Buy insurance before you lose your marbles

If you've been putting off important decisions about auto, life, health or home insurance, make sure you don't wait until advancing age impairs your ability to make sound financial judgments.

A recent study by researchers from Texas Tech University and the University of Missouri at Columbia found that, regardless of gender or education, U.S. residents steadily become less able to deal with financial issues - including insurance purchases -- after age 60.

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It’s important to make financial decisions before age 60.Scores on a test designed to measure understanding of insurance, investments, credit and money basics dropped on average from about 59 percent correct for those in their 60s to only 31 percent for people age 80 and older. The telephone survey drew 1,757 responses.

When focusing on insurance literacy, the survey found that people ages 60 to 69 had an average score of nearly 64 percent, but that dropped to about 37 percent for those who had reached age 80.

Your inevitable mental decline

"Advanced age leads to predictable declines in cognitive abilities," researchers said in a report on the survey called "Old Age and the Decline in Financial Literacy." "The abilities to reason, retrieve information from long-term memory and perform quantitative tasks are closely related to financial decision making."

The evidence suggests that while math skills begin to decline while you still are a young adult, problem solving that requires experience and knowledge peaks just before retirement age.

Although some individuals seem to age more slowly than others, it's a harsh fact of life that you can expect your mental abilities to decline beyond age 60. If that isn't scary enough, the survey found that people with diminished abilities typically don't recognize their limitations.

As you get older, you tend to become overconfident of your ability to make financial decisions, says Michael S. Finke, an associate professor in the department of personal financial planning at Texas Tech University and lead author of the study.

Finke acknowledges that it can be disturbing to contemplate your inevitable decline. Even so, you fail to acknowledge your limitations at your own peril. His hope is that the study will prompt people to put their financial houses in order no later than by their early 60s, when they're still near their mental peak.

"Yes, it is depressing to be aware of the fact that our brain changes as we get older," Finke says. "What is encouraging is we can make decisions that don't cause us to make mistakes as we age."

AARP is an advocacy group for people age 50 and older. The results of Finke's study didn't surprise Laura Bos, a senior project manager on AARP's financial security team. However, she says the entire population - not just the elderly -- needs help when it comes to money issues.

"We know that decision making tends to decline with age for some people," she says. "Given that the population is aging, this is an issue that we are looking at. But financial illiteracy is not exclusive to older Americans."

Don't put off insurance decisions

Debra Newman, chair of the board of directors for the nonprofit Life and Health Insurance Foundation for Education (LIFE), is a 32-year industry veteran who specializes in long-term care insurance. The results of the survey underscore the need to convince people not to procrastinate when it comes to planning for their old age, she says. The idea is to buy such policies before illness and old age make your insurance premiums unaffordable.

"We are trying to get people to understand this is a planning decision that needs to be made certainly in your 50s if not your 40s," Newman said of long-term care policies. "The average age for purchase is 57. We are trying to move this" to an earlier stage of life.

If you are retired and living on a fixed income, preserving your wealth can be crucial. Dave Snyder, vice president and associate general counsel for the American Insurance Association trade group, says some seniors don't realize how important it is for them to maintain adequate property and casualty insurance policies.

"A serious motor vehicle crash or a slip and fall by a visitor [to your home] could wipe out an entire life's savings," Snyder says. "It is very important for seniors to maintain full coverage regarding assets and liabilities."

That doesn't mean you can't change policies or shop for cheaper insurance quotes. There are times when it makes sense for seniors to reduce their coverage, Snyder acknowledges. You may need to re-evaluate your car insurance needs as you begin to drive less.

"As things change -- for example, if a person no longer needs a car to commute to work or moves from a house to a condo -- these should be discussed," he says.

Buyer beware

Before you buy any insurance product, make sure it truly meets your needs. Bos says seniors need to be on their guard whenever they make financial decisions. If they need help with complex issues, they should not be too proud to ask for it.

"Make sure you check out the product yourself and you don't just listen to what the salesman is saying about it," she says. "You may want to talk to people you trust. It may be a financial planner. It may be a friend."

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