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How Does Buying Life Insurance Change When You’re a Senior?

The process of buying life insurance doesn’t change with your age. Your need for insurance does.

Then and now
When you’re younger, you’re more likely to have obligations like a mortgage and dependent children. Term life insurance helps you create a large estate at low cost.

But when you’re a senior, concerns often shift to protecting your estate and leaving a legacy. Permanent life insurance (term to 100, whole life or universal life) fits well because coverage lasts your entire life.

Changing needs
At death, various taxes and expenses are due. If you have a spouse, some assets can be transferred tax-free (e.g., your RRSP). However, tax is then due when the surviving spouse dies.

Assets like an RRSP/RRIF, cottage and investments are taxed as if they were sold the day before you pass away. This is called a “deemed disposition.” If there’s not enough cash available for your loved ones, a forced sale of assets may be required at an inopportune time such as a down market.

Life insurance provides quick liquidity and may be a much cheaper way to cover the costs. That leaves more of your estate to be given away according to your wishes. Your tax planner can estimate your final liabilities to show how much insurance you need.

A special form of life insurance

There is a special form of life insurance for estate planning called joint last-to-die (JLTD) coverage. The death benefit is deferred until the time that both you and your spouse have died. This means the premiums are lower than if you each bought single life policies. Some progressive single life contracts can be switched to JLTD as your needs change from estate creation to estate preservation.

Creditor protection
Life insurance offers strong creditor protection when configured appropriately. In contrast, your RRSP/RRIF, TFSA and other assets could be subject to claims from creditors.

Bypass probate and wills
Selecting a beneficiary other than your estate lets the life insurance death benefits bypass your will and the probate process.

The gift of life insurance
You can donate your life insurance to a charity now or at death. Besides supporting a cause which matters to you, there are rewards in the form of tax deductions. Your tax planner can help you see the tax savings.

You can also buy permanent insurance on the lives of your children or grandchildren. Since they’re younger, the premiums are lower. Some plans can be fully paid up within 20 years, which removes the burden of ongoing premium payments. If you’re the owner and the family member insured is the contingent owner, you maintain control while you are alive.

As you get older, the approval process for insurance (called underwriting) gets more complex. You face more tests and stricter criteria to qualify. You’re more likely to pay a surcharge for poor health or be denied coverage.

Many term life insurance policies allow you to convert them to permanent life insurance without underwriting up to a maximum age like 65. Your contract will have the details. This option is valuable if you no longer qualify for new coverage. Your premiums are based on your age at the time of conversion.

Save money
The longer you wait to buy or convert life insurance, the higher the cost. Without realizing it, you might pass the maximum age allowed for purchase or conversion. If you’re starting to think about your estate and legacy, why not explore your life insurance options, too?

Flickr: Garry Knight