Buy Life Insurance With A Guaranteed Net Cost Of Zero

If you buy a term life insurance policy, you are betting that you will die before the end of the term. Typical terms are 1 year, 5 year, 10 year, 15 year and 20 year. The longer the term, the higher the annual premium will be. If you survive the term, you lose 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 that it is inexpensive compared with all other types of insurance. In my 40-plus years as a CPA/lawyer advisor, 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—for example, to cover a mortgage or other debt or to provide for your spouse and/or kids.
3. It’s all you can afford.

According to Tax Planning With Life Insurance (Zaritsky and Leimberg), “After five years, over one-half of all term policies are no longer in force. Ten years after issue, there is only a 15 percent probability that a term policy will be in force at the insured’s death. There is less than a 2 percent probability that term insurance bought twenty years before an insured’s death will be in force.”

As you can tell, I have never been a fan of term life insurance (unless the insured was in one of the situations described above). 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” (MBT), “return-of-premium term” or some similar name.

Let’s take a look at a typical example. Joe, a healthy 36-year old, 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. At that point, the insurance company will pay him back the entire $45,000. And here’s an extra bonus: The full amount of the returned premium is tax-free.

Of course, there’s no free lunch. An MBT (for 30 years) cost a bit more than traditional terms. Your net out-of-pocket cost is truly zero, but your economic cost for the MBT 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 (with the exceptions noted earlier) to a rising star. MBT term is sold for 15-year, 20-year and 30-year terms. One more nice surprise: The longer the term, the lower the annual premium cost.

Hats off to David Greenspahn (the insurance expert in my network) of The Orchard Group in Winnetka, Illinois for providing me with the information about MBT.

I’m a tax guy, not an insurance expert. So if you have a question about MBT (or your existing insurance), call Mr. Greenspahn direct at (847) 446-1906. If your question involves how to use insurance in your tax planning, call me at the number listed at the top of this column.