Why buy term life insurance?

     Young couples with families need life insurance to provide an “instant estate” to support the family should a breadwinner die.   Purchasing “cash value” life insurance which builds up an investment fund which eventually replaces the life insurance allows for a premium cost (what you pay for the coverage) that stays the same for a long time, sometimes forever.  Part of your payment pays for coverage; the rest goes into a savings account that builds up and takes the place of part of the coverage.  A $500,000 policy with $100,000 cash value “costs” the insurance company only $400,000 of it’s own money for a death claim.

    Life insurance rates are all based on life expectancy, so ALL policies cost more as you grow older.  Term insurance charges you the lowest rate initially, and then the premiums eventually rise.  Cash value insurance in it’s various permutations (whole life, universal life, variable life) involves a level cost over time, and a cash value that replaces the death benefit; e.g. as it grows, you get back partly your money, and partly the insurance company’s money.

     My strong opinion is that life insurance policies are NOT good savings vehicles.  For most young people (that’s younger than me, and I’m 53), buying term insurance to protect their family, and then investing in serious, professionally-managed investments will result in eventually reaching the stage where the investments fully protect the family.

      For example, take Tom, a 33 year old with a family.  Since he is a nonsmoker and in good health, Tom can buy $750,000 in coverage for about $48 per month, with the premium locked in for 20 years.  Since that is a fraction of the cost of cash-value insurance, Tom can invest seriously in his employer’s 401k plan.  (If this was not available, he could invest in an IRA, Roth IRA, or any number of retirement alternatives.) 
If Tom can put away $979 per month, and earn 10% per year, he will have $750,000 accumulated in 20 years.  However, since his children will be “almost grown” in 20 years, Tom’s life insurance needs might decline by then.  If he can put aside $653 per month in his 401k, he can accumulate $500,000 by age 53. 

      Whether half or three quarter million, it doesn’t take the sharpest middle-aged man to realize that real hard cash money in a retirement account is significantly superior to the same size life insurance policy with 1/3 or ½ as much cash value.

     If we assume that Tom saved the $653 per month and accumulated the $500,000 by age 53, if he continues with this plan until he is age 61, he will have over a million dollars in his 401k, sufficient to pay him, conservatively, about $55,000 per year for the rest of his life.

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