# Term to 100 - 20 pay



## swoop_ds (Mar 2, 2010)

My wife(30) and I (28) recently opened up a term to 100 insurance plan that we pay off in 20 years (I believe the option is called '20 pay).

We each have $100K of coverage ($200K total/combined). It costs us $107 per month for 20 years and then we are covered until our death. I don't have the paperwork in front of me but the one 'perk' I can remember is that 50% of the policy can be taken out to cover nursing home bills. Granted 50K doesn't go that far. . . 

A similar term coverage was certainly cheaper, but the premiums got pretty high after 20 years. So it would be cheaper for the term but then a lot more later, which of course makes sense.

I figured that this would be a good base to cover our debts and funeral costs etc if one of us dies. We don't have any kids but when we do we will likely get a term policy for a higher amount for when the kids are under 18. We each work so neither of us dying would result in the other having much financial hardship. The base 100k policy would just be nice for the remaining spouse to pay off debts/funeral costs/leave work for a little bit of time. Our debt would be more than wiped out by the $100K.

I guess what my question is, is this such a bad thing? Everyone is always saying that term is a lot better but running the numbers we are paying a total of about $26000 over 20 years for $200000 of rewards (even if it is in death). Is there something I'm missing? 

-Dave


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## MoneyGal (Apr 24, 2009)

What your missing is that if you simply want $200K of life insurance, you are vastly overpaying. Now, if you want $200K of life insurance until your age 100 AND you expect to live a long time AND you aren't going to save outside of the insurance policy AND you have never considered that the face value of $200K will be severely eroded over time with inflation, I guess you...are getting what you pay for. But there are faster, easier and cheaper ways to save $200K.


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## dave2012 (Feb 17, 2012)

Wow that is expensive, especially considering your age. We pay approx $55 total a month for $350K (me) and $100K (wife) and we are in our 50's. It would be really cheap if we were in our 30's. Longer term guarantees like that are really expensive since they are guaranteed regardless of health.

Consider that over time you'll need less insurance. When you are retired, you don't need all that insurance to cover a lost income and could easily self insure with all your net worth at that point.

If you have a ton of medical issues or are likely too in the future, you may be ahead of the game having a 100 year guarantee but if you are generally healthy you are paying a TON for a guarantee. Who needs insurance when you're 100 anyways? By the time you are retired you should have a decent net worth and won't need any at that point.


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## swoop_ds (Mar 2, 2010)

Thanks for the info guys, it gives me lots to think about!


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## OptsyEagle (Nov 29, 2009)

You cannot compare pricing on a temporary term policy (term 10 or term 20) to a permanent policy (term 100) and end up with any useful comparison. They are apples and oranges. The term policy you have is money that the insurance company will eventually pay out. With the other term policies, it is only in very rare circumstances that money is ever paid out to beneficiaries. Those policies usually expire or are cancelled before the insured dies.

If you want to ensure some money is there "whenever" you die, you could probably not achieve it in any more tax efficient methods, then from buying Term 100 insurance. Not only are your premiums being invested for you in a tax free method, but your returns are significantly boosted by something known as a "lapse subsidy". That is an insurance industry term, but what it means is the insurance company estimates how many people will cancel their Term 100 policies, before they die. When they do, the insurance company gets to keep the reserve money they were saving up to pay that inevitable claim. In their perfect world this would have been a very profitable day (when they receive the cancelation notice from the policy owner). In our competitive world, however, they use that money to reduce the premiums required. So in other words, other morons, who bought permanent insurance, but let it lapse or cancelled it, are significantly boosting the returns to the permanent policy owners, who maintain their coverage to the end.

The only caveat. Someone else (benficiaries) gets the money. In your case, since you are not expected to die vey soon, someone, who probably hasn't been born yet, is in line for all that benefit. So, if you think that is a good idea, then fine, if not, then fine.


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## swoop_ds (Mar 2, 2010)

I think one thing that will be done is that we will name a charity as the beneficiary for atleast some of the money. (Obviously the same result could be done through term or by investing). If we are blessed with kids they would be the eventual beneficiaries, or possibly nieces/nephews if we aren't blessed with kids. (term would pick up the slack of the policy during the kids being under 18)


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## the-royal-mail (Dec 11, 2009)

I guess I'm fairly uncomfortable with this for a number of reasons. At a very simple level, you're basically putting your money in someone else's account and hoping they'll cough it up later Have you read the fine print/exclusions etc? Remember these providers are there to make money. $107 a month is around $1200 a year. Over 20 yrs you're paying them $24K and then they'll have benefitted from investment growth on those funds for the rest of your life or until you require a payout. This is really long term stuff. You have no kids yet so basically you're paying $107 a month for funeral expenses?

What do you mean when you refer to debts needing to be paid?

IMHO I think a far better approach to protecting yourselves and your family is to save a tiered savings plan, in cash, and manage and keep it yourself. I don't support the idea that we should put our trust in someone else in the hopes of an eventual payoff. It's my opinion that your family is far better protected with tiers of savings in case one of you loses your job, need a new roof, the kids need expensive dental work etc. I dunno. Maybe I'm missing the point but this just doesn't seem like a very good deal.

Remember, just because you can do something does not mean that you should.


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## swoop_ds (Mar 2, 2010)

How would a tiered savings plan work? (I'm unfamiliar with what that means)


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## the-royal-mail (Dec 11, 2009)

It's all explained in my sig file - the concept is simple. You save the money in your own accounts yourself rather than giving it to someone else. This money is there to protect you, or you can save for a funeral or other known expenses. It does take time. No instant gratification here.

I would stress though that these suggestions are just my opinions though. Those opinions are based on a lifetime of experience of the sky falling on top of my head and the disappointments you can encounter when the other people/organizations you had counted on, abandon you in your darkest hour.


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## Guigz (Oct 28, 2010)

swoop_ds said:


> How would a tiered savings plan work? (I'm unfamiliar with what that means)


It is basically an emergency fund seperated in separate accounts/enveloppes each earmarked for given "types" of emergencies. According to TRM, the Tiered Savings Plan (TM) is the solution to *everything*.

If you have some measure of self control, you don't really need specific tiers, but I do concur that an emergency fund is a good way to self insure.


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## MoneyGal (Apr 24, 2009)

OptsyEagle said:


> You cannot compare pricing on a temporary term policy (term 10 or term 20) to a permanent policy (term 100) and end up with any useful comparison. They are apples and oranges. The term policy you have is money that the insurance company will eventually pay out. With the other term policies, it is only in very rare circumstances that money is ever paid out to beneficiaries. Those policies usually expire or are cancelled before the insured dies.
> 
> If you want to ensure some money is there "whenever" you die, you could probably not achieve it in any more tax efficient methods, then from buying Term 100 insurance. Not only are your premiums being invested for you in a tax free method, but your returns are significantly boosted by something known as a "lapse subsidy". That is an insurance industry term, but what it means is the insurance company estimates how many people will cancel their Term 100 policies, before they die. When they do, the insurance company gets to keep the reserve money they were saving up to pay that inevitable claim. In their perfect world this would have been a very profitable day (when they receive the cancelation notice from the policy owner). In our competitive world, however, they use that money to reduce the premiums required. So in other words, other morons, who bought permanent insurance, but let it lapse or cancelled it, are significantly boosting the returns to the permanent policy owners, who maintain their coverage to the end.
> 
> The only caveat. Someone else (benficiaries) gets the money. In your case, since you are not expected to die vey soon, someone, who probably hasn't been born yet, is in line for all that benefit. So, if you think that is a good idea, then fine, if not, then fine.


I have no disagreement with even one word of this. The OP has (in my view) no legitimate need for insurance. And the OP is the one who made the comparison to term life insurance. If your goal is to "save $x to be available when you die," there are other ways to do this that are as tax-efficient (I said I don't disagree with you, and I do not. You said he wants the money to be there "whenever" he dies - life insurance is the way to do that. I would and did counter that the $200K face value is going to change inherently over time and economically it the actuarial PV is not $200K).


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## Sampson (Apr 3, 2009)

Tiered savings is in NO WAY a substitute for insurance. Even with 12-months of emergency savings, how will that help if the primary income earner has passed away, or if they become permanently disabled and unable to work for the next 5-10 years.

Insurance is insurance - in most cases you need to have a lot of capital saved up to self-insure. I don't fully agree that one needs to replace all their income so that dependents do not have to change their lifestyle - over insurance can be a waste of money - but don't mix the two things up. Emergency savings is short term.


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## Sampson (Apr 3, 2009)

@ OP, regarding what is the best or suitable insurance product.

M_Gal lists a tonne of reasons why Term-100 is often not in the buyer's best interest.


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## OptsyEagle (Nov 29, 2009)

MoneyGal said:


> I have no disagreement with even one word of this. The OP has (in my view) no legitimate need for insurance. And the OP is the one who made the comparison to term life insurance. If your goal is to "save $x to be available when you die," there are other ways to do this that are as tax-efficient (I said I don't disagree with you, and I do not. You said he wants the money to be there "whenever" he dies - life insurance is the way to do that. I would and did counter that the $200K face value is going to change inherently over time and economically it the actuarial PV is not $200K).


Hey, I am not arguing with anyone here. There really is no right or wrong answer to this question. I just wanted to point out that although they call the two products, term insurance, there is a sigificant difference between temporary term and permanent term.

In my personal opinion, he is nuts to buy the term 100 policy, at this stage. Sure his future kids will get some money, but as you said, it won't feel like $200,000, but with inflation it will probably be about as good as about $40,000 is today. When you consider that each child doesn't get all that, but in fact it is divided by all the brothers and sisters, and they won't even get it until they are about 45 to 55 years old.

So, would the OP's future children prefer $15,000 to $20,000 when they are about 50 years old .... OR....$20,000 more house now ($107 a month can increase the mortgage a lot) to allow for a nice backyard with a swing set ...OR...all the ice cream they can eat while they are kids ...OR... all the best cartoon and movie channels their cable company offers .... OR... birthday presents every month for 20 years ... OR ... I could go on, but I think you get my point.

I highly suspect that if the OP buys that term 100 policy, he will indeed be the guy cancelling it and subsidizing someone else's estate returns as opposed to the other way around, that I discribed above. That of course, would be up to him as is this decision.


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## MoneyGal (Apr 24, 2009)

Good on ya. I don't have the brain cells to rub together to do this right now, but the actuarial present value of a $200K life insurance payment at the OP's age of (what was it? 30's?) would be closer to $20K than $40k. The value will go up as the date of expected death nears, and it will also go down if/as inflation wears away the face value. I do think people need to understand both moving parts:

- the date of the payout is random [but can still be calculated as an expected value]
- the amount of the payout *when it is received* is not the same as the face value

The OP doesn't seem to need any particular amount of money now or in the future. I think he should understand that although the policy is described as being worth $200K, unless it is paid out in the near future it won't actually be worth that.


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## swoop_ds (Mar 2, 2010)

This is all making me a bit queasy. Need to have a discussion with the wife about all this!


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## the-royal-mail (Dec 11, 2009)

I wasn't aware this was disability insurance. Reading the OP's description, it sounded like he was trying to protect the spouse or non-existent children from debts and funeral costs? That sounds to me like life insurance.

Disability insurance is a whole other game.

I just don't see a strong enough case here for this type of insurance. There are no kids and the surviving spouse works. If you're worried about debt, don't operate with debt. What's a funeral cost, maybe $20K? The latter can be saved in cash and the former is easily addressed. Not sure spending $1200 a year for this makes financial sense.

When considering insurance, ask yourself what you're trying to protect yourself against and then ask yourself if it's really worth the hassle of trying to collect later on and the short term expense. Never focus on the monthly payment. Focus on the overall cost.


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