Updating, Upgrading and Increasing my Life Insurance

I knew that after I bought the new house it was time to take a step back and really reevaluate the basics of my personal finance situation.  One of the first things I did was to make sure any newly acquired consumer debt was at zero percent interest.  I, then, calculated my new monthly nut and in the midst of that I have been giving real thought to my life insurance situation.

I have talked a lot about life insurance on this blog in the past four and half years.  I am back office support for a wealth management and financial planning firm so I discuss the topic daily, so it is only natural I bring my private thoughts to my blog.

Before we start. I own whole life insurance. I will be buying more whole life insurance.  I also own term. I will own more term.  I am comfortable discussing the pros and cons of whole life versus term, but don’t believe this is the post to do it.

My Current Life Insurance Situation

In preparation for this post I went through my archive and I couldn’t believe that despite posting about various life insurance topics like when life insurance is taxable, purchasing life insurance on my baby, and even comparing an actual whole life insurance policy, I never provided what I actually owned on my life.  As of writing this post (it will change in the next week and a half or so) I own:

• One $250,000 whole life insurance policy which was blended with term with a $500,000 Renewable Term Rider on the policy.

What does that mean?

• I currently have a death benefit of $750,000.
• The $500,000 renewable term rider increases the premium every policy year.
• The whole life insurance portion of the policy is not a 100% true whole life.  To keep costs down the policy is created in such a way that part of it is term, but the *hope* is that the policy, using the dividends, will eventually pay to turn that term portion into a fully funded whole life policy.

I should have written about the blending of a life insurance policy in the past, but since I haven’t I will introduce the topic now.  Note, that the blend has nothing to do with the additional renewable term rider which just lets me buy one year term life insurance which increases every year when I get older.

What Does it Mean to have a Whole Life Blended Insurance Product?

When you blend a whole life product you are purchasing part term part whole life.  The desired outcome is that the dividends + premium paid will start to convert small pieces of the term portion over a long period of time into a completed whole life contract.

In a normal whole life product, the dividends plus premiums paid will usually go to purchase additional units of death benefit.  So, if you purchased a $250,000 death benefit by the time you would have significantly more death benefit.  Alternatively/concurrently, you could one day decide to stop paying the premiums and the dividends could possibly be enough to keep the policy alive.

In a blended policy, the dividend + premiums paid are used to convert tiny pieces of the term portion to eventually get you to a non-blended state.  The pros are pretty simple, it brings the cost of whole life down significantly. The con is that if dividend rates change there is a possibility you get a bill one day as the premium plus dividends paid are not enough to support the product.

My Future Life Insurance Situation

I have already been underwritten by multiple insurance companies. Somehow by the grace of God, I received very good (actually at some companies THE BEST) ratings.  This means that the insurance I am going to purchase will unlikely ever been cheaper. As such, I think I am going to end up with the following:

• Bring that $250K Whole Life to 100% whole life with no blend.  Drop the Renewable term rider of $500K.
• Purchase $1,000,000 of the cheapest 20 year term my agent (who I trust with anything…guy was in my wedding party lol) can find.
• Purchase $1,000,000 of not so cheap term at a 150+ year old company with the hope that over time I will convert pieces of that into whole life.

This would bring me to a total death benefit of $2,250,000.  How did I come up with that number? Again, this may deserve its own post, but that number at 3.5% provides The Wife with enough income to basically run her life exactly the same without having to touch much of principal.