Life Insurance payout vs. inflation costs

Question

I'm currently thinking about purchasing 10 Pay whole-life insurance and I wanted to calculate how long it would take for the guaranteed cash value to break even with the out-of-pocket annual premium costs adjusted for inflation. The plan is set up such that I would pay $3,117 annually for 10 years, and the guaranteed cash values are the following:

$32,730 after 13 years (Y13)

$33,887 after Y14

$35,084 after Y15

$36,320 after Y16

$37,595 after Y17

$38,910 after Y18

$40,265 after Y19

$41,657 after Y20

Unfortunately, I don't know how to calculate inflation adjustments for recurring annual costs. I would greatly appreciate it if someone could lend some help. Thank you!

Answer 1

It might never break even, unless the insurance has a money-making machine.

• Understand that the insurance needs to take a share of your payment to deliver the actual insurance (some of their customer actually die, and want payouts).
• They also need to take a share to finance their own cost, plus their gain (those guys want salaries, etc.)
• the remaining piece now needs to be able to outperform inflation - and be guaranteed to do so, as they have the amounts in the contract.

Aside from that, you can convert payments between different base dates by a simple formula - for ever year, you multiply/divide the payment by (1+the assumed inflation percentage). So if your first payment is 1000 $ and it is in 2017, and inflation is 3%, this is for example equivalent to 1000*(1+3%) = 1030 $ in 2018, or 1000*(1+3%)^10 = 1343.92 $ in 2027. Do this math for every payment, add them up, and compare to the value they show you to see if it breaks even.

How do you estimate the inflation ratio? You can google for predictions, but nobody knows them exactly. It's up to you if you want to make your own guess, or use conservative or agressive predictions.

Answer 2

Assuming a constant inflation rate i, a premium p, and a duration t, the future value will be p(1+i)^t. If the payment is recurring, then the total value will be p[(1+i)^t+1-1]/i (this is assuming that you make one payment at t_i = 0 and an additional payment every year until t_f = t). So at the beginning of the tenth year (which will be nine years from now, if we consider today to be the beginning of the first year), it will be worth 3,117[(1+i)¹⁰-1]/i. The current inflation rate is 1.7%, so if we assume it remains constant, that gives 3117[1.017¹⁰-1]/.017 = $33,665.89. Again, that's the value at the beginning of the tenth year. At the end of the tenth year, the value will be $34,238.21. However, this doesn't take into account the interest that you would be earning if you invest the money instead of putting it into a life insurance policy. If you take your opportunity costs into account, your cost will be much higher. There are many online calculators that you can use, and Excel has an FV (for Future Value) function where you can enter your parameters and it will tell you the value. If you just want to look at the effect of inflation, you can treat inflation as an interest rate for the purpose of entering values in the calculator.