Most people do not question the need for life insurance. Life insurance is typically purchased if you owe another person or love another person. It is really no more complicated than that.
Love: For a breadwinner of the family, life insurance allows the surviving family the financial stability to remain in the world that has been built for them. Life insurance generates income tax free cash to provide the surviving spouse an income and surviving children an education. Life insurance also can help pay the mortgage to allow the family to remain in their home.
Owe: With a business, some of a company’s financial loss may be due to the fact that the business owes money to the deceased shareholder’s heirs.
If a key person dies, the company stands to lose financially. Bank covenants could be called; key clients could leave, lost sales could result. Finding a replacement could be an expensive and lengthy endeavor.
Wealthy people own life insurance to pay estate taxes with discounted dollars. Why pay the estate tax with $1 when you can pay it with $.02.
The real question is how to best purchase life insurance. Let’s start with an analogy. If you ask most people if they would prefer to own or rent a home, the answer would be to own. Why? Because of the economics. Rent is pouring money down the drain, paying someone else’s mortgage. With renting, you do not gain an asset or participate in any potential appreciation. At the end of your rental term, you are left with cancelled checks and not much else. And you need to start searching again for a roof over your head.
So why do most people rent their life insurance? Because they want to write a check for the least amount needed.
But what if you could hedge your bet and get a second and third bite of the apple? One innovative solution is a product that provides the opportunity to receive back up to 100% of premiums paid at the end of either the 20th or 25th year should you determine that insurance coverage is no longer needed. At the end of the 20th year, the policy owner is notified in writing of the opening of a 90 day window to exercise this benefit. If not exercised, another 90 day window will be available at the end of the 25th year.
This provision offers purchasers an exit strategy should needs change. And the only cost is use of money on the differential between the return of premium policy premium and the term premium.
Take an example: A 60 year old male needs $5,000,000 of life insurance for 25 years. The cost for term insurance is $46,264/year while the investment for the 100% refund of cost of insurance is $68,280 per year. A savvy CFO will take the differential in cost between the two products ($22,016) and assume a use of money factor (e.g.: 6% gross rate of return in a 30% Fed/State tax bracket, net return of 4.2%). Since 100% of the premiums are recovered, the cost of the insurance is the lost interest (loss of use of money) on the premium differential of $431,135 over 25 years. At the end of 25 years, the cost of term insurance has been $1,156,600.
To sum it up, purchasing the low cost term insurance ends up costing the buyer $1,156,600 vs. recovering $1,707,000!
Why rent when you can own and recover all of your costs?