Wednesday, May 11, 2011

Life Insurance over 50? Hell, No.

This is a stupid waste of money.

Caption:  "Gee honey, I can't wait for you to DIE so I can clean up on our elderly life policy we just took out on you!  More tea? Don't tell me it tastes funny.  You know I don't like that!"

A reader asks:

"Where can I get life insurance if I am over 50?"

The answer is, there are tons of places offering such coverage, but it is a bad bet - even if Ed McMahon or AARP recommends it.

Why is this?  When I said "bad bet" I meant it literally.  Life insurance is a gamble, and the bet is that you think you are going to die and the life insurance company is betting you aren't.

Problem is, over 50, you pretty much ARE.  Gonna DIE, that is.

So the companies that offer this type of "insurance" (which we used to call "burial insurance") are selling bad bargains - often hyped heavily  on the internet, TeeVee, and in magazines, and offering you peace of mind.

But you remember what I said about peace of mind, right?  When someone offers to sell you peace of mind, run away, as they are selling snake oil, period.   You can't buy peace of mind.   It doesn't come in a package.

And anything hyped heavily is of course, a bad bargain.

Why do people buy life insurance, anyway?  The answer is simple.  If you are young, starting out, and have a wife, a child, and mortgage to pay, a term policy for say, $100,000 to $250,000 is a good idea.  You get hit by a bus, and the wife and kid are provided for.  And since the bet is a long-shot (mortality rates for 20-30 year olds are low) the rates are low as well.

But as you get older, of course, the rates go up, up, up.  Because you are more likely to DIE.  So eventually, you reach a point where you drop coverage - because by then, you have some money in the bank, your mortgage paid off, and your wife and child are no longer at risk.  Or that is the way it should be, anyway.

I dropped my coverage with the American Bar Association ($650,000 term life) last year, as the premiums edged up from $1500 a year to $2500 a year.  And as I got older and older, the premiums would have soared to $5000 a year, to $10,000 a year or above.  And most term life policies have a cutoff date - 10 year term, 20 year term, or term to age 65.  So the vaunted payoff may never happen in any event.

That money, invested over 30 years, would have come to over a half-million dollars, easily.  You can't spend your whole life insuring "what if" scenarios.  You are better off just living your life.

Whole Life, of course, is a different beast - it is an investment vehicle, not just an insurance policy.  But whole life is not what these "Insurance over 50" people are selling.  My whole life policies, bought young, are now self-funding and increase in value every year.  If you are over 50, it is too late to buy whole life.

So why do people buy life insurance over 50?  And what are they buying?  As I noted before, they used to call these policies "burial insurance" - you paid a fairly hefty premium and then they paid out a paltry sum (usually a few thousand dollars).  In terms of bang for the buck, it is not a good bet.

And if you think about it, of course it won't be.  The odds of an older person dying are pretty high.  So no one is going to sell you life insurance at age 50 and up, for very good prices.

And yet, the Internet is clogged with queries like, "Where can I find affordable life insurance for someone over 50?"   And tellingly, the blogsites which discuss this in cheery tones ("Life insurance for people over 50 is easy to get!!!!" - well, so is Herpes.  Doesn't mean you want it.) have adverts on the sidebars for - you guessed it - life insurance for oldsters.

Note:  The blogsite linked above is disturbing, and appears to be written by someone in India or something (based on the horrible grammar).  The articles are all vague and say little, other than in general terms, and appear to little more than click-through bait.  This is one problem with the Internet - articles are written using keyword spamming to be little more than search engine bait.   When you see a monetized blog, always be suspicious of the content!  And note there is a whole company that churns out drivel like that, called Associated Content - that just generates search engine hits.

And the term "affordable life insurance" is interesting as well - as if some companies were more expensive than others, for no apparent reason whatsoever.  In the insurance game, it is all about mortality rates and actuarial tables.  And thus, most companies have prices that are pretty much in line with one another.  What determines "affordability" is you AGE, GENDER, and HEALTH - and you are trying to buy a policy when all those conditions work against you.

What these queries never mention is why a person would want life insurance for an older person.  For example, one person asks about getting life insurance for his elderly father in the nursing home.  I suspect that the person asking such a question is of the "something for nothing" variety, and assumes that life insurance companies are big chump-olas who never read an actuarial table.  These folks figure that they can pay a few hundred a month and then get a huge payout on life insurance when Dad dies.

What's not to like?

That would be nice, if you could do that.  While you are at it, go down to the bank and ask if they are giving out free samples of money this week.  That could happen, too, I suppose.

The reality is, you will likely pay in as much (if not more) than you will get out.  And you won't get much out, either, because anything more than a few thousands of dollars would be prohibitively expensive.

Many folks are enticed by the offer of "No medical exam! No medical questions!" - which they think means their cancer-ridden Mother will be able to obtain $1,000,000 of coverage for $500 a year or something.  Again, let's get real here and stop believing in the FREE LUNCH theory of life, because TANSTAAFL!

Usually, the "no medical exam!" policies will not pay out for the first few years of the policy - to prevent just such an occurrence from happening - terminally ill people applying for coverage.  And most policies have a clause where you have to certify that you are not, in fact, terminally ill or have any known illness that will kill you in short order.  So if you lie on the form, they don't have to pay out.

So there is no free money.  Never was, never will be.  So why is it you want life insurance when your life is nearly over?

The answers are complex.  Some Seniors are sold these policies based on FEAR and their apparent small costs.  "For only a few hundred a month, you can make sure your children can afford to bury you in style!" says the salesmen.  So Granny spends $150 a month on burial insurance, which pays out $5000 maybe 5-10 years later, which is less than what she spent on premiums.  A better approach might be to just examine low-cost cremation options or put that $150 a month into the bank.

For others, particularly husbands, who failed to save in life or have no assets, the promise of "providing for your loved ones and spouse" is the hook.  You've been financially irresponsible your whole life and have barely enough to live on, much less to leave to your heirs.  Here's your chance to be a big shot and have some inheritance for the kids to fight over!  Hey, maybe now there is money on the table, they'll come visit more often!

But of course, this is the same sort of insane financial planning that caused Joe Elderly to get into financial trouble in the first place.

When you are old, you don't need life insurance.   When you are a young newlywed, with a wife and kids, yea, it makes sense, as you have no assets and the cost is small.

But at age 50 and up, well, all you are doing is squandering money that you could be living on.  If you have nothing, taking what little you have and buying a "bad bargain" life policy is no answer.  And if you have money, you don't need it.

And no, there are no "good bargains" in elderly life.  Because any insurance company that sold "cheap life insurance" to the elderly would soon go out of business.

Stop believing in something-for-nothing!  Sheesh!  You are over 50, for chrissakes!  Grow up!

But of course, this posting will fall on deaf ears.  If you are the kind of person who is shopping for "life insurance" at the end of their life, then you believe in the something-for-nothing mentality, and there is no way to dissuade you otherwise.  After all, our government works on the same principle, right?  Or it did, for a while, anyway.


This blog, which is monetized and also a cheerleader for elderly life, at least provides some concrete numbers to look at!

But while at first the numbers look promising, if you crank up our old friend, the compound interest calculator, the numbers aren't so great.

Bear in mind that the average person in America lives to be age 77 or so.  And if you make it to age 50, the odds of you reaching 78 or 79 improve (mortality rates include events such as car accidents and mid-life medical problems, that affect the elderly less.  If you make to 50, your life expectancy is longer.  If you make it to 60, your life expectancy is even longer.  It is weird, but that is how actuarial tables work).

So, at first, this looks promising - $13 a month for $10,000 of coverage!  That's cheap!  Right?

Well, maybe not.  The costs go up with time, and by the time you are 75 or so, that $13 a month, invested, could be worth $30,000 or more, depending on your rate of return.  So in other words, if you live to be an average age, you come out way behind.

And what, pray tell, will $10,000 do for your heirs?  Or even $50,000?  If you think that is "a lot of money" then it illustrates why you are poor in the first place.

People buy policies like this because they are perceived as "cheap to buy" - but they provide little coverage.  And when the person gets older (like over 70) and the premiums shoot up to hundreds a month (which is a lot to someone living on social security) they will drop the coverage, eventually, and there is no payout.

Like I said earlier in this blog, I dropped a $650,000 term policy when I hit age 50, as the premiums, I felt, were more than the payout.  And the "need" for the policy (which would terminate at age 70 anyway) was less and less.  I had bought the policy at a time in my life when I had over $650,000 of debt on my investment properties.  Now that I have cashed out - and have cash in the bank - there is no need to insure that anymore.

Old people don't need life insurance - or that shouldn't anyway!  Keep your money instead.