All of the clients I have had who passed away and their families received death benefits really made good deals. They paid far less in premium than the pursuant death benefit.
Just some examples would be a Colorado client who paid one annual premium of $800 and his family received $100,000 when he died of colon cancer. Another client in California was insured for $1,000,000 as a student pilot. He paid in $1800 and died in a crash on his first cross country flight. His family got $1 million. A business owner paid $45,000 a year for 5 years for a buy/sell business policy on his partner. When his partner died he collected $1.5 million and per their agreement paid the deceased partner’s family for their half of the business.
It goes on and on. Life insurance payouts almost always dwarf the amount paid for the coverage, but not always. I have a client who was just approved for a $1 million dollar universal life policy. He’s an older gentleman with a few health issues and the premium is $53,000 a year. He has that level premium guaranteed to age 100. At that time the payments stop and the death benefit goes on to age 121. But at age 78 that means he will have paid in $1,166,000 in premium if he lives to 100. Premiums paid more than the death benefit? That kind of sucks.
In this case there are some offsetting circumstances. It is a trust owned policy for the purpose of paying estate taxes so you really have to look at more than just premium paid and death benefit received. Having this policy in a trust allows him to not include the insurance in his estate which will decrease the size of the estate by $1 million. His heirs then get the $1 million income tax free to pay the remaining estate taxes.
Even when it’s not estate tax protection it is worth considering the fact that the death benefit is income tax free. I know. It still kind of sucks. Personally I would like to see it be against the law for an insurance company to charge more than the face amount of the policy. I believe that once the premiums equal the face amount, the premiums should end for the balance of that life insurance contract.
Whether it is a 10 year term policy or a universal life policy, no premiums beyond the death benefit.
Companies would argue that those few people that pay more than the benefit offset some of those I described above, but that’s not really an accurate argument. What offsets the losses that an insurance company has when it pays off after only a few years of premium is the fact that somewhere around 97% of term life insurance comes to the end of the term and lapses or lapses for some other reason with no death benefit paid. For those very few that pay more than the death benefit, it’s truly like the company saying, “We gotcha”. After paying in $1 million is a person going to lapse the policy and get nothing or overpay and ensure their family gets the $1 million death benefit.
Guaranteed issue life insurance is priced so that it pays for itself usually in about 7 years, sometimes 8. So if this person that couldn’t get insurance any other way lives 10 years they are not only paying through the nose for the illness, but also overpaying for the benefit their family will receive.
Bottom line. This is the kind of stuff I wake up thinking about at night. My Dad had a New York Life policy that was taken out when he was 17. The death benefit was $7500. He paid $15 a month for it for 70 years until he died. New York Life collected $12,600 in premium and paid my Mom $7500. Don’t you think that ought to be against the law?