Difficulties in understanding emotional signals might have important implications for social interactions in old age. In this study we investigated emotion perception skills involved in decoding facial expressions of emotion in healthy older adults, compared with those with Alzheimer's disease (AD) or late-life mood disorder (MD). Although those with MD were mildly impaired in identifying emotional expressions, this was not caused by negative biases in choosing labels. Emotion decoding performance in AD was much more impaired, particularly when relatively subtle expressions were presented. Difficulties in choosing between labels to describe an emotional face were predicted by executive dysfunction, whereas impaired ability to match 2 emotional faces was related to general difficulties with face perception. Across all 3 groups, problems with emotion perception predicted quality of life independently of variance predicted by cognitive function and mood, indicating the potential importance of emotion decoding skills in the well-being of older adults.