Everybody struggles to reduce and eliminate costs. A cost is an unrecoverable expenditure of money. Most insurance premiums are costs. They’re usually wise expenditures—shifting huge risks from you to a multibillion dollar insurance company. But they’re costs never-the-less. If you don’t have an accident, a fire, a hurricane, a medical bill, a disability, etc., the premium was a pure, non-recoverable cost.
Term life insurance is just like most other insurance. If you don’t die during the term, i.e., prematurely, the premiums are gone forever—non-recoverable costs. Permanent life insurance, on the other hand, is totally and fundamentally different.
Accidents, fires, hurricanes, and premature death are totally unpredictable, but ultimate mortality is 100% certain. So, permanent life insurance, maintained in accordance with the policy’s terms for life, is 100% certain to produce a return. The only uncertainty is the rate of return.
We know that in the event of a premature death, the rate of return will be astronomical, but what happens if the insured lives to a ripe old age? How does the return on permanent life insurance compare to other safe assets if the insured lives to life expectancy, or beyond? We’ll use tax-free bonds for the comparison. (At the time this article is being written, tax-free bonds are yielding approximately 3.75%.)
A healthy 65 year old male preferred non-smoker can purchase a $1,000,000 universal life insurance policy with a guaranteed premium of $21,910*. As long as each premium is paid on its due date, the premium and death benefit are both guaranteed for life. The only variable is how long the insured lives.
The Social Security Actuarial Table, Updated July 9, 2007, indicates the life expectancy of a 65 year old male is 16.33 years. Let’s round that up to 20 years or age 85. If instead of this insurance policy, he put the $21,9101 per year into tax-free bonds, they would be worth $659,613. That’s $340,387 less than the insurance benefit!
Let’s assume the insured lives beyond life expectancy to age 90. The bonds would be worth $915,428. That’s still $84,572 less than the insurance benefit! In fact, if the insured dies any time before his 92nd birthday, his family would get less from the bonds than from the insurance benefit, probably lots less. So, in my mind, permanent life insurance provides protection in the event of premature death, and a good return if I live to a ripe old age—win, win.
From the standpoint of maximum wealth delivered to the next generation, doesn’t permanent life insurance look like “special” tax-free bonds with “free” term insurance? That’s not a cost. That’s an asset. Owning permanent life insurance is an asset allocation decision.