Insurance Maze Blog

Nov 26

Term Life Insurance-Is It Really The Best Insurance Buy?

Category: Life Insurance post

November 26, 2007

“Buy term life insurance and invest the difference” - that is what all financial guru’s (not in the insurance business) will tell you. If you want to guarantee that your life insurance policy is in force the day you die, term life insurance may not be what you want.

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Having spent many years in the insurance business, I can honestly tell you that there is no “always” answer in buying life insurance. Each individual need and insurance goal is different and the life insurance programs must be designed accordingly.

Let’s assume for a moment that you are a 40-year-old male in excellent health and you do not use tobacco products.

You want to buy $250,000 in life insurance and your insurance agent has presented you with two insurance proposals:

20 Year Level Term @ $26.46 per month
Universal Life Product @ $166.35 per month

Well, right away, you see a difference of $139.89 per month in insurance premium, so you buy the 20 Year Level Term policy with the intention of investing this premium difference and totally replace the need for this life insurance policy in 20 years.

Here’s how you do it:

Starting with $0 and depositing $140 monthly over 20 years (at a rate of return 24.5%, compounded monthly and taxed at your marginal rate of 28%), you will save $254,215.

Initial balance: $0
Total deposits: $33,600
Total interest earned: $306,410
Total taxes paid: $85,795
Total Saved: $254,215

So, if you can find an investment that will guarantee you a 24.5% return, you could eliminate the need for this $250,000 life insurance policy, at a cost of $85,795 in income taxes. The total difference in insurance premium over the 20-year period would only have been $33,574. Had you purchased the UL product, at the end of 20 years you would just continue to make premium payments and the policy would remain in effect for the rest of your life, provided all the terms and conditions of the policy were met.

Now, 20 years have passed and you are now age 60. You have a couple of choices:

Renew the term life insurance policy

The premium for this term life insurance was guaranteed to remain level for a 20-year period only. To renew the policy, your insurance premium will now be approximately $408.00 per month and will increase on an annual basis.

Buy a new life insurance policy

Remember, you are age 60 and there will be a significant increase in the premium and you may be limited in the number of years’ coverage you can buy. Is your health condition as good as it was 20 years ago? Can you actually qualify for a new life insurance policy?

Please remember three very important points about life insurance:

Never buy life insurance for cash accumulation only.
Before you buy any life insurance policy, decide how long you want to keep it.
There is no “always” answer

Both of these hypothetical examples are underwritten by MetLife Investors USA (20 Year Level Term & Guarantee Advantage UL). The premium is based on a male, age 40, at the Preferred Non-Smoker rate. The investment calculation was made by using the Savings Calculator found at MSNMoney.com and we in no way attest to its accuracy. This example is for informational purposes only.

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