When life insurance can still be a smart purchase after 50

Three years ago my father-in-law moved nearly 1,000 miles from Winnipeg, Manitoba to our home in Toronto after a cough he’d developed following a trip to Florida turned out to be something much worse than a common post-vacation cold.

He’d been diagnosed with cancer and the prognosis wasn’t good. My wife and I wanted to take care of him during his treatment.

As it turned out, he was also taking care of us.

My father-in-law, a lawyer who kept working until the day he died, never talked about what could happen. But he did share that he was paying over $1,000 a month in life insurance premiums and that, no matter what happened, he wanted to continue making those payments.

He wanted to ensure we’d be able to pay any taxes due on his estate and have money left over to leave to his children and grandchildren.

I was surprised that he had life insurance at all, let alone the high priority he put on maintaining such a high-cost policy.

I thought life insurance was mostly for young parents, like my wife and I, who still have children at home dependent on their income, not older people whose offspring already have independent lives and, perhaps, families of their own.

As I learned from my father-in-law, though, life insurance can be much more than an income replacement tool.

The reasons for taking out a policy typically change as people age, but can include wanting to leave your spouse, children, or charity a bigger chunk of money than you have in savings or, if you have a mortgage or other debts, enough cash for your heirs to pay them off after you die.

The tradeoff: A bigger legacy doesn’t come cheaply, since life insurance costs substantially more as you age than when you probably first bought a policy decades ago.

Is coverage at this stage of your life worth the steep price tag? Here’s what you need to know to decide.

To renew or not to renew?

Like many people, I bought my first policy a decade ago, just after my oldest child was born. And like most parents of young children, I bought term insurance, which covers you for a specific number of years and pays a pre-set amount to your beneficiaries if you pass away while the policy is in place, known as the death benefit.

Because a term policy isn’t guaranteed for life, it’s relatively inexpensive, especially if the policyholder is reasonably young and healthy, says Jeff Cutter, founder of Cutter Financial Group, a financial planning firm in Falmouth, Mass.

For instance, Cutter took out a 20-year term life policy with a $1 million death benefit in 2003 and pays about $58 a month.

The policy will expire in five years, when Cutter is 55, and he has no plans to renew. His children will have finished college by then and he expects they’ll be self-supporting.

He’s also saved enough that when he passes away, his wife will be taken care of. He says, “I’ll be happy when my term policy expires—it means I never had to use it.”

Others may want to buy more life insurance, but not for income replacement reasons. Most Americans who are older than 55 use life insurance to leave an inheritance, help their family pay for estate taxes, or to give money to charity.

Which type to buy: term vs. permanent insurance

Once you’re in your 50s, though, you’re usually better off with permanent insurance, such as a whole life or universal life policy, instead of term, says Ted Quillen, a director at WSFS Wealth Investments in Greenville, Del.

That’s because, unlike term insurance, permanent coverage doesn’t expire as long as you keep paying your premiums. If your goal is to leave money to your beneficiaries, Quillen says, then don’t buy a policy that can run out before you pass away.

Another drawback to term: While you can try and renew once the policy is up, you may not be approved if you’ve had a health setback, such as a heart attack, cancer, or another serious medical issue.

Then too, many insurers stop selling coverage to customers of a certain age (commonly, age 75 and up), while some start restricting the length of the term once you’re in your mid-50s or 60s.

When term still makes sense: If, in case you pass away, you need a set amount for a specific period of time to cover a mortgage or support your family’s day-to-day needs—in other words, for the same reason you were likely to buy it when you were younger.

With people starting families and buying homes later in life, Quillen says he is seeing more people 55 and older buying term. He says, “It was always a 30 to 45 [year-old] kind of thing, but now with people taking out 30-year mortgages at 50, they need money to cover at least some of [that debt].”

If your goal in buying life insurance, though, is to leave a legacy or money to charity, whole life makes more sense, says Paul Golden, a spokesperson for the National Endowment for Financial Education, a non-profit focused on financial education.

In addition to the permanent nature of these policies, they also have a savings component, known as the cash value, which builds over time and adds to the final value of the policy.

Premiums are fixed (unlike those in a different kind of permanent life insurance known as universal life) and, if needed, you can borrow against the cash value for, say, daily living needs.

Be prepared to pay up—and up

Whatever type of life insurance policy you take out, the older you are when you buy it, the more expensive it will be.

Term will still be the least expensive. According to Quillen, a healthy 55-year-old male who receives a “premium” rating would pay around $800 a year for a 20-year $250,000 policy with a top-rated carrier. A 60-year-old male would pay about $1,450 a year for the same policy.

If you’re not in peak condition, the costs are even steeper. A less healthy 55-year-old with a “standard” rating, for example, might pay $1,400 or so annually for that $250,000 term policy, while the 60-year old will pay around $2,300.

Still, that’s cheap compared to what permanent insurance will cost. For a $250,000 whole life, that healthy 55-year-old would pay about $6,000 a year, while the 60-year-old would pay more than $8,000. And costs go up from there as health declines.

Additional charges to be aware of: Whole life policies often have high fees, commonly around 5%, especially in the early years. That eats into the cash value, although the fees tend to drop the longer a policy is held.

And if you want to cancel the policy in the first few years—which is not uncommon, as some people find the steep premiums hard to keep up with—you’ll typically also pay a surrender charge, although this fee gradually declines over time.

In other words, life insurance as you get older is certainly not for everyone.

But in my case at least, I’m grateful that my father-in-law had the foresight to buy a policy when he did.

His illness came on so suddenly, and he passed away only a few months later. The thoughtfulness of the legacy he left helped us get through some tough emotional times.

And on a practical note, it’s helped my wife and I save for retirement too. That’s a lovely gift to remember him by.