Lauren In Tokyo

Tuesday, May 29, 2007

Insurance comparison: the tables

Unbeknownst to anyone, I stopped in at Nippon Seimei, better known as Nissay, this morning to have a chat with the insurance department there about their offerings. If Ishida-san is reading, don't be alarmed. I only went to get policy information, not with any intent to actually buy. You're still our guy.

I received information about 4 different policies. The main thrust was that I want to leave enough such that my survivors will be able to survive without me. I also want to be free from paying the insurance company at some point, so all payment options are limited to age 65 at the latest.

The first is the simplest, 20 year Term Life insurance for 50,000,000 yen.
The second is slightly longer, an Age 65 Term Life insurance policy for 50,000,000 yen.
The third is a standard Whole Life policy with premiums paid until age 65 for 10,000,000 yen.
The fourth is a Mixed Term and Whole Life combination policy which provides 50,000,000 for a term of 20 years, then premiums and coverage drops to a Whole Life policy for 10,000,000 yen and is paid off at age 65.

I ran the numbers and was surprised by what I found.

I used the most expensive policy premium as a baseline. Any amount over the baseline is assumed to be saved or invested at a rate of 5% per year (current AAA bond values are this rate). Every month the premium is paid and the leftover is thus invested and returning some value. Naturally, the most expensive policy will have a zero rate of investment. If the maximum premium is 20,000 yen per month and the policy costs 15,000 yen, then I have a savings of 5,000 yen which is applied to the savings.

The value at any given time of the basket is simple. I take the redeemable policy value (how much my heirs get when I die), subtract the total value of the premiums paid to that point, then add the value of accumulated non-policy assets (the savings I mentioned earlier).

I then calculated the value of the basket up to my estimated death (75). As the policies expire, the entire amount of the premium is then applied to the savings. In the example earlier, I was depositing the surplus 5,000 yen into an investment vehicle, but once the policy payment term expires I would deposit the entire 20,000 yen amount into the investment vehicle.

What I found was that the best ROI by the time I died was the 20 year term policy. This is not surprising. The rates are low and the term is relatively short (for my purposes), so a lot of surplus investment capital is left over to build a large nest egg.

In second place was the Whole Life policy! Coming in at a 122% ROI, it outpaced the lagging Age 65 term policy in the long run. By providing a guaranteed cushion, the whole life plan never ventured into negative territory. Likewise, the fact that the premiums stop when I reach 65 means that I would have only paid 80% towards the 10,000,000 yen policy value. While not spectacular, the returns were steady.

In third place, I was surprised to see that the Age 65 term life plan failed to keep pace with the Whole Life policy in the long run. However, it does far outpace Whole Life for the 30-odd years that the term covers. In fact, this is probably why this laggard isn't such a bad deal once you start thinking about priorities. If the reason that I have insurance is to make sure that my kids are taken care of, then 1) I need to provide more than 100,000 dollars for them when I die, and 2) I expect that they will finally be independent by the time they are approaching 30 (Julian will be at least 32). Therefore, if I die before I turn 65, this policy makes the most sense. However, if I die after the policy expires, then all of this must be considered sunk costs. It does return about 57% in the long run, so that's not too bad.

Coming in last is the pitiful Mixed policy type. It not only didn't provide any return on investment, but actually costs more than the policy is worth as the end of the payment period approaches. The basic idea is that you have a 20 year term life insurance policy for 40,000,000 yen and a Whole Life policy for 10,000,000 yen into which all the premiums are divided. In essence, it provides a way of providing a significant amount of policy value for the years you need it while socking away a smaller amount of money for the twilight years. After the 20 year term is up, the policy can be renewed for another term at a higher rate (31+20 = $$$) or the term policy can be dropped and the premiums drop to reflect that. Since both policies must be paid, the premiums are about a quarter more than the Whole Life policy. If you do the math in your head, you will quickly realize that the policy actually ends up upside-down. You have paid more in than you can ever expect to get out. The best chance for this to pay off is to die right away or at least before the 20 years is up. Once the term policy is over, the Whole Life policy part becomes more expensive than a standard Whole Life policy.

Armed with this information and numbers, I am finally ready to discuss this with Miki. Her Whole Life mindset is not wrong if you only consider the long term, but I'm not exactly sure what she intends to do if I die before Julian becomes independent. 10,000,000 is not a lot of money, especially in Japan. Once we figure this out, we'll call up Ishida-san and get him to hook us up with an appropriate policy.

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