Michelle and I are taking some great classes at church (FPU) and, armed with this knowledge are looking to get some new life insurance as we currently have none. Zero. Nada.
Turns out when she went part time the school district dropped her coverage, and didn’t bother to mention that detail to us. So, like good grownups we’re now looking to get ourselves covered in the event of the unthinkable.
Dave Ramsey makes a great case for a term policy over whole life. It’s cheaper and if you wisely invest the difference you’ll end up way ahead in the end. We called an insurance broker and he has found some rates for both 20 and 30 year term for us and also mentioned something called “Return of Premium” where you get all the money you paid in back (if you don’t kick the bucket first). At face value this seems like a great idea… I pay $65 per month for, say 30 years for a $500,000 policy, then I get a big fat check back at the end of that if I’m still around. Return of Premium policies are more expensive, though (40-100% more from what I can tell). So, a similar regular term policy would run me around $45/month for the same amount of coverage and years.
So is it worth it? Here’s the recent quotes. I’m just going to list mine (and not Michelle’s) to keep things simple:
A. 30 year term (with Return of Premium): $767 per year
B. 30 year term (Normal): $545 per year
Difference: $222 per year
OK, I’m no financial guru by any means, but it seems that if I go with plan A and give an insurance company $767/year for 30 years, that equates to a total of $23,010. So in 30 years, I’ll be 61 and get a check (tax free) for $23,010.
If I go with Plan B and pay $545/year for 30 year (a total of $16,350) and invest that extra $222 somewhere I might be able to do better. At least I’ll be in control of my money and it won’t be tied up with an insurance contract. Not to mention that if I die before the 30 years is up, all that extra cash paid in Plan A disappears in to the insurance company’s pocket rather than going to Michelle and Davis.
So, if I invest $222 each year into a Roth IRA mutual fund earning an average of 9% over the 30 years, I end up with around $30,260 (assuming it earns no more or less than 9% every year). After taxes are taken out on those earnings I have $24,345. Since its in a Roth IRA, as that money is growing over those 30 years I have access to what I put in (after 5 years)… so that I could tap it if needed (rather than it being tied up with an insurance company).
Our insurance broker argues that while more money is made going the Plan B route, those investments are not protected from market fluctuation, lawsuits, bankruptcy, etc. while the return of premium “guarantees” I get all the money I put in back. But my issue is that the $23,010 I get back won’t really be $23,010 after inflation (using this inflation calulator at 3% inflation per year it’ll would be worth more like $9,227!). So, I will have just given an insurance company extra money to invest and I don’t get to share in any of those extra profits. Return of Premium seems more like burying that money in a mason jar in the back yard than any sort of sound investment strategy.
Am I missing anything here or are return of premiums just another way for insurance companies to make money?