One of the tasks on our 2008 to do list is to buy more life insurance. We both have small life insurance policies through work, but we have decided that we would like at least $750,000 coverage on each of us. We decided on $750,000 because we have @$657,000 in mortgage debt. If either of us died the other would be able to pay off the mortgages on all of our real estate and would not be forced to sell in a bad market.
For me a 20 year term life insurance policy of $750,000 would have an annual premium of $705 ($14,100 total cost). For Mr. Sam, he would have an annual premium of $557 ($11,140 total cost). The upside of term life insurance is that its pretty cheap and you can get a lot of up front protection. But the down side is that term life insurance only provides a death benefit and only during the term (in this case 20 years). You pay, in our example $25,000+, but if neither of us dies in the next 20 years we don't get any of that money back.
I think of life insurance as just insurance so I've been more in favor of simple term policy. Mr. Sam doesn't like the idea that we don't get any of that money back so he wanted to consider whole or some variable life insurance product.
Accordingly, we met with a very nice life insurance agent that came recommended from a friend. We looked at a blended life insurance product that provides an immediate $700,000 death benefit. This product is really an investment product with a cash value and a dividend, etc. plus the death benefit
The annual premium for this product is $5000 a year (for both of us $10,000 total).
At the end of 10 years, after $50,000 in premium payments the policy has a cash surrender value of $45,736.
At the end of 20 years, after $100,000 in premium payments the policy has a cash surrender value of $152,343.
At the end of 20 years, after $150,000 in premium payments the policy has a cash surrender value of $356,789.
After 30 years of premium payments the death benefit also starts increasing. At 40 years of premium payments ($200,000), the death benefit is $1,046,800 and the cash surrender value is $741,500. After 50 years at age 86 (my grandparents are in their mid 80s), the death benefit is $1,678,700 and the cash surrender value is $1,405,400 based on premium payments of $250,000. This is just for one of the two policies, we would have about $3.3 million in combined death benefits.
One benefit of life insurance is that the death benefit passes tax free to the beneficiary and there are also ways to structure the policy so that it falls outside an estate.
There are a lot up upsides to the insurance product that we discussed with the agent, but the big down side is the annual cost ($10,000 a year for both of us). We could buy the term insurance for under $2000 a year and invest the remainder $8000 in an IRA and I wonder whether or not we would come close to the cash surrender value. According to a simple calculator if I invested $333 a month ($4,000 annual) for 50 years with a 6% interest rate I would end up with $1.2 million which isn't too much less than the cash surrender value for one policy. Clearly we would not have the $3.3 million in death benefits, but we should have other monies to leave to our heirs.
Thoughts, what would you do??