September 16th, 2011 | Author: Mitch Reynolds

Should your life insurance be cheaper than paying for a car?

Life insurance is much more valuable than your car so why should you pay less for it?

Cash value life insurance is more valuable than a car. How much do you pay for life insurance premiums vs. your car payments? Which asset, your life insurance or your car, do you think is more valuable? In this article I want to show you how owning a life insurance policy can be way more valuable than owning your car AND how you can spend less money than you will spend on car payments over your life.

The cost of car payments over time

If we could all just buy one car in our lives and drive it forever, we would be in good shape. Unfortunately we tend to rotate cars on a regular basis and seem to be perpetually paying for a vehicle. The average lifespan of a vehicle in Canada is a little over 8 years. If it took you 4 years to pay off a car, then you would be having car payments for half your adult life. Maybe, maybe not, depending on how well you take care of your car and/or you continuously upgrade your ride.

If we were to assume the average care payment is $350 per month, and they were making these sorts of payments for 25 years of their adult life, they would shell out $105,000. Now, let’s assume their vehicle was sold as used car at the end of 8 years, and they were able to get $5,000 out of a $30,000 vehicle. If they did this 7 times over the course of your life, they would have a net value of $35,000 for your investment of $105,000.

We all know cars are a depreciating asset, but in this scenario you only get 33.33% of your investment day, and lose two thirds of the value.

What could a permanent life insurance contract do for you?

If you were willing to spend the same amount of money and “invest” into a secure permanent, cash value life insurance policy, how would your investment and total value stack up over time? Life insurance is an appreciating asset and is increased by the immediate insurance death benefit attached to the policy.

For the sake of this analysis, let’s assume the following:

Woman, age 30 (nice and young to simulate all those years of owning a car)
Non-smoker in regular health (the vast majority of Canadian women)
Willing to invest $350 monthly into a whole life insurance policy with guaranteed cash values and dividend payments
Wants to have her policy paid off in 20 years

For this analysis I will illustrate a Participating Whole Life Insurance policy from Equitable Life. This plan is called an Equimax 20 Pay, and here is what she would get for her money:

$420,000 of life insurance coverage ($351.64 per month)
Total investment over 20 years = $84,393.60
Cash values at ages 50, 65 and 85: $112,114, $379,448 and $841,761
Total death benefit at ages 50, 65 and 85: $420,000, $601,572 and $1,147,545

So what is the rate of return on her money? The rate of return will increase as she ages since her premiums were front-end loaded into the first 20 years. Here is the basic calculation on the cash value only (annualized rate of return):

Age 50 – 1.43%
Age 65 – 4.38%
Age 85 – 4.27%

The stable and secure rate of return on the cash value only is 4+% annually over time. BUT, what if we looked at the real rate of return, which is the total death benefit of the policy. Then the rates of return would be:

Age 50 – 8.35%
Age 65 – 5.77%
Age 85 – 4.85%

Since the death benefit is a large immediate payment in the early years, the whole life insurance rate of return would be inflated if something happened to you while you’re still young. As you age the rate of return decreases because the $420,000 of death benefit is minimized by the growth of money. Still, in today’s economy getting a secure and stable 5+% growth on your money in a tax sheltered plan is very attractive.

Make your life insurance payments a priority over your car payments

When you look through your finances, deciding on where best your money should go, looking at your life insurance would be a very valuable plan vs. buying depreciating assets like cars. What I’m trying to say here is if you’re willing to that much money over time for a vehicle why wouldn’t you be equally or more willing to invest that money into yourself and your family’s future?

If you can afford to save or invest money into a life insurance policy, we can show you how best to do it. Feel free to contact Life Guard Insurance to find a qualified life insurance broker who can show you how permanent cash value life insurance can be a great financial asset, not an expense.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about cash value life insurance vs car payments would also be very much appreciated.