Life Insurance Comparison?

Full Transcript:

Did a “Financial Advisor” sell you a life insurance policy a few years back? You may want to check to see if that policy is really in your best interest. In my last video, I demonstrated a simplified calculation for determining how much life insurance you may need. Today, I want to compare two different life insurance policies.

We’re going to look at a whole life 20-pay policy and a 20-year level term policy. With these two policies, they both have a $1 million death benefit, and they both have 20 years of annual premiums. Also, both of them are quoted out for the same 35-year-old individual.

Now, let’s look at some of the differences.

The whole life policy is a permanent policy. So the coverage is designed to go for your entire life. Where the 20-year level term policy is a term policy. Term policies are more of a pure insurance policy over a set term. In this case, 20 years.

With the whole life policy, you’re building up savings within that policy. That savings is known as the cash value. Now, with the term insurance, you’re strictly paying for insurance coverage. So, therefore, you’re not building up any cash value.

Now with the whole life policy, if you choose to cancel that policy, depending on where you are within the policy life, there may be a surrender charge. A surrender charge is a fee that they take from the cash value for canceling that insurance. Your level term policy is much more like a homeowner’s insurance policy. If you stop paying, you no longer get the coverage, but there’s no additional fee to cancel.

Now, let’s talk about paying. The annual premium with the whole life insurance policy, in this case, is $15,841. Now, the same person can get the level term policy for $465 per year over 30 times less. This factor is one of the major items when deciding which insurance policy is best for you.

All right. Now let’s fast forward. Let’s go 19 years down to see where we’re at with these policies. After 19 years with the whole life policy, you would have paid $301,000 in premiums. Now, let’s assume you die at that point. At year 19, if you died, your family would get a $1 million death benefit. Now, with the level term policy, after 19 years, you have paid just under $9,000 in premiums. Now, if you happen to die at that point as well, your family would get the same $1 million death benefit.

Now, let’s go two years further. Let’s look at year 21. At this point, you’ve paid 20 years of premiums for $316,000. Now, if you died in year 21, with this being a permanent policy, you still have coverage in place. So your family would get a $1 million death benefit. Now, with the level term policy, you have paid 20 years of premiums, so just over $9,000. But at year 21, you’re after the 20-year term, so your family would not get a death benefit. In this case, the whole life policy would be a better fit.

However, what happens if we look at also investing the difference with the level term policy? In this case, you’d have an extra $15,000 to invest at the beginning of each year. Now, let’s assume that you invest in this at an average rate of return of 8%. And now let’s look at what happens after you’re 19 and then after your 21.

After 19 years, your investment account would be about $671,000. So if you happen to die at that point, your family would inherit this in addition to getting the $1 million death benefit.

Now, if we look at your 21, this investment account would have grown to about $800,000. So at that point, if you happen to die, you’re coming out ahead with the whole life policy by about $200,000.

However, hopefully, at year 21, you’re still kicking, and you have no plans on dying soon. Also, at that point, let’s say you don’t need the insurance, so let’s assume your kids are grown. They have careers of their own, and you’re in or near retirement. At that point, let’s say, hey, I want my cash value. The predicted, not guaranteed, but predicted cash value at that point with this policy is $417,000. So if you wanted to cash out and go buy a boat, you will have had just over $100,000 of interest on 20 years of premiums. So here you’re looking at over a half million dollars of growth. So you really need to see which one is the best option for you.

Now, when looking at insurance, it’s a very complex view, and your individual circumstances matter a lot. I recommend you reach out to a fee-only financial planner; this is somebody that doesn’t get paid to sell insurance, to see what is the right insurance for you.