Term vs Whole Life Insurance for Retirees

Term and whole life answer different questions. Term asks who needs money if you die in the next 10 or 20 years. Whole life asks what should be left behind whenever you die. After 60, most people have a bit of both, so the real work is matching each need to the right tool, at a premium you can carry for as long as the policy has to last.

What is the difference between term and whole life insurance?

Term life pays a death benefit only if you die during a set period, such as 10, 15, 20 or 30 years. The National Association of Insurance Commissioners (NAIC) describes term as "lower cost coverage for a specific period of time," and most term policies build no cash value. If you outlive the term, the coverage ends or renews at a higher price.

Whole life is a kind of cash value, or permanent, insurance. It is built to stay in force for life as long as you pay the premiums, which usually follow a set schedule. Part of what you pay builds cash value, a savings element you can borrow against or collect if you surrender the policy. The NAIC notes that for coverage you want for your whole lifetime, "cash value insurance may be more cost effective."

Universal life is the other main type of permanent coverage. It lets you choose a flexible payment pattern, as long as you pay enough to keep the policy in force. This page sticks to term and whole life, the two choices retirees usually weigh first. For the bigger picture, start with life insurance for retirees.

How long do you need coverage after 60?

Start with the end date of each need, not the policy type. A need that ends belongs with term. A need that lasts as long as you do belongs with permanent coverage.

Picture a 63-year-old in Lancaster County with 12 years left on the mortgage and a spouse who would go from two Social Security checks to one. A 15-year term policy can cover the payoff window. A smaller whole life policy can handle the funeral and leave something behind no matter when death comes. Two policies, two jobs, each sized to its own need.

What happens when a term policy ends?

Coverage stops unless you renew or convert. The NAIC says most term coverage can be renewed even if your health has changed, but "the new premiums are higher," and you should ask whether you'll lose the right to renew at a certain age. A nonrenewable policy simply ends, and you would have to apply again at your new age and health.

That matters more at 60 than at 35. A 20-year term bought at 66 runs to 86, and buying new coverage then may not be possible. Issue ages also tighten. As one example, Gerber Life sells its term policy only to people ages 21 to 70 as of 2026. Check the issue ages and the longest term each company offers at your age.

Ask about conversion. The NAIC says you may be able to trade many term policies for a cash value policy during a conversion period "even if you are not in good health." The conversion deadline often comes well before the term ends, so put it on the calendar. If your health changes in your 70s, that option can matter more than anything else in the policy.

Is whole life worth the higher premium?

Whole life is worth it when the need is permanent and the premium fits your budget for life. It rarely makes sense as a stand-in for term on a need that ends, because you pay for decades of coverage you didn't need.

What the higher premium buys:

• Coverage that doesn't expire. Your beneficiary is paid whether you die at 70 or 98, as long as the policy stays in force.
• A premium schedule that usually doesn't rise. You know the cost going in.
• Cash value. You can borrow against it or surrender the policy for it. The NAIC warns that in some policies the values are low in the early years and build later.

What to watch:

• Not every number is guaranteed. Illustrations mix guaranteed values with projected ones, such as dividends on some policies. The NAIC suggests asking, "What part of the premium or policy value isn't guaranteed?"
• Loans shrink the payout. "Any loans you have not repaid (plus interest) will be subtracted from the death benefit," the NAIC says.
• Surrender has a cost. Cashing out ends the coverage, and a gain above what you paid in can be taxable.

More on that shift in thinking in the wrong retirement question.

Who should choose term, and who should choose whole life?

Term usually fits if:

• your need ends on a date you can name: a mortgage, a loan, the years a spouse depends on your income
• you want the largest death benefit for the smallest premium
• you're healthy enough to qualify for fully underwritten rates
• you'd rather keep savings in accounts you control than in a policy's cash value

Whole life usually fits if:

• the need is permanent: final costs, a gift to family or a charity, or evening out an inheritance
• you want premiums that don't rise and coverage that can't run out
• you can pay the premium for life without straining the monthly budget
• you're comfortable that cash value grows slowly at first

If the main goal is a funeral and final bills, a small whole life policy sold as final expense coverage may fit better than a large policy. See final expense vs term life for that choice.

How is a life insurance payout taxed?

Usually it isn't, for the beneficiary. The IRS says that "generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income." That holds for term and whole life alike. Interest is the exception: if a beneficiary takes the money in installments, the interest portion is taxable. A policy transferred for cash or other value can also lose part of the exclusion.

Cash value is a separate question. If you surrender a whole life policy for more than you paid in premiums, the gain can be taxable. Larger estates have estate tax to think about too. Talk to a tax professional before you change a policy's owner or cash it out. As Bill says, "Some things, when they get inherited, get taxed. Some things don't."

What mistakes do retirees make with life insurance?

1. Canceling the old policy first. The NAIC's advice is plain: don't cancel your current policy until you get the new one. An older policy may have terms you can't buy today.
2. Counting on group life from work. Employer coverage is usually smaller than people think, and the NAIC notes you may not be able to keep it when you leave. Ask what happens to it the day you retire.
3. Picking the wrong term length. A 20-year term at 68 can cost more than a 12-year need justifies. Match the term to the end date.
4. Missing the conversion deadline. After it passes, you may have to qualify on health again.
5. Naming a minor grandchild as beneficiary. Insurers won't pay a minor directly. The NAIC suggests a trust or your estate instead; get legal advice on which.
6. Forgetting to update beneficiaries. Changing them costs nothing. Do it after a marriage, divorce or death in the family.
7. Rounding off the health questions. If the insurer finds false statements after issuing the policy, it could reduce or cancel your coverage.

When a new policy arrives, you usually have a review period of about 10 days to return it for a full refund, according to the NAIC. Read it then. You can confirm an agent's Nebraska license with the Nebraska Department of Insurance producer search. Life insurance is separate from Medicare. If you're sorting out both at once, Nebraska SHIP (formerly SHIIP) offers unbiased Medicare counseling at 1-800-234-7119.

For company-level facts, see life insurance companies for seniors in Nebraska, and for quick answers, the life and final expense FAQ. If you want help matching each need to a policy, talk to Bill.