I recently read a good article regarding an old proverb, "time equals money," discussing how we often make exchanges between time and money, especially in the form of work. The more we value our time, the more money we're willing to spend on saving it. The more we value our money, the more time we're willing to spend on preserving it. If we elect to take a direct flight over a one-stopper, we've decided our time is worth more than our money, therefore justifying the extra cost. In other situations, our money will be worth more than our time. You may drive across town to save a few bucks on groceries but you've decided that the money saved is worth the time driving. All throughout life, we will contemplate the two in an effort to help us make the correct decision... we hope!
After reading this article, it got me thinking on how I see this proverb contemplated everyday. The careful consideration of "time = money" holds strong to many of the decisions we make, especially when evaluating the different life insurance products available. One of the more popular choices is a product referred to as term insurance, which does come up in conversations between advisor and client most of the time - but how much do we really understand about the distinct differences between the terms available, and especially the effect this proverb has on our choice?
Evaluate life insurance on your terms
Term Life Insurance means just that - coverage for a set period of time selected by you, in which the insurance will eventually expire. You do have some options with term insurance, such as having the option in the first five years to exchange your existing term to a longer term. You can also convert to permanent insurance at anytime during the term without any evidence of insureability (meaning, regardless of a change in health during the term, the insurer cannot deny you the current insurance amount when applying for a conversion or exchange).
There are 10, 20, 30 year and to age 100 terms along with some others such as YRT (a Yearly Renewable Term), but generally, the former terms listed are the most popular. Terms are the most economical forms of life insurance and cost is one of the main reasons why they're such a popular choice, although one should be cautious with some of the "buy term, invest the difference strategies" available, as they're not always the most appropriate or wisest choice. When you buy a term, you're essentially protecting your beneficiary from a risk that, in that period of time, you generally anticipate will require capital should you no longer be around to mitigate it - such as a mortgage or the dependency period for a child. In some cases, you can purchase term to suffice temporarily for one reason or another.
But what happens if you still need the insurance nearing, or at expiry of the term? The price drastically increases, and with regards to the term length selected when first purchased, it could be many times the original premium depending on how much time has passed since inception. This scenario is surely a case where the insurance company now puts a higher value on their time - so how do you evaluate your value?
Consider the road ahead
I usually try to advise my clients to at least see the price for the longer term, even if they feel it's unnecessary at the present time. You may find it to be worth your while to buy the extra time now, because it can potentially cost you down the road. Also consider that, if your health were to change during that period for one reason or another, having a little extra time to decide or afford an option can help you. In such difficult circumstances, time is worth more than the money spent. Don't get me wrong, there are times when the shortest term makes the most sense, especially when you are confident that your financial needs and/or situation will improve in the near future but you still need coverage that will suffice for today. Another such time might be if and when you are almost absolutely certain an obligation will be gone before the end of the term. These are situations where your money is more valuable than time, especially if changing the length of the term, product type or canceling are inevitable actions in the near future.
Time = money?
It's a slippery slope when contemplating what is needed now, and also trying to anticipate future obligations. Evaluating where you place your value in the equation of time and money is something to be considered when buying term insurance. Properly assessing your needs can help in calculating what you pay now, in relation to what you (might) pay later. It's an equation that doesn't have a one-size-fits-all answer.
Carl Richards said "When and how we exchange time for money, or money for time, is incredibly personal. The decision doesn't fit neatly into some formula. Instead of assuming there's a right or wrong answer, we need to put the exchange in the context of what's right for us now. Some days money will matter more. But other days, we'll consider the money well spent for the time it buys us. That's the way it should be."
The opinions expressed in this article are those of Mike Cautillo, and not necessarily those of Desjardins Financial Security Independent Network.