Life insurance part of the portfolio? And where to keep the premiums ?

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Spgold
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Life insurance part of the portfolio? And where to keep the premiums ?

Post by Spgold »

Hello all, happy Sunday !

I am thinking of making a life insurance policy to make sure there will be a principal in case something happens to me which will cover some living and education expenses for my daughter.

Against all suggestion that were made to me I am leaning towards “term” instead of “whole” since I do not consider it an investment vehicle due to big expenses and fees.

This Term insurance will be for 25-30 years with annual payments. I already have the total cost (sum of 25-30 annual payments) currently available and my questions are the following :

1) Should I consider this amount (the sum of the 2t payments) as a part of my portfolio ?

2) Should I just keep this amount in a savings deposit bank account (withdrawing each year 1/25 or 1/30 for the annual payment of the premium) earning absolutely zero or should I hold it somewhere else (perhaps in a very conservative investment)?

3) in this case what alternatives to the savings account should I consider ?

4) Lastly is a 25-30 year Term life insurance a wise choice for someone’s in his mid 40’s for the above purposes ?

Thank you.
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climber2020
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by climber2020 »

I don't understand. Term policies are usually cheap; mine costs $30 a month. Just pay for it out of your paycheck. Once you're financially independent, however long that takes, you don't need the insurance anymore.
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Spgold
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Spgold »

climber2020 wrote: Sun Sep 19, 2021 7:35 am I don't understand. Term policies are usually cheap; mine costs $30 a month. Just pay for it out of your paycheck. Once you're financially independent, however long that takes, you don't need the insurance anymore.
I guess it depends on the age, term and coverage amount. In my case it would be around 180 per month…
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andrew99999
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by andrew99999 »

Yes, term life, not whole of life!

Additionally, there are some others
- term life (lump sum in case of death)
- total and permanent disability (lump sum where you can not work anymore)
- income protection (income stream when you temporarily cannot work due to injury or illness)

some thoughts
- you can often reduce the premium significantly by pre-paying annually, sometimes a month off, and I have heard of 2 months off before.
- for income protection, the longer the wait time, the cheaper, but you need liquid assets available to last until it kicks in.

I consider the premium an expense like any other expense like car insurance.
As mentioned above, it's a bit unusual to save up for the premiums. The point is that you pay the premiums while you can, and if you are unable to, the insurance pays out.

I suppose the exception is if you are unable to work but not due to death, illness, or injury? I would expect you could retrain within 5 years, though, if you are able-bodied?

How long to have the insurance? All three of those insurances are useful until you are financially independent, and you and your dependants will be fine even if you no longer draw an income (either due to death or illness).

The more assets have accumulated on your way to financial independence, the less that needs to be made up from insurance in these unfortunate events, so you often can reduce the benefit amount over time (although as you age, you might have to pay more for the same benefit so it might offset some of that reduced insurane premium that comes with the reduced benefit amount).
runninginvestor
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by runninginvestor »

Spgold wrote: Sun Sep 19, 2021 7:48 am
climber2020 wrote: Sun Sep 19, 2021 7:35 am I don't understand. Term policies are usually cheap; mine costs $30 a month. Just pay for it out of your paycheck. Once you're financially independent, however long that takes, you don't need the insurance anymore.
I guess it depends on the age, term and coverage amount. In my case it would be around 180 per month…
You may be getting dinged by having a policy into your 60's. You could look at laddering a couple policies to see the cost difference.

For instance, if you were looking at a $1.5million 25 year term (ages 40-65), you could see what the total cost for $500k @25 years, and $1million @15-20 years. You'd still have mostly $1.5million coverage, but you could drop the more expensive, shorter policy if your investment portfolio rises enough so that you only needed $500k for your beneficiaries.

That's just an example, but something to play with if you are insuring into your 60's.
Valuethinker
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

Spgold wrote: Sun Sep 19, 2021 7:27 am Hello all, happy Sunday !

I am thinking of making a life insurance policy to make sure there will be a principal in case something happens to me which will cover some living and education expenses for my daughter.

Against all suggestion that were made to me I am leaning towards “term” instead of “whole” since I do not consider it an investment vehicle due to big expenses and fees.
"all suggestions"? No one here would recommend whole life insurance over term.

[qutoe]
This Term insurance will be for 25-30 years with annual payments. I already have the total cost (sum of 25-30 annual payments) currently available and my questions are the following :
[/quote]

Term should match duration of need. If you are 30 then your family may need this insurance for a long time to cover mortgage and university costs, etc. If you are 45, then your savings should displace the need for at least some insurance (all mine expires when our mortgage is to be repaid).
1) Should I consider this amount (the sum of the 2t payments) as a part of my portfolio ?
No. It's an expense.
2) Should I just keep this amount in a savings deposit bank account (withdrawing each year 1/25 or 1/30 for the annual payment of the premium) earning absolutely zero or should I hold it somewhere else (perhaps in a very conservative investment)?
That's a lot to keep in low risk & low return. You might "tweak" your portfolio by holding a bit more safe assets -- but not to the extent of holding 25 years of premiums.

Most of us just fold the premiums into our cost of living. I insure my house and my car, pay broadband, utilities & property taxes. And I also insure my life. Make sure you have named your beneficiary on the policy - I believe I am correct in saying that (in the UK at least) the proceeds can go direct to beneficiary without having passed probate? (Not sure how that works vis a vis Inheritance Tax).
3) in this case what alternatives to the savings account should I consider ?
Whatever your safe assets are: bank accounts, bonds, Certificates of Deposit, etc.
4) Lastly is a 25-30 year Term life insurance a wise choice for someone’s in his mid 40’s for the above purposes ?

Thank you.
When will you have repaid your mortgage?

When will your children have finished university?

What financial needs will your spouse or other dependents have after you are 60 or 65? Presumably after 65 you will have stopped working and your other investments will provide a pension income? So you won't need insurance.

Insurance cover over age 65 (or even 60) was very expensive when I looked into it. I don't know if Covid-19 has (yet) altered the actuarial tables again. In the 1990s very pessimistic assumptions were made re AIDS, and it turned out claims experience was much better than anticipated. Thus, prices of term life came down quite a bit.

Be very careful of periods of limitation. You are not covered for a number of events (like suicide) until the policy has been in force for a certain period of time. I am expecting that there will be some kind of Covid-19 related language in new policies, eventually. For the same reason do not lie on an insurance form eg re smoking - it can invalidate your claim if you were to die of lung cancer or asthma, say.

Critical Illness cover is quite expensive -- I did not take it out. On the other hand, you could have a terminal cancer diagnosis and live another 4 years, so it might be worth considering.
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

runninginvestor wrote: Sun Sep 19, 2021 8:55 am
Spgold wrote: Sun Sep 19, 2021 7:48 am
climber2020 wrote: Sun Sep 19, 2021 7:35 am I don't understand. Term policies are usually cheap; mine costs $30 a month. Just pay for it out of your paycheck. Once you're financially independent, however long that takes, you don't need the insurance anymore.
I guess it depends on the age, term and coverage amount. In my case it would be around 180 per month…
You may be getting dinged by having a policy into your 60's. You could look at laddering a couple policies to see the cost difference.

For instance, if you were looking at a $1.5million 25 year term (ages 40-65), you could see what the total cost for $500k @25 years, and $1million @15-20 years. You'd still have mostly $1.5million coverage, but you could drop the more expensive, shorter policy if your investment portfolio rises enough so that you only needed $500k for your beneficiaries.

That's just an example, but something to play with if you are insuring into your 60's.
Good advice.
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Spgold
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Spgold »

Valuethinker wrote: Sun Sep 19, 2021 9:02 am
"all suggestions"? No one here would recommend whole life insurance over term.
Yes, suggestions made by friends and relatives who believe that with term all premiums paid get lost if the policy is not triggered, where as with whole the face value of the policy gets paid sometime in any case…

I think it is best if I provide some specific nrs.

I am thinking of getting a 30 y term until the age of 72 because I have a newborn daughter. The 30 years will cover some leaving expenses until she gets to 4 yo and start attending school, then her 16 years of attending a private school plus 5 years of University expenses and will also leave some chips on the table for living expenses or to serve her as an emergency fund (so until she gets to 30 years of age).

The term will cover absence of life (either by natural causes, illness or accident) , disability fee and also free premiums from the date of disability until the end of the policy. In addition it will also cover “Serious illnes” compensation such as Cancer, Serious Heart disease, etc.

For such term policy my monthly premium should be around 170-200 Euros per month and if a prepay the annual premium it would be around € 1800-2000.

If everything goes well and policy is not triggered that would cost me total € 54-60.000 for the 30 years.

Since I am self employed and my income is not stable, I am thinking of putting asside this amount which is now disposable and forget about it so even if something goes wrong in the future and my income plunges I will at least know that the policy will be taken care off.

In addition I am putting aside another amount each month constantly in Vanguard LS 60/40 so that it grows and takes care of the “growth” part of my plan.

That was my plan.

What do you think ?
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Stinky
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Stinky »

Spgold wrote: Sun Sep 19, 2021 9:36 am
Valuethinker wrote: Sun Sep 19, 2021 9:02 am
"all suggestions"? No one here would recommend whole life insurance over term.
Yes, suggestions made by friends and relatives who believe that with term all premiums paid get lost if the policy is not triggered, where as with whole the face value of the policy gets paid sometime in any case…

I think it is best if I provide some specific nrs.

I am thinking of getting a 30 y term until the age of 72 because I have a newborn daughter. The 30 years will cover some leaving expenses until she gets to 4 yo and start attending school, then her 16 years of attending a private school plus 5 years of University expenses and will also leave some chips on the table for living expenses or to serve her as an emergency fund (so until she gets to 30 years of age).

The term will cover absence of life (either by natural causes, illness or accident) , disability fee and also free premiums from the date of disability until the end of the policy. In addition it will also cover “Serious illnes” compensation such as Cancer, Serious Heart disease, etc.

For such term policy my monthly premium should be around 170-200 Euros per month and if a prepay the annual premium it would be around € 1800-2000.

If everything goes well and policy is not triggered that would cost me total € 54-60.000 for the 30 years.

Since I am self employed and my income is not stable, I am thinking of putting asside this amount which is now disposable and forget about it so even if something goes wrong in the future and my income plunges I will at least know that the policy will be taken care off.

In addition I am putting aside another amount each month constantly in Vanguard LS 60/40 so that it grows and takes care of the “growth” part of my plan.

That was my plan.

What do you think ?
I think that your plan to purchase term life is a good one.

The only area where I might differ with your thoughts is setting aside 30 years of premiums now. When I carried term life insurance, I considered the premiums to be just part of my daily/weekly/monthly expenses, like food, utilities, auto/home insurance, etc. So I didn’t set aside a lump sum for my term life premiums.

However, if it makes you feel better and more secure, there’s nothing wrong with setting aside the term life premiums.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Retired Bill
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Retired Bill »

Unsure of your household situation, or I missed it in the discussion, but assuming a single parent household with one dependent child. If this is the situation then I would recommend you also consider the need for disability insurance as this may be the greater risk than death, especially if you are young. Probably should be considering both, as if one becomes disabled your total household living expenses generally stay the same or increase and the loss of wages is generally not fully offset by social security disability benefits. Getting to life insurance, first consider how much you need between now and for how long. From sound of it, would be till dependent child reaches adulthood or maybe a few more years. The greatest need for life insurance is today and decreases over the years to zero by the time your child finishes their education or becomes financially independent. In my way of looking at things, term life insurance is not a part of the "portfolio" as it has no value unless one dies, but rather just a monthly or annual expense to be budgeted for. As your portfolio increases the need for term life insurance should decrease unless underinsured to begin with. I trust you have already dealt with other issues, such as custody of your child (physical as well as financial--does not have to be the same party) in event both parents predeceased. Hope this helps. Best Wishes
Rex66
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Rex66 »

Both term and whole life have cost of insurance

Term is pretty much just that

With WL the cost of insurance is ALSO spent and does NOT go towards the investment piece.


Additionally the cost of insurance is higher in WL
glorat
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by glorat »

I've just finished researching this whole topic for myself and come to the conclusion of... the same great advice already given in this thread by others.

Term insurance is the way to go, not whole life. I looked at the WL policies and it was essentially term insurance + an investment component that had a TER of 2.0%. Ouch.

The premium should be treated like any other fixed expense in your life (rent, utilities etc.). Treat any set aside the same way you do for your other monthly fixed costs - not specially for insurance.

I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
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Spgold
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Spgold »

glorat wrote: Mon Sep 20, 2021 7:51 am
I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
Actually it seems that it is quite the opposite (if I understand you correctly).

The longer the duration the higher the premium due to the risk increase of the company actually having to cover the policy.

For example for 25 years the fix annual premium would be around €1.600 where as for 30y ~ €1900 (all rough numbers).

Thank you all for your inputs, it helped me a lot.

I will go for TERM and consider the premium to be a monthly expense so no need to tie up the whole sum amount of premiums.

I just have to figure if I should opt for 25 or 30y , in other words if the ca 10-12k sum difference is worth insuring myself for the additional 5y period…
Valuethinker
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

Spgold wrote: Mon Sep 20, 2021 9:33 am
glorat wrote: Mon Sep 20, 2021 7:51 am
I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
Actually it seems that it is quite the opposite (if I understand you correctly).

The longer the duration the higher the premium due to the risk increase of the company actually having to cover the policy.

For example for 25 years the fix annual premium would be around €1.600 where as for 30y ~ €1900 (all rough numbers).

Thank you all for your inputs, it helped me a lot.

I will go for TERM and consider the premium to be a monthly expense so no need to tie up the whole sum amount of premiums.

I just have to figure if I should opt for 25 or 30y , in other words if the ca 10-12k sum difference is worth insuring myself for the additional 5y period…
It's up to you whether you feel a need to protect your child after age 25. Given your age, it will probably be a big increase in monthly premium, 25 v 30 years?

Guaranteed level term is the only kind worth having. If the premium is not guaranteed for the entire period of the insurance, then you are not actually buying a policy for that entire time period.

The reason is the insurance company will escalate your premium at each opportunity. And they will take into account not only your age, but also your personal circumstances. If you get a cancer diagnosis, for example, the renewal premium will be unaffordable - it's in their interests to do that.
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

glorat wrote: Mon Sep 20, 2021 7:51 am

I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
Glorat

I think you are a good, well informed poster.

On this point, I think you are incorrect. You can often buy extra insurance through your employer in the manner you describe - premium changes annually.

Level (premium) term, guaranteed premium, is the only type of life insurance worth having. If your health deteriorates, the insurance company cannot simply raise your premium to unaffordable levels.

If one wants the option to reduce cover, it is better to buy 2 policies (guaranteed premium level term) and lapse one as need for insurance diminishes.
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by David Jay »

Spgold wrote: Sun Sep 19, 2021 9:36 amI am thinking of getting a 30 y term until the age of 72 because I have a newborn daughter. The 30 years will cover some leaving expenses until she gets to 4 yo and start attending school, then her 16 years of attending a private school plus 5 years of University expenses and will also leave some chips on the table for living expenses or to serve her as an emergency fund (so until she gets to 30 years of age).
This is where multiple policies will save quite a bit of money. Your daughter does not need 1.5M at age 25. Based on 50K per year, you can buy 500K/10 year, 500K/20 year and 500K/30 year. The 10 year and 20 year policies will be lower cost because you are less likely to pass away in your 50s and 60s.
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andrew99999
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by andrew99999 »

Valuethinker wrote: Mon Sep 20, 2021 4:39 pm Level (premium) term, guaranteed premium, is the only type of life insurance worth having. If your health deteriorates, the insurance company cannot simply raise your premium to unaffordable levels.

If one wants the option to reduce cover, it is better to buy 2 policies (guaranteed premium level term) and lapse one as need for insurance diminishes.
The other side is that:
1. when you buy level, you are locked into that insurer for decades
2. they can increase costs significantly across all of their customers due to lack of proper previous risk assessment and still call it "level". This has happened in Australia, resulting in very frustrated customers who expected their premiums to remain relatively level.

I've read of people who purchased stepped and with the initial savings, they invested it for use in paying the higher premiums later on so that they're not locked into their insurance company who could be raising prices to unaffordable levels to make up for their earlier stuff-ups.

I'm not advocating for one or the other — just pointing out the other side.
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Spgold
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Spgold »

Thank you all for the inputs. It helped me a lot in the discussion I had with my insurance broker.

He is an independent one, so I got offers from several companies.

As per you suggestions I asked and got only offers for LEVEL TERM with the guarantee that the premium will stay stable through out the whole period.

Just a few numbers to make things simpler.

If I go for 30 years, the whole sum f the premiums will be between 51.000 - 54.000
If I make 1 contract for 25 years and 1 contract for 30 y (50% each) total premium cost 43.000~46.000.

I figured that if I go for the split solution and put the difference (ca 9.000) in VANGUARD LS 60 for 30;y with 5% annual compound (hopefully) it should end up worth ca 39k so all in all the premiums would have cost me around 5-7k ….

Sounds good ? Any error in my calculation?

Thanks
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by glorat »

Valuethinker wrote: Mon Sep 20, 2021 4:39 pm
glorat wrote: Mon Sep 20, 2021 7:51 am

I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
Glorat

I think you are a good, well informed poster.

On this point, I think you are incorrect. You can often buy extra insurance through your employer in the manner you describe - premium changes annually.

Level (premium) term, guaranteed premium, is the only type of life insurance worth having. If your health deteriorates, the insurance company cannot simply raise your premium to unaffordable levels.

If one wants the option to reduce cover, it is better to buy 2 policies (guaranteed premium level term) and lapse one as need for insurance diminishes.
I'm still new to the territory of term insurance and this month is the first time I've been looking into get it. I have company coverage but also want cover in case I lose my job.

On reflection I think you're right and happy to stand corrected. There is value in the additional value of freezing premiums for a number of years. I haven't bought yet but will rethink what tenor works for me.

Thanks to you and the community for the advice!
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

andrew99999 wrote: Mon Sep 20, 2021 10:38 pm
Valuethinker wrote: Mon Sep 20, 2021 4:39 pm Level (premium) term, guaranteed premium, is the only type of life insurance worth having. If your health deteriorates, the insurance company cannot simply raise your premium to unaffordable levels.

If one wants the option to reduce cover, it is better to buy 2 policies (guaranteed premium level term) and lapse one as need for insurance diminishes.
The other side is that:
1. when you buy level, you are locked into that insurer for decades
2. they can increase costs significantly across all of their customers due to lack of proper previous risk assessment and still call it "level". This has happened in Australia, resulting in very frustrated customers who expected their premiums to remain relatively level.
The terms then have different meanings in Australia v some other countries.

Guaranteed premium level term means guaranteed level premium, in North American insurance usages.

EDIT: upon reflection, maybe I garbled my word order? In any case, I meant guaranteed premium & level term. So "level term" can be taken to mean a fixed value upon crystalisation (death). Guaranteed premium or "guaranteed level premium" means premium does not increase for any reason - the insurance company has an unbreakable contract with you not to raise your premium (and you agree to pay a fixed amount every month).

If not clear, what the OP wants is a fixed annual premium for the term of the policy. Insurance without that clause is not worth much, if anything - because a deterioration of health can cause your premium to go through the roof, making it unaffordable to renew.

My critique of the alternative strategy that you suggest some use, below, remains correct in my view.
I've read of people who purchased stepped and with the initial savings, they invested it for use in paying the higher premiums later on so that they're not locked into their insurance company who could be raising prices to unaffordable levels to make up for their earlier stuff-ups.

I'm not advocating for one or the other — just pointing out the other side.
That cannot happen with the product I am describing. The premiums cannot rise.

Inflation can reduce the amount of protection - but will also reduce the value of the premiums.

In the UK or North America, the strategy you describe there would pile risk on risk.

Insurance, which is a protection product. But your ability to retain protection would depend on the investment returns. You are linking 2 things that one should not want to link.
Last edited by Valuethinker on Tue Sep 21, 2021 3:12 pm, edited 1 time in total.
Valuethinker
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

glorat wrote: Tue Sep 21, 2021 9:47 am
Valuethinker wrote: Mon Sep 20, 2021 4:39 pm
glorat wrote: Mon Sep 20, 2021 7:51 am

I don't think the upfront tenor matters. You could even simply purchase an annually renewing policy. Sure, it will start cheap and then get expensive as you get older - but that's also like an option to cancel for free if you become financially independent for both yourself and your dependents. The raw maths say it just doesn't matter what tenor you go for. (I suppose the longer tenor might be slightly cheaper since the vendor achieves a lock-in)
Glorat

I think you are a good, well informed poster.

On this point, I think you are incorrect. You can often buy extra insurance through your employer in the manner you describe - premium changes annually.

Level (premium) term, guaranteed premium, is the only type of life insurance worth having. If your health deteriorates, the insurance company cannot simply raise your premium to unaffordable levels.

If one wants the option to reduce cover, it is better to buy 2 policies (guaranteed premium level term) and lapse one as need for insurance diminishes.
I'm still new to the territory of term insurance and this month is the first time I've been looking into get it. I have company coverage but also want cover in case I lose my job.

On reflection I think you're right and happy to stand corrected. There is value in the additional value of freezing premiums for a number of years. I haven't bought yet but will rethink what tenor works for me.

Thanks to you and the community for the advice!
The value to company coverage comes if you have an adverse life expectancy or health diagnosis - say cancer, even if in remission. Then you can, as a 39 year old, say, buy insurance that you wouldn't otherwise be able to get.

But your premium will rise steadily every year. I had a colleague who had had cancer. But the premium for him, aged 60, was so high (even though not "rated" ie weighted for lower life expectancy) that it was not worth it (if he'd had a 5 year old son, and I did have a colleague like that in his late 50s, the call might be weighted differently).

But for the healthy individual, typically with new family responsibilities, mortgage shared w spouse etc, typically in their 28-35 age, the best solution is almost always (dare I say *always*?) to buy guaranteed premium level term.

That is:

- amount of coverage stays flat (so inflation will reduce it)
- premium is guaranteed for the life of the policy

Then you choose policy term. Typically until end of term of mortgage BUT you also have do consider needs of dependents etc.

This is a very inexpensive product. And insurance companies make no money from it - it's transparent to compare and highly competitive. So of course insurance companies and agents try to sell you more complex products, especially ones which blur investment and insurance functions. They are different, and are best kept separate.

BTW every 3 to 5 years the agent will call you back and ask if you are still happy. After a certain holding period, they can "churn" you to another product, and they don't have to repay the commission.
Valuethinker
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Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

Spgold wrote: Sun Sep 19, 2021 7:27 am Hello all, happy Sunday !

I am thinking of making a life insurance policy to make sure there will be a principal in case something happens to me which will cover some living and education expenses for my daughter.

Against all suggestion that were made to me I am leaning towards “term” instead of “whole” since I do not consider it an investment vehicle due to big expenses and fees.

This Term insurance will be for 25-30 years with annual payments. I already have the total cost (sum of 25-30 annual payments) currently available and my questions are the following :

1) Should I consider this amount (the sum of the 2t payments) as a part of my portfolio ?

2) Should I just keep this amount in a savings deposit bank account (withdrawing each year 1/25 or 1/30 for the annual payment of the premium) earning absolutely zero or should I hold it somewhere else (perhaps in a very conservative investment)?

3) in this case what alternatives to the savings account should I consider ?

4) Lastly is a 25-30 year Term life insurance a wise choice for someone’s in his mid 40’s for the above purposes ?

Thank you.
Discussion in the thread above might seem confusing.

It's simple:

- a. determine insurable need. There are worksheets for same. But basically to get your child (and your spouse) to the right place financially if you died tomorrow, when they reach age X.

- b. determine term of insurance. Related to a. Consider carefully whether you really need insurance for more than 20 years term? Because it gets expensive at your age. What outstanding liabilities will there be at that age? Mortgage? University tuition? Retirement portfolio for your spouse? I can see why you might decide you need 25 years, but 30 years? Remember you will be growing your investment portfolio all this time. (Unless you still expect to have a mortgage outstanding in 30 years).

Then you need a guaranteed premium for the life of the policy. Nothing else is worth having. Because if you get a cancer diagnosis, or angina or whatever, then your premium would be jacked up through the roof upon renewal.

There are many threads in the US boards here about how to do this for US citizens, and the principles are not much different.

One warning. It's absolutely in the interests of the insurance companies to sell you something more complicated (with higher profit margins, and so they award the agents higher commissions, too). Particularly European insurers with their outrageous fund expense ratios (don't get me started). And indeed, on the US threads, you find people associated with the insurance industry often starting threads, or trying to muddy the water.

You also get posters such as myself who worked (briefly) for a life insurer in our careers, who are vociferous in our line of argument, as above. There was a poster, now deceased, Old Mephistopheles , who had many many wise things to say about insurance.

"Buy term, and invest the rest" is the mantra of our US-based posters, and it's true for the rest of us, as well.

(Exception: I think in Ireland (?) the awful tax environment for individual investors, insurance products provide some tax protection. But it may still not offset the disadvantages).
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andrew99999
Posts: 1021
Joined: Fri Jul 13, 2018 8:14 pm

Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by andrew99999 »

Valuethinker wrote: Tue Sep 21, 2021 3:00 pm
I've read of people who purchased stepped and with the initial savings, they invested it for use in paying the higher premiums later on so that they're not locked into their insurance company who could be raising prices to unaffordable levels to make up for their earlier stuff-ups.

I'm not advocating for one or the other — just pointing out the other side.
That cannot happen with the product I am describing. The premiums cannot rise.

Inflation can reduce the amount of protection - but will also reduce the value of the premiums.

In the UK or North America, the strategy you describe there would pile risk on risk.

Insurance, which is a protection product. But your ability to retain protection would depend on the investment returns. You are linking 2 things that one should not want to link.
Quoting from an insurer:

Code: Select all

While your level premiums don’t increase because of your age, your premiums can still change because of the following reasons:
1. if you chose automatic indexation, which increases your cover amount in line with inflation
2. if we change our premium rates for all of our level premium policies
3. due to changes in stamp duty rates or
4. due to discounts that end or are reduced.
Then expanding on #2:

Code: Select all

2 Increases in premium due to a review of our premium rates

We regularly review our premium rates for all policies and make changes to them if we need to. For instance, we might need to increase our premiums if we are paying more claims than we expected to pay, or if the economic conditions change.

If we increase your premium rates, we will give you at least
30 days’ notice before any increase occurs.
So yes you are right that it does not increase based on age, but are you sure the above is not part of level premiums in other countries?
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by Valuethinker »

andrew99999 wrote: Wed Sep 22, 2021 5:20 am
Valuethinker wrote: Tue Sep 21, 2021 3:00 pm
I've read of people who purchased stepped and with the initial savings, they invested it for use in paying the higher premiums later on so that they're not locked into their insurance company who could be raising prices to unaffordable levels to make up for their earlier stuff-ups.

I'm not advocating for one or the other — just pointing out the other side.
That cannot happen with the product I am describing. The premiums cannot rise.

Inflation can reduce the amount of protection - but will also reduce the value of the premiums.

In the UK or North America, the strategy you describe there would pile risk on risk.

Insurance, which is a protection product. But your ability to retain protection would depend on the investment returns. You are linking 2 things that one should not want to link.
Quoting from an insurer:

Code: Select all

While your level premiums don’t increase because of your age, your premiums can still change because of the following reasons:
1. if you chose automatic indexation, which increases your cover amount in line with inflation
2. if we change our premium rates for all of our level premium policies
3. due to changes in stamp duty rates or
4. due to discounts that end or are reduced.
Then expanding on #2:

Code: Select all

2 Increases in premium due to a review of our premium rates

We regularly review our premium rates for all policies and make changes to them if we need to. For instance, we might need to increase our premiums if we are paying more claims than we expected to pay, or if the economic conditions change.

If we increase your premium rates, we will give you at least
30 days’ notice before any increase occurs.
So yes you are right that it does not increase based on age, but are you sure the above is not part of level premiums in other countries?

I am honestly not aware of any such clause in a UK (or North America) policy

https://www.moneysupermarket.com/life-insurance/faqs/
Are life insurance premiums fixed?
Level and decreasing-term insurance, and family income benefit policies, usually have guaranteed fixed premiums throughout the policy term.

That said, check the small print as some firms offer ‘reviewable’ premiums, which can be reviewed every five to ten years and normally go up in price.
https://www.cnbank.com/Your_Bank/Educat ... ce_Go_Up_/

The most common type of Term Insurance is Guaranteed Level Premium Term Life Insurance. Depending on age, you can get terms of 10, 15, 20 and 30 years. The premium is guaranteed not to increase for the life of the term period. The longer the term period, the higher the premium because the older, more expensive to insure years are averaged into the premium. At the end of the term period, your premium can increase dramatically. Therefore, it is important to choose the proper term period and to be aware of when that period ends.
https://havenlife.com/blog/does-a-term- ... s-you-age/
When you buy level term life insurance coverage, your rate is locked in. As long as you continue to pay your insurance premiums each month, you’ll pay the same rate during the entire term length – which, for many term policies, is typically 10, 15, 20 or 30 years. When the term ends, you can either choose to end your life insurance coverage or renew your life insurance policy, usually at a higher rate.

Level term policies can lock in affordable life insurance rates for the duration of your coverage. For example, a 35-year-old woman in excellent health can buy a 30-year, $500,000 Haven Term policy, issued by MassMutual starting at $35.40 per month. Over the next 30 years, while the policy is in place, the cost of the coverage will not change over the term period.
https://www.aviva.co.uk/insurance/life- ... insurance/
Level cover
For this option, you choose the cover amount and the length of time you’d like it for, and pay the same monthly amount for the duration of the policy. Though, remember that the policy has no cash in value at any time and if your payments stop, so does your cover.
Your point does underline the need to read the fine print... perhaps there is such a clause and I have never noticed it.

I don't know what the situation is in Continental Europe, but I think I have fairly characterised the UK position. So I don't think your point would apply here.

I've had life insurance since about 1994, and certainly the premium has never increased. It's inflation that is the downside - reduces the real value of any payout. However my mortgage is fixed in size - so that remains covered.
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andrew99999
Posts: 1021
Joined: Fri Jul 13, 2018 8:14 pm

Re: Life insurance part of the portfolio? And where to keep the premiums ?

Post by andrew99999 »

Valuethinker wrote: Wed Sep 22, 2021 4:33 pm Your point does underline the need to read the fine print... perhaps there is such a clause and I have never noticed it.

I don't know what the situation is in Continental Europe, but I think I have fairly characterised the UK position. So I don't think your point would apply here.

I've had life insurance since about 1994, and certainly the premium has never increased. It's inflation that is the downside - reduces the real value of any payout. However my mortgage is fixed in size - so that remains covered.
Thanks for taking a look at those.
Now I'm curious whether what I mentioned is standard across Australian life insurance companies or just some of them.
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