Podcast: Play in new window | Download
You are never going to pay less for whole life insurance than the amount you will pay this year. Whole life insurance rates become dramatically more expensive (actual dollar cost and the cost of lost opportunity) but all of this will become much more clear in the next few paragraphs.
You really don't need an advanced education or professional background in insurance to understand this. The reason the cost you pay for life insurance will increase each you comes from two places.
First there's the fact that you are getting older, which also means the probability that you are going to die is inching up year over year.
Second, every year you don't buy life insurance is a year that you don't pay premiums to an insurer. While this may not sound like a big deal–you might even think the money is better in your pocket than in theirs–this consideration can have a large impact on your future finances.
Compound Interest…The 8th Wonder of the World
Whether you buy term insurance or whole life insurance, insurers have a similar view on the dollars you pay them for the death benefit they promise to pay your beneficiary. They collect that money to create a pool of funds necessary to pay life insurance claims. There is no secret sauce that really cause whole life insurance rates to differ in terms of internal cost to the insurance company.
Now there are a multitude of nuances that highlight some pretty cool features of life insurance as it relates to the purchaser (we've written a lot of articles on that subject over the years), but I'm going to skip over most of them today and simply focus on on the fact that life insurance functions similarly to most other elements of life and time helps make it even better.
You can wait to buy life insurance for whatever reason you might come up with:
- I'm too young
- I'm too broke
- I don't have enough obligations to worry about
- I don't plan on dying anytime soon (one of my favorites!)
- Now's not a good time because I just had to buy a…
- Etc. etc. etc.
I'm not here to tell you that you absolutely have to buy life insurance because of this that or the other reason someone might have told you means you need to buy life insurance. I'm here instead to suggest that you might want to buy whole life insurance today because if you do, you have the very real possibility of benefiting from compound interest that significantly augments the value you can derive from the policy.
A Whole Life Insurance Cost of Waiting Analysis
Looking at three major U.S. life insurers' whole life insurance rates for a paid up at 100 participating whole life policy, we analyzed the increase in premiums imposed by the insurer every 10 years for a hypothetical male purchaser in normal health (i.e. he qualified for the insurer's standard risk class).
We looked at five different death benefit amounts for all age ranges. These death benefit amounts were:
- $100,000
- $500,000
- $1,000,000
- $2,000,000
- $5,000,000
We looked at the whole life insurance rates starting at age 25 and then every 10 years later (i.e. age 35, 45, etc.) ending at age 65. We then calculated the percentage change in required premiums from the prior 10 year point.
For example, the premium for $100,000 for a 25 year old was $943 per year on average. At age 35 this same $100,000 death benefit was $1,372 so the change from age 25 to age 35 was 45%. The chart below shows the average percentage change for each age band for all death benefit amounts.
Here's what happens:
| Age | Whole Life Insurance Rates from 10 Years Prior |
| 35 | 48% |
| 45 | 56% |
| 55 | 63% |
| 65 | 69% |
To help clarify the data, the row for age 35 depicts how much more premium you'd be required to pay at age 35 because you didn't buy at age 25. The increase in this case in required premium is 48%. So on average you'll pay 48% higher premiums for the same level of death benefit at age 35 versus what you'd pay had you bought the same amount of life insurance at age 25.
Required Premium Increases with Death Benefit
You might think that the premium increase over the span of each 10 year cohort would be the same for all levels of death benefit–I did. Apparently, this is not the case. Instead we noticed a slight increase in required premium as the death benefit increased.
Waiting hurts Your Whole Life Insurance Cash Value
Waiting to buy life insurance also impacts cash value accumulation. We'd hope that an increase in the whole life insurance rates cover the interest we lost from waiting 10 years, but hope is a lot cause in this case.
Looking at the age 35 to 45 results for a $1 million death benefit policy, we already know from the table above that the 45 year old pays a 56% higher premium than the 35 year old. But even worse than this is the fact that at age 65 the 45 year old will have 29% less cash value than the 35 year old. Turns out the 45 year old needs an premium increase higher than 56% in order to create cash values that match what the 35 year old will accumulate. Again time is on your side and the sooner you start, the more benefit you will reap.
What About Whole Life Designed for Cash Value?
We spend a lot of time on this blog discussing how people use products like whole life insurance as a way to accumulate wealth through the cash surrender value of the policy. People do this primarily through specialized policy design that seeks to cut out a majority of expenses (i.e. guarantees) associated with plain whole life insurance.
If we use this approach to life insurance, we can no doubt minimize the disparity between cash accumulation using similar premium figures. In other words, funding a 45 year old's policy at a level 56% higher greater than a 35 year old's policy. But we cannot overcome the lost years of compounding dividends the 35 year old will get that the 45 year old will not. As such, the 35 year old will always have an internal rate of return advantage over the 45 year old.
Time lost can never be regained. This sentiment echoes through the personal finance industry for eternity and its principle simple. Compounding will benefit you greatly so best to take advantage of it as early as possible.
