Cost Of Term Life Insurance At Age 70 – Many people wonder why buying term life insurance is better than whole life insurance. Many people have explained this
I think these are good points, but I think it can confuse us and take us away from the main question of why we should choose term life insurance over whole life insurance.
Cost Of Term Life Insurance At Age 70
Before starting the discussion, I need to briefly explain the difference between term insurance and whole life insurance because I understand that there are people who are unfamiliar with this type of insurance.
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Term insurance is insurance that you buy for a specific period of time. This term can be 5 years, 10 years, 25 years or up to 99 years. Insurance companies allow you to specify the term within the limits they allow.
By purchasing term insurance, you are insuring a specific health risk. For example, you buy $1 million in term life insurance that covers you until age 70. The health risk is that in the event of your untimely death, your dependents, such as your wife and children, will be able to rely on insurance proceeds and be less likely to face financial hardship as a result of your passing. life.
Term insurance has no remaining cash value. This means that if you quit after X years, you won’t have any money left to pay.
The premium payment term can increase over time, decrease over time, and remain the same throughout the term (term level). Some policies have a fixed premium, but the plan can be renewed for x number of years, after which the premium will change.
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In contrast, whole life insurance, as the name suggests, is a type of insurance that covers you for your entire life. Remember, the goal is to protect you for life. Although the name refers to whole life, some whole life insurance policies last up to 120 years of age.
A basic whole life plan includes life insurance and you can attach insurance companies to it to cover disability, critical illness, TPD, failure.
You can choose to pay the premium for life (for example from age 25 to 99) or choose a limited premium payment period (pay for 10, 15, 20, 25 years and then no longer have to pay. The shorter the term, the higher the premium higher insurance each year)
When you pay insurance premiums, they are transferred to an investment fund called a participating fund. Participating funds are managed by the insurance company, often in a conservative manner.
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The reason you buy insurance is to prevent health risks. There are many different health risks such as the risk of hospitalization, the risk of cancer, organ failure, hitting your head against the wall, and dizziness that makes you unable to work.
If a person dies prematurely, his or her dependents will bear the financial burden of:
Technically, there is a third option – buying a mixture of both (but we’ll get to that later).
Let’s call him John. John will be 41 years old on his next birthday. John doesn’t smoke and earns $40,000 a year. John has a wife and a baby boy on the way.
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While your wife is working, your income will be lost, which will be used to cover expenses and save for retirement.
This will also create more stress for the wife. Without his income, the wife will also have doubts in her mind about how to manage life while working and taking care of the children.
A smart way to show love and responsibility is to buy life insurance for John to fully cover his income and some of his outstanding debts.
Assume that the family has no outstanding debt. This means we don’t have to set aside a certain amount of money through our insurance plan to pay off debt.
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The reasonable amount of protection that John must pay is equivalent to 25 times his current income.
If John dies at any time during those 25 years, his wife will have 25 years’ worth of income to cover his share of future household expenses. At least his son and wife won’t have to worry much about it.
25 years is a reasonable estimate until his son becomes less dependent on his wife. By then, his son will be productive and able to contribute income to the family.
If your income is higher, you will need a higher level of insurance. If your dependents were previously rated as less dependent, reduce the number to 25.
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This rule of thumb is not rocket science. If you use MoneyOwl’s insurance tour, it will give you roughly the same conclusion.
Note. If you want to account for income inflation, the sum insured can be higher. Going back to the same example, John would need $1.46 million based on an inflation rate of 3% per year.
John has two main ways to receive $1 million in insurance: buy life insurance with a term of at least 25 years or buy whole life insurance.
For whole life insurance, John can purchase a limited payout term of 10, 15 or 20 years. After completing the premium payment, he will become the owner of the whole life insurance policy.
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If John chooses the term option, he will try to cover his life until he is 70 years old. John chose to be conservative, aiming for age 66 when his son would be economically productive.
If John chooses whole life, he can choose term payments and receive whole life insurance.
The whole life option looks good because the plan pays out $1 million for his whole life. However, insurance costs increase from age 65 to age 70. After this period, the likelihood of death increases with age. Because the probability is higher, insurance costs naturally take into account this higher probability.
I was able to get premiums for a 41 year old non-smoker for both term insurance and whole life insurance of varying terms from the insurance company.
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For clarity, I have excluded all subjects such as critical illness, early critical illness, but only included TPD subjects. I believe we should consider each insurance risk separately and not lump them all into one rojak.
I can set payment limits on my whole life insurance policy at 10, 15, 20 and 99 years.
However, there is a reason. You are insured for life from 41 years old to 99 years old. This is a longer warranty period than the 70-year warranty. Insurance costs for the period after 70 years are much more expensive.
To have enough insurance, John must spend nearly half of his salary on insurance. A 10 year salary cap is not an option at all as it is higher than his salary!
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These are mandatory payments that John must make. If John doesn’t arrive on time, he will lose his insurance.
John will wonder how he can spend money on household expenses and save for other financial goals if 47% to 104% of his salary is spent on insurance.
The term option will cost John less than 4% of his annual salary. This will leave a large cash flow that can be spent on his expenses and saving for retirement.
And remember: John needs more than just life insurance, he still needs to cover disability and critical illness income.
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If John chooses an option similar to life insurance, he will likely have to spend a large portion of his salary on insurance.
Some people may comment: Keith, that’s an unfair comparison, we need to respect the other benefits of whole life insurance.
I think we often spend time debating a different aspect of the term than whole-of-life comparisons, which takes readers’ attention away from why they’re buying insurance.
John’s main concern is to ensure that his family passes away early so that his family has enough insurance for the period of time he needs.
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If he spends too much on insurance, he will have less money for current spending and future financial goals.
If we focus on this, let’s calculate the cost of insurance to get this coverage at least until John turns 66:
Regardless of which lifetime option is chosen, John will have to spend 12 times more on insurance until his son is economically productive.
For example, if John wants to insure $1 million before age 70, he can choose basic coverage of $200,000 with a 5x multiplier.
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In my opinion, hybrid whole life policies are an admission by insurance companies that they do not provide adequate whole life coverage.
If whole life insurance were effective in adequately solving the insurance problem, hybrid whole life insurance policies would not exist!
I encourage you to ask yourself why you are buying insurance. If that’s the protection… why would you pay more when you have the ideal option of paying less?
The purpose of insurance here is to prevent the risk of premature death at a time when you really need it
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