Suze Orman Money Matters

Not easy, is it?

Well, I have one for you: life insurance. Protecting your loved ones with a term life insurance policy costs one-third less than it did just a decade ago.

That makes life insurance a great deal for anyone who needs to purchase a new policy, but folks who already have a policy can save, too, if they ditch their old, expensive policy and take out a new one. Of course, that only makes sense if the insured is still in good health. And remember: Never cancel an old policy until you have been approved for a new policy, have paid your first premium, and the new policy is active.

How to Save a Bundle on Your Life

Let's say that 10 years ago a healthy 30-year-old guy bought a 20-year level term insurance policy with a $500,000 death benefit. Translation: He bought insurance for 20 years and agreed to pay an annual premium that would not rise in that time. If he dies during the 20-year period, his beneficiaries get a $500,000 payout. If he's still alive after 20 years, the policy expires with no payout to anyone.

This policy has an annual premium of $455 a year, according to the folks at AccuQuote, an online life insurance firm. But if the same fellow, now 40 and still in good health, wanted to save a bundle, he could take out a new 10-year, $500,000 level term policy and pay just $295 a year. That's a 35 percent saving!

Or, if he decides to extend the duration of his insurance, he could add an extra 10 years to his current coverage. So instead of taking out a new 10-year policy, he would go for a new 20-year policy. The cost: $470 a year. He just bought an extra 10 years of coverage for only $15 more a year than he paid on the policy he bought in 1996.

The Whole Story

The cheap cost of term life insurance is further evidence that permanent life insurance -- also called cash value insurance -- is in most cases a supreme waste of money.

Insurance agents love to sell cash value policies because they cost a lot more, and agents are compensated by a commission on what they sell. According to AccuQuote, a 30-year-old buying a $500,000 whole life insurance policy -- a popular type of permanent insurance -- would pay a $4,505 annual premium. The same 30-year-old who buys a 20-year level term policy today will pay just $355 a year.

Here's what the agent selling the permanent policy isn't saying: You rarely need insurance forever. Life insurance is only needed to provide protection in the early stages of your life, when you have yet to build up other assets. It's only in rare cases -- if you have a disabled child who may survive you, say, or a very large estate that requires some tax planning -- that a permanent policy might make sense. For the vast majority of us, term insurance is the only logical choice.

It's true that a permanent policy is good forever -- as long as you keep paying the premiums, your policy will remain in force. With a term policy, your coverage stops after the end of the term. And, yes, it's also true that there's an investment component to permanent policies. But as you'll see, it's not a good deal.

The Best Deal

The difference between the $355 premium you as a healthy 30-year-old would pay today for a $500,000 term policy, and the $4,505 you would pay for a whole life policy, is $4,150 a year. If you opted for the term policy and invested the $4,150 you "saved" by not going for the whole life policy, and earned an average of 8 percent a year, you would have about $202,000 after 20 years.

That $202,000 is a nice bit of savings to protect your family after your insurance runs out. Moreover, it exceeds the value of the permanent policy; after 20 years, the cash value of the whole life policy is $110,200. So you would make nearly $100,000 more by investing on your own. Even better, if you leave the $202,000 to grow at an average rate of 8 percent a year -- without investing a penny more -- you would have more than $2 million by age 80.

I can hear the insurance agents howling, "Oh, sure, but you will have to pay tax on that $2 million."

Wrong again. First, if you are eligible to invest in a Roth IRA, you could have the money grow tax deferred, and then you could withdraw the money in retirement absolutely tax-free. Yes, I realize that the maximum annual contribution is $4,000 for individuals under 50 but if you invest $4,000 rather than $4,150, you still end up with $1.9 million at age 80.

The whole point of this saving is not to have money for yourself, but to build assets for your survivors. Given that scenario, taxes aren't an issue: even if you invest in a regular taxable account, your heirs receive the money on a stepped-up basis, meaning they have no tax bill when they inherit the money.

A Third Option -- If You Must

If you absolutely need to know that you'll "get something back" from an insurance policy, take a look at a term policy that offers a return of premium. I'm not a huge fan of these, but they're a better deal than permanent insurance. As the name implies, with a term ROP policy you'll get your premiums back at the end of the policy term.

The catch is that a ROP term policy costs a lot more than a simple term policy. A 20-year, $500,000 level term policy with an ROP will cost $750 a year for a healthy 30-year-old. That's more than double the $355 it would cost to stick with a simple term policy. But at least it's a lot less than the $4,505 for the whole life policy.

Let's take one more trip to the chalkboard (sorry, I couldn't resist): For 20 years, you pay the $750 annual premium, and if you are alive after 20 years the insurer will pay you $15,000 -- the sum of all your premiums.

But don't pat yourself on the back just yet. If you opt for the simple term policy that runs $355 a year instead, and invest the $395 difference ($750 - $355 = $395), you'll have more than $19,000 saved up in 20 years, assuming an average annual return of 8 percent.

Yes, an ROP term life policy is a better deal than cash value insurance, but for my money, the best deal is still a simple no-frills term policy.