Are you married?
Do you have children?
Would your parents and/or siblings have trouble paying for your funeral if you were to die?
Me: Probably not.
Since I answered “no” to all of these questions, it is quite easy to see that I do not necessarily need life insurance.
However, would it be a wise investment decision to lock in a life insurance term rate now (at age 24 when I do not need it) than to wait until I do need life insurance? This will be the subject of today’s posting.
To do this analysis, we’ll need to compare the total cost of two scenarios – #1) the total cost of obtaining life insurance now, at age ~25 or #2) the total cost of obtaining life insurance at age 31, an age when I will be closer to having a wife/children. Both scenarios will involve obtaining a $1MM, 30 year level term policy quote from LifeQuotes, Inc.
Annual premium = $688
Annual premium =$891, ($738 current quote increased with inflation for 6 years from to simulate buying at age 31)
As you might have guessed, because I am younger in Scenario 1, the annual premium cost is less than in Scenario 2. However, we need to understand the magnitude of this difference in order to make a final decision.
The Google Docs spreadsheet, which can be accessed at the link below, provides a comparison between these two scenarios.
As you can see on the comparison, the difference, in today’s Dollars, is approximately a $6000 total savings by obtaining life insurance now vs. waiting until I am in my 30’s.
While this is a significant amount of money, it is not enough to influence me to buy life insurance now. Furthermore, the advantage of locking in coverage now diminishes further when you look at the opportunity cost of having your funds tied up in life insurance premiums.
For example, if I took the $688 annual premium for life insurance that I would pay between the ages of 25-31, invest it in the stock market, and assume an average return of 10%, it would result in an invested balance of $5300.
So, I would encourage each of you all to examine your own situation (and the benefits and negatives involved) and determine when is the most appropriate time for you to obtain life insurance.
Keep on learning!
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