For an audio version of this post, please click on the speaker icon (top left).
Ride Or Die: A colloquial expression of extreme loyalty to someone or something.
This was a very interesting post for me to write.
I went into it thinking one way and by the time I did the analysis, I may have undergone a complete 180.
The issue in question?
A 30 year term $2M life insurance policy I purchased in 2006.
More specifically it was regarding an extra charge for an insurance rider, the return of premium.
The insurance agent discussed that if I did indeed purchase this rider, at the end of my 30 years if I did not use it (aka I didn’t die), I would be issued a refund of the entire amount I had paid in.
In addition, since it was classified simply as return of post tax money I paid, I would not owe any taxes on this amount in the end.
Not having to pay for coverage you did not use?
Sign me up! (He did).
This was almost a decade before my, “financial awakening.”
After reading post after post on the pitfalls of insurance traps such as whole life insurance and combined insurance/investing products, I automatically assumed I was duped into this product.
This year, year 13 of my policy, I felt I was at the point in my financial life cycle where I could be considered self-insured, as my heirs would do just fine with the proceeds of the inheritance as well as having no debt on the books.
Without much thought I figured I might as well cancel the policy and take my losses.
I then had the idea that this would make for a good blog post on the topic so that others may not have to endure the same mistake I made.
Because of a potential blog post, I decided to actually sit down and do some analysis and the results are included in the following tables.
I have to admit I was a bit surprised with the results and now am torn between canceling the policy or just keep paying to have it remain in effect.
| Year | Premium | Rider Cost | Premium + Rider | % Return | $ Amount Return | % of Rider Cost |
| 1 | $3,100.00 | $1,085.00 | $4,185.00 | 0% | $0.00 | 0% |
| 2 | $6,200.00 | $2,170.00 | $8,370.00 | 0% | $0.00 | 0% |
| 3 | $9,300.00 | $3,255.00 | $12,555.00 | 0% | $0.00 | 0% |
| 4 | $12,400.00 | $4,340.00 | $16,740.00 | 0% | $0.00 | 0% |
| 5 | $15,500.00 | $5,425.00 | $20,925.00 | 0% | $0.00 | 0% |
| 6 | $18,600.00 | $6,510.00 | $25,110.00 | 0% | $0.00 | 0% |
| 7 | $21,700.00 | $7,595.00 | $29,295.00 | 0% | $0.00 | 0% |
| 8 | $24,800.00 | $8,680.00 | $33,480.00 | 0% | $0.00 | 0% |
| 9 | $27,900.00 | $9,765.00 | $37,665.00 | 0% | $0.00 | 0% |
| 10 | $31,000.00 | $10,850.00 | $41,850.00 | 5% | $2,092.50 | 19% |
| 11 | $34,100.00 | $11,935.00 | $46,035.00 | 8% | $3,682.80 | 31% |
| 12 | $37,200.00 | $13,020.00 | $50,220.00 | 11% | $5,524.20 | 42% |
| 13 | $40,300.00 | $14,105.00 | $54,405.00 | 14% | $7,616.70 | 54% |
| 14 | $43,400.00 | $15,190.00 | $58,590.00 | 17% | $9,960.30 | 66% |
| 15 | $46,500.00 | $16,275.00 | $62,775.00 | 20% | $12,555.00 | 77% |
| 16 | $49,600.00 | $17,360.00 | $66,960.00 | 23% | $15,400.80 | 89% |
| 17 | $52,700.00 | $18,445.00 | $71,145.00 | 26% | $18,497.70 | 100% |
| 18 | $55,800.00 | $19,530.00 | $75,330.00 | 29% | $21,845.70 | 112% |
| 19 | $58,900.00 | $20,615.00 | $79,515.00 | 32% | $25,444.80 | 123% |
| 20 | $62,000.00 | $21,700.00 | $83,700.00 | 35% | $29,295.00 | 135% |
| 21 | $65,100.00 | $22,785.00 | $87,885.00 | 38% | $33,396.30 | 147% |
| 22 | $68,200.00 | $23,870.00 | $92,070.00 | 41% | $37,748.70 | 158% |
| 23 | $71,300.00 | $24,955.00 | $96,255.00 | 44% | $42,352.20 | 170% |
| 24 | $74,400.00 | $26,040.00 | $100,440.00 | 47% | $47,206.80 | 181% |
| 25 | $77,500.00 | $27,125.00 | $104,625.00 | 50% | $52,312.50 | 193% |
| 26 | $80,600.00 | $28,210.00 | $108,810.00 | 60% | $65,286.00 | 231% |
| 27 | $83,700.00 | $29,295.00 | $112,995.00 | 70% | $79,096.50 | 270% |
| 28 | $86,800.00 | $30,380.00 | $117,180.00 | 80% | $93,744.00 | 309% |
| 29 | $89,900.00 | $31,465.00 | $121,365.00 | 90% | $109,228.50 | 347% |
| 30 | $93,000.00 | $32,550.00 | $125,550.00 | 100% | $125,550.00 | 386% |
As highlighted in blue, if I were to bail out now, I would receive $7617 or only 14% of what I paid in.
I would also be “underwater” in terms of my benefit received to the cost of said benefit, recouping only 54% of the extra rider charge I incurred.
Each additional year I keep the policy in play would gain me an extra 3% return until year 25 when each year adds an extra 10% gain.
To truly compare apples to apples, I also calculated what the Value of Lost Opportunity would be if I had never taken the return of premium rider in the first place and instead invested it (with a conservative 5% annual return).
I also considered what my final value would be if I canceled the entire policy in my current year 13, invest the proceeds along with continued annual investment contributions of $4185 (the yearly savings from canceling the policy).
| Year | Rider Invested 5%/yr | Total Invested 5%/yr |
| 1 | $1,111.00 | |
| 2 | $2,276.00 | |
| 3 | $3,499.00 | |
| 4 | $4,784.00 | |
| 5 | $6,133.00 | |
| 6 | $7,549.00 | |
| 7 | $9,036.00 | |
| 8 | $10,598.00 | |
| 9 | $12,238.00 | |
| 10 | $13,959.00 | |
| 11 | $15,767.00 | |
| 12 | $17,665.00 | |
| 13 | $19,658.00 | |
| 14 | $21,750.00 | $12,292.00 |
| 15 | $23,948.00 | $17,206.00 |
| 16 | $26,255.00 | $22,372.00 |
| 17 | $28,677.00 | $27,802.00 |
| 18 | $31,221.00 | $33,509.00 |
| 19 | $33,891.00 | $39,509.00 |
| 20 | $36,695.00 | $45,816.00 |
| 21 | $39,640.00 | $52,445.00 |
| 22 | $42,732.00 | $59,414.00 |
| 23 | $45,978.00 | $66,739.00 |
| 24 | $49,386.00 | $74,439.00 |
| 25 | $52,966.00 | $82,532.00 |
| 26 | $56,723.00 | $91,040.00 |
| 27 | $60,669.00 | $99,983.00 |
| 28 | $64,812.00 | $109,384.00 |
| 29 | $69,163.00 | $119,266.00 |
| 30 | $73,731.00 | $129,653.00 |
As you can see I never catch up to the value of discontinuing the policy and investing the proceeds/savings.
However at year 30, if I did run this policy out to this course and didn’t die, those additional 17 years of a $2M life policy would have only cost me $4k.
Quite a bargain if you ask me.
If I had never taken the rider in the first place and invested that money instead, it would take me 27 years before my current policy overtook its value.
Points Of Consideration:
If only real life would exactly follow the tabular data this would be a bit more cut and dry.
But unfortunately even if the market does happen to average 5% over the period questioned, it certainly would not do so in a year after year fashion.
If I was hit with a bad sequence of returns early, the financial advantage could be completely lost.
Pros Of Keeping Policy:
- Guaranteed rate of return as outlined by the policy, ramping up significantly in the last 5 years of the term.
- In the event of my death, the $2M cash would be immediately available to my beneficiaries which could be invaluable if other assets are tied up in probate or are difficult to liquidate if needed.
Cons Of Keeping Policy:
- This policy is at risk based on the company backing it.
- If this business goes out of business I would be likely left with nothing.
- Potential opportunity cost magnified if market returns out perform the 5% estimate.
Is keeping this policy sunk cost fallacy thinking or does it actually make financial sense?
Note:
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
As always please consider subscribing to this blog.
It is loyal subscribers like you that really want me to continue to pour my heart into this passion project and create worthy content.
You will be kept up to date with the latest post along with bonus material like the net worth spreadsheet template I created (and satisfaction knowing you make Xrayvsn really happy as he is a number/stats guy at heart).
Thank you
-Xrayvsn
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
I’d probably cut bait but I’m no expert on these things. I kind of go along with the “I’m self-insured” model.
Thanks Dave. Yeah that was the option I was originally going with (although I still haven’t done it). I do like the thought of leaving my daughter with a life changing amount on top of what I already have if something happens to me before 65. Either way financially I don’t think it is going to hurt me so I just may let it ride.
Well the two thoughts that come to mind are that the market historically returns more then 5% once you talk about inflation which you don’t have factored in here.
I’d consider this a poor option for someone just getting the policy. But
things get trickier once you own the policy. I might recommend running the average rate of return from now to maturity.
Thanks FTF for the insight. I agree, I wish I hadn’t gone into the extra rider in the beginning but now I am stuck in the purgatory side of things and was trying to decide what would be best course of action. As for me choosing 5% I think it may be conservative for future returns in equity but was swayed by a lot of reading by people in the space (even Bogle thought future returns are not as rosy as past ones, but who knows the future). I figured if I picked 5% it would be a compromise in… Read more »
The other way to look at it would be to do a net present value of future payments and cash flows. If you plug in your 5% interest rate it can give you the opportunity cost of the money locked up versus available today.
That’s actually quite a good suggestion. I will see if I can manage the calculations on my own. (I have a quite limited knowledge base of higher financial mathematics).
That’s a tough call. My first hunch was to drop the life insurance since you’re self insured… but I can see how it could be worth it to wait a bit more.
Luckily for me, I had great resources like White Coat Investor to aid in my “financial awakening” prior to making big financial decisions such as insurance, asset protection, and investment.
I purchased term life insurance with minimal riders and a shorter term (thinking I could self insure by the time I’m 45) , so my premium is quite a bit lower.
I agree that you did it the right way (if had to do it all over again I would have done the term insurance life ladder and no need for return of premium). But since I did not come across Jim’s site when I made this decision (plus it wasn’t around 13 years ago) I bumbled my way through things financially. Some were hits, some were homeruns, and some were strikeouts. This one may be a base hit if I do let it play out and things work out according to the charts.
I’d probably drop it – simply shunt the difference to taxable investments and simplify one more life item. I like Dave’s simple approach of letting go as you hit FI and have enough to self-insure.
Thanks CD. It is true that there is benefit to simplify things in life (although this is pretty much something that runs automatically anyway with premiums set to come out of my account monthly)