Whole Life vs. Term Life Insurance When You're Retired
When you’re retired or are over the age of 65(ish), your life insurance needs are very different from a young family.
But once you understand all the needs for life insurance, like funeral costs or leaving a legacy, many get stuck on which kind of life insurance to purchase.
Which is better: whole life insurance or term life insurance?
For starters, let’s cover how they differ.
Whole Life vs. Term Life Insurance
Whole life insurance is permanent, meaning your beneficiaries will get the payout when you die. It’s designed to last so that the death claim is a sure thing. The tradeoff is that it’s more expensive.
On the other hand, term life insurance is not permanent, meaning your beneficiaries will only be paid if you die within the term. Typical terms are 15, 20, or 30 years. Term life insurance is rarely paid out because it’s an ideal product for young individuals. It’s unlikely that a 30-year-old will die at age 50, so the insurance companies can offer the product at a very inexpensive rate.
In fact, only about 1% of term life insurance policies go on claim. In other words, there’s a 99% chance that you’re going to outlive your term life policy. (Which is what you want, after all!)
Whole life insurance also has another feature that term policies don’t, which is called cash value. This is a living benefit for the policyholder (it can’t be accessed after you pass – that’s what the death benefit is for).
That cash value grows over time and is an added benefit to having whole life insurance. Term life insurance has no cash value.
Age Ranges and Death Benefit Amounts
Both whole life and term life insurance have their place, but they serve different age ranges. Term life insurance is ideal for younger individuals, such as newlyweds or couples starting a family. You can get a huge death benefit – which you would really need in case of your spouse passing – for a low premium. Usually, about 10 times your annual income is recommended for a term life insurance policy – if you can afford it. For example, if you currently live on $100,000 per year, you’d want to purchase a $1,000,000 death benefit.
Whole life, on the other hand, is great for all age ranges, but particularly older individuals who are closer to retirement. You don’t need a $1,000,000 death benefit when you’re older, unless you want it, of course.
A typical whole life death benefit is closer to $15,000 if it’s meant for final expenses, or perhaps $100,000 if it’s meant to be passed on to kids or grandkids.
Why Is Whole Life Insurance a Better Option For Retirees?
When we’re older, our financial needs shift a bit. We’re no longer purchasing life insurance to protect those that rely on our income in the event of premature death. Now, we’re purchasing it for the real deal. (Sorry for being so morbid, but it comes with the territory!)
Whether you want to purchase a small policy to cover funeral expenses or you want to pass on some of your wealth to your kids, a whole life policy comes with excellent features.
Pass On Income Tax-Free Money
First of all, whole life insurance ultimately passes income tax-free money on to your family (or whoever you choose to be your beneficiary). If you kept that same amount of money in your bank account with the intention of giving it to your kids, they’d have to pay income tax on that.
Whole life insurance is a great way to leave a legacy without giving a huge chunk of it to Uncle Sam.
Cover Your Final Expenses
Secondly, a whole life insurance policy will protect your family from the costs of your death. We’ve seen it happen way too often – a person dies, and their family is left with debt and final expense costs that they can’t afford.
What follows is bankruptcy, GoFundMe pages, and so on. It’s not a great way to go.
There’s nothing wrong with term life insurance, but it protects young families. We rarely recommend term life insurance to older individuals unless they have a debt with a set term, like a 15-year mortgage.
Whole Life Has Options for Smokers
Term life insurance is very affordable, but if you’re a smoker, your premium is going to be about 3.5 times more than someone who doesn’t smoke.
For a 65-year-old male in great health, his monthly premium for a 20-year term and a $100,000 death benefit would be about $96. If he was rated as “standard tobacco,” his rate would be $352. That’s a huge rate hike for being a smoker.
We have a whole life option that gives smokers a chance to quit before making the rates higher. In essence, you can be a smoker and take advantage of non-smoker rates as you attempt to quit. We don’t know of any term life insurance option like this.
Should I Get Whole Life Insurance?
At the end of the day, we’ve never heard a story of a family receiving a death claim check saying, “That’s too much,” or “We don’t need that.”
In many cases, we’ve been able to help individuals with existing life insurance policies improve their death benefit, lower their premium, or even eliminate their premium without sacrificing their current coverage.
If you’re interested in either talking about life insurance or having your current policy reviewed by one of our life insurance experts, schedule a free policy review today.
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