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Insure or Save - Can Smart Investment Make Your Life Insurance Redundant?
Insure or Save - Can Smart Investment Make Your Life Insurance Redundant
?When you start investigating life insurance, you'll often come across opinions that lean towards the idea that you don't need to pay money to a big (evil) corporation to get something that you can do for yourself for free - save money. The idea is that smart saving and investment can replace life insurance. So, is this true? Today we take a neutral look at the things you need to consider, and how the numbers might stack up.
If you save the amount of your life insurance premiums, how much will you have?
If you're a male, a recent survey of life insurance premiums for professional male non-smokers revealed the average premium to be about $488 per year, and around $365 per year for female professional non-smokers.
Given that low-risk investments like bank term deposits return about 6% per year, in your first year of saving your premiums a male 30-year old would have $517 saved, and a female would have $386 ... compared to purchasing life insurance, which would give you 12 months of complete peace of mind and the certainty of a $750,000 payout to your family at the time of claim.
But most life insurance premiums go up as you age!
All stepped term life insurance premiums go up as you age. The same survey revealed that at age 40, male non-smokers would be paying $575 per year and females would be paying $464 per year. Saving premiums instead of buying insurance would give males around $7000, and females around $5000. Still, this doesn't quite compare to the $750,000 of cover.
Don't premiums go up far more after age 50?
Yes, average premiums for 50-year old professional male non-smokers are around $1419, and around $1069 for females. At age 60 this has increased to $5062 for males and $3132 for females.
However, these figures are to keep the same level of cover (indexed to the CPI) that these males and females had at age 30 ... when they were far more likely to have dependent children and very long mortgages. It is far more common to reduce your level of cover as you age to keep premiums manageable. In this way, it is possible to keep your life insurance for the whole of your life ... and still have a substantial payout at the end of it!
While the theory of simply saving your own cash for a rainy day rather than spending money on insurance sounds tempting, the numbers simply don't add up. Saving the same amount of money as your life insurance will eventually pay out would have a massive impact on your lifestyle ... and doesn't provide you the peace of mind when you really need it.
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