How not to lose at the life insurance waiting gameArticle added by Ken Godfrey on July 5, 2011
Ken Godfrey

Ken Godfrey

Arlington, VA

Joined: March 12, 2011

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Life insurance is less expensive to purchase at younger ages. Therefore, if you have children and extra cash, you may consider purchasing permanent life insurance on your children. This may sound like a crazy financial decision, but the truth is in the numbers. It will save a lot of money over their lifetimes and reduce the potential risks that health concerns will impact their ability to obtain favorable life insurance in the future.

When children are young, they typically haven’t developed health concerns or other risk factors that impact the ability to obtain favorable underwriting. For example, they typically haven’t yet dabbled in nicotine products or developed high cholesterol or other common health concerns of many adults which are unfavorable to life insurance pricing.

Let’s look at an example:

Although other premium durations or permanent products such as whole life may be more appropriate depending on the circumstances, we will assume a $1,000,000 level death benefit guaranteed universal life (GUL) policy guaranteed to age 105. Premiums are illustrated paid annually for life and based on Preferred No Nicotine underwriting classification for insureds ages 1 to 75.

According to the 2001 CSO Mortality Tables, a 75-year-old Super Preferred Nonsmoker male has a .22 percent chance and female has a 1.4 percent chance of living to age 105. Therefore, guaranteeing the policy to age 105 is a conservative time frame since there is a very low chance of outliving the coverage.

The chart below illustrates the estimated annual premiums based on various purchase ages. The chart highlights that the cost of insurance coverage increases with age and can become very expensive later in life.



The chart shows that the cost of permanent life insurance coverage begins to increase dramatically around age 50. For the male, the annual premium for the life insurance coverage at age 1 is only $1,364 per year. The same coverage at age 31 is over 205 percent more per year ($4,158 annual premium) while the same coverage at age 61 is over 1059 percent more per year ($15,810).

The chart below illustrates the cumulative annual premiums for the male when purchasing the coverage at age 1, 31 and 61. This chart also highlights that the cost of insurance coverage increases with age and can become very expensive later in life.



One could argue that children don’t need significant life insurance coverage. However, when you look at the total potential cumulative premiums paid over their lifetime, buying the coverage at a younger age will save substantial money over their lifetimes.

For instance, per the chart above, it only takes six years (age 66) of annual premiums for the age 61 year old to exceed the cumulative premiums for the age 1 year old ($15,810 x 6 > $1,364 x 66). Alternatively, it only takes 11 years (age 71) of annual premiums for the age 61 year old to exceed the cumulative cost for the age 31 year old ($15,810 x 11 > $4,158 x 41).

Opportunity cost and time value of money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. For example, $100 today is worth more than $100 in the future because you could invest the $100 today and earn interest on the money. Therefore, when comparing these life insurance examples, there is an opportunity cost of money associated with purchasing life insurance at younger ages.

The time value of money is an important part of analyzing various life insurance alternatives, particularly when the cash flows are uneven as is the case in this comparison. When comparing various alternatives with differing cash flows, adding an opportunity cost of money to the cash flows can create a more valid comparison. The challenge is determining an appropriate interest rate to use. This may be the rate earned on a savings account, a CD or the expected rate of return on an investment portfolio.
However, the time value of money is not the only factor to consider when comparing these alternatives. When waiting to buy life insurance, the purchaser assumes the inherent risks that he or she will die before coverage is secured or develop health concerns that impact his or her underwriting classification and ability to secure the coverage. A change in underwriting classification from Preferred to Standard or worse can have a significant impact on annual premiums for a life insurance purchase (see the chart below).

Annual Premiums - $1,000,000 Coverage
Underwriting Classification
Age At PurchasePreferred BestPreferredStandard
1$1,263$1,364$1,830
31$3,546$4,158$4,721
61$14,402$15,810$19,917


A significant change in health and corresponding underwriting classification can more than offset the opportunity cost of waiting to purchase the life insurance coverage. The insured’s age and underwriting classification are two of the most important criteria that impacts life insurance pricing.

Life expectancy

In addition to age and underwriting classification, the insured’s ultimate mortality age also has a substantial impact on the overall cost of the insurance coverage over the life of the insured.

If death occurs at later ages and the insured waits to purchase the insurance coverage, living longer has a negative effect on the overall cost of the insurance coverage. This is because the longer one lives, the more premium payments are necessary to keep the coverage in-force.

Therefore, since buying permanent life insurance is a long-term commitment and mortality age is uncertain, it is important to only purchase an amount of insurance that one can stay committed to and afford over the long term.

The chart below shows the potential cumulative premiums paid at various assumed mortality ages for purchase at ages 1, 31 and 61. The chart highlights that the longer one waits to buy coverage and the longer the individual lives, the more costly the insurance becomes.

Cumulative Annual Premiums - $1,000,000 Coverage
Mortality Age
Age At Purchase758595105
1$102,300$115,940$129,580$143,220
31$187,110$228,690$270,270$311,850
61$237,150$395,250$553,350$711,450


Let’s look at the numbers in more detail. For example, the cumulative cost of the life insurance for an age 31 male is almost double (97 percent increase) that for an age 1 male ($228,000 compared to $115,000) assuming age 85 mortality. Waiting to purchase the coverage at age 61 will increase the cumulative cost to over $395,000, a 241 percent increase over the age 1 cost.

The chart below graphically illustrates the premium results on a cumulative basis for the male insured for purchase ages 1 through 75 and mortality ages of 75, 85, 95 and 105. Each line represents the cumulative premium cost of the life insurance for each purchase age and assumed mortality age.



The chart above highlights that the results can differ dramatically for insurance purchases at older ages. The range of potential premiums paid until mortality age becomes wider the older one waits to purchase the insurance. For instance, if one lives to age 105, he or she may ultimately pay more in premiums than received in death benefits. Alternatively, if one dies shortly after policy issuance, the insured will pay substantially less in cumulative premiums. Because the timing of mortality is difficult to predict at older ages, this helps to explain why the cost of insurance coverage increases dramatically with age.

Summary

Life insurance provides cash payment of death benefit proceeds upon the death of the insured. There are numerous factors such as age, underwriting classification, and ultimate mortality age that impact life insurance pricing and the overall cost of providing such coverage.

Since one can’t predict when he or she will die or what health complications may arise in the future, waiting to buy permanent life insurance carries the inherent risks of developing underwriting concerns, becoming uninsurable or dying before coverage is secured.

To be safe and save substantial money over time, it is prudent to not delay the purchase of permanent life insurance coverage. Next time you meet with your insurance agent about your personal coverage, ask about permanent life insurance coverage for your children. Your children will thank you later and you won’t lose at the life insurance waiting game.
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