Five Little Known Facts of Life Insurance That Can Have Big Implications for Older Americans

Many older Americans continue to struggle with finances in retirement as a result of the recession. Life insurance in particular can represent a tremendous burden on a retiree's finances, as premiums can rise swiftly and unexpectedly later in life. Senior citizens should educate themselves early about the potential cost of life insurance as they age in order to be properly prepared.

In particular, five specific characteristics of life insurance can significantly increase expenses for those on a fixed income. Senior financial resource Golden Gateway Financial explains these little known facts and possible solutions.

1. Avoid Fast Rising Premiums
Life insurance premiums can rise significantly and suddenly for older Americans, creating challenges for those on a fixed income. Premiums for universal life insurance (also known as flexible premium whole life) rise in cost as the consumer ages because the insurer factors in higher mortality risk. A sample premium table (fig 1.) shows that premium increases usually begin their steep rise around age 70 or 75.

For those on a fixed income this sudden increase can become unaffordable. If the policyholder needs to maintain coverage, one option is to reduce the face amount of the policy. Options for unneeded or unaffordable policies include selling or surrendering the policy.

2. Monitor Term Insurance Increases
Term life insurance has two points at which premiums can take a big jump. The first is at renewal. At the end of most term policies, if the owner cannot or will not convert the policy, then they must either discontinue coverage or undergo a new medical underwriting in order to get a new policy. This will often lead to higher rates.

There are also term policies that begin with level premiums, but then increase dramatically as the insured ages. These sample rates (fig. 2) for a healthy, non-smoking male demonstrate this significant increase.

3. Pursue Payouts from Policies
Most life insurance never pays a death benefit, meaning most policies never realize their original intent. According to the Insurance Studies Institute, this number is as high as 85 percent of all policies. In those cases, policy owners often leave a significant amount of money on the table. For example, in 2005 policy owners stopped paying premiums on 19.8 million policies worth $1.1 trillion (Insurance Information Institute).

Policy owners should monitor their policies closely and be aware of all the life insurance options available to them so as not to leave their money on the table. These can include adjusting beneficiaries, choosing to receive cash value, or selling their policy in a settlement.

4. Avoid Cash Surrender Fees
Be wary of the cash surrender option with a life insurance policy. In many instances, if you choose to access the cash value in your policy, you'll have to pay a surrender fee. These fees vary by insurer, and can be substantial. Seek other options for generating cash from your policy such as life settlement or -- if your policy allows -- taking dividend payments.

5. Be Aware of Policy Maturity
The majority of life insurance policies are only valid through age 95 or 100. If the insured is still alive at that point, then the policy matures and the carrier will pay out the cash value. However, if the senior had previously relied on the cash value to pay for the policy's increasing premiums, then they could be left with little to no benefit at maturity. One way to address this is to inquire about a life extension rider that can extend the maturity date to 120 years of age.

Another option available to those policy owners facing unexpectedly increasing premiums or those who are considering allowing their insurance to lapse is life settlement. Life insurance was classified as an asset by the Supreme Court in 1911, and as such, can be sold just like a house or car. This is useful for those older policy owners seeking to turn an unneeded or expensive policy into cash.

A recent study found that more than 80 percent of older policy owners did not know they could sell their policy for cash. This means that many policy owners simply allowed their policy to lapse or accepted a cash surrender value instead of seeking a more lucrative life settlement.