Depending upon your financial and family situations, you have a number of options when it comes to buying insurance. There are policies that cover the remainder of the mortgage owed the bank if the head-of-household dies unexpectedly, and there are policies that are more like investments that accrue wealth over your lifetime so that you can withdraw funds when you reach a certain age.
There are all sorts of variations of life policies to suit individual needs and desires. My wife and I started in the insurance business some years ago, specializing in mobile homes (house trailers). One of our main lines of insurance was credit life insurance. It insured the life of the purchaser of a mobile home for the term during which he was purchasing the home, and it insured for exactly the amount owed the bank on his time payments. If he died the day after he purchased a mobile home on which he owed $5,000, the insurance company paid off the $5,000 debt and his family would not be dispossessed.
There is one type of policy, which represents the savings element alone and does not provide the insurance element. This is the annuity. You make a cash payment early in life, or periodic payments throughout your life, in order to get an income when you retire or pass a certain age.
At age 25, for an annual premium of $100 for 40 years, you can get $8,201.47 in cash at age 65 or monthly payments of $51.34 for the rest of your life.
You have invested in 40 years 40 times $100 or $4,000, and at age 65 this has grown to $8,201.47. It has better than doubled.
To find the average annual return, we determine the profit ($8,201.47 less $4,000), which equals $4,201.47, and divide this by 40 to get an annual profit of $105.
The average investment is halfway between zero and $4,000 and is equal to $2,000. The annual return is thus $105 divided by $2,000, or 5.25 percent. This represents considerably less than 4 percent compounded annually.
If the option of $51.34 per month is selected instead of the sum total of $8,201.47, it takes between 13 and 14 years to exhaust the total, and if you live longer than this number of years, you have come out ahead.
If you pay $1,000 in a lump sum at age 25 and pay nothing more, by age 65 this $1,000 has grown to $3,920.17. It has almost quadrupled, and the profit is $3,920.17 less $1,000, or $2,920.17-$73 a year. This is, of course, a return of 7.3 percent, which is equal to $1,000 compounded annually at roughly 4 percent. It is safe and it is not a bad investment.
The rate is slightly better than all of those worked out above because the mutual insurance company whose rates are quoted above anticipates an income dividend roughly equal to 10 percent of the monthly payments. Thus 10 percent should probably be added to the monthly payments.
Keep in mind that we are discussing return on your money and insurance as an investment. We are not talking about the absolute desirability or undesirability of insurance. This is important because every investor has different investment needs.
Think carefully and do your research before buying an insurance policy. There are so many options out there, and not all of them above board, that it is easy to get confused and frustrated. It's a good idea to speak with a financial advisor or insurance professional to decide what policy is best for you and your family.