In the first part of our discussion, we compared Term and Permanent Life Insurance. Term Insurance is cheaper but has an expiration date and gets pricier over time. On the other hand, Permanent Life Insurance is much more costly, but it lasts forever and can accumulate cash value.
I wrapped up by learning something about life insurance that made me question my Variable policy. Here’s what I found out and how it led me to request new quotes for both Term and Variable Life Insurance to see which offered the best value.
About five years after buying my Variable Life Insurance Policy, I read “Your Money Ratios” by Charles Farrell. One key takeaway was that with a permanent policy, the coverage amount is deducted from your investment account when you die before the life insurance company covers the rest. For instance, if you have a $500,000 policy and your account holds $400,000, your family would get $400,000 from your account and only $100,000 from the insurance company, totaling $500,000 – not $900,000 as I initially believed. Essentially, you might be paying for your own death benefit.
This revelation was shocking because I assumed the death benefit was on top of the cash value in my investment account, which seemed like a great deal since everyone eventually passes away. Realizing my family would get less than I thought, I immediately contacted my insurance rep, who confirmed it. He mentioned there are special policies where coverage and cash value are separate, but those are even more expensive.
If I lived long enough and grew my investment account significantly, the insurance company might end up paying nothing on my death. This raised the question: why pay for lifelong coverage if the insurance company might not have to pay out?
With this new information, I reevaluated my insurance needs and requested two new quotes for a $750,000 policy: one for a 30-year Term and one for a Variable Permanent Life Insurance Policy. I wanted a minimum of 30 years of coverage, but which would be the better financial option?
Here are the quotes I received:
– Option A) Variable Life Insurance Policy: $250 per month
– Option B) Term Life Insurance Policy: $58 per month
Let’s crunch the numbers to see which is really better. For the Variable option, we’d pay $250 per month indefinitely. The account’s cash value would grow, but remember, we’d essentially be paying for our death benefit if the account grows too much. Instead of guessing, let’s ask how long it would take to grow $250 per month to exceed $750,000 if we invested it ourselves. Assuming an 8% annual return, it would take 38.2 years to reach $750,000.
So, if you die within 38.2 years, the policy makes sense. But if you live longer, you’d be better off investing the money yourself.
For the Term policy, we pay $58 per month for 30 years, totaling $20,880, and get nothing if we don’t die within that period. However, if we invest that $58 per month with an 8% return, it would grow to $86,441, showing the Term option is much cheaper compared to the Variable plan.
Comparing the two options, we save $192 per month with the Term policy. If we invest this $192 per month over 30 years at an 8% return, we’d accumulate $286,149. That’s money you’d have missed out on with the Variable policy if you didn’t die.
Would we really have $750,000 in the account after 38.2 years of paying $250 per month with the Variable policy? Likely not, considering the ongoing fees. This is why it’s hard to consider such insurance as an investment; the high costs and fees erode returns. A low-cost index fund or ETF would likely provide better returns.
Personally, when I switched from Variable to Term insurance, my Variable policy had a cash value of only $300 after nearly five years and $7,000 in payments. Even worse, the insurance company’s exit redemption clause deducted $500 upon cancellation, leaving me with nothing.
At the end of 30 years, here’s where we’d stand:
– Option A (Variable Policy): We’ve paid $90,000 to the insurance company, which could have a future value of $372,590 at 8%. The cash value of the policy is uncertain, and in another 8.2 years of payments, we might have paid for our own death benefit.
– Option B (Term Policy): We’ve paid $20,880, with a future value of $86,441 at 8%. The policy expires with no cash value, but we’ve built our own investment portfolio of $286,149 by saving the difference.
The Term Life Insurance Policy is clearly the better choice because:
– It offers lower costs for the same coverage.
– Investing the savings from the Term plan yields higher returns.
– Life insurance should replace your working income. After 30 years, we should be retired and no longer need life insurance, making a Term plan adequate.
When I switched to the Term policy, my insurance rep tried to persuade me with a complex mix of Term and Permanent plans. I declined. Always run the numbers to see if a plan makes sense – often, it doesn’t.
In summary, buy life insurance purely as protection for your family, not as an investment. Keep it simple and ensure it provides peace of mind for those you care about.
