BUY TERM LIFE insurance and you are betting you will die before the end of the term. Typical terms are one year or five, 10, 15 and 20 years. The longer the term, the higher the annual premium. If you survive the term, you lost the bet.
But you can step up to the window and place another bet (for a higher premium). Remember, you are now older by the length of the term you survived.
The biggest, and really only, virtue of term insurance is it is cheap compared to all other types of insurance. In my 40-plus years as a CPA/lawyer/adviser, I have only recommended term insurance in three situations:
1. You have a better longer-term after-tax opportunity than the cost of buying more expensive insurance. Typically, young business owners buy all or some term.
2. You have a temporary need to cover a mortgage or other debt or provide for your spouse and kids until they can support themselves.
3. It’s all you can afford.
“After five years, over one half of all term policies are no longer in force,” according to the book, “Tax Planning With Life Insurance.” “Ten years after issue, there is only a 15% probability that a term policy will be in force at the insured’s death. There is less than a 2% probability that term insurance bought 20 years before an insured’s death will be in force.”
No doubt you can clearly tell from what you have read so far that I am not — unless the needs of the insured fits one of the three situations described above — a fan of term life insurance.
That is, until now.
Why the sudden change? One of the experts in my network introduced me to a new type of term called “money-back term” or “return-of-premium term” or some similar name.
For example, Joe, a healthy 36, would pay $1,500 per year for a $1 million 30-year term MBT policy. After 30 years Joe will have paid $45,000 in premiums. Then, the insurance company will pay him back the entire $45,000. Here’s an extra bonus: The full amount of the returned premium is tax free.
You know there’s no free lunch. MBT for 30 years costs a bit more than traditional term. Your net out-of-pocket cost is truly zero. But your economic cost for the policy is the loss of the time value of your premium dollars.
With the birth of a MBT, term insurance has gone from a bad bet to a rising star. MBT is sold for 15-, 20- and 30-year terms. The longer the term the lower the annual premium cost.
Finally, hats off to David Greenspahn of The Orchard Group in Winnetka, Ill., for providing the information about MBT contained in this article. If you have a question about MBT (or your existing insurance) call David direct at 847/446-1906. If your question involves how to use insurance in your tax planning, call me at 847/674-5295.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, Ill. 60606; tel. 312/207-1040, or via e-mail at [email protected].