Sample Product Problem

Suppose a person, 30 years old, purchases a 20-year term life policy with a guaranteed annual premium of $395 for $500,000 of coverage from a certain life insurance company. This premium may appear to be low cost, but there are other important facts to consider before making that conclusion.

The total premium cost over the 20 years is $7,900. At the end of the 20-year term period, the policy has no cash value upon termination. Therefore, these term premiums provided only protection but no cash value. Since term premiums provide no cash value, he should consider what the time value of money will be on term premiums paid if he/she lives beyond the term life insurance period.

In our example above, if he/she had invested the $395 for 20 years at his hypothetical net investment rate of 10%* (such as in his Roth IRA), it would have grown to $24,886 by age 50. Therefore, the term policy has a premium and time value of money cost of $24,886 and not just $7,900.

The client above planned to cancel the death benefit of $500,000 at age 50.  Therefore, if the client were to die at age 51 or thereafter, the family could incur additional costs such as income taxes, estate taxes, probate fees, court costs, legal fees, accounting fees, and possibly a forced sale of a business or other asset. Where these costs are likely to occur in any significant amount, a permanent life insurance policy may be the more appropriate choice or better alternative. 

The estimated total costs of your individual term or group life insurance policy over your lifetime can be calculated. If appropriate and where needed, we will show you strategies designed to help you acquire an equivalent amount of permanent life insurance coverage at no additional out-of-pocket outlay for premium.

*For illustration only; does not represent any specific investment. Each consumer's long-term net savings or investment rate establishes the rate used for the time value of money.