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Life Insurance Later Years
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THE SCENARIO
Recently, I talked about the choice between
two life insurance policies, and
how long it might take for me to get to the more expensive policy's end point if I chose the cheaper policy instead.
But what if I chose the cheaper policy, did the investing
as discussed before, and then stopped paying? I'm not young, but I'm not
that old either - 26 years from now I'll be younger than my parents are today, and they're both probably going to be alive for quite a few more years (at least I hope so!). My grandmother is 93 and she's still healthy, so there's at least
some hope for longevity for me, right?
So if I buy the Permanent policy, I'll have to continue making the $400 per month payment forever in order for the $500,000 death benefit to be paid out. If I go with the Term policy and invest the difference, I can choose to stop investing after the 26 years and not only will have have half a million dollars in the account, but it will continue to grow even after I stop contributing.
The question: If I live for 38 more years and it takes me 26 of those years to get up to $500,000 in my investment account, how much will I have in my account when I die? Assume that I can make 9.5% on my investments.
THE SOLUTION
This one is pretty straightforward.
First things first, make sure the calculator is using 12 Payments per Year.
N: 144 (I'll live for 38 - 26 = 12 years after I stop contributing, and that's 12 x 12 = 144 months)
I/YR: 9.5 (I can make 9.5% on my investments)
PV: -500,000 (After 26 years, I'll have half a million dollars)
PMT: 0 (After I've reached $500K, I'll stop contributing)
FV: (This is what I'm trying to find)
When I die, my account will have $1,556,382.15 in it.
If I were to have chosen the Permanent policy, I'd have to contribute for those 12 extra years, and my beneficiaries would be paid out $500,000 - less than ⅓ of the amount I'd have if I went with the Term-and-invest plan.
What do you think? Is it too much to assume I'll live past 80? Or that I'll be able to make good returns on my money in my twilight years? What would you do in this situation? Let us know in the comments!
