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Life Insurance - To Surrender or Not


BG2008
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Back in 1992, my family bought me a whole life policy.  After 22 years, I realized that the cash surrender value is only $15,420.  Annual premium was $664 for a face value of $100k.  Cover has gone up by about $21k.  Adding in the actual cost of buying term life insurance over the years, I figured that the CAGR on this only about 2-3%.  This makes me wonder, an insurance product is basically a term life policy plus putting that annual premium towards investments.  While I am not confident about a lot of things, I think I can do better than a 2-3% CAGR a year.  To mimic the current policy, it seems to make sense to synthetically create this life insurance product.

 

1) Turn in the policy and take the cash surrender value

2) Buy term life insurance for $100K

3) Invest the cash surrender value and compound at a rate higher than 2-3%

 

Had the investments been compounding at 10% in the last 22 years, the cash surrender value should be $45k now.  Being a value investor, it seems like I should synthetically create this product rather than continue to burn $664/year.  The checks I will write in the future will be the term life policy premiums.  I believe these policies are supposed to be paid off within 10-15 years, the investment should have compounded enough to pay for the annual premiums so that they are self sustaining going forward.  However, the low interest rate environment has made this nearly impossible. 

 

Am I missing anything? 

 

 

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The cost of term insurance goes up significantly as you get closer to your probable date of death.  You won't be able to renew at $664/year in 10 years time.

 

He could buy a longer duration term life policy. We bought a 25 year term policy, just before my wife had a child. I figure that should last until he is done college, and since we'll have our home/rental properties paid off well before then, plus 25 years of compounding on investments, life insurance will no longer be necessary. So the cost of renewing at that time is irrelevant, as I wouldn't do it.

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After 22 years, I realized that the cash surrender value is only $15,420.  Annual premium was $664 for a face value of $100k.  Cover has gone up by about $21k.  Adding in the actual cost of buying term life insurance over the years, I figured that the CAGR on this only about 2-3%.

I think this number is mostly irrelevant to determine if you should exit; what matters is what the value of the life insurance policy is today based on factors such as your health, the average death probabilities for someone if your age/gender group, discount rates and other factors. Can you replicate your current life insurance policy with the same payout, term and annual premiums?

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The cost of term insurance goes up significantly as you get closer to your probable date of death.  You won't be able to renew at $664/year in 10 years time.

 

He could buy a longer duration term life policy. We bought a 25 year term policy, just before my wife had a child. I figure that should last until he is done college, and since we'll have our home/rental properties paid off well before then, plus 25 years of compounding on investments, life insurance will no longer be necessary. So the cost of renewing at that time is irrelevant, as I wouldn't do it.

 

It's still the same consideration.  The last 5 years of a 25 year term policy is much more expensive to insure than the first 5 years. Depending on how old OP is, he may not be insurable for a 25 year term.

 

You probably didn't see much difference between a 10 and a 25 year term policy when you were shopping around because you are so young.  The chance that you die before your sixties is really, really low. (Lower even because I can deduce that you are relatively wealthy because you are on an investment board.)

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This question has been around ever since term insurance became popular.  the only pure insurance is term insurance as you allude to.  I'll bet your carrier has all kinds of options for you to convert partially or fully to term.  It would be interesting for you to find out how much protection your cash value could buy in a lump sum term policy as one of the conversion alternaTIVES. 

 

Once you have a nest egg large enough to support your family you don't need life insurance except possibly as an inheritance tax avoidance measure later in life.  My thinking is if you are a disciplined saver then whole life as you've discovered is not a great deal.

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You probably didn't see much difference between a 10 and a 25 year term policy when you were shopping around because you are so young.  The chance that you die before your sixties is really, really low. (Lower even because I can deduce that you are relatively wealthy because you are on an investment board.)

 

Absolutely, as an under 30 year old person, life insurance for me is really cheap. Your deduction about my relative economic status is accurate enough that I'm extremely unlikely to have any need for life insurance after the expiry of my current policy, so I don't care what it costs then.

 

Also, the compounded value of the difference in premiums (which was substantial) exceeds the death benefit by the end of the policy. So for me, buying term and investing the difference has only the potential downside of me not achieving a rate of return equal to the current medium bond rate if I don't die in the next few decades. It might be hubris, but I'll take that bet.

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