term that's thrown around a lot with
term life insurance is the "Cost of
Waiting". What exactly does this
mean and how is it important to your
decision of when and how much to buy?
Let's take a look at how
pricing works and the critical impact
that age has on this process.
life insurance is different from other
types of insurance such as health in
that the rate you pay throughout the
life of the policy is based on how old
you were when first enrolled. This
makes sense since the the statistical
probability of triggering life benefits
increases as we get older. Age at
the time of enrollment can be the
biggest determining factor in how much
term life will cost you. The key
point is to calculate the cost over the
life of the policy. It's best to
look at an example.
example, if you are age 30 and planning
to buy $500K for 20 years (let's say for
a newborn child), the average premium
for a given carrier/plan is around
$20/monthly. That's $240 annually
or $4800 over the 20 year term.
Let's say you want to wait till age 35
to purchase the same type of coverage.
Now the average cost is $5760.
That's an increase of $1248 or a
whopping 26%. On top of this, you
did not have coverage for that 5 year
year period and if something were to
happen, you really lost $500,000 plus
the $1248. The $500K is a little
more important! This comparison is
for two relatively young age bands.
The difference in cost only increases as
you get older. For example, the
difference between a 35 and 40 year old
would be $1440. This means you
will have to either buy less coverage
which may preclude you from taking
advantage of price breaks that accompany
dollar of coverage thresholds
(such as $250, $500K) or you will have
to buy it for a shorter period of time.
You don't want to have to buy 10 years
of coverage now and another 10 years
(assuming you qualify based on health)
10 years later because you will pay a
significantly higher amount based on
your older age then.
take away from all this is that you want
to buy as much as you can at the
earliest age possible. You don't
want to buy too much and overextend
yourself. It makes no sense to buy
$2 million in coverage when you can
really afford (over the full term) $1
million. If you end up lapsing the
coverage due to non-payment, that
defeats the whole purpose of term life
insurance. It's better to find an
amount within your budget and lock in
the rate at the younger age. This
is clearly a case where procrastination
and waiting can you cost you real money!