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27 Aug 2019

The cost of living too long: how over-50s life insurance could backfire

Could you end up paying more in premiums than your loved ones receive?

Taking out over-50s life insurance could be one of the worst ways to leave money to your family, Which? research suggests.

A pot of money to leave to your family, help towards paying for a funeral, and a free gift card to spend at a high street store.

Over-50s life cover offers these perks, with a guarantee you'll be accepted if you're aged between 50 and 80 (or 85, depending on the policy) without any health checks or questions about your medical history.

Opt for this cover, however, and it could cost you far more than traditional life insurance. You could even end up paying more in premiums than your loved ones will receive.

Which? explains how over-50s life cover works, and what you should know before taking out a policy.

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Why the payout could be less than your premiums

Taking out over-50s life cover can be a significant financial commitment, as you usually have to keep paying premiums until you die or reach your 90th birthday.

One of the biggest risks of over-50s policies is that you could pay in more than the cash sum your loved ones will receive, as the graph below shows.

Of the 16 quotes we got for a 60-year-old non-smoker paying £40 a month for over-50s life cover, the highest payout was £11,858 from Shepherds Friendly.

Based on this quote, after 24 years and nine months our 60-year-old customer would have paid £11,880 in premiums as they approach their 85th birthday, which is more than the £11,858 payout their loved ones would receive.

With premiums payable to Shepherds Friendly every month for 30 years or after you reach 90 (whichever comes first) our 60-year-old policyholder would still have to pay an extra £2,520 if they lived past the age of 90, otherwise the cover would end.

Like most over-50s life policies the Shepherds Friendly plan has no cash in value, so if you stopped making payments you would lose any money you'd already paid in.

You also need to consider that the value of the payout your loved ones get will gradually be reduced by inflation.

Alternatives to over-50s life cover

If you're in relatively good health a traditional whole-of-life insurance policy, which takes into account your health and medical history, could be a better value option.

For example, while Shepherds Friendly's over-50s plan cost our 60-year-old customer £40 a month, Zurich quoted a premium that was almost two-thirds lower for the same £11,858 payout, at £24.79 a month (for a 60-year-old non-smoker with no medical history.)

Alternatively, if you want a relatively small payout, it's worth considering savings as an alternative to insurance. For example, if you saved £1,000 into a seven year fixed-rate bond that paid 2.75% interest, you would have £1,209 at the end of the term.

Tips if you're buying an over-50s plan

Over-50s life cover is a long-term financial commitment, so if you want to take out a policy, it's well worth doing your research beforehand. We've put together some tips below on how to choose an over-50s life insurance policy.

  1. Compare quotes

As with any form of insurance, it's worth shopping around by getting at least a few quotes.

When we got 16 quotes for a 60 year old non-smoker paying £40 a month, we found that guaranteed payouts can range between £7,650 and £11,860.

If you're looking to take out over-50s life cover, you might find that some plans are provided via another company (Santander offers a policy provided by Aviva, for example.)

When we compared quotes from Aviva and Santander, we found Santander's payout was £304 less than the quote we got on Aviva's website, even though the policies are the same.

  1. Work out when you'd start overpaying

If you want to buy an over-50s life insurance policy, it's worth calculating at what point the total you'll pay in premiums will start exceeding the amount your loved ones would receive as a payout.

For example, one of the lowest payouts we were quoted was £8,595 in exchange for £480 a year (equal to 12 premiums of £40 a month.)

By dividing the total payout (£8,595) by the total annual premiums (£480) you can work out that you would start overpaying after 17 years and 11 months.

  1. Read the small print

Not all over-50s life insurance policies are the same, and some are a little more flexible than others.

Over-50s plans commonly require you to keep paying premiums until you die or reach your 90th birthday, but not always. If you stop paying after you've made at least half the premiums on a Direct Line or Royal London policy, for example, your family will still receive at least half the payout when you die.

Although over-50s life cover usually has no cash-in value, providers such as British Seniors and Foresters Friendly Society let customers cash in their policy after a certain number of years.

And while the payout your family would receive is normally fixed from the outset, policies offered by The AA and British Seniors, for example, have an option for the payout to increase and help protect against inflation.

  1. Consider writing your policy 'in trust'

Putting life insurance policy in a trust means that your loved ones won't have to pay any inheritance tax on the payout they receive.

It also means they can get access to the money more quickly, as it won't be treated as part of your estate and won't have to go through probate, which can take months.

Many insurers allow you to set up your policy in trust at no charge; transferring an existing policy into trust may involve the assistance of a financial adviser or solicitor, and so could involve some costs.