Retirees Could Immediately Regret Buying This Type Of Life Insurance

Life insurance can offer retirees peace of mind by ensuring their beneficiaries are cared for after they're gone. But buying a policy isn't always as easy as it seems. There are two main types of life insurance: term and whole life. Term coverage lasts for a set period — say 15 or 20 years — meaning if you die during that window, the policy pays out; if not, it expires. Whole life, on the other hand, is more complicated. These policies requires you to pay premiums for the rest of your life and, worst of all, not all of that money ultimately reaches your beneficiaries. This makes it a type of insurance you may want to avoid if you're a retiree, and one that might leave you with a pang of regret if you've already purchased it.

There are various reasons why whole life policies aren't a great fit for retirees, the most significant being cost. Because these policies are designed to last an entire lifetime — potentially past 100 years old — the premiums are significantly higher than term policies which become void after a set number of years. For example, a 60-year-old, non-smoking woman in excellent health could expect to pay around $1,650 a year for a 20-year term policy with $500,000 in coverage, according to NerdWallet, while a whole life policy for the same person would skyrocket to more than $14,600. Plus, with a term policy, you're only making payments until the term ends whereas, with whole life, you're on the hook for those high premiums for the rest of your life.

Another issue with whole life policies is that some of what you pay goes into a cash value account, and not towards the death benefit. This money can be borrowed, tax-free, by the policyholder as needed and repaid when they die. This can technically make whole life policies a savings vehicle for retirees who want to supplement their income or cover long-term care costs. However, while there are situations where this can make sense, it's often considered a bad way to save for retirement because of the high premiums involved. Also, if you die before using the cash value, the insurer keeps that money rather than including it in your death benefit – something that could make whole life feel like an insurance product that is a total waste of money.

If you have a whole life policy that you're unhappy with, there are a few options available to you. One is to stop paying the premiums. If you go this route, the money for the premiums will be taken from the cash value in your account as long as there are funds to access. You can also look into lowering your death benefit, adjusting certain terms, or even exchanging the policy for one with lower costs. Another option is to sell the policy to a third party for a lump sum, known as a life settlement transaction. As a last resort, you can also cancel the policy outright. If you've accumulated cash value, you'll receive that amount back; however, there may be fees and taxes that ultimately reduce the amount returned to you.