but they wonder, “Is it too late for me?”
In this post, we’ll offer some guidelines for determining “How old is too old?” And perhaps more importantly, we’ll suggest a couple strategies that readers can implement to “stretch their assets” in their later years, even post-retirement.
Many investors assume that there may be no time to build up cash value, that life insurance makes no strategic sense if there is little time for compounding, or that life insurance is not even offered to people over 60 or 65. Oftentimes, they are pleased when they find out the facts! However, there are also times when it’s not possible or advisable for seniors to purchase life insurance.
To answer the question more fully, Tom Dyson from the Palm Beach Letter’s Wealth Builder’s Club interviewed Kim D. H. Butler about this very question. This post includes a summary of some of the points discussed. You can also listen to the interview or read the transcript.
Yes, there is an upper limit, but it’s much higher than people imagine. Most insurance companies won’t write policies for anyone who is 85 years or older. Assuming you are younger than 85, there are two questions you must then ask:
Can you qualify for life insurance, from a health standpoint?
Not all people will. Sometimes people put off life insurance until it truly is “too late,” because you cannot get insurance when you are battling cancer or other serious diseases. However, sometimes people are pleasantly surprised. Even people who are in recovery or remission from serious health challenges sometimes DO qualify for life insurance.
In some cases, you may qualify for insurance, but at a higher rate because of health issues. We can help people do the math to determine if it makes sense for them. Obviously, sometimes the costs can outweigh the benefits.
Do you have the financial capability to purchase life insurance?
Of course, life insurance becomes more expensive the older you are. (One benefit of permanent insurance is that, unlike term insurance, your premium rates will remain level. However, the age at which you obtain the insurance, along with your gender, health, and medical history, determines that rate.)
You must be able to afford the premium and a paid-up addition, and if you do not have the cash to meet these requirements, life insurance is not a good fit for you.
If you can qualify and if you can afford it, then you are never too old for life insurance. Though there is an additional question that is relevant, from a strategic standpoint:
Do you have assets that you are afraid to spend down?
If so, then there are strategies that you can use to stretch your assets using life insurance. (Five of those strategies are outlined in Live Your Life Insurance.)
Can you take a policy on a healthy relative? Yes, that works for cash value, but not for death benefit! Generally, people in their later years want to USE the death benefit while they are living, and that strategy only works when you are insuring yourself.
The cash value accumulates at any age. In later years, the internal rate of return will be more like 3 or 3.5% than the 4.5% a younger person can reasonably expect. But cash value actually builds more quickly later in life, because the premiums are higher. Benefits of life insurance for seniors can be significant, such as capacity to:
- Replenish, replace, or preserve assets. Almost any financial advisor will tell clients to try not to spend their principle. “Running out of money” is the top fear of many seniors, especially women, according to polls. Shockingly, a recent AARP poll found that running out of money in retirement topped fear of death for most seniors.
With life insurance in place, seniors have more options. Permanent life insurance is like a “permission slip” to spend the assets they were intending to preserve and leave for heirs, such as homes and investment accounts.
One strategy is to reverse mortgage your home, which actually turns your home into an income stream. And contrary to public opinion, your home does not need to be free and clear; you just need a good portion of equity in it (generally, around 50%). This helps seniors in several ways. First, if they had a mortgage payment, it disappears. Secondly, they are paid an income stream.
Thirdly, the income is tax-free.Now, when you add life insurance to the mix, the asset can be preserved! Heirs can use the money to pay off the reverse mortgage, or they can choose to keep the money instead of the house, if that works better for them.Another strategy is to increase your distributions from investment accounts.
While the “4% rule” has fallen into question lately (in March of 2013, the Wall Street Journal declared, “Say Goodbye to the 4% Rule” ), one thing is certain: you can spend your money faster if you have more assets, and if you are not trying to preserve your principle.
- Reduce income taxes. Seniors “living off their interest” are often paying higher income taxes than necessary. Many can reduce taxes by sequencing their income streams to include non-taxable and tax-free sources, such as reverse mortgages or life insurance dividends.
- “Repay” adult children for their assistance. Even when seniors have adequate assets and income to support their basic needs, they may find that as they age, they need help with driving, shopping, cooking, cleaning, or gardening. Hiring out and paying for these services can deplete assets quickly, as well as create other headaches. Adult children often step in to assist, when possible. Life insurance is one way to repay those who have given of their time or money to assist you.
- Life insurance provides an old age “emergency fund.” What if you live longer than you expect? What if your liquid assets, a reverse mortgage, and your social security aren’t enough?With a whole life insurance policy, you’ll still have your cash value, which can be used, borrowed against, or annuitized. Still not enough? You can sell your life insurance policy. Not unlike a piece of real estate, policies are assets, and the death benefit can be collateralized or even sold.Selling your death benefit is typically known as a “life settlement.” Your health and life expectancy will determine how much your policy is worth. (Partners4Prosperity also works with high net worth individuals who wish to invest in life settlements.)
- Live more freely and fully. Knowing that you have more options for income and more assets for your hairs allows a higher quality of life in your later years. Nothing produces more stress than feeling you’ve got to hang onto assets for both yourself and your children. And nothing is more freeing than knowing that you’ve got everything handled.
Have you always wanted to see the Sistine Chapel ceiling, cruise through the Panama Canal, or get that second degree? Go for it! If you only go around once, don’t spend your life nickel-and-diming yourself and your loved ones. Increase your financial options and opportunities by investing in permanent life insurance today.
Want to know more about how you can spend your own death benefit? You can find these plus additional strategies for using life insurance to strategically spend and replace other assets in Kim D. H. Butler’s book, Live Your Life Insurance. It’s a short book, you can read it in a day, and you’ll want to pay particular attention to part II (out of III). Part II of the book is entitled, “Using Your Death Benefit While You’re Alive,” and the subtitle is “Spending Other Assets.”
Are you too old for life insurance? Unless you are 85, the decision is less about age and more about your situation. If you would like to personally discuss your situation with us, we’d be happy to arrange a time to explore whether or not life insurance makes sense for you. Just fill out our contact form, and Jill will be in touch to set up an appointment.