May 26, 2015

Is This a Good Deal For Whole LIfe Insurance?

I saw an add in a local news paper offering whole life insurance policies for $10,000 of benefit.   The policy is marketed to people 40-85 years old and talks about paying for your funeral.    The premium rates cited didn't seem too bad to me.  The rates for men and women are listed in the table below for the $10,000 benefit.

This is just the $10,000 benefit.   I've used the best case scenario as far as life expectancy for the age group.  So by that I mean that for the age 45-49 I used the life expectancy for the 45 year old and rounded up.   Life expectancy data is from social security site.

45-49  $  32.50  $  27.00 34 38  $13,260  $12,312
50-54  $  36.00  $  30.00 29 33  $12,528  $11,880
55-59  $  45.00  $  37.50 25 29  $13,500  $13,050
60-64  $  55.00  $  42.00 21 24  $13,860  $12,096
65-69  $  66.00  $  51.00 18 20  $14,256  $12,240
70-74  $  89.00  $  69.00 14 16  $14,952  $13,248
75-79  $121.00  $  98.00 11 13  $15,972  $15,288
80-85  $166.00  $139.50 8 10  $15,936  $16,740

The first set of columns on the left is the monthly premium.   The middle are the expected life expectancy.   The right hand columns are the total amount you'd pay over the average life expectancy at the given premium cost.

If you simply put the cash into savings the average person would be ahead by $2000 to $6000.

For example then if you're a 58 year old woman you'd pay $37.50 a month and the average life expectancy for your age group is about 29 years and I'm summing it up as a total of $13,050 paid over that term.   $37.50 x 12 months x 29 years = $13,050.  

OK but I figure the net present value (NPV) of that at about -$4500.     That isn't good.   Also if you simply take the $37.50 a month or $450 a year and invest that money at just 4% you'd have a total around $25,200 after 29 years.

You can see the total amounts paid in are lowest when you get coverage at a younger age.

The policy does advertise "no medical exam" and "no health questions".   If your life expectancy is below average then this insurance could work out for you.   If you're in poor health or have a family history of significant illness then you could face a lower life expectancy than average.  

This isn't a bad policy as far as whole life goes.    But the average person will come out way better on average if you simply dump money into a savings account.


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