An American peer and friend of mine by the name of Chris Huntley forwarded me a link to a new life insurance calculator he’s developed for his website. The intention of the calculator is to tell if your life insurance quotes are a ‘good deal’ or a good investment.
The calculator is nifty. It doesn’t provide any new information – I’ve run similar calculations throughout the years. However, it is new in the sense that for the first time it compiles a number of different approaches into one place, and puts it all online.
And it’s worth noting that the intent of the calculator is to emphasize to you as a consumer that life insurance is a good deal if you need a death benefit when you pass. It’s better than savings in most cases. That’s right, you likely can’t save realistically as well as a life insurance policy. The alternative way to think about this is, is where’s the crossover point – where does the person who saved win financially over the person who bought life insurance? For most calculations, I expect that the answer will be that the saver is unlikely to ever win out. And a whole calculator to make that point! It’s something that most insurance brokers already know intuitively and have run the calls for. Bravo to Chris for putting this into a cool calculator on his website.
How the calculator works:
You enter your age and a premium for the quote you’ve received. The calculator then looks up your expected age using U.S. actuarial mortality tables. Then it figures out what rate of return you’d have to receive (after tax) in order to have accumulated the death benefit at your average life expectancy.
I tried the defaults. Male, age 50 with a premium for $500000 of coverage of $3050. The average life expectancy of that person is age 79. In order to accumulate the $500000 at age 79 by saving, you’d have to earn an interest rate of over 10%! What’s worse, is that that interest rate would have to be both guaranteed and after-tax to be comparable (since the death benefit is after tax and guaranteed).
That’s pretty cool. But is it useful? Well, yes and no. It’s not useful in terms of calculations – you don’t need to actually use the numbers it produces. It is, however, very useful in making a simple point that many consumers fail to understand – life insurance as a death benefit is a ‘good deal’. You probably can’t save as well as the insurance company can. And that’s one of the things that makes life insurance a really good deal.
In fact, one could extend this to treating life insurance as an investment. Not from the direct investment perspective, just as a death benefit/estate option. If you want to increase your estate for your beneficiaries, buying life insurance will likely leave you more than if you’d saved and invested. To extend the argument, if you plan to leave $100,000 behind to your beneficiaries, you’re probably better off (i.e. have more money) to put that $100,000 into insurance premiums. Unfortunately, you lose any liquidity if you do that. Nonetheless, this ‘smart buy’ is something many agents understand intuitively and it’s why many agents maintain large permanent policies – it’s just a good deal from a long-term perspective. I personally maintain a decent-sized permanent policy simply to leave my kids or spouse when I die. It’s a better buy than if I saved the premiums, as illustrated by the calculator. Is this something a typical consumer would do? Probably not, most of us have better things to do with our limited dollars. Nevertheless, life insurance premiums are certainly not a bad deal!