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Three Ways to Pay for Life Insurance - No Equity
Sunday, 24 November 2013 12:57

There are many ways to pay for Life Insurance, here are three alternatives that are not designed to build cash values.

Let's examine a hypothetical example on a male, age 35, that doesn't use any form of tobacco, and has average health, normal weight for their height. Face amount of the life insurance policy is $1,000,000.

Strategy:   Rent Lifetime Lease  Own After 30 Years 
Inital Premium (monthly)  $73 $678 $783 
Total Premiums, Age 65 $704,837 $244,080 $281,880 
Total Premiums, Age 95 $8,812,966  $488,160  $281,880 

What are the life insurance policies used for these three "strategies?"

Rent:  This is a 10 Year Level Term Life Insurance policy, that is guaranteed renewable to age 95. Premiums increase annually after the initial 10 year term period. As you can see, the premium is very low initally, but by the end of 30 years (age 65), the 10 Year Term policy costs more than the Lifetime Lease or the Own After 30 years strategy. This solution works when the need for Life Insurance coverage is temporary, or the ability to pay a premium is limited.

Lifetime Lease:  This a Universal Life policy, with a No Lapse Guarantee Rider. What this means to you is that as long as the premiums are paid on time, this policy is guaranteed to stay inforce until age 121, and the premiums are guaranteed to stay the same all the way to age 121. Essentially, this is Lifetime Level Term, or Lifetime Level Protection, and the policy has negligible cash values, and no cash values in later years. It is not an investment or savings vehicle. As you can see, the cost during the first 30 years is lower than the Rent strategy, and also lower than the Own After 30 Years strategy.

Own After 30 Years:  This is a Universal Life policy, with a No Lapse Guarantee Rider, with guaranteed level premiums for 30 years, and coverage guaranteed to age 121. No premiums are required after 30 years, much like a 30 year traditional mortgage. As long as the premiums are paid on time, the policy stays inforce to age 121, and no more premiums after age 65. Essentially, this is Lifetime Level Term with Guaranteed Limited Payments. Once the 30 years of premiums are paid, the policy owner will own this policy outright, just like one owns a home after the mortgage is paid up. This policy has negligible cash values for the first few decades, and no cash values in later years. It is not an investment or savings program. As you can see, the Own After 30 Years strategy costs more than the Lifetime Lease during the first 30 years, but less than either the Rent or the Lifetime Lease over a lifetime.

The obvious objection raised by people who think that paying Rent is the only viable option, or that Term Life Insurance is the only alternative for everyone, is "What about 20 or 30 year term?"

Here's the same analysis, using 20 Year Term instead of 10 Year Term:

Strategy:   Rent, 20 Years Lifetime Lease  Own After 30 Years 
Inital Premium (monthly)  $109 $678 $783 
Total Premiums, Age 65 $316,088 $244,080 $281,880 
Total Premiums, Age 95 $8,714,697  $488,160  $281,880 

As you can see in the table above, the Rent strategy costs slightly more intitially that it does in the first example, and while the total cost by age 65 is lower than the first example, that total cost over 30 years is still more than the Lifetime Lease, and more than the Own After 30 Years strategy. Remember, we're not talking about cash values, and we're not talking about using life insurance as an investment, or retirement savings program. The topic here is soley about the cost of coverage over a lifetime.

But what about 30 Year Level Term Life Insurance? Here's the same analysis, using 30 Year Term instead of 20 Year Term, with one additional line for total premiums by age 75:

Strategy:   Rent, 30 Years Lifetime Lease  Own After 30 Years 
Inital Premium (monthly)  $182 $678 $783 
Total Premiums, Age 65 $63,296 $244,080 $281,880 
Total Premiums, Age 75 $818,222 $325,440 $281,880
Total Premiums, Age 95 $8,461,905  $488,160  $281,880 

During the first 30 years, a Rent strategy has lower costs than a Lifetime Lease, or Own After 30 Years. After 30 years, the term life insurance policy has annually increasing premiums. By age 75, the Rent strategy costs more than the Lifetime Lease, and more than double the cost of the Own After 30 Years strategy.

Some people may not need Life Insurance past age 65, especially if they have not saved for retirement, or if they have no debts, spouse, or others who depend upon them for financial support.

Anyone that has saved for retirement using an IRA, or employer sponsored retirement plan like a 401(k), 403(b), or 457 plan, AND they desire to pass on their savings to the next generation, may find that they still need Life Insurance. Why? Because all those dollars in an IRA or tax-deferred retirement plan are taxable upon death. While there are options to spread those taxes out over a few years, the one thing we know for certain about taxes is they are very likely going to go up. It is impossible to predict what future rates will be with any certainty, and there is no guarantee that the existing options to spread out those taxes will exist after the next election.

Also, if you are eligible for a pension, and you're married, then you may also want to keep some Life Insurance coverage after retirement. Why? Because when a married person pulls the trigger on their pension, they have a tough decision to make. They can accept the maximum monthly pension amount, disinherting their spouse (this usually requires the spouse's signature), or they can accept a much lower monthly pension with a survivor benefit for their spouse. Any election that provides a survivor benefit for a spouse is like buying life insurance at retirement age, which it is much more expensive than it was when one was working.

Finally, a lot of people over the age of 65 still carry a mortgage balance, or have other debts, like car loans, credit cards, and even student loans. Life Insurance may still be necessary.

If the benefits of Life Insurance are still needed after age 65, or for more than 20 to 30 years, then Term Life Insurance may cost a lot more than permanent Life Insurance alternatives. This is where a professional life insurance agent can help you make the best decision for your situation using the financial planning process.

If you want to work with a professional life insurance agent, then I would like to apply for the job. Call me today at (800) 680-5596 and leave me a message, or send me an email by clicking  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 

Brent D. Gardner, CLU, ChFC