When people consider the purchase of life insurance, the consideration normally centers around term vs whole life insurance. The basic idea is that if you need life insurance for a period of time, say 20 years, then term life insurance is perfect. If you need life insurance forever, you should consider some variant of permanent life insurance such as whole life or term to 100.
There’s only one problem with that – it assumes all or nothing. Either you need all your life insurance forever, or you don’t need any after a certain point. In reality, you may need a lot of life insurance when you’re younger, and a much smaller amount of life insurance when you’re older. In fact I believe that most people have an insurance need like that. Rather than having an insurance need that goes right to 0 at retirement, that in fact a small amount of continued insurance after retirement would be better.
So what would the perfect policy to fit those needs look like? It’s actually fairly simple once you’ve seen it done. Rather than having just term or just permanent life insurance, we can actually mix two types of coverage in one policy.
For example you could purchase $100,000 of permanent life insurance and top it up with a layer of $400,000 of term life insurance. This would give you a total of $500,000 of coverage when you’re younger. When you get older and we need less life insurance we can drop the $400,000 of term life insurance, getting rid of both the premiums and the coverage. That leaves us with the $100,000 of permanent life insurance coverage with premiums level for life. The good news is those lifetime premiums will be based on our younger age when we bought the policy and not our older age when we drop the term coverage.
For example if you purchased $500,000 of term life insurance at age 45 and then wanted $100,000 at age 65, you would normally cancel your term life insurance and purchase a permanent life insurance policy at age 65 – at age 65 rates of course. If instead you’d purchased the two layers as described above, when you cancel the term insurance at age 65, your remaining $100,000 of insurance premiums are based on someone who’s 45 years old, not 65. And which premiums would you rather have at age 65 – rates for a 45 year old or a 65 year old?
This mix of coverages provides a decreasing amount of coverage over your lifetime at the lowest possible long-term cost. That’s why I call it the ‘perfect policy’.