First and foremost, I am very proud of you for taking the step to look at Life Insurance, but if you’re getting just started, you’re probably at a complete loss for where you should even start. I know that I was, but I settled on short term life insurance for myself to set my family up for success.
Previously I wrote a blog post about term life insurance and the importance that it can have on your life. If you’re completely new to looking for life insurance, start there. I go over a lot of the basics and the fundamentals to help you make an educated decision.
Insurance isn’t just insurance in this case. The worst thing that you can do is to just sign up with any sort of life insurance and then your family not be setup for success as well as you thought they were going to be. And the worst part is that you’re obviously not going to be there to be able to do anything about it.
At a high level, there are two types of life insurance – whole life and term. Whole life will give you life insurance for your whole life and term gives you life insurance for a certain time period, usually between 10 – 30 years.
In general, the younger and healthier you are, the cheaper your insurance is going to be. So, whole life is more expensive than term because by nature you’re going to be paying the same rate the day you get the insurance as you will when you die 50+ years later. Term, on the other hand, is going to be cheaper the younger you are, and also cheaper the shorter the time period on the insurance is.
For instance, if you’re 30, a 10-year plan will be cheaper than a 30-year because when the plan is up, you’re only going to be 40 instead of 60 with the 30-year plan, so the chance of you dying is naturally much lower.
I found a pretty good chart from NerdWallet that shows the differences in the rates for both men and women for various ages, and then compares them for whole life and term life insurance.
As you can see, the younger you are, the cheaper your insurance is. And the shorter the term, the cheaper the insurance is. And if you want whole life, you’re going to be paying about 5X – 10X as much as you would for term insurance. That’s a big swing!
So, why do financial gurus love short-term life insurance? Well, it’s simple really.
Essentially, it’s a two-step process:
- Buy short-term life insurance
- Invest the rest
I know that seems super simple…but that’s because it is. Let me lay out a scenario for you…you’re a 30-year old male and you want to have $250,000 life insurance for the rest of your life. You have two options – you can either pay for whole life insurance, which according to the chart above is $2,145/year, or you can do a combination of term life insurance in investing.
Let’s do both and see how thigs land! So, the two scenarios are this:
Whole Life Insurance – I am going to pay $2,145/year for $250,000, from ages 30-100 (when I die)
Term Life Insurance and Investing – I am going to take out a 20-year term life insurance plan and pay $150/year. I am going to then invest the remaining $1,995/year ($2,145 whole life insurance cost – $150 term life insurance cost) that I would have and get an 8% return on my money (Stock Market average is over 10%).
Once I hit 50, my term life insurance will end. I am then going to get another 20-year term life insurance plan and pay $465/year. That means I’ll have $1,680 leftover to invest ($2,145 – $465) and I will still earn 8% on my money. Rather than going year by year I grouped the chart into 5-year periods to help it fit better.
Let’s see how it shakes out!
As you can see, with the Whole Life Insurance plan, I will pay $2,145 every year and will always have that same $250,000 in coverage. With the Term Life Insurance plan, I will have $251,995 in coverage my first year because I have the $250,000 from the term plan as well as the extra $1,995 that I was able to invest.
In the second year, I actually will have $254,150 in coverage because I still have the $250,000 from the insurance plan, plus the $1,995 this year that I am investing, plus I earned 8% on my invested $1,995 from Year 1.
As you can see, my annual cost picks up when I’m 50 to cover that extra cost of the term life insurance plan. So, I am not investing less, but look at my total coverage!
When I turn 70, I no longer have life insurance but guess what – I don’t need it! My total investments are over $544,000 on their own! I have no need for life insurance at this point. So, I could keep investing at this same 8% return or I could stop investing entirely and let this money continuously compound at that 8% return – either way, I am going to have over $5 million freaking dollars! How insane is that?!
Obviously, investing is never a 100% sure thing, but history tells us that you’re much more likely to win than you are to lose, especially if you stay out of your own way and are focused on investing for the long-term.
If you use short term life insurance in a similar way that I have laid out here then you’re going to be much more ahead of the game than you would be if you were to just pay for the whole life insurance just for the peace of mind.
I always recommend that you all do as much research as you can whenever you’re investing and this is no different – now you’re just investing for the future of your family, and if you ask me, that makes it even more important!