Ella Beck bought a life insurance policy shortly after her husband died in 2007. She was 71 at the time and concerned about burdening her sons with her own eventual funeral costs. Spotting an ad on TV – one of those ‘no medical exam, no questions asked, guaranteed acceptance’ policies – the grieving widow purchased what is now called BMO’s Guaranteed-Life Plus policy, paying premiums of $30 per month for a death benefit of $3,200.
If you just did a double-take at the high premium / low death benefit amounts, you’re not alone. That’s because a guaranteed issue life insurance policy is a bad deal – a last resort policy for the small number of people who have been declined for life insurance due to a medical condition or risky lifestyle.
Guaranteed life insurance policies do not require a medical exam or medical questionnaire. That puts the burden of risk on the insurer, which is why coverage is limited to around $25,000 with hefty premiums for the insured.
These plans are advertised heavily on TV and through direct mail, highlighting how easy it is to sign up without any questions asked. Unfortunately, insurance companies don’t ask whether a guaranteed policy is really in the client’s best interest. Insurer’s make a lot of money selling no medical exam insurance to seniors like Ella Beck, who might have otherwise qualified for a policy with broader coverage and lower premiums.
In Beck’s case, she paid $3,960 in premiums from age 71 to 82 – $760 more than the face value of her policy. The BMO Guaranteed-Life Plus policy would have her continuing to pay $30 per month until age 95, should she live that long, paying a total of $8,640 in premiums for a death benefit of $3,200.
Another reason to avoid guaranteed issue life insurance policies is that most come with a two-year waiting period, meaning that if you purchase this type of insurance and die less than two years later, no claim will be paid out (although premiums may be refunded).
Life Insurance Options For Seniors
Are there life insurance options for seniors that ensure their funeral expenses are covered and they can leave a tax-free benefit to their beneficiaries? More importantly, which of these options will protect you, or your elderly parents, from getting screwed by an unscrupulous insurance agent?
First, let’s look at the mortality table to determine the average life expectancy for men and women aged 70 to 80:
|Current age||Life expectancy (Male)||Life expectancy (Female)|
At 71, an otherwise healthy Ella Beck could reasonably expect to live until she’s 86 years old. Worried about saddling her children with her end-of-life expenses, Beck had several options from which to choose:
1.) Self-insure / Save the money
Since Beck could afford to pay premiums of $30 per month towards the Guaranteed Life Plus insurance policy, let’s assume she can save that amount in a GIC or high interest savings account. Earning an interest rate of 1.3%, Beck could have saved $4,703 by the time she turned 82, and the break-even age at which she had more in savings than the death benefit of her insurance policy paid out is 79.
It should be noted that insurance policies aren’t savings plans – they are in place to protect you against an untimely death for which you are not prepared. If Beck passed away between age 73 and 79, the insurance plan would have been more beneficial than self-insuring or saving the money on her own.
*Don’t forget about the Canada Pension Plan death benefit, a one-time, lump-sum payment to the estate on behalf of a deceased CPP contributor. The maximum payment is $2,500.
2.) Traditional life insurance
Seniors can still access traditional term life insurance policies, usually until about age 70. A 5-year term life insurance policy for a 70-year-old female might cost $32 per month for $50,000 in coverage. At age 71, that wouldn’t have helped Ella Beck.
Permanent insurance policies are still available, and one quote I found online would have cost Beck $180 per month for $50,000 in coverage.
It’s not as bad a deal as the guaranteed issue life insurance policy. With a permanent insurance plan, Beck would have paid $23,760 in premiums over the last 11 years – less than half of the $50,000 death benefit. If she lives until 87 she’ll have paid $34,560 in premiums. It’s more than likely she would receive much more than she paid, especially when compared to other options.
Still, Beck’s budget was around $30 per month and so an expensive permanent insurance policy was likely out of reach.
3.) Simplified issue life insurance
A simplified life insurance policy is a close cousin to the guaranteed issue life insurance policy. Both are a type of no medical exam life insurance, but the simplified policy does have a medical questionnaire you will need to answer. The more health-related questions you can answer ‘no’ to, the lower the premiums.
Premiums are lower than guaranteed policies, and coverage is typically higher – around $150,000. You’ll get immediate coverage with no waiting period, and premiums will never change.
You could also put funeral insurance, or ‘final expenses’ insurance, into this category. Companies such as Canada Purple Shield offer insurance services to prepay your funeral expenses.
Information asymmetry occurs when one party has more or better information than the other. When it comes to insurance, that balance of power is tilted heavily in favour of the insurer. Insurance salespeople can play on emotions (not wanting to burden loved ones with your final expenses), and use the simplicity of no-medical exam insurance to convince people to choose an insurance policy that might not be in their best interest.
Ella Beck was still grieving over the loss of her husband when she saw an ad on TV that persuaded her to buy a life insurance policy that she probably didn’t need. In fact, Beck’s five sons have assured her that they don’t need the cash from her guaranteed life insurance policy to cover her funeral expenses. She cancelled her policy and got a partial refund of her premiums.
Don’t let emotions or cognitive decline affect your decision making when it comes to important financial matters. Talk to your loved ones and don’t assume you know everything or that everything is fine.
Talk to your elderly parents about their estate plan and funeral arrangements so the entire family is on the same page. Finally, if you’re worried about burdening your children with your funeral costs and other final expenses, set aside some money now in a GIC ladder or savings account and save yourself from much more expensive options down the road.