Should you pay your life insurance premium forever, or would you rather be able to stop paying after a stipulated number of years? That sounds like an easy question, but it’s a little like, “Have you stopped beating your wife?” It’s a loaded question.
With Universal Life, you can design the premium paying period just about any way you want. The premium can be structured to be level over your lifetime, or you can determine what premium will be required to be able to stop paying after a number of years, but have the insurance continue for your lifetime. It’s probably a good idea to look at how these premium paying options can work for you. Just be certain that in comparing these various premium payment options, the guaranteed death benefits are the same. So, if the level pay premium guarantees the death benefit to age 121, the 20 year payment plan also guarantees the death benefit to age 121.
With the guaranteed death benefits at the same duration, it’s pretty easy to determine when the crossover point takes place; that’s when the cumulative lifetime premium exceeds the cumulative 20 year premium. But, just a cumulative premium test doesn’t take into account the “time value of money.” The best test for the real cost differential is to look at the Internal Rate of Return (IRR) of each payment method. The IRR will give you a point of reference that compares the actual rate of return based on death occurring at every year after the policy is purchased.
When considering the differences between paying a lower lifetime premium, or a higher initial premium that stops after a number of years, you might find that the insurance company with the lowest level guaranteed premium may not produce the lowest limited payment premium. If you are looking at different premium payment patterns, make sure your agent has taken this into account and looks at different companies.
IRR may be a mystery, so on my next entry, I’ll get into this subject in greater detail.