Home' Trinidad and Tobago Guardian : April 21st 2016 Contents APRIL 21 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG17
Celeste is a 40-year-old single
mom living in a two-bedroom
apartment with her eight-
year-old son Kyle. Celeste
earns $17,500 before taxes and
pays $4,500 in rent. She des-
perately wants to purchase her own home and
recently consulted with Jim, a financial adviser,
at her bank.
Jim suggested that she invest in some life
insurance as she plans to take on a mortgage
in the near future. He said that the bank offered
a plan with the loan and the sum assured
reduces as the debt reduces. He quoted a pre-
mium of $0.79 per month per $1,000 of insur-
ance coverage to age 65, when the loan will
Her best friend Marcia believes that Celeste
should shop around to compare plans and
select the one that is best suited to her needs
and pocket. Celeste requested quotes from
two insurance companies---which we shall call
Green Company and Blue Company---for plans
that also mature at age 65.
Green Company offered two level term
insurance plans: $1 million costing $237.13 per
month and $1.5 million costing $301.88 per
Blue Company gave four options: two level
term plans to age 65 for $1 million costing
$233.56 per month (or $2,616 annually), $1.5
million costing $335.34 per month (or $3,756
annually) and two increasing benefit plans of:
$1 million costing $459.17 per month with a
projected growth rate of 4.0 per cent per
annum and a maturity value of $46,992, $1.5
million costing $688.75 per month also with
a projected growth rate of 4.0 per cent per
annum and a maturity value $77,833.
The agent from Blue Company told Celeste
that whereas the term life insurance plan was
cheaper, she would receive nothing back when
the plan matures. Celeste wouldn t mind get-
ting back something at the end of the day but
still could not tell which plan is best for her.
Celeste has been saving for the house pur-
chase with the credit union and receives an
annual dividend of about of 5.0 per cent.
At present, she does not have all the money
needed for the down payment and is open to
any options that can close the savings gap in
the shortest time.
Putting the right type of life insurance plan
in place today is a very good idea, not only
because Celeste will have to pay a higher pre-
mium per $1,000 in coverage as she gets older,
but also because of the risk that she could die
before purchasing the house and leave Kyle
without a roof over his head. If she were to
die after the mortgage is granted then the loan
would be paid off ensuring that the bank does
not take away the property.
Paying off debt and providing shelter is not
the only purpose of insurance for someone in
Celeste s situation. She should also ensure
enough money is available so that part or all
of her income could be replaced until Kyle is
of age that he can take care of his own needs.
Declining, increasing and level
Jim is recommending a plan with coverage
that declines as the mortgage is reduced. While
this sounds practical---and even economical---
if the premiums on such a plan were the same
or higher than what she would pay for with
a level or increasing coverage plan then she
might be better off with going with the latter.
Increasing coverage has a sum assured that
increases over time, which helps the insured s
beneficiary deal with the rising cost of living.
If the increasing coverage plan were a term
life plan it means that, at the end of the term,
there would be no money coming back to her
if the plan expires before she dies.
The plan recommended by Company Blue
that has a savings component is most probably
the feature that allows the coverage to increase
over time as the cash value grows. If the pre-
miums paid on this plan were the same or
lower than that of a level term plan that has
no savings then it would be the better choice.
Level coverage or level term life insurance
has a fixed sum assured for the duration of
These so-called "bare bones" plans have
no savings so their premiums are often the
lowest, which means that for the same pre-
mium of a savings-type plan the insured could
purchase more coverage.
The fact that Celeste has not yet achieved
her saving target means that she should look
for an economical way to get the maximum
coverage she needs with the lowest monthly
commitment in premiums.
Quantifying coverage & cost
If Celeste just wanted to have enough insur-
ance for her debt then we need to know how
much the mortgage would be. Assuming that
she had a mortgage to age 65, with an interest
rate of 6.0 per cent and a monthly payment
of $6,125 ($17,000 x 35%) she would have a
loan of $951,000, which means that she would
in the market for about $1 million in insurance
The bank s declining coverage monthly pre-
mium would work out to be $751.29 for
$950,000 ($951,000 x $0.79 per $1,000) or
$790.00 for $1,000,000 ($1,000 x $0.79).
Green Company s level term for $1 million
is $237.13 ($237.13 / $1,000 = $0.24 per $1,000
of coverage per month).
Blue Company s level term is $233.56
($233.56 / $1,000 = $0.23 per $1,000 of cov-
erage per month).
Blue company s increasing coverage plan is
$459.17. ($459.17 / $1,000 = $0.46 per $1,000
of coverage per month).
It appears that Blue Company s $1 million
level term is the overall cheapest plan at $0.23
per month per $1,000 of coverage as compared
to Green Company s rate of $0.24 and the
Bank s rate of $0.79.
Volume & annual discounts
An interesting observation from studying
Celeste s insurance quotations was that if she
purchased $1,500,000 of level term coverage
from either Blue or Green Company the
monthly premium rate per $1,000 of coverage
was actually lower than with the $1,000,000
plan. So if her budget could afford it she could
buy more for less and address her other needs
apart from insuring the debt.
Blue Company has an incentive whereby if
she were to take the $1,500,000 level term
plan and pay annually the figure would be
$3,756 (instead of $334.34 x 12 = $4,024.08),
which is the same as $313.00 per month or
$0.21 per month per $1,000 of coverage.
However it was a surprise to note that at
the $1,500,000 level, Green Company s month-
ly premium was $301.88 or $0.20 per month
per $1000 of coverage even lower than if she
utilised the Blue Company s annual discount.
Term life versus life with savings
Blue Company has proposed an insurance
plan that also provides savings for the future.
If Celeste were to choose their $1,500,000
increasing coverage plan she would have a
maturity value of $77,833 at age 65. The down-
side is that the premium is a whopping $688.75
This premium is $386.87 ($688.75-$301.88
= $386.87) more than what she would pay at
Green Company for the term plan with no
savings but with the same coverage. The total
of this $386.87 difference for a period of 25
years (65-40=25) adds up to $116,061 which
is more than the projected future value with
interest of $77,833 (negative 3.45 per cent per
If Celeste were to invest $386.87 with her
credit union at 5.0 per cent (dividend rate) per
annum then she would have a future value of
In the final analysis based on the information
given Celeste would be best off taking Green
Company s level term plan for $1,500,000 at
$301.88 per month and investing any surplus
cash in the credit union assuming the dividend
rate is sustainable.
D C F
.F C C .
Term life vs life with savings
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