Fred and Barney are the same age and in good health. They both need the same amount of life insurance protection and they both have discretionary income. Fred is a saver and Barney is a spender.
As a saver, Fred doesn’t like to rent things-he likes to accumulate. Since he’s already saving it makes sense to own his policy. He redirects some of his savings toward the annual premiums for the coverage he needs.
Barney’s a spender. He chooses to rent his life insurance. He could afford to pay the higher cost of owning but accumulation isn’t urgent right now. He wants to rent his life insurance. He rents his policy for a 25-year period.
Nobody wants to pay insurance premiums. If you don’t like them now, however, they’re going to be even more unpleasant when you’re older.
Look at the difference 25 years later:
Fred’s not paying the premium anymore. The coverage will last for his lifetime, and the possibility of his needing to pay any premiums in the future is remote at best. In addition, the cash value in the policy exceeds the premiums he’s paid by a large amount and has created a stable pile of cash that’s available to him if needed.
Barney’s not paying premiums anymore either. That’s because the 25 years are up. If he no longer needed the insurance (a scenario I seldom see) he’ll be fine. If, however, he needs to continue the coverage, he’ll be paying substantially higher premiums for the rest of his life. Those premiums will ultimately be a drag on the quality of his retirement.
The right solution depends on your time horizon and your perspective. Ultimately, the beneficiary isn’t going to care. As long as it still pays off when it’s needed, the policy did its job. The question is – at what cost? If they both die in the same accident, it looks like this;
In the first ten years, Barney’s been ahead by a lot. His total out-of-pocket is way less than Fred’s.
In the next ten years or so, Fred gets back all his out-of-pocket costs and now begins to pull ahead. From then on, there will always be more money on his balance sheet (cash value) than he’s paid into the policy. His total acquisition cost will fade and become a distant memory. More importantly, (to the beneficiary) the policy will always outlive Fred.
After year 25 it’s no longer a contest. Fred will always be happy and satisfied with his original decision.
Barney’s situation is different. As long as he has to maintain the coverage, Barney’s acquisition cost will always be increasing. At some point, (we see it frequently) Barney will encounter a fork in the road. It usually begins with, “I didn’t think I’d live this long,” or “I didn’t think I’d still need the insurance.” Going forward, either direction Barney chooses will be painful. The decision will be based on which of the two roads is less painful.
Okay – here’s the disclaimer. Fred and Barney’s story is a generalization. The details won’t change the trajectory it describes. Accurate details will, however, identify the best solution for each person’s particular needs.
A good review will lead to a good result. The best kind of review leads to the best kind of result.
Please do yourself a favor and seek out the best review you can find.
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