Often times, someone who is between 50 and 60 years-old will be in-the-market for term life insurance…or so they think. They want a policy that will be guaranteed for about 20 years, but simultaneously want the policy to be in force till death. This is a questionable idea because essentially they are gambling on the age of their death. Yes, statistically the average man in America dies before age 80, but to rely on this to make your financial planning objectives come to fruition isn’t really planning at all. The alternative to term life insurance is of course permanent life insurance, which in many cases costs 4-8 times as much. What is the balance between paying drastically more for coverage and simply gambling on the year of one’s death or assuming that in the most conservative phase of one’s investment stage they will somehow make up the difference between permanent life insurance and term by investing?
A 60 year-old man in virtually perfect health wants to be insured until death for $500,000. To keep everything consistent, I will use the life insurance carrier North American Company for Life and Health Insurance for all of the following figures.
He could just buy a 20 year term policy for $235.47 and have this rate until age 80. This is extremely cost-effective for $500,000 of term life insurance, but when the 20 year level period ends, the premium skyrockets to over $4,000 per month. The rate at age 84 increases to $103,000 per year! This is more than the aggregate cost of coverage for the initial 20 years. The reason term life insurance is so inexpensive is due to the fact that the carrier is not taking on the risk of someone dying during their most mortal years. This makes the product perfectly designed for temporary needs, but in this scenario it is clear just how poor of an idea it is to just assume when one will die.
To avoid the death spiral that takes place after the initial 20 years of the term life insurance policy shown in option 1, this individual could just purchase a $500,000 policy that has a level premium until age 100 (it’s free thereafter). This would cost $1,913 per month. This means that by age 81, the applicant would have paid $459,000 in aggregate premiums for a $500,000 life insurance policy. While permanent level life insurance appears to be a bargain for younger individuals when you realize how little is paid in premiums throughout life versus the death benefit, for a 60 year-old man the numbers are much more harsh. So, between option 1 and option 2, the applicant has the choice of a morbid gamble or a very likely financial wash. Neither appear too attractive for this individual seeking life insurance so late in life.
A hybrid of options 1 and 2 produces a very hedged solution to the risk that one can very well live past age 80, but while offering a much lower sticker price than the $1913 per month of option 2. Using the same product outlined in option 2, but dialing the level premium guarantee down from age 100 to age 81 years-old, provides a premium that is as follows:
Monthly Premium from Ages 60-81 = $433
Monthly Premium from Ages 81-100 = $1700
Monthly Premium from Age 100 = $0
Option 3 is objectively the most advantageous.
Mathematical Summary of Option 3:
If the applicant died just before their 81st birthday while utilizing option 3, their total premiums paid would be $103,920, which is a mere 21% of the total death benefit!
Even if the applicant lived till age 90 while utilizing option 3, their total premiums paid would be $287,520, a mere 58% of the total death benefit.
Financially speaking, the worst case scenario under option 3 would be if the applicant lived till 100 or more years, and even then the total premiums paid would be only $511,920.
Generally speaking, it’s more cost effective to simply buy life insurance at an age far younger than 60 and purchase either permanent life insurance or term life insurance that can be converted to permanent life insurance later. Although, should you be purchasing a considerable amount of coverage late in life, it’s much better to hedge your bets on an option 3 style solution rather than gambling on an option 1, or simply forgoing coverage due to the sticker-shock of option 2.
Eric Smith | YourLifeSolution.com | 888.374.2764