While there are plenty of you out there who paid too much for your life insurance and believe I meant to say “the staggering cost of life insurance”, I meant what I said and I would like to again discuss the idea of staggering or layering your term life insurance.
There are throngs of unimaginative life insurance agents out there who are so anxious to make a sale that, rather than throw out a few wrinkles for the customer to think about, they recommend all your eggs go in one basket. The sale will go much quicker and smoother if they can keep a client from thinking outside the box. The problem is that it is rare that all needs fit neatly into one term length.
Let me just bounce this off of you and please, feel free to point out if I’m crazy. Let’s say you are 45 years old and you have determined that you currently need $750,000 of life insurance. You have a 15 year old child. You are loving what you do for a living and currently anticipate working until age 65, maybe 70. You own a house with a $250,000 balance on the mortgage and have 20 years left to pay on it. Your assets are growing nicely and you’re thinking by age 75, conservatively, you should be able to sustain a comfortable retirement for you and your bride.
Agent A comes along and suggests you buy a $750,000, 30 year term policy. That should cover all of those things he says. Health wise you qualify for a preferred rate, so you’re looking at $1940 annually, $173 per month.
Agent B comes along and suggests that there may be a more appropriate way to layer your insurance coverage so that it matches your needs more closely. He suggests that we look at a package of 4 policies. $250,000 of 10 year term, $250,000 of 20 year term, $200,000 of 30 year term and $50,000 of permanent coverage.
His logic? Your child is 15. While that is certainly an insurable need now, 10 years from now she will be an adult and there really isn’t a need to carry insurance for someone who isn’t dependent on you, or at least shouldn’t be. So, $250,000 of 10 year term. Your mortgage will be paid off in a maximum of 20 years, so $250,000 of 20 year term.
That still leaves $250,000 in force when you reach age 65, a point where you have already determined you are just a few short years from retirement and your assets should be peaking. Since $200,000 of that is term, if you determine you have outlived the need for it, you can drop it at any point. There is never a problem with dropping a term policy when you don’t need it.
If you kept the term in force to age 75, that would leave you with $50,000 of permanent coverage with a locked in rate to age 100 that won’t strain your budget. I discussed in a blog yesterday, “Why universal life…”, that I recommend that everyone carry some amount of permanent coverage. For most folks I think $50,000 is adequate.
Now agent B has painted a pretty complex picture here. You might be thinking that this comprehensive approach is going to bust the bank. Let’s break it out monthly. $250,000 of 10 year term should cost about $22 per month. $250,000 of 20 year term would be $36 per month. $200,000 of 30 year term should run $55 per month and the $50,000 universal life policy would be about $44 per month.
So, to layer your coverage would run $157 per month for the first 10 years, $135 per month for years 10-20, $99 per month for years 20-30 and then $44 per month for a guaranteed permanent policy.
If you go with Agent A and keep that policy in force for 30 years, you will be over insured for most of that time and the total cost will be $58,200 over that period.
If you go with agent B, you will pay $47,000 over that same 30 years and will still have coverage in force. In all fairness, if you kept the $50,000 in force to age 100 you would actually spend just over $60,000, so let’s compare apples to apples at that point.
If at age 75 you convert $50,000 of your 30 year term to a permanent policy it will run you about $181 per month. So, if you pay that to age 100 you will pay out another $54,000, for a total of $112,000 paid out for life insurance.
I think it makes complete sense. It’s the way I handle my own insurance and the way I recommend my clients consider handling their own.
This post is somewhat dated. Life insurance underwriting is changing and evolving continually. For more updated information check out some of the key word links. If you have a specific question or topic you need information for do a search. If you don’t find the answers you need contact me and we’ll make sure you get the information that is important to you.