Plan along with me: My life insurance

by Nick on August 1, 2010

In my first plan with me entry I mentioned that I have 30-year term life insurance for ten times my gross income.  In short, the reasons for the amount and that term were because I believe that amount invested conservatively could get my family through long enough for my son (and any second or third children we may have) through college age.  And my plan is to be self-insured by that time.  If I thought my wife and I were done with children I probably would have chosen a 20-year term.  I also could have chosen two policies:  one 20-year term for five times my salary and one 30-year term for five times my salary. 

If went with the two-policies I would have ten times my annual salary for the next twenty years.  Then the first policy would expire and I would have the last ten years of the 30-year term policy worth five times my annual salary left.  This probably would have saved me a little money (and under my plan I will be at least half-self-insured (i.e. I will have five times my current annual salary saved within twenty years to replace the first policy)), but I had it in the budget and paid a little extra for the higher amount and just in case my plan took a little longer to develop.  It’s safer and simpler too.  And I tend to be a little conservative when it comes to setting things up for my family if I pass away early.  More on that later.

But what were my other life insurance options?  There are two general types of insurance:  Term and Permanent.  Each of them has a few options.  But the general characteristics break down to this: 

Term expires after a period of time (the “term”) or if you stop paying the premiums.  The options with term are generally with the length of the term.  There are some variations of term (i.e. tied to a mortgage), but the point of my insurance was in case I passed away, so I didn’t consider those. 

Permanent does not expire (unless you stop paying the premiums).  Permanent life insurance is generally more expensive than term (because as long as you pay the premium there is no way for the insurance companies to avoid paying the amount and they generally have other compenents to the policy in addition to the insurance (i.e. a cash value component)).  There are many variations of permanent life insurance, but here is a little bit about the two main categories:

  • Whole life:
    • Characteristics
      • level premium; cash value; death benefit; no set expiry date;
    • Pros
      • if the policy is in effect your family is virtually guaranteed the death benefit;
      • known and fixed premiums;
      • ability to cash out for the cash value if you no longer need the policy; ability to borrow (if that’s a pro…) from the cash value;
    • Cons
      • cash value interest is low generally;
      • you generally lose the cash value upon death (the insurance company gets it – your family only gets the death benefit);
    • Bottom line for me
      • I didn’t feel that I needed insurance for longer than thirty years.  To get ten times my salary in insurance for a whole life policy my payments would have been prohibitively high.  In the end, I felt I would have to sacrifice too many other parts of my plan to choose this.
  • Universal Life:
    • Characteristics:
      • different premium options (fixed, level, flexible);
      • cash value accumulates;
      • death benefit;
      • no set expiry date;
    • Pros:
      • generally more flexible than whole life;
      • generally no policy lapse if paid as required (see Cons below);
      • ability to borrow (if that’s a pro…) or withdraw cash value;
    • Cons:
      • expensive;
      • complicated (one complication is that it is possible that a greater-than-planned premium is required if the interest actually earned is less than estimated at the time of policy);
    • Bottom line for me:
      • This was also too expensive for me too to get the death benefit I wanted over the next 30 years.  And I would rather build my own cash value with more investment flexibility than in life insurance.  We’ll talk about investing later.  Perhaps if I thought I wanted to be insured for longer than 30 years I would have considered whole or universal.  But that wasn’t the case.  I actually met with a saleswoman who tried to convince me that it would be the best investment of my life.  There were many “ifs” and caveats in the pitch – too many for my liking.

So there is my experience.  “Ifs” do not belong in life insurance in my opinion.  So I went with something simple.  30 years.  Level premium.  Guaranteed to renew ofr 30 years as long as I keep paying.  Ten times my gross salary.  Highly rated company.  And I invested the difference between the premium for term and permanent (and then some) separately.

Does anyone feel different?  I have a friend with a whole life policy who loves the “security” of knowing that as long as he pays his premium (that he budgeted for) an amount exists for his family no matter how long he lives.  He doesn’t have to worry about saving or investing separately (other than for use during his lifetime).  It helps him sleep at night.  It’s worth it to him.  It wasn’t to me.  I believe that my family will have at least ten times my current salary no matter when I pass away either through my term policy or the “SAFTM Life Insurance Policy” (i.e. my savings from living a simple lifestyle and saving and investing).

Until next time, slowly put the credit card down and step away from the mall!

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