This is certainly in the top 10 questions I get from clients considering what product will best serve their life insurance needs. When I explain that a 10 or 20 year term is really not designed or priced to go beyond those guaranteed periods I usually get the stock, “So I’m betting I’m going to die and the insurance company is betting I’ll live” line.
First, let me put that line to rest. Of course the insurance company believes you’re going to live. If they didn’t, they wouldn’t issue the insurance. Try to keep the focus that term life insurance is not about whether you are going to die (because we all do eventually), but rather is there a chance that you will die prematurely? And more importantly, will you die while there is still a need for the life insurance? In spite of companies like New York Life who don’t believe there are temporary needs for life insurance, the truth is that the larger amounts of insurance in our lives aren’t covering permanent needs. We do outlive them.
So, what happens if you outlive your term insurance? Well, job well done! You’re still around and you were able to provide insurance against the possibility of your demise during those years it was most needed. And you did it in affordable way. Do you get a prize? Again, you’re still around. That’s pretty cool stuff. This is way better than car insurance where you pay the premium and if you don’t use it, all you get is a used car with no repairs.
For those who just can’t get over the idea of spending money to protect their family and not getting anything back, there is always a permanent insurance like universal life or if you agree that the need is temporary, a return of premium term insurance policy. Again, I’m not convinced that the majority of life insurance needs are permanent so we’ll leave that discussion until another time.
So, if you can afford it, having your cake and eating it too with term insurance can be done through return of premium products. It is as simple as it sounds. When you get to the end of your 15, 20 or 30 year term, you get back all the premiums you’ve paid in. Keep in mind that while this sounds attractive, it comes with a glitch. The premium you pay is much higher than what you have to pay just for the insurance. I ran quotes on a customer this morning whose $500,000, 15 year term price was $875 annually. A $500,000, 15 year return of premium policy was a little over $2900 annually.
If you can safely budget 3 times as much money, and don’t feel like you can do better investing the difference on your own, this may be a way to consider. The gentleman I was providing quotes to this morning asked why anyone would buy straight term insurance when they could be guaranteed their premium back, and the honest answer is budget. I think it is always, and especially in these economic times, very important to buy what you can safely budget.
Bottom line. There is nothing wrong with having nothing at the end of your term insurance policy. You’ve done a good job and you’re still are around to enjoy the family you’ve protected.
When I plug your scenario into a spreadsheet I come back with a rate of return on the extra premium of 4.4%. That would be a tax free 4.4% for 15 years.
Just remember that you would be locked in for 15 years to recoup your investment. If you lapse before 15 years you get a very small portion of your premiums back and a substantially smaller return.
I like the way you inform and educate first, before taking a position.
It’s best to help inform people about the meaning of life insurance, as well as their options, instead of pushing a certain plan.
I agree with you about term life insurance providing protection, and if you outlive the term, it’s a job well done.
Why not be happy you protected your family, and you lived beyond the term of your policy?
I guess people just need to understand that yes, you do need to pay for life insurance. Life Insurance companies are in business to make money, just like any other for-profit business.
Very true. Term Insurance has a lower initial cost; however the premiums only stay the same for a stated term – and the cost increases in a dramatic fashion after the term ends. If you don’t renew it your coverage ends and your premiums are gone. By contrast the initial premiums for a Permanent Insurance are higher than Term Insurance but your cost remains level. So it’s worth thinking twice before you sign the contract.
As long as that permanent insurance doesn’t include whole life, I agree, it’s worth study. But please folks, don’t insure temporary needs with permanent insurance. Is anyone out there buying permanent car insurance?