Whole life insurance for seniors: 4 reasons to consider it

No matter how wisely you save and spend throughout your working years, the costs of your golden years can sometimes be more than you bargained for. Many seniors are thinking through a plan for themselves, their spouses and their families. However, they also want their finances to benefit those around them, like children, grandchildren and the causes they care about.

Whole life insurance can be a simple tool to help people who are retired (or about to retire) reach their financial goals. It builds a cash value component that can be used during your retirement, and it also pays out a benefit that can defray final expenses and leave a legacy for those you love.

As a senior, whole life insurance allows you to pay predictable premiums throughout your retirement years while growing the cash value of the contract. Over that time, you can use your whole life insurance in a variety of ways—like a source of cash for your emergency fund or a part of your long-term care plan. If you'd like to leave a legacy and cover your own final expenses, whole life insurance in retirement can offer both a source of financial security now and assets for your beneficiaries when you die.

While people of all ages can benefit from whole life insurance, seniors are in a position where they've usually concluded their wage-earning years and have a better idea of how well-situated they are for retirement. Therefore, they may look to whole life insurance as a source of flexibility and wealth expansion in their current life stage. Here are some of the key considerations.

The core benefit of a whole life insurance policy is the death benefit, an amount you choose upfront that will be distributed to your beneficiaries when you die. This money is usually not included in your beneficiary's income tax, and can be used to settle your affairs. This could mean paying for funeral expenses, settling outstanding medical bills, supporting your spouse or a dependent, or giving charitably as part of your legacy.

Unlike term life insurance, part of your whole life insurance premium will go toward the contract's cash value, which you can access during your lifetime for any purpose. Taking a loan from this balance may cost you less than the interest rate charges you'd receive from a bank, making it an available source of cash during retirement.¹

Many whole life insurance contracts also have a feature that allows you to invest the cash value of your contract and use the earnings to supplement your retirement income when needed, which can give you more confidence that you won't run out.

There are multiple tax advantages of whole life insurance for seniors, starting with the generally tax-free death benefit. As loved ones are settling your affairs, your life insurance gives them a financial benefit without a tax burden.

Some tax advantages also exist while you hold the life insurance contract yourself. First, as cash value accumulates, no tax is due, even if you use investing options within that cash value to grow the value of your contract. Second, if you do withdraw your cash value in some way, you only begin owing taxes after you've withdrawn more than you've paid in premiums—so you're still tax-advantaged to a point.

Dive deeper into the taxability of life insurance

An exciting aspect of whole life insurance is the potential for dividends, or money distributed by a company when it performs better than expected.² While dividends aren't guaranteed, they have been issued frequently. Many companies offering whole life insurance contracts have paid out dividends in the past 150 years, and these dividends can add up when you hold your contract over time.

Contract holders opt to use dividends in a variety of ways that can make retirement more secure and positive for seniors:

• Dividends can be used for a life insurance feature known as paid-up additions. Think of it as "reinvesting" dividends. These additions raise your death benefit and the value of your contract and may be part of the calculation that makes you eligible for more dividends in the future.
• Dividends can be used to defray the costs of premiums, bringing down your monthly payments when dividends are issued.
• You may be able to cash out your dividends without affecting the cash value or death benefit of your policy. Your dividends simply come to you as a check.

The potential for dividends makes whole life insurance a particularly positive option for seniors since dividends can defray either retirement expenses and premiums now or increase a death benefit down the road.

Learn more about Thrivent's dividend performance

• Most whole life premiums are set when you purchase the contract and remain constant going forward. However, each year you delay purchasing life insurance, your premium, on average, will go up. The calculations that generate premium quotes take age into account, so purchasing when you first are considering it will usually be the least expensive time you can possibly purchase.

• Some retirement plans, like 401(k)s, may allow you to use your life insurance as an investment and pay the premium with pre-tax dollars, earning a tax benefit. Because these policies tend to be complex, working with a financial advisor can help you figure out if purchasing life insurance with pre-tax dollars is worthwhile in your circumstances.

• Many people purchasing life insurance early in adulthood seek out coverage that will replace an income source in their family. However, as a senior, it makes more sense to choose a death benefit that would contribute to the legacy you want to leave, offering substantial aid to family members and important causes in your life while also completely covering any final expenses or payment of debts.

• While some companies offer a no-exam option, most whole life insurance contracts will require a medical exam for underwriting. It's part of how the calculations for premiums are conducted.

• Depending on the maturity date of your whole life insurance, it is possible to outlive the policy's maturation, which is sometimes set at 100 years old and more often at 121 years of age. At this point, the policy ends and you receive the benefit amount, though it may be treated as taxable income then.

Whole life insurance can be a particularly useful and good fit for some seniors and less so for others. Here are some of the scenarios where you might be best served by whole life insurance:

• If you have outstanding home mortgages or other debt that you'd like paid down by a death benefit, whole life insurance's permanence can help ensure final expenses will be covered.
• If you're early in retirement and in relatively good health, you're likely to qualify for (and lock in) better whole life premium rates.
• If you want to take advantage of the borrowing and cash value options associated with whole life insurance, this option can be useful as supplemental retirement income.
• If you want funds available for long-term care, some whole life insurance policies are structured to offer hybrid benefits in addition to the cash value that can be used for those needs.

A couple of situations exist where whole life might not be the most appropriate choice compared to other options. If you're currently in poor health, the higher premiums may not be worth the benefits of whole life insurance. And if you have existing assets and investments that will easily cover your final expenses, pay debts and leave a legacy, you may decide to stick with those potentially larger rewards and benefits rather than divert money to life insurance.