Is the premium affordable? A fixed-income worksheet for older buyers

A quoted premium that looks small next to a $10,000 benefit can still be too large for a household on a fixed income, because the premium is not paid once. It is paid every month for as long as the coverage is meant to last, and a policy that lapses after years of payments pays nothing. This worksheet tests a premium five ways: as a share of income, as a share of spare cash, against a bad month, against the total paid over time, and against the cost of waiting. The sample retiree is hypothetical and every number is an illustration, not a price or a recommendation.

The question to answer before you compare policies

Most of the effort in buying coverage goes into finding a premium. The more useful question is whether you can keep paying it. A lapse in your seventies or eighties is hard to undo: you may be unable to qualify again at your age or health, and a new policy would cost more. The life insurance grace periods and lapses guide explains how short the window to catch up is when a payment is missed.

So affordability is not "can I pay this month?" It is "can I pay this every month through the worst year I can picture, and would I still want the coverage then?" The tests below are designed to show where the answer is yes, where it is no and where it depends.

Meet the sample household

Say Helen is a hypothetical 68-year-old widow living on a fixed income of $2,900 a month: $2,100 from Social Security and $800 from a small pension. She is looking at a $10,000 whole-life style final expense policy. The agent quotes a level premium of $62 a month, which is an invented figure for this example. She wants to know if it fits.

Her monthly fixed bills are:

Her income of $2,900 minus fixed bills of $2,450 leaves $450 a month for everything else: clothing, gifts, repairs, small pleasures, savings. That $450 is her spare cash, and it is the figure the premium really competes with.

Test 1: the premium as a share of income

Divide the premium by gross income: 62 ÷ 2,900 = 0.0214, about 2.1 percent.

On its face, that looks small, and many people stop here. But income is the wrong denominator for a household that spends most of its income on needs. Look at spare cash instead.

Test 2: the premium as a share of spare cash

Divide the premium by what is left after fixed bills: 62 ÷ 450 = 0.1378, about 14 percent.

That is a different picture. Nearly one dollar in seven of Helen's discretionary money would go to the premium. She may decide that is fine, since the policy protects her children from a bill. But she should decide it knowingly. After the premium, she has 450 − 62 = $388 left each month.

There is no universal threshold that separates affordable from unaffordable. Some households are comfortable giving up a fifth of their spare cash; others feel strain at a tenth. A useful habit is to set your own line before you see the quote, for example "no more than 15 percent of spare cash," and to write it on the sheet. It is easier to hold a line you drew calmly than one you drew in front of a salesperson.

Test 3: the bad month

Spare cash on paper is not the same as spare cash in practice. Pick the worst plausible month and see whether the premium still fits.

Helen lists three bad-month possibilities: a car repair of $400, a month of extra prescription and copay costs of $300, and a home repair she must cover of $350. These do not all happen at once, but one or two might. Her cushion is $388 a month after the premium. A $300 medical month leaves 388 − 300 = $88, so she covers it. A $400 car repair leaves 388 − 400 = −$12, a small shortfall that she would have to fill from savings. If she has no savings, the shortfall is the point where a premium is missed.

So the question becomes: how many months of savings stand behind the premium? If Helen has, say, two bad months' worth in an emergency fund, the premium survives. If she has none, the policy is exposed to the first surprise. A premium paid by automatic withdrawal can be missed silently when an account runs short, so also note which account pays it and whether anyone will notice a failure.

Test 4: total premiums paid versus the benefit

A level premium of $62 is 62 × 12 = $744 a year. Cumulative premiums at several ages for Helen, who starts at 68:

The break-even is 10,000 ÷ 744 = about 13.4 years, which is around age 81.4. A family receives more than was paid in if Helen dies before that, and less if she lives past it.

This calculation is where many people reach the wrong conclusion in both directions.

• The case against reading it as a loss. Insurance transfers risk. A person who lives to 90 did not lose money on a policy any more than a homeowner loses money when the house does not burn. Helen's premiums bought protection against dying at 72, and the benefit the family would have collected then is much larger than the premiums paid. Premiums that exceed the benefit after age 81 are the cost of that protection.
• The case for taking it seriously. If the real goal is to have $10,000 available for final costs, and Helen would rather save than insure, the table shows what she gives up. A policy that is paid for 22 years and then pays out $10,000 delivers a worse financial result than the savings, provided she lives long enough and the savings stay untouched. Many people do not leave savings untouched.

For a sense of the savings alternative, suppose Helen deposited $62 a month into an account earning an assumed 3 percent a year, a rate chosen only for illustration and which changes. After 2 years she would have about $1,532 (against $1,488 deposited), after 5 years about $4,008, after 10 years about $8,664 and after 13 years about $11,811. So by roughly year 12 or 13, saving would surpass the $10,000 benefit, but in the early years the policy would be worth far more than the account. The two options differ in what they do in the worst case, not on average: the policy pays the full benefit even on the first anniversary (subject to any graded benefit; see below), while savings take years to accumulate.

Check for a graded benefit

Policies sold without health questions, often called guaranteed issue, and some simplified-issue policies pay a reduced benefit if death occurs in the first two or three years. The common pattern is a refund of premiums paid, sometimes with interest. This is a graded benefit; the graded death benefits: why the first two years matter guide explains it.

Why this belongs in an affordability test: the "early years" protection in the last paragraph may not exist. If Helen's policy is graded and she dies in year one, her family would receive back about 744 in premiums, plus any interest the contract provides, not $10,000. That reduces the value of the coverage in the years when her savings would be thinnest. Ask the agent for the benefit schedule by year, in writing.

Test 5: buy now or wait?

Waiting a few years usually raises the premium because age is a main driver of cost; see why premiums jump at each birthday and how insurers price age for how insurers price it. Waiting also risks a change in health that could limit options or push you toward a policy with a graded benefit. The the cost of waiting to buy life insurance guide covers the general case. Here is the arithmetic for Helen.

Say Helen waits three years and then buys the same policy at 71 for a hypothetical $75 a month.

• Premiums she avoids during the wait: 62 × 36 = $2,232.
• Extra premium after that: 75 − 62 = $13 a month, or 13 × 12 = $156 a year.
• Years of extra payments needed to use up the saving: 2,232 ÷ 156 = about 14.3 years, which is around age 85 (71 + 14.3).

On cost alone, waiting wins until about 85. But the comparison ignores three things. Coverage during the wait is zero, so a death at 70 leaves nothing. Her health might change, so she may not get $75 at 71 or any offer at all. And she could end up with a policy with a graded benefit, which changes what she is buying. None of these facts says waiting is wrong; for a healthy person with savings to cover final costs in the meantime, waiting may be reasonable. It does mean the choice is a trade, not a free saving.

Re-running the sheet with a smaller benefit

The sheet is most useful when you run it more than once. Suppose Helen asks for a $5,000 benefit instead. The agent quotes a hypothetical $33 a month, a figure invented to show the method, not a price list. Helen reasons that $5,000 plus some savings would cover a simple cremation and a few bills.

• Share of income: 33 ÷ 2,900 = about 1.1 percent.
• Share of spare cash: 33 ÷ 450 = about 7.3 percent.
• Spare cash left after the premium: 450 − 33 = $417.
• Bad-month check: a $400 car repair now leaves 417 − 400 = $17, so the repair no longer breaks the month.
• Annual premium: 33 × 12 = $396. Break-even: 5,000 ÷ 396 = about 12.6 years, around age 80.6.

The smaller policy takes a lighter bite from her spare cash and survives the repair test, but it covers only half the benefit. The $10,000 policy costs $29 a month more, or 62 − 33 = $29, and doubles the benefit. Helen has to decide whether an extra $5,000 of protection is worth $348 a year (29 × 12), or whether she would rather keep that money and raise the difference from savings. Both are reasonable answers. The sheet turns a vague feeling about "more coverage is better" into a price she can weigh.

A related option is to buy part of the need with insurance and set up a separate small account for the rest, naming a beneficiary on that account so it passes quickly to the person who will arrange the funeral. Which mix works depends on how much cash she can spare and how quickly her family would need it.

Test 6: what if she cannot keep paying?

Affordability today is not affordability in ten years. Before buying, ask what happens if payments stop.

• Grace period. Policies commonly give about 30 or 31 days after a missed payment, during which coverage continues. After that the policy can lapse.
• Cash value and paid-up options. Many final expense policies build little cash value in early years, so a lapse may leave nothing. Policies with more cash value may offer a reduced paid-up option; see nonforfeiture options: reduced paid-up and extended term for how those work, and ask whether the policy has any.
• Premium guarantee. Ask in writing whether the premium is level for life and guaranteed, or can change.
• Payment mode. Paying monthly usually costs more over a year than paying annually, as paying life insurance monthly vs annually explains. If cash flow allows, an annual payment can lower the total, but it requires a lump sum.
• A named contact. Some insurers let you name someone to receive a notice when a payment is missed. Ask whether yours does.

If a premium later becomes a burden, tell the insurer before lapsing. The post on keeping an old permanent policy affordable on a retirement income describes options for an older policy on a retirement income.

A decision list

Use the results together instead of one at a time.

• If the premium is under your personal share limit of spare cash, you have a bad-month cushion, and the benefit schedule has no long wait, the premium probably fits.
• If the share is above your limit but you value the coverage, consider a smaller benefit with a lower premium, and re-run the sheet with that quote.
• If the premium fits only if nothing goes wrong, treat it as unaffordable for now. Building a small reserve first may serve you better than a policy you could lose.
• If the policy has a graded benefit and your savings would not cover the first years' costs, weigh that gap openly.
• If the whole exercise points to a number that is really about final costs, consider whether dedicated savings with a named beneficiary could do the same job; the work out your final expense number with a worksheet and a sample family helps size that number.
• If an agent pressures you to decide today, that is a reason to slow down; see mistakes seniors make when buying final expense coverage.

Your blanks

A fee-only planner, a trusted family member or a free state health insurance counseling program can look over your figures before you commit. The state insurance department can tell you how to file a complaint and what the free-look period is on a policy you have bought.

Key takeaways

• Test a premium against spare cash, not just income. In the illustrative example, $62 is about 2 percent of income but about 14 percent of what is left after fixed bills.
• Run a bad-month test and note which account pays the premium; a missed payment is how most older buyers lose coverage.
• Cumulative premiums eventually exceed the benefit. In the example, break-even is about 13.4 years, around age 81, but the comparison measures cost, not the value of protection if death comes early.
• Waiting can save money for a healthy buyer, but it trades away coverage in the meantime and risks worse options, so treat it as a decision rather than a bargain.
• Ask in writing about graded benefits, the premium guarantee, grace period and what happens at lapse before you sign.