The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

July 27, 2009

Life Insurance Part II: Term v. Whole

Filed under: Excel fun, Personal Finance, Real Example, Simulation, Uncategorized — Tags: , , — thebalancedspreadsheet @ 2:20 pm

As promised in yesterday’s post, I am going explain the financial reasons why we picked the type of life insurance policy that we did.  I highly recommend reading yesterday’s post, but as a reminder we decided to go with the 30 yr level term at $375 a year instead of the Whole life $1575.99 a year policy.

Term vs. Whole- While term is definitely the cheaper of the two, whole is sold on two major selling points.  1.) As long as the annual premiums are paid, the coverage extends your whole life and 2.) Cash value builds into the policy, so should you ever need to cancel the policy you will have some cash available when you cancel.  Whereas with term, you get nothing if you cancel your policy.  Or do you?  What if instead you invested each year the difference between the prices of term vs. whole?  Would you come out ahead?  I did a simulation based on the price difference of $1,200.99 ($1,575.99-$375).   I assumed a 10% rate of return on investing if I did it on my own and a 4% return from the whole life.  It is very hard to determine what kind of interest rate you receive on a whole life policy as it varies by policy as well as there are a lot of other fees tacked on as well.  Here is what I came up with:

  Term Whole Life  
         Value of    Premium “Cash Value” Difference
Year 1  $       1,200.99  $                –    $     1,200.99
Year 2  $       2,642.18  $       1,249.03  $     1,393.15
Year 3  $       4,227.48  $       2,548.02  $     1,679.46
Year 4  $       5,971.32  $       3,898.97  $     2,072.35
Year 5  $       7,889.54  $       5,303.96  $     2,585.58
Year 6  $       9,999.59  $       6,765.15  $     3,234.44
Year 7  $     12,320.63  $       8,284.78  $     4,035.85
Year 8  $     14,873.79  $       9,865.20  $     5,008.58
Year 9  $     17,682.25  $     11,508.84  $     6,173.41
Year 10  $     20,771.57  $     13,218.22  $     7,553.34
Year 11  $     24,169.82  $     14,995.98  $     9,173.83
Year 12  $     27,907.89  $     16,844.85  $   11,063.03
Year 13  $     32,019.76  $     18,767.68  $   13,252.09
Year 14  $     36,542.83  $     20,767.41  $   15,775.42
Year 15  $     41,518.20  $     22,847.14  $   18,671.06
Year 16  $     46,991.11  $     25,010.05  $   21,981.06
Year 17  $     53,011.31  $     27,259.49  $   25,751.82
Year 18  $     59,633.53  $     29,598.89  $   30,034.63
Year 19  $     66,917.97  $     32,031.88  $   34,886.09
Year 20  $     74,930.86  $     34,562.18  $   40,368.67
Year 21  $     83,745.03  $     37,193.70  $   46,551.33
Year 22  $     93,440.62  $     39,930.48  $   53,510.14
Year 23  $   104,105.78  $     42,776.73  $   61,329.05
Year 24  $   115,837.44  $     45,736.83  $   70,100.62
Year 25  $   128,742.28  $     48,815.33  $   79,926.95
Year 26  $   142,937.59  $     52,016.97  $   90,920.62
Year 27  $   158,552.44  $     55,346.68  $ 103,205.76
Year 28  $   175,728.77  $     58,809.58  $ 116,919.20
Year 29  $   194,622.74  $     62,410.99  $ 132,211.75
Year 30  $   215,406.10  $     66,156.46  $ 149,249.64

As you can see above, by going with term and investing the difference, you will come out way ahead of the cash value whole life insurance.  But what happens when you die?  I ran a projection for the next 50 years of my life (Age 28-Age 78) and here is what I came up with:

Age Term Whole Difference
28  $   501,200.99  $   500,000.00  $        1,200.99
29  $   502,642.18  $   500,000.00  $        2,642.18
30  $   504,227.48  $   500,000.00  $        4,227.48
31  $   505,971.32  $   500,000.00  $        5,971.32
32  $   507,889.54  $   500,000.00  $        7,889.54
33  $   509,999.59  $   500,000.00  $        9,999.59
34  $   512,320.63  $   500,000.00  $      12,320.63
35  $   514,873.79  $   500,000.00  $      14,873.79
36  $   517,682.25  $   500,000.00  $      17,682.25
37  $   520,771.57  $   500,000.00  $      20,771.57
38  $   524,169.82  $   500,000.00  $      24,169.82
39  $   527,907.89  $   500,000.00  $      27,907.89
40  $   532,019.76  $   500,000.00  $      32,019.76
41  $   536,542.83  $   500,000.00  $      36,542.83
42  $   541,518.20  $   500,000.00  $      41,518.20
43  $   546,991.11  $   500,000.00  $      46,991.11
44  $   553,011.31  $   500,000.00  $      53,011.31
45  $   559,633.53  $   500,000.00  $      59,633.53
46  $   566,917.97  $   500,000.00  $      66,917.97
47  $   574,930.86  $   500,000.00  $      74,930.86
48  $   583,745.03  $   500,000.00  $      83,745.03
49  $   593,440.62  $   500,000.00  $      93,440.62
50  $   604,105.78  $   500,000.00  $    104,105.78
51  $   615,837.44  $   500,000.00  $    115,837.44
52  $   628,742.28  $   500,000.00  $    128,742.28
53  $   642,937.59  $   500,000.00  $    142,937.59
54  $   658,552.44  $   500,000.00  $    158,552.44
55  $   675,728.77  $   500,000.00  $    175,728.77
56  $   694,622.74  $   500,000.00  $    194,622.74
57  $   715,406.10  $   500,000.00  $    215,406.10
58  $   242,830.82  $   500,000.00  $   -257,169.18
59  $   273,546.51  $   500,000.00  $   -226,453.49
60  $   307,948.09  $   500,000.00  $   -192,051.91
61  $   346,477.85  $   500,000.00  $   -153,522.15
62  $   389,631.18  $   500,000.00  $   -110,368.82
63  $   437,962.91  $   500,000.00  $     -62,037.09
64  $   492,094.45  $   500,000.00  $       -7,905.55
65  $   552,721.77  $   500,000.00  $      52,721.77
66  $   620,624.37  $   500,000.00  $    120,624.37
67  $   696,675.29  $   500,000.00  $    196,675.29
68  $   781,852.31  $   500,000.00  $    281,852.31
69  $   877,250.58  $   500,000.00  $    377,250.58
70  $   984,096.64  $   500,000.00  $    484,096.64
71  $1,103,764.23  $   500,000.00  $    603,764.23
72  $1,237,791.92  $   500,000.00  $    737,791.92
73  $1,387,902.94  $   500,000.00  $    887,902.94
74  $1,556,027.29  $   500,000.00  $ 1,056,027.29
75  $1,744,326.55  $   500,000.00  $ 1,244,326.55
76  $1,955,221.73  $   500,000.00  $ 1,455,221.73
77  $2,191,424.33  $   500,000.00  $ 1,691,424.33
78  $2,455,971.24  $   500,000.00  $ 1,955,971.24

During the 30 year term policy you come out well ahead of a whole life policy.  However, after the 30 years are up there is a seven year stretch where the whole life policy would be better if you became deceased, although only five of those years have a deficit of over $100,000.  But as mentioned in the my previous post, my wife and I will not need life insurance in 30 years as long as we stick to and our financial game plan.  Also after the seven year gap, the investments you make with term insurance outgrow the payout of the whole life insurance! 

After looking at these numbers it was quite obvious that term life insurance was the way to go.  I know everybody’s situation is different, but I would run the numbers for your situation and decide what to go with.  I think most situations will end up like mine, with term insurance coming out way ahead.

 Tomorrow I will do another comparison.  This time between 30 year term life vs. 30 year term life with return of premium.

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3 Comments »

  1. […] Would I come ahead of the $15,450 at the end of the 30 years?  Like in my comparison between term and whole life insurance I assumed a 10% annual rate of return and came up with the […]

    Pingback by Life Insurance Part III « Thebalancedspreadsheet's Blog — August 14, 2009 @ 6:12 pm

  2. […] is Term Life vs. Whole Life insurance.  I wrote back in July about life insurance and compared term vs. whole  and wrote about my decision to go with Term.  I feel that term is a superior product to whole […]

    Pingback by Media Monday: Term vs. Whole Life « The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice — May 24, 2010 @ 7:34 am

  3. interesting blog you have here…

    Comment by honey — July 1, 2010 @ 4:44 am


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