Life Insurance Analysis

Term life insurance. Get some. Buy it cheap. As cheap as possible, and use the rest of your money for more attractive investments like stocks and mutual funds. The primary question: Is term the least expensive option? Obviously, if you knew you were going to die early the term premium is the way to go since your're paying as little as possible for the death benefit. However, probability dictates that most people will live to at least age 65, with an even higher probability if you are a white-collar worker. Knowing this provides the realization that it makes sense to plan on living to a much older age.

It might also pay to look at the true cost of term insurance. Some individuals convert the term to permanent insurance, and many just drop the coverage all together. This means that after many years of paying premiums, the consumer receives no monetary benefit in return. Not only have you lost those premium dollars, but you've also lost what those dollars could have earned. Forever.

Let's take the case of a 35-year-old male, who is purchasing a $500,000 term policy. He would pay a premium of $410 his first year, going up to $4810 per year at age 65. The total premiums, paid over those 30 years are approximately $74,000. However, the true cost is also the interest we could have earned on those dollars. After all, the insurance company is certainly investing those premiums for a profit! Assuming an 8% rate of return, those premiums would have grown to approximately $198,000. That is $198,000 of lost wealth that we have just transferred to a financial institution instead of enjoying ourselves in retirement.

Unfortunately, the wealth transfer does not end there. If we live to the age of 80, the insurance company has had our money that entire time. The $198,000 of lost opportunity costs at age 65 would have grown to approximately $628,000. That's right. We have in essence given the insurance company $628,000 for $500,000 of term insurance! Term insurance is not cheap!

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