Should I guarantee my life insurance policy to age 121?

By Ken Godfrey

Life Insurance Financial Evaluations, LLC


Should you guarantee your life insurance policy to age 121? It depends. A shorter guarantee period is not for everyone. The appropriate age for the guarantee period is dependent on many factors including comfort level, risk tolerance, and potential premium savings.

Many guaranteed universal life insurance products available for purchase today allow for death benefit guarantees up to age 121 (or later). The 121 age is aligned with the new mortality tables used in pricing life insurance products and is intentionally set high enough with the expectation that no one will live this long.

Many of these GUL products allow the insurance agent to custom design the policy and “dial-a-guarantee period.” For example, these products can be custom designed to provide a guaranteed death benefit to age 100 or age 105.

A shorter guarantee period is usually cheaper than a policy guaranteed to age 121. This is because if the insured outlives the guarantee period, the life insurance coverage will lapse and no death benefit will be paid.

Does the lower cost of a shorter guarantee period justify the risks of potentially outliving the life insurance policy?

Let’s look at some examples:

We will assume a $1,000,000 level death benefit guaranteed universal life policy guaranteed to age 100 and age 121. Premiums illustrated are paid annually for life. Gender, age and underwriting classifications will be varied to highlight the results.

The probability of living for each age and underwriting class is also shown. The probability of living calculations are based on the 2001 CSO Preferred Class Structure Mortality Tables for Gender and Smoker Classes.
The charts below illustrate the estimated annual premiums for guaranteeing a policy to age 121 and the potential annual premium savings of only guaranteeing the death benefit to age 100 on a male.

The charts highlight that the results can vary significantly by age and underwriting class. The probability of living to age 100 for the male is approximately 1 percent for the given ages and underwriting classes.

There is a potential for higher savings for policies designed with an age 100 guaranteed death benefit at better underwriting classes.

For example, a super preferred age 50 male may be able to save up to 13.1 percent by designing the policy with the shorter guarantee period to age 100. This makes sense because the probability of living to age 100 and outliving the coverage is slightly greater for healthier individuals.

Alternatively, the potential savings are less for non-super preferred underwriting classifications since the probability of living to age 100 is lower. In addition, the potential savings for this specific carrier’s GUL product are lower for policies issued to age 70 insureds.

The charts on the following page illustrate the estimated annual premiums for guaranteeing a policy to age 121 and the potential annual premium savings of only guaranteeing the death benefit to age 100 on a female.


The charts highlight that the results for females are more varied than males for these examples.
This is because the probability of living to age 100 for females is higher than for males. The probability of living to age 100 for females is approximately 4 percent to 7 percent for the given ages and underwriting classes. There is a higher probability that a female will outlive coverage to age 100.

Conclusions

Results will vary by insurance carrier and the results shown in this analysis are from only one carrier and product. This analysis is not meant to imply that age 100 is an appropriate guarantee period. However, it is intended to highlight that consumers may be able to save money on their life insurance premiums for varying policy designs and guarantee durations.

Should you guarantee your life insurance policy to age 121? It depends. A shorter guarantee period is not for everyone. The appropriate age for the guarantee period is dependent on many factors including comfort level, risk tolerance, and potential premium savings.

It may pay to analyze a shorter guarantee period when considering the purchase of guaranteed universal life insurance. However, purchasing a policy with a shorter guarantee period includes the inherent risks that the insured will outlive the coverage.

Intuitively, it makes sense that an insured who is standard or rated has a lower probability of living to advanced ages. Therefore, a policy designed to age 121 may be overkill and the policy owner may be able to save money by guaranteeing the death benefit for a shorter period of time.

Planning idea

Next time you are discussing the purchase of a guaranteed universal life insurance policy, incorporate life expectancies and probability of living into the analysis. Determine the corresponding age associated with the comfort level and risk tolerance for potentially outliving the policy. Then compare the premium results for the various guarantee periods to determine the risks and potential premium savings for the results.