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

July 28, 2009

Life Insurance Part III

Filed under: Excel fun, Personal Finance, Real Example, Simulation — Tags: , , , — thebalancedspreadsheet @ 1:09 pm

To finish up my series of life insurance I am going to write about term insurance vs. return of premium life insurance (RoP).  The basic concept of RoP is that if the insurance policy is never used, at the end of the period the premiums that you paid are returned to you.  From my own personal example, I can receive a 30 year RoP policy for $515 a year.  If I keep the policy for the full 30 years and do not die, the total premiums paid of $15,450 (30 x $515) are returned to me after the 30 years.  Obviously because of this feature, RoP is more costly then regular term insurance.  I can get the same 30 year $500,000 policy for only $375 a year.  What if I invested this difference of $140?  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 following:

 

  Regular v. RoP    
  Premium difference RoP total  
  invested at 10% Premiums Pd  
Year 1  $               140.00  $      515.00  
Year 2  $               308.00  $    1,030.00  
Year 3  $               492.80  $    1,545.00  
Year 4  $               696.08  $    2,060.00  
Year 5  $               919.69  $    2,575.00  
Year 6  $            1,165.66  $    3,090.00  
Year 7  $            1,436.22  $    3,605.00  
Year 8  $            1,733.84  $    4,120.00  
Year 9  $            2,061.23  $    4,635.00  
Year 10  $            2,421.35  $    5,150.00  
Year 11  $            2,817.49  $    5,665.00  
Year 12  $            3,253.24  $    6,180.00  
Year 13  $            3,732.56  $    6,695.00  
Year 14  $            4,259.82  $    7,210.00  
Year 15  $            4,839.80  $    7,725.00  
Year 16  $            5,477.78  $    8,240.00  
Year 17  $            6,179.55  $    8,755.00  
Year 18  $            6,951.51  $    9,270.00  
Year 19  $            7,800.66  $    9,785.00  
Year 20  $            8,734.73  $  10,300.00  
Year 21  $            9,762.20  $  10,815.00  
Year 22  $          10,892.42  $  11,330.00  
Year 23  $          12,135.66  $  11,845.00  
Year 24  $          13,503.23  $  12,360.00  
Year 25  $          15,007.55  $  12,875.00  
Year 26  $          16,662.31  $  13,390.00  
Year 27  $          18,482.54  $  13,905.00  
Year 28  $          20,484.79  $  14,420.00  
Year 29  $          22,687.27  $  14,935.00  
Year 30  $          25,110.00  $  15,450.00  $  9,660.00

 

I come out almost $10,000 ahead by investing the difference myself.  The average rate of return I would need to break even would be about 7.46%.  Also it is important to remember that the premiums are returned only if the death benefit is not paid.  If you died, you would not get the premiums returned, however if you went with regular term and invested the difference, the money would be with your estate when you died. 

Below is a table comparing the total money left to your estate if you died using Term vs. RoP:

 

  Term: Death Benefits RoP: Death Benefits  
Age and investments and investments Difference

28

 $          500,140.00  $          500,000.00  $      140.00

29

 $          500,308.00  $          500,000.00  $      308.00

30

 $          500,492.80  $          500,000.00  $      492.80

31

 $          500,696.08  $          500,000.00  $      696.08

32

 $          500,919.69  $          500,000.00  $      919.69

33

 $          501,165.66  $          500,000.00  $    1,165.66

34

 $          501,436.22  $          500,000.00  $    1,436.22

35

 $          501,733.84  $          500,000.00  $    1,733.84

36

 $          502,061.23  $          500,000.00  $    2,061.23

37

 $          502,421.35  $          500,000.00  $    2,421.35

38

 $          502,817.49  $          500,000.00  $    2,817.49

39

 $          503,253.24  $          500,000.00  $    3,253.24

40

 $          503,732.56  $          500,000.00  $    3,732.56

41

 $          504,259.82  $          500,000.00  $    4,259.82

42

 $          504,839.80  $          500,000.00  $    4,839.80

43

 $          505,477.78  $          500,000.00  $    5,477.78

44

 $          506,179.55  $          500,000.00  $    6,179.55

45

 $          506,951.51  $          500,000.00  $    6,951.51

46

 $          507,800.66  $          500,000.00  $    7,800.66

47

 $          508,734.73  $          500,000.00  $    8,734.73

48

 $          509,762.20  $          500,000.00  $    9,762.20

49

 $          510,892.42  $          500,000.00  $  10,892.42

50

 $          512,135.66  $          500,000.00  $  12,135.66

51

 $          513,503.23  $          500,000.00  $  13,503.23

52

 $          515,007.55  $          500,000.00  $  15,007.55

53

 $          516,662.31  $          500,000.00  $  16,662.31

54

 $          518,482.54  $          500,000.00  $  18,482.54

55

 $          520,484.79  $          500,000.00  $  20,484.79

56

 $          522,687.27  $          500,000.00  $  22,687.27

57

 $          525,110.00  $          500,000.00  $  25,110.00

While RoP sounds nice initially, when you dig further in you see that it is just a gimmick to get you to pay more.  My wife and I are very pleased with our decision to get regular 30 year term life insurance.  It is not only the cheapest, but the best return on our investment as well.

Has anyone else out there had any similar experience comparing the types of life insurance to get?  Let me know what you think.

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2 Comments »

  1. […] was offset by a decrease in car and health insurance premiums for the year.  In July we took out a life insurance policy for me, which was an added but necessary and well worth it […]

    Pingback by Follow up to “Financial How to. . . .” series Part I. Updating our own budget « The Balanced Spreadsheet-Financial News, Advice, tips, and more — January 14, 2010 @ 7:55 pm

  2. […] 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 life insurance.  Below is clips […]

    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


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