Financial FICTION #8: Term insurance is less expensive than permanent insurance for the same person

Financial FICTION #8: Term insurance is less expensive than permanent insurance for the same person

You may have heard again and again that term insurance is less expensive, compared to a permanent version of life insurance, but I’m here to tell that information is inaccurate. Please bear with me as I walk you through the intricacies of this issue.

The cost of life insurance – and by this, we mean pretty much all life insurance – is based on a mortality table that factors in several items, including an applicant’s age and health. Insurance companies, having been around for a while, seem to have noticed that, generally speaking and all things being equal, the probability of someone dying (and therefore requiring a benefit payout) increases with time and age. As a result, in reality, the cost of life insurance increases (yes, goes up) for EVERYONE in America each year as they age.

Please do not doubt that last statement because the premium payments you make to your life insurance company remain level every year. That’s a method the insurance companies have devised to keep things simple for policy owners. Notice also that your life insurance premium is not the same as your cost of insurance. What actually happens is that when you contact an insurance company to purchase, say, a 10-year- term-life policy, their computers add up the (increasing) cost for each of those 10 years. The total amount is then converted into equal monthly, quarterly, or annual payments based on your preference.

Now think about this: if you want a policy for 20 years (as opposed to 10 years), would or should the cost be the same? To answer this question, I just requested a quote from a life insurance company on a fictitious 35-year old female with a death benefit amount of $200,000.

• The monthly premium will be $16.72 for a 10-year-term.
• But if this very same female wants to keep that policy for a 20-year-term, instead, her monthly payments will increase from today (Day 1) to $24.64.
• She cannot pay the 10-year rate of $16.72 for 20 years. Pretty interesting, isn’t it?

Here’s the thing, this payment difference could be attributed to only one factor: the cost of insurance increases every year. That’s just an indisputable fact!

Let me ask you a very important question. If the premium payment for a 20-year policy is higher than that of a 10-year policy for the very SAME individual, what would be your guess/expectation about the premium on a policy that would provide permanent coverage for you for the rest of your life, until the day of your certain death? Higher, of course. Our 35-year old female would have to pay $53.08 a month for such a permanent policy. Given the facts as we know them, would you consider this to be expensive?

To restate: All insurance has the same cost for the same individual. The reason premiums differ is the length of time an individual needs that protection. Expensive is a very loose term that gets tossed around a lot, but in this instance, it’s just wrong.

You may be wondering, if that’s the case, then how come almost every financial advisor, media, and finance personality preaches otherwise? I’ve been wondering exactly the same thing. But then, on the other hand, it may very well explain why the overwhelming majority of Americans, at the end of their working lives, wind up in an inadvertent cycle of poverty. If you plan your finances around myths, what can you expect as a result?

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Contact Laser Financial Group TODAY to schedule your complimentary, no-strings-attached session with a financial professional who can help you determine which type of insurance policy makes the most sense for you and your family. 301.949.4449 or LaserFG.com.