You Don't Know Jack

Jack is 45 and he just purchased $1,000,000 of Term 20 insurance.     He pays $1,930 to the insurance company every year.   The plan is to drop the insurance after 20 years.   His family won't need it.   Mortgage will be paid off.   Wealth will be amassed.   Children are through their first degrees.   And there is little if any working income left to insure as he will be 65.

Jack was really pleased with himself ... that was until I came around.

Everybody has an economy, and I showed Jack what was likely to happen to his.   You see he was putting in over $38,000 into his economy ... but if he lived 20 years plus a day ... not one red cent of his money was coming out of his economic model.  

    

 
 

 

It can get worse for Jack ... 


If Jack had known he was going to live 20 years he would never have bought that insurance right?   Let's say then, instead of putting his hard earned money into the insurance company's economy, he invested it and earned 6% after tax.     That money would be worth almost $71,000 after 20 years.   That's called Lost Opportunity Cost.   The cost of his decision should he not die within the 20 years the policy was in force would be $71,000.
Why would you make a financial decision, that if you get want you want, you lose?   Assuming you want to live beyond 20 years, the financial decision of term insurance makes you a loser.   Money goes into your economic model, but nothing comes out.
The problem is Jack, like most people thought of insurance as an expense.     

 


What if Jack invested in his insurance?

Jack is a saver.   He contributes to his RRSP and his TFSA.     And his mortgage balance is lowering with every biweekly payment.   Well what would Jack's economy look like if instead of the expense of $1,930 each year he invested $11,540 into a permanent whole life policy that grew cash values on a tax sheltered basis?   $11,540 gets Jack $375,000 of permanent whole life insurance and the balance of his insurance needs are covered by $625,000 of Term 20.
In this case, if Jack lives 20 years plus a day he is not a loser.   Jack has $310,000 of cash in his policy that he can access in retirement.     He also has $625,000 of permanent insurance.   And Jack never needs to pay a premium again.

 

 Jack gets better with age

And so does Jack's whole life policy.   The cash in Jack's policy has grown to $838,000 when he is 85.   And the permanent death benefit is worth over $1Million.     At 85, this strategy alone has created an Economic Value for Jack of over $833,000.