When Should You Buy Life Insurance?

There is a theory that says you should buy life insurance when you are young because it is cheaper. That assessment contains a cost-price-value error.

The cheapest time to buy life insurance is the day before you die.

Understanding problems is a key skill. In homage to the cost-price-value question, buying life insurance the day before you die is a different question than buying when you are young.There are two more variables to achieve that arithmetically correct answer.

  1. You don’t know which day that is
  2. You don’t know if an insurer will treat you as insurable on that day

Much of the insurance premium is to cover those two variables

The right answer is to buy life insurance when you recognize a financial shortfall should you die without it.

Young people are easy. They have a huge career value to lose and no way to pay for real and implied obligations should they die too soon. Buy a lot and buy term. Many people outgrow their need for insurance. But not all do.

End of life costs can be large and inconvenient

People who own businesses face enormous losses at death, regardless of the timing. Taxes are one. Loss of key skills and relationships another. Value lost because purchasers know it is an estate sale a third. Costs to administer the estate another, yet. 

For those who have not prepared for the inevitable with perfect succession plans, the cost can sink the work of a lifetime. Cash needs and losses to get the cash can drag value down by 50%.

Life insurance is a conditional option on cash

If you knew some day you might need the land beside your factory, would you tie up capital now, or acquire an option to buy the property? Most would choose the option because the capital working in their business will earn more. Same deal for the cash to pay taxes at death.

Your death triggers the option and the cash is delivered when it is needed. No capital tied up. The option price is the annual premium.

An example

A 55-year-old male non smoker in reasonable health owes $10,000,000 in taxes if he dies today. Succession plans include a freeze and trusts and every other artifact known to man.  $10 million is the irreducible minimum need.

He has already dismissed the two executor controlled choices of borrow and sell something. These are provably too expensive and needlessly risky. He is deciding between life insurance and own the cash before death.


  1. Average life expectancy is about 25 years
  2. Probability of death before age 80 about 50%, Before age 90 around 90%
  3. Riskless investment in government bonds yields at about 3% and 1.5% after income taxes.
  4. Level term to 100 premium is $180,000 per year

The outcomes

At 1.5% after taxes, investing $180,000 annually in bonds would accumulate $5.5 million by age 80. To get to $10 million, the owner must live to 95. Low probability. Well, maybe he can find a riskless investment at 5.75% after taxes. No problem now.  $10,000,000 in 25 years. 5.75% after taxes is nearly 12% pretax. Again low to no probability of achieving the result.

Live to 95 or earn four times the market rate on riskless investments still leaves the problem of what if he dies next month?

The Decision

Term to 100 is not the only choice and sometimes participating insurance would work better. Higher premium though. Every need and resource set is different.

In context of the person’s estate and income, roughly $45,000,000 and $2,000,000, the premium is not material. The estate liabilities would be material because the estate is not liquid both by nature and design.

The life insurance solution is cheaper than any other and is chosen.

Harvey MacKay’s Lesson 62

Reread “Swim with the sharks without being eaten alive.” It has wonderful intuitive wisdom for business owners.

Lesson 62 is a masterpiece

“If you have a problem you can cure by writing a check, you don’t have a problem, you have an expense.”

Cash cures estate problems

There is no such thing as a tax problem in an estate. The problem is finding the cash to deposit in order to clear the check to the government. There are just four ways to get the cash and each has a cost. Life insurance is the least expensive.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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