Not knowing anything else about your situation, as a general rule, you should keep it. Do you know when it becomes fully paid-up?
Term insurance isn’t for everybody.
It was ideal for me around age 30. I had a parent who was dependent upon me for partial support, so if I died, the parent would suffer. I also had very few worldly goods, so if I died, there wouldn’t be much of an estate.
So I contacted my friendly neighborhood insurance agent and asked for a quote on 5 years of term insurance. Although the quote was good, he showed me his rate book and
I found another policy for less. When I asked him about that one, he said, “Oh, that’s the young executive policy. It’s cheap at first, but at age 35, it jumps up significantly, so you don’t want that.”
It was exactly what I wanted. At age 35, I planned to cancel the policy anyway, thinking I would have accumulated enough assets to not need life insurance any more. It worked perfectly.
I just keep paying forever. If I don’t, then it’s cancelled.
It’s never actually paid-up. I just keep paying until the day I die.
I figure that since 1980 I’ve spent $10,000 (just a rough guess).
At the time it was a good deal through the military. I actually think the insurance is thru Prudential.
I probably could have changed it after I got out of the service in '88, but I just continued it. And just keep paying my yearly thing.
I don’t even need $75,000 worth of insurance (especially since most of my family is dead), and I’m single with no estate. But I want to leave something to my younger sister and her daughter (my niece). That’s pretty much my family.
As a note: There is only a 30-day grace on the policy. If I miss it, it is cancelled. So I have auto-pay every year for it.
A few points:
Those cheap rates are only for the young and healthy, and only for a limited time, as the word “term” implies. There’s no way you’d be paying the same cheap rate for fifty years, as you suggested in the OP.
A young and healthy person will probably not die within the limited term covered by the policy.
Most companies require a medical exam to determine the health of the insured. Mine showed that I have a condition that means I cannot get the cheapest rates. So I can get term life insurance, but I have to pay substantially more.
^This.
Person A is 25yo & in good health. He can get the rate advertised on TV for, say a 5 yr policy. If he wants a 10, 20, or even 30 year policy, the rates will be higher for the same coverage. Further he will be required to truthfully answer a number of questions on the application - does he use (any form of) tobacco? Does he drink/how much? Does he engage in any risky occupation/hobby, including flying &/or skydiving, etc.?
Also, any coverage over a base amount will require some testing, a physical &/or blood work. Any box on the app that you checked off with a “Y” or any issues in the testing & you won’t get that rate but a higher one &/or there will be an exclusion - it won’t pay out if you die in a private plane crash if you stated that you’re a private pilot. With certain medical conditions, they won’t give you a policy.
If you’re 25 yo & single; you only need enough coverage to not be a burden to your family for funeral expenses, probably only $10,000 or so. OTOH, a general rule of thumb for someone with a young family is 10x salary. If you’re only make poverty level income, you’re talking a $250,000 policy.
Not only that, but some policies include an “accidental death and dismemberment” rider where the payout is signficantly higher in case of accidental death.
I imagine the company will try to argue that a specific death is NOT accidental, of course, unless it’s clear cut. I mean, it might have been carelessness or deliberate negligence on your part that caused you to walk down that sidewalk the day that piano was dropped on your head, right? (or more subtly: what if you’ve got a broken leg from a car accident, and you’re not moving around enough, and you throw an embolism a week later? The immediate cause of death would be the embolism, but the real cause was the car accident)
I think others have said it better but yes, as a younger person, you’re less likely to die in general, and likely to terminate the insurance for one reason or another as you get older. Our insurance coverage is becoming prohibitive (we’re 59 years old) and is going to jump again this coming year; we’ll be looking at reducing it some over the upcoming years.
If the rate increases as you age, it’s more like term than whole life. I’m not as familiar with the name “permanent insurance”.
I have one policy that my parents took out when I went to college, 40+ years ago. It’s about 125 a year for 10,000 in coverage and there’s some kind of cash build up - about 5,000 or so. If I were to quit paying on it, I think I could get the 5,000 back. It has not risen in the 40 years.
I have a 100,000 policy that was converted from my employer’s group term insurance 16+ years back. The term insurance was a much larger amount, but converting that to a whole policy would have been about 18,000 a year in premiums. OUCH!! For a number of reasons, I couldn’t get term insurance with the new employer right away, so I just slashed the balance to 100K. I’m paying about 1800 a year which is steep but is at least building a cash balance. It hasn’t risen since I took out the policy either.
400 a year, for 75,000 in coverage, sounds like it’s in line with what we’re paying for a group term policy nowadays - that jumps every couple of years.
Permanent life is a generic term for policies including whole life and universal life, which carry a cash value. **TheCuse **should be getting annual statements indicating the residual cash value. I can’t account for the change in the premiums every 10 years or so, but these types of policies can come in different flavors.
Most financial planners advise against these because they muddle investment with life insurance, and the insurance company benefits. Term life is clearer and more transparent.
TheCuse, you may want to get with your insurance agent to review your needs. If you are still working and have dependents, $75K of coverage may not be adequate. Term life is just as easy as what you are doing now. Life insurance is to replace your potential future income for your dependents if you are gone, and most people can expect to earn more than $75K in their remaining working years. (I have done some research into life insurance over the years but IANAFP–get professional advice).
Also, the policy you have does not sound like a bargain. I had a universal life policy with National Life of Vermont for $75,000 and was paying $108 per year until I let it expire at age 51 when the cash value went to $0. From ages 39 to 59 I had a term life policy for $500,000 for $635 per year (20-year term). I now have another term life policy that costs about twice as much per amount of coverage because I am older. I will probably drop the policy when I retire.
(Emphasis added.)
This is incorrect.
There is a paradoxical thing about life insurance: I and the insurance company are hoping for the exact same outcome.
The insurance company is hoping I do not die before the end of the term. Likewise, I am hoping I do not die before the end of the term.
I and the insurance company want the exact same outcome.
An analogy is buying smoke detectors for your house. Even though you spent money for them, you are hoping they’re never needed.
Well, it’s no more paradoxical than any other insurance. Insurance is hedging the risk of a bad outcome, not betting that the bad outcome will happen. In general, the likelihood of a bad outcome (car accident, house fire, etc) is somewhat under the control of the insured party, so no insurance company will insure a risk if there is reason to believe that the insured party wants the bad outcome to occur. They won’t over-insure property for more than its value, for example; and contracts won’t generally pay out against proven deliberate acts. And this is also part of the reason for the existence of deductibles. It’s an underlying principle of all insurance that both parties want the same outcome, otherwise actuarial statistics don’t mean much.
Agree.
My main point of contention was the use of the term “betting.” When betting or gambling, the two parties are wishing/hoping/praying for different outcomes. This is not the case with insurance, obviously.
Yup. There’s a loose sense in which it’s similar to (professional) betting, inasmuch as it involves estimating the true probabilities vs implied probabilities of outcomes. We might do that in trying to judge whether an insurance price is good value. But the analogy doesn’t go very far. We don’t generally take out insurance because the expected return is positive - if it were, the insurance companies would go out of business. We take out insurance in situations where the potential loss would be large and devastating, and we do so knowing that the expected return is small and negative. And there’s a clear implication from that - in general, don’t insure small risks where you can easily afford to take the hit.
Your use of the word “interest” suggests you think they’re just putting the insurance premiums in a bank CD someplace. They’re not. Instead, they invest the money, in stocks, real estate or whatever else they can find that is a good investment. In his annual letter to the shareholders of Berkshire Hathaway, Warren Buffett calls this money “float” and describes how it lets the company invest at a very low cost. Some years the cost of this money is one percent or even negative. In 2001, it was almost thirteen percent, because the payouts after 9/11 were so large.
But factoring in other profitable things they might choose to do with their cash is irrelevant to any analysis of the economics of insurance risk. Compounding at a suitable interest rate is the rational measure of that. It doesn’t make sense for an insurance company to write policies with an expected payout above the rate at which they can borrow money.
This thread made me take a look at my life insurance, which is 20 year term I started a few years ago when I was 33. The total premiums I’ll pay over 20 years only add up to about 1% of the death benefit.
But according to those actuarial tables, I should have a ~6% chance of dying between 33 and 53.
I can think of a few reasons (nonsmoker, average weight, educated, married, etc.) why I might be a better actuarial bet than the average 33-year-old, but that seems like a big gap to make up. Do 6+% of 33-year-old men really not make it to 53? What am I missing?
You are likely missing the investment income made off the premium payments at the beginning of the 20-year term. At least, the way you wrote your post makes me assume you just summed up the total premiums rather than use something like the FV() function in Excel.
Although it still seems a bit off since I would only expect the total value of your payments at maturity to maybe be twice what you calculated, not 6 times. I’m guessing non-smoker in good health covers the rest of it.
True - and I assume TheCuse’s policy is the sort where they have to continue renewing as long as he pays the premiums. Some term policies don’t have guaranteed renewals - or perhaps they jack the rates up if they think you’re more of a risk than other people the same age at renewal.
A universal policy is sort of a hybrid of term and whole. You’re paying a bit more, and that builds cash value, and I gather that could in theory be used to fund the premiums (I had such a policy from a previous employer).
They may also be more portable - if I leave this current job, I can keep the same universal coverage. The rates would go up quite a bit, but still likely cheaper than if I tried getting a new policy, as I’ve developed some health conditions an insurer wouldn’t like.
AND, term policies often have an, er, “drop dead date”… after which they go away. My husband has a policy through a professional organization, that disappears when he turns 70. Now, at 70 we shouldn’t need much at all - though in our situation we may keep up the universal policies - if at a reduced value - simply because we have special needs kids and want to leave money to help them. The universal policies do NOT go away at any age, though the premiums become prohibitive.
Two nuances to policies: it IS possible to have a “paid up” policy where either it’s built such a cash value that its income pays the premiums, or the up-front cost was a substantial percent of the face value. I have a policy with a face value of about a thousand dollars. My uncle, who was an insurance broker, bought it when I was born. It’s got a cash value now of about 1,600 bucks. There’s also some weird income associated to it; every year I get a 1099-INT for about 20 bucks in interest, and a similar amount on a 1099-R. It’s weird, as my two whole life policies do not send any such thing. I suppose I should find out what it’s about but the amount is so trivial it isn’t worth the hassle.
The other oddity, that some may have heard of: a “second to die” policy. It was suggested to us as part of estate planning for the kids; we wound up not doing so and in hindsight I sort of wish we had. I believe it’s a whole life policy or perhaps universal; my brother and SIL got one to take care of their autistic son, and evidently it’s doing well enough that the premiums are covered by the income. It doesn’t pay out until both people named have died, so it’s cheaper - presumably because a) the risk is spread out over two people, and b) they hope that after #1 does, #2 will let it lapse :).
Yes, I’m not doing any kind of time-value calculation. Just my annual premium * 20.
Well if it’s half what you think it would be, then I guess my chance of dying is roughly half what the actuarial tables say. Yay!
Time value only adds about 40% to the premiums.
Quite honestly, I have no good explanation for why your premiums are so cheap, other than those actuarial tables just being inaccurate. 6% does seem intuitively rather high, even averaging across smokers etc.
Life insurance is based on the law of large numbers. Death rates are fairly predictable for a large group of people. If an insurance company collects $30 and only pays out on 2% of policies, that $30 is not therefore nearly all profit. A couple claims for $250,000 eats up a lot of $30 premiums.
Some years life insurance companies lose money or barely break even. The prolonged period of very low-interest rates has contributed to making them less profitable.