Life Insurance

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?

6 thoughts on “Life Insurance”

  1. Hello Tracy,

    I appologize for taking so long to contact you about this, we have been on an Alaskan cruise.

    Here is some insight about the life insurance issue. Life insurance was never designed to be an investment vehicle, it was designed to pay a lump sum at death. The ROP term has become rather popular but used mostly for those people who do not manage their money well. I recommend you take the $222 difference and invest it in an index annuity. If you invest this $222 yourself your family will receive the death benefit from the life insurance upon death and the assets you build in the separate account. Remember, the life insurance pays the lump sum or ROP, not both. I recommend the index annuity over a mutual find because of the safety in an index annuity. With an index annuity you have the benefit of never losing money unlike a mutual fund you are subject to the ups and downs of the stock market. Some of my clients are earning 10% to 15% return on their index annuities.

    What insurance company did you get a life insurance quote from? I will be happy to get a quote for you.

    I hope this is some help to you, let me know if you need more information,

    Uncle Homer

  2. Tracy,

    Ask your broker what HE does with HIS money…Gosh, that sounded like my dad. He so would have asked that, and expected an answer, not a nervous smile.

  3. Knowledge matters. Better you make the money instead of the insurance broker. Be your own broker, it is your money. Why do you need to pay someone to tell you what to do with your money – thats what you got married for!!! Proud of you for being so wise.

  4. i’m so glad you guys are getting to take that course! …i’ve never learned so much over 13 weeks that actually stuck with me and proved so USEFUL!

    i just created this little blogspot…

    you guys are part of the inspiration!

    much love!

  5. Listen to your Uncle Homer. He deals with insurance and is a Financial Adviser.

    I just made 11% return on my annuity! i must say i was surprised and excited!!

    OK INVEST WISELY!!! It is your money!!

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