Once upon a time, there were three 30 year-old males (they could just as easily be females, but in our example they are males) that were in the market for life insurance. We’ll call them Andy, Bill and Charley to distinguish them. They were all reasonably healthy and needed $1,000,000 of coverage.
Andy had heard Suzy Orman call whole life insurance the worst investment one could make, so not wanting to be a dupe, he opted for term insurance. The policy he chose had an annual premium of $539 which was guaranteed for 20 years. Andy figured that in 20 years, he wouldn’t need life insurance.
If he indeed had no need for life insurance in 20 years, his choice would have been fine. But what if he did? Well, a new 20 year term policy at age 50 would have an annual premium of $1,969, if he obtained the same underwriting classification he received at age 30.
But if he had put on a few pounds, and/or his blood pressure was higher, and/or his cholesterol was higher (nothing outlandish, but just enough to knock him out of the preferred classification), his premium could be $3,479 at a standard classification.
However, the real problem would be if Andy still needed the coverage but had become uninsurable. His 20 year term policy could be renewed for the 21st year, but at an annual premium $6,709. Should he need the coverage for five years, the cumulative premiums for years 21-25 would be $40,545. Ouch.
Charley’s dad had told him that whole life was the way to go if he could afford the premium, and the premium is substantial - $9,510, although it would only have to be paid for 15 years at the current dividend scale.
What does Charley get for his extra nine grand a year? Well for one, an exit strategy. The cash value would almost equal the total premiums paid after ten year - $93,664. After 20 years it would be almost a quarter million ($223,332) and at age 65 over a half million ($527,979).
Another benefit Charley would have is total control over his life insurance program. The decision to keep it or surrender it, to pay the premium out of pocket or to let policy values pay it rest with Charley.
Bill would like the whole life policy but is not in a financial position to pay that big a premium. He feels the term policy has a bit too much risk for his liking. Fortunately for Bill, a new form of guaranteed universal life insurance (GUL) has recently been introduced by several carriers.
While GUL can be structured to stay in force for one’s entire life, the drawback is that since there is virtually no cash value, there is no exit strategy. The newer “return of premium” GUL policies solve that problem, to a degree.
The policy that Bill chose has an annual premium of $3,874 and while it develops no cash value, it does offer a premium refund at three different points in time. After 15 years, if Bill decides he longer wants/needs the coverage, he can surrender it for 65% of premiums paid, or $37, 770 ($3,874 x 15 x 65%).
Alternatively, he can surrender it after 20 or 25 years for 100% of premiums paid. Of course if he decides he still needs the coverage, he can keep it indefinitely with no increase in premium.
So there you have it, three different ways to solve a problem. How you solve it should depend on you objectives, risk tolerance, and cash flow. It should not depend on a lack of knowledge about the alternatives.