And Why You Shouldn't Do It.
I had one of my favorite prospects (I really hope she becomes a client soon) ask me about how much Life Insurance she should get. She’s a pleasant and pretty woman, doesn’t intend to get married anytime soon.
Since she has no dependents, her primary desire for Life Insurance was about the mortgage that she will ultimately take, perhaps at 35 – so that her parents/siblings don’t have to take on any of her debts.
She’s presently 30 now. I do not think her parents/siblings are likely to co-sign on this lease, but you never know. It could be a particularly big mortgage that requires another owner - and another owner’s income power, by extension.
We can see the need for Life Insurance – but comes the question.
Should she buy insurance now, in anticipation of this?
Or should she buy it later, when she wants to purchase the property at 35?
For consultants, this seems like a no brainer. After all, insurance gets more expensive as you get older, right?
But what if the client
a) Fully intended to get Life Insurance, but wants to buy it according to her needs (as she should).
b) Has a Fixed Term in Mind (Life Insurance expires by a certain time), such as Insurance till 65 or a certain age?
c) We both assume that she will stay healthy, or has a policy that will allow her to purchase at standard rates
(I have opted not to use Decreasing Term Insurance for the purpose of this analysis)
A 35 year old would spend $3000 less on insurance than a 30 year old for the same value of coverage, which is pretty nuts.
The yearly increase in cost went up as predicted, but the total amount required to be paid actually didn’t.
In fact, on multiple occasions it was actually CHEAPER OVERALL to purchase the insurance LATER.
WORSE, with Time Value of Money (TVM) in place – for example, if I invested that difference early, I could also create an even more sizeable difference than illustrated above.
I thought this might be a weird outlier, so I tried it with Company X2.
Not quite as extreme as Company X, but the fact that there was even such a decrease in total price at all made it clear that this was potentially more common than expected.
Thoughts
If you think about it, this outcome could have been a reasonable assumption at some point since the duration of the Term is the same but you have less coverage years.
It's also possible that this particular anomaly could have been created since it was quoting for females.
Females have cheaper life insurance and more expensive critical illness insurance generally - but the differentials are more distinct than males. Running the exact same parameters for males resulted in the expected outcome.
My de-facto stance is simple and factual. Two Points:
Point Number 1:
The reason we buy Life Insurance is because we do not know when we will die. Obviously, the probability of dying at a young age is not very high. But the purpose of Insurance remains.
I rarely respect inexperienced consultants – especially whom I’d consider direct competition, but Young Daniel put together a very strong argument for NOT putting off your insurance.
If you are underinsured and have dependents, Life Insurance ASAP is my stance, based on facts and logic. Any cost-benefit analysis will tell you that.
Additionally, there is no guarantee (save for policies you have on hand already that provide some guarantee) that you will be able to purchase such policies whenever you 'feel like it'.
A surgery, an accident, the mildest high blood pressure or high cholesterol diagnosis – could drastically increase your premium even if you’re perfectly healthy otherwise.
Point Number 2:
Life Insurance or any related Insurance (e.g. TPD, CI) is more expensive every year. This is factually true as well, and there are no outliers. As a result, if price per year from your pocket is the most primary factor, it is always advantageous to get your life insurance earlier than later.
We’ve seen it in ILPs COI (cost of insurance) tables, and we’ve seen it when people try to buy Term Insurance once their Term expires - it doesn't end well.
READ ALSO: Some Things You Thought Wrongly About Insurance - That Could Cost You Thousands of Dollars More
Then What’s The Point of This Article?
If this is yet another article about not putting off your insurance despite me providing LITERAL DATA that actually shows that there could be financial benefits for doing so, what's the point of this article?
1) It’s Not Too Late, But Be Smart: This may seem unusual to people who hang around Financial Forums and reasonably consider themselves to be a bit more financially savvy, but there's still a lot of people who would put off the risk transference process because they 'feel' its too late.
Some of the reasons are quite nonsensical - while there are others who are clawing at nothing to get covered, there are folks that will never want to buy insurance again after i) missing a discount or a sale with vouchers in it, or ii) if their friend got it cheaper than they did.
Conversely, such research is not an invitation to put off
READ ALSO: Why Insurance Agents (and Me!) Don't Like Serving Those With Pre-Existing Conditions, Part 1
2) Speak To A Professional:
a) Budget Planning: It is NOT unreasonable to have a budget that you think may have passed, but at least allow a consultant to work that out for you before you decide.
The cost of protection is something that can be assessed mathematically. After all, insurance is designed to pay a high payout for low premiums in the event of claim.
How low those premiums must be to justify the potentially high payout is up to you.
b) Needs Based Analysis: Insurance is not a competition nor a comparison with your younger self. A needs based analysis will help to ensure that you get the proper amount of coverage for a fair price, rather than to copy your peers or to catch up with wants that you have in the future/FOMO.
c) Comparative Analysis: This article has already shown that there are factors that can result in favorable or unfavorable results for insurance applications. Toss in a few more factors like company strength, gender, smoking or other health issues - and things could be very different.
Such a complex matter can and should always be handled by a specialist.
My door is always open if you'd like to speak to me on such matters.
Money Maverick