Time is of the essence – Part 2 (Insurance Play)

In my last part of this series, I shared my view about “How Compound Interest can do Magic on your long term savings and even make you a millionaire in just $500/month before retirement if you start by age 25. Time is truly in control of our destiny.

Here is my next case which will also show taking age advantage reaps better rewards in a long term .

Life Insurance

I know as soon I say Life Insurance, oh yeah I want to have one. It is one of the topics which we always want to procrastinate next to making a Last WILL. I always recommend people to consider at least a small policy if you love your family.

I need to share a funny fact about Life Insurance. “You are never going to use a life insurance policy that you buy on your own life. After all, you will be dead when the policy pays out. Life insurance is therefore a gift that you give to someone else”

I am strong believer of protecting your Family first when it comes to emergency. The sole purpose of the Life insurance is to protect your family and other people who may depend on you for financial support when you die and not you. Life Insurance is a way to make your family safer when you suddenly disappear from this world. If you die, the people that are dependent on your financial support will lose that income, so life insurance can help cover some or all of that loss depending on the policy you choose.

But there are instances where life insurance can be beneficial even if you have no dependents, such as your desire to cover your own funeral expenses avoid putting that burden to your relatives.

If you couldn’t help anybody while you are alive, at least you shouldn’t bother anybody after you leave this world. That’s my 2 cents. So depending on your status, you either need a Life Insurance immediately or sooner. But sooner the better who save you some pocket money is my argument.

Who actually needs life Insurance? How much coverage they need will be covered in future posts. Let only stick to the point of finding out how buying a life insurance early and going long might save money you lot of money? Lock-in rates early and go long

There are different types of Life Insurance. I am only referring to Term Life at this point. Term life insurance rates are really at good and affordable.

Let say you are at age 35, good health and non-smoker. Most likely you will fit in the category of Preferred Plus rating which is highest rating given by insurance guys for an individual with clean health. You plan to take $500,000 term life insurance policy for 10 years. You might end up paying around $15-20/month. But if you just delay it, 10 years, the rate might double or triple the amount for another 10 years which is just waste of money. Check the table for different ages which clearly shows that if you buy it early you might be able to lock in lower rates.

Age 10 year
35 $185
45 $475
55 $994
65 $1575

One more thing, lot of insurance agents will tell you buy the cheaper 10 year policy and then buy another 10 year term when the first one runs out. Some companies even offer this strategy as a policy option they call “re-entry”. The problem with this re-entry policies is that you face all the medical and insurability issues over again. Some might say, you don’t need to do medical again but you never know the company policy at that time. If your health condition changes you may not get a new 10 year policy for the price you think.

And how much would you save anyway? Is it really worth taking a chance? Using the same health status for the 35 year old, a 45 year old can buy a 10 year policy for $475 and a 55 year old can buy a 10 year policy for $994. Let’s compare that with the 20 and 30 year policies:

Age 10 + 10 + 10 20 Year 30 year
35 $185 $385 $556
45 $475 $385 $556
55 $994 $556

Is this really a risk worth taking?

You endup paying more after 10 year and still more after 10 more years depending upon your health conditions. But if you buy 30 year premium today, the preferred premium of $529 is locked in for a period of 30 years. Check out the overall price savings, just doubling current 10 year premium prices for every 10 years. For 30 years, 30 * 556 = $16880 For every 10 years, 10 * 185 + 10 * 925+ 10 * 2000= $31100 It just double may be more taking the inflation and everything into consideration.

The 30 year level term policy cannot be changed by the company. You are safe for 30 years. But on the other hand,
if your medical condition gets bad after 10 or 20 years, you might not able to buy insurance or it might cost way too high to afford. It makes absolutely no sense trying to save money buying a 10 year policy. The added risk just isn’t worth it. I like to insist in a Texas way, Big&Hard truth is to lock your rates pretty much when you are young enough by going long which is the best strategy for long term. I will touch on savings for Kids education early in my next part 3.

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