Most of the clients who walk through the doors of our offices are older individuals looking to plan for estate taxes and manage their benefits for their heirs. One such client was a man who’d met the love of his life in his later years and wanted to ensure she was provided for after he passed away with life insurance. But he was worried. At his age, he wondered was it even possible for him to buy a life insurance policy? Or was he going to have to face the high premiums of a high-risk policy?
He was right to be concerned. After all, your life expectancy, as determined by the insurance company, is the single most important factor in determining premiums for life insurance. But what if there was a way to determine your own life expectancy, rather than relying on the insurance company to do it? When that’s the case, you can avoid the high cost of premiums while ensuring you have the protection you need to provide for your heirs.
How Life Insurance Rates Are Determined
A lot goes into the determination of your life insurance rates. Whether you’re doing a medically or non-medically underwritten policy, your health, age, and family history are all going to play key roles in the way your rates are determined. Some of those things are outside of your control while others allow you a bit more leverage in how your life expectancy is determined.
Most insurance premiums work off of something called “mortality risk.” Simply stated, the older you get, the higher your risk of dying. This risk sharply increases after you exceed the average life expectancy, and life insurance premiums during that time period will increase as well.
Life expectancy is determined by using your rated age. This means that while you might be 55 years old, you could have the health status of a 60-year-old. Rated ages can vary significantly by insurance company, which is why it’s common to shop around when purchasing permanent life insurance policies to get the best deal.
However, when purchasing a standard permanent life policy is too cost prohibitive, then sometimes we recommend that clients take a life expectancy-based approach. This allows them to set their own life expectancy rather than count on the insurance company to do it for them. Since many insurance policies are based on a life expectancy of age 120, the insurance companies are charging for an extended period of time that may be unnecessary for the average person.
The Life Expectancy Approach
In the case of a client who desires life insurance coverage that will be in place at the time of their death, we often recommend purchasing a life insurance policy for a set period of time that you determine. There are a few options for taking this “life expectancy approach.”
Using this approach you are essentially asking the insurance company to provide a death benefit through a particular age that you believe will cover your life expectancy. As an example, you may want coverage through age 90, 95 or age 100. By not extending coverage to age 120, significant premium savings can be realized. This is a very cost effective approach.
Should you live beyond the intended age; the insurance company will bill you for an increased premium at that time rather than terminate coverage. You can also choose to pay additional premium into a universal life policy prior to that age if it is clear you might exceed the intended life expectancy. This will help lower the “sticker shock” of any future required premium.
The life expectancy approach not only helps clients secure the most insurance possible for a given amount of premium, but it avoids the unnecessary expense of paying for a period of coverage that is well beyond your normal life expectancy. We recommend you take full advantage of the advice and expertise of a qualified insurance professional, like a Howard Kaye representative, can make this process a bit easier to manage. Call us today at 800-DIE-RICH to get started.
