How to Save $246,000 on life insurance:
Although this proposition may sound prosperous, it is real. It is 100% real. In fact this dilemma is one that is faced by typical Americans almost every day. Every day consumers are asked to determine which type of life insurance to buy. This article is about how to save on life insurance.
An Example of How to Save on Life Insurance:
To make this example more real, we have created an example and used real premium quotes and actual numbers. A thirty five year old woman, lets call her Mrs Jane, needs a life insurance policy. She needs the policy mostly until her youngest child is out of the house. Mrs. Jane would love to have purchased her life insurance before she had her child, but she did not. Her child is now three years old.
She is the sole provider and earns about $90,000. It is determined that she needs about $1,000,000 in life insurance coverage.
Should she buy a Whole Life Insurance Policy or a Term Life Insurance policy?
Should She Buy $1MM Whole Life Policy or a $1MM Term Policy?
Life Insurance Options?
Option 1: Term 20 Year
Coverage Amount: $1,000,000
Years of Coverage: 20 Only
Yearly Premium: $355
Lifetime Outlay: $7,100
Option 2: Whole
Coverage Amount: $1,000,000
Years of Coverage: Forever
Yearly Premium: $8,325
Lifetime Outlay: Est till age 100 at $541,125
Therefore this client can either choose to purchase a 20 year level term life insurance policy for a total outlay of $7,100 or a whole life insurance policy for an estimated total outlay (until age 100) of about $541,125.
In the above chart it is shown that her two options: a twenty year term policy and a Whole Life insurance policy cost vastly different sums: $355 per year vs $8,325 per year.
The Benefits of Each Option:
As lop sided as each of these considerations seem each of these two options still have negatives and positives. It is not quite as simple as just looking at the premium outlay. The benefit to the lower costing term life insurance policy is really the simplicity and the low cost. A very low cost. But after twenty years the client will no longer have the life product. In the case of the whole life policy - the client will have life insurance for her entire life, which could be a good thing. However with the whole life comes the yearly premium, even through the retirement years.
Many insurance agents will attempt to point out that saving money on life insurance by buying the cheapest policy is not the best solution to a complex problem. But given the HUGE cost discrepancy - it may be hard to win this argument, especially in this situation.
Once Mrs Jane's child is out of the house and off and on her own, likely her biggest financial challenge will be saving for retirement and potential long term health care costs. If she were to die, with no life insurance, once her kids were out of the house - what is the real financial problem there? Sure it would be nice to have had a life insurance policy at her age of say 67, but is it worth given the cost?
How to Save $246,000 on Life Insurance:
Using the above example, this client can either pay $8,325 per year for whole life or $355 for a twenty year term. If she buys term she can save the remaining $7,970. Twenty years of saving just this money results in about $159,400. If that money is invested and returns a paltry 4% per year the money would accumulate to about $246,824. If she receives a higher return, say 6% then she could end up with $313,247.
Technically speaking if you look at the total lifetime savings difference vs the 20 year savings difference the client can save lots more than just $246,824.
So there you have it, the secret to saving over $246,000 on life insurance for a thirty five year female is merely to opt for a twenty year term policy. I realize that this sounds too simple, almost irrational.
However its not, the concept is completely built on a rational monetary argument.
What We Did Not Include:
Frequent readers of life insurance articles will notice we entirely skipped one item of the whole life insurance calculation: The so called "cash value" of the permanent life policy. Cash value builds over over time. Typically there will be almost no real cash value in a whole life policy for the first five years and just some in the first ten. By year twenty or twenty five often the policy begins to catch with outlays.
So technically speaking there is more to this story. However that is not the point of this article. This article was based on How you Can Save $246,000 on life insurance, NOT Where Can I Achieve the Best Cash Value in a Life Insurance Policy. Or How Can I Find the Best Return on My Investments (mind you it would rarely be from buying whole life insurance.)
So why did we skip this? Well a shockingly high percentage of people that buy whole life insurance cancel it within about ten years. Upwards of 50%. And in those first ten years almost all the money put in them are lost. Therefore to begin to consider making any money on whole life insurance, as far as an investment is concerned you need to own it, well in excess of typically thirty years or more, and this is such a small sub set of people that purchase these products - it is shocking.
Questions - How to Save on Life Insurance:
But Wait - It Can't Be That Simple!
Oh but it is that simple in many ways. It is simple math, I implore you to run the numbers yourself. It is completely legitimate to save $246,000 on life insurance for a thirty five year old woman by just purchasing a level term life insurance policy as opposed to a whole life insurance policy.
You are Assuming She is able to Save the Money Each Year:
Bingo! Yes you are absolutely correct, we are assuming that she can save the money each year. But what happens if she cannot save it and spends it? Well she fails to save the money and won't have any investment return right? However this argument cuts both ways right? If she does not have the money for a term life policy and investment than she won't have it for a whole life policy either. What happens if she can't make her permanent life payment? Especially in the first couple of years? The policy may be cancelled and she may end up in year three with no life insurance at all...
You are lying - this is One Sided
Saving on life insurance is what we do here. I am not sure how we are lying. The numbers speak for themselves. Yes there are certainly benefits of buying whole life insurance, but the costs for this product are pretty extreme. In this article we have not done a deep dive into the full benefits of either of these two competing policy types, we are just sticking to simple numbers.
This is an honest representation of how one thirty five year old woman can save about $246,000 by choosing a term product over a whole life insurance product in twenty years.
Life Insurance is Way More Complicated that This!
You are correct. Life Insurance is way more complex than this and that is precisely the problem with the industry. They have made it so complex that many people are opting not to buy any life insurance products at all. The truth is that whole and universal life are complex - term is super simple and easy to understand.
But in this Example, if this Client Buys Term Life - She won't Have life insurance forever?
You are absolutely correct. If this client, or any client really buys term life insurance they probably will not have life insurance forever. What exactly is the issue with this? The number one and two issues for most older Americans these days is a lack of retirement savings and long term health care plans. Not having to make whole life insurance payments each year frees her up to save for retirement and potentially have better long term care options. There is not much of an economic crisis going on in this country with retired folks not having enough life insurance. Yes there are situation when a couple can lose their pension when one of them dies and this is indeed a good reason for a simple life insurance backstop. However if many of these clients just saved their money they likely will not need a life policy.
But you Did not Include Cash Value!
You are correct we did not. Cash value is the number one thing that insurance agents sell with, however they are rarely the thing that clients are looking for. It is not all that dissimilar to people walking into a fast food restaurant and being sold on the virtues of steak dinner that costs ten times as much.
Yes it is true that the cash value from this proposed life policy can give the appearance of allowing the client to come out on a more even status between the term and whole life options. However that money in the cash account will be controlled partially by the insured and partially by the insurer. The insured 'may' be able to take out policy loans and 'may' be able to receive policy dividends. But this is all behind the wall of the insurance company.
But all of this is rather academic and avoids the central point. When confronted by the choice of buying a $355 limited policy vs an $8,325 entire life policy, the overwhelming quantify of Americans choose the cheaper policy. Consumers have other things to do with their money.
But My Whole Life Insurance Policy has Living Benefits, She will Not Have this:
Oh does it? What exactly are the living benefits that you are referring to? Will your whole life policy provide in home hospice care for 10 years for a long slow ageing process? Will it provide income for retirement - income that is not taken out as a loan from a whole life policy? Yes some whole life policies have riders that allow for relatively low value living benefits and this could be good. But do not confuse living benefits on a WL policy with a full long term care policy or true retirement income.
I Still do not understand How to Save $246,000 on Life Insurance:
First off, each person's exact numbers will be different given their age, insurance needs,and underwriting conditions. But the basics of it are this:There are multiple forms of life insurance, some that guarantee coverage for your entire life and others that only insure you for a given period of time. In this twenty year example - this client has saved $159,400 in cash by not spending it on whole life insurance. If she just stuffs the money under her mattress she will have the $159,400. If she invests it she could have $246,000 at a 4% interest rate.
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