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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?
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-Xrayvsn
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This is very interesting. It seems like investing money would win, but your numbers look good. I guess you already stayed in long enough. If you cancel earlier, investing would win by a larger margin. I’d stick with it if I was in your position.
Thanks Joe. Yeah the numbers surprised me as well. I was really all set to cancel it (in fact called the insurance company and had them mail the paperwork to do so). After running it through I have come down on the side of just keeping it as an extra cushion when I hit 65