General Question

Snoopy's avatar

Term Life Insurance: When to buy?

Asked by Snoopy (5793points) September 30th, 2008

Are there references (e.g. tables) to help determine at what age/circumstances is the best time to buy? The rates go up as you age, but your family is less likely to make a claim (i.e. due to your death) the younger you are…..

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11 Answers

augustlan's avatar

Before you become ill, or gain too much weight.

Seriously though, as soon as you have children, or a spouse that relies on your income. You are certainly less likely to die at a young age, but if you did, your young family would be more likely to need the money.

shilolo's avatar

I bought term life for myself and my wife as soon as my wife and I were considering having a child. We are equal partners in our marriage, and generate the same amount of income, so it was reasonable to have insurance on both of us. The younger you are, the cheaper it is since you should be healthier, but it does mean paying for a longer period of time.

IchtheosaurusRex's avatar

Here are some figures for you. These are based on a typical, $250,000, 30-year term policy with a conversion provision:

Male, nonsmoker, preferred risk (no health problems)
Age 20: $460/yr.
Age 30: $505/yr.
Age 40: $840/yr.
Age 50: $1885/yr.
The plan in question can’t be issued past age 50.

As you can see, there isn’t much of a rise in rates between ages 20 and 30, but the longer you wait after that, the more prohibitive the premium becomes.

I would recommend a traditional whole life policy for a younger person instead. The premiums are higher, but they build cash value that can be redeemed when your kids are out of college, and the premium never increases. Dividend-paying policies can be reinvested to increase the plan’s face amount over the years.

Avoid Universal Life policies, they make money for agents at your expense. If an agent mentions any product with the word “Variable” in its name, run out of his office.

Snoopy's avatar

Thanks to all who have answered thus far. Sigh. We will likely get it….it just is a pain to fork over more money for something else. The dumb thing (on our part) is that we pay for car insurance, home owners insurance etc. w/out any difficulty…but haven’t done this one yet….

We just keep (foolishly) telling ourselves “well if you die, I still make enough to support the family….so why bother?”

shilolo's avatar

I disagree with respect to buying a whole life policy. You are paying for an investment vehicle that gives very poor returns. Many people buy them because they don’t know how to save, and believe this is one way to do it (much like the people who overpay their taxes only to be “psyched” when they get a big fat return from the IRS). Term life is much cheaper (also, I got term life until the age of 60 since I started buying at in my 30s).

mderr2400's avatar

I also disagree with whole/universal life, primarily because returns in this economy are going to be abysmal…that’s why the mantra, “Buy term and invest the rest”. In this economy, it’s best to keep your excess income (or any, for that matter), close to home. A few years back I purchased some term life insurance and was very pleased with their prices and process—that would be a good place to start.

IchtheosaurusRex's avatar

@shilolo, @mderr2400, it is illegal to represent life insurance as an investment vehicle. The purpose of buying an insurance policy is to leave something behind when you die. The cash that accumulates in a whole life policy has the effect of reducing the insurer’s risk as you age, which allows the premium to remain level until the plan is paid up – after which you still have insurance, but you don’t have any more premiums. The fact that you can use the cash at some point is secondary to this purpose.

I mention this because a lot of people outlive their term insurance policies and cannot afford to renew them once the term expires. At a minimum, you should have enough life insurance to pay off your final expenses, so they don’t have to come out of your family’s pockets. Probate takes time. Life insurance pays immediately, with no tax consequences to the beneficiary.

If you buy a plan with a modest face amount, e.g., $25,000, when you’re young, the rates will be low, and in all likelihood, the plan will either be paid up or have enough dividends to pay its own premiums after 15 or 20 years – sometimes less. Then you put it in your safe deposit box and forget about it. If you live to be 100, whole life still pays on your death. For most people, a combination of plans is the best strategy; you buy a small whole life plan and supplement with term as a hedge against dying young.

I don’t sell life insurance for a living, but I do work in the industry, and I can run numbers. In fact, I run these numbers every day, and they cut through the conventional wisdom quite convincingly. Most financial pundits compare the internal rate of return on a whole life policy to the difference between WL and term premiums invested in equities, typically at a 10% rate of return. Then they compare the cash value of the policy in 20 years to the market value of the securities, and declare the insurance policy to be trash. What they don’t talk about is what happens to you when your 20 year term policy has expired, you have emphysema, and you’ve got two kids in college.

When you think life insurance, you don’t think about what it will pay you after 20 years, you think about what it will pay your hiers on your death.

Snoopy's avatar

Ich Thank you for answering this question. It was always my understanding that one should by term insurance.

Please see my example below and please comment….

I presume that the policies you are describing are similar to a policy my in laws purchased for my husband as an infant.

I posted these number on another question:

“My in laws paid just under $500 for the policy. Current value is approx $2600.

If we cash it in, we would get $1200. We would then have to pay taxes on $700 ($1200 – what they paid/$500)

If I cash it in whenever hubbie dies (assuming I precede him in death, obviously) I get the $2600 (or whatever the current value is—-). No tax implications.”

“Further…..I just figured this out on an investment growth calculator

If they had taken that money and invested it at 8%, that money would be worth $8800 today.”

From this question:

Obviously the value will continue to increase over time.

If the policies you are suggesting are similar to this, then they don’t seem like a great investment.

Ich, what am I missing?

IchtheosaurusRex's avatar

@snoopy, if you can tell me (feel free to PM) how old you are and your general health, I will run some numbers for you tomorrow AM. I don’t think the policy your in-laws bought is a very good one. A $2600 death benefit for a single premium policy purchased at birth for $500 seems ridiculously low. A $500 single premium policy from my company would have an initial death benefit of $5,200, and a death benefit of $18,600 at age 65. The cash value of the policy at that time would be$10,120. If held to age 85, the death benefit would be $31,500 and the cash value would be $25,900. These are real numbers, from a real product. I can’t tell you the name of my company, but the numbers are typical for a participating WL policy. I can tell you more about what all that means if you’re interested.

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