#4.1: Types of life insurance
post by mingyuan · 2021-01-26T19:55:21.948Z · LW · GW · 13 commentsContents
Getting oriented Duration Premiums Death benefit Cash value Interest rates Price Term Life Whole Life Universal Life Guaranteed Universal Life Indexed Universal Life Properties of an ideal cryonics life insurance policy Permanence Flexibility Returns TL;DR Axes of variance Fixed term vs permanent insurance Term insurance Permanent insurance Which one should I choose? Cash value Guaranteed vs non-guaranteed insurance Guaranteed Non-guaranteed Types of insurance Term insurance Premiums Death benefit Whole life insurance Premiums Cash value Death benefit Payment options (limited vs lifetime) TL;DR Indexed universal life insurance (IUL) Premiums Cash value Death benefit TL;DR Universal life insurance (UL) Guaranteed universal life insurance (GUL) Premiums Death benefit TL;DR Choosing a policy Why I chose IUL My recommendations If you’re price-sensitive and expect to remain so: If you're currently price-sensitive but will be able to save a few hundred thousand dollars in the next decade: If you just want to get the best thing: If you're old: None 13 comments
This is post 5 of 10 in my cryonics signup guide [? · GW], and the second of five posts on life insurance.
In this post, I'll cover the different types of life insurance policies you might want to use to fund your cryopreservation. This is the most complicated part of this entire sequence and it's taken me many, many hours of confusion to reach even the tenuous understanding I'm presenting here. Please bear with me and let me know if you spot any errors or have any questions.
Note that in addition to being labyrinthine, the life insurance landscape changes fairly often, such that the options that were available to you when you signed up for cryonics ten years ago might no longer be offered. They're always adding new types of life insurance and getting rid of old ones, and the name of a policy doesn't always tell you the relevant information about it.
Getting oriented
Life insurance policy types vary along several major axes. Some cover you forever, while others expire; some are more expensive than others; some are more reliable and others are more flexible.
Here is the basic information in table form. You may want to refer back to this if you get confused while reading.
Duration | Premiums | Death benefit | Cash value | Interest rates | Price | |
Term Life | Fixed term | Fixed | Fixed | No | N/A |
|
Whole Life | Permanent | Fixed | Fixed | Yes | Guaranteed | |
Universal Life | Permanent | Adjustable | Adjustable | Yes | Determined by the carrier; variable | |
Guaranteed Universal Life | Permanent | Fixed | Fixed | No | Guaranteed |
|
Indexed Universal Life | Permanent | Adjustable | Adjustable | Yes | Indexed on S&P 500, capped |
|
For maximum hope of successful communication, I've approached this question from two angles – first I'll talk about the ways in which policies differ from one another, then I'll give a summary of each type of policy.
Properties of an ideal cryonics life insurance policy
Before we get into what types of life insurance actually exist, I think it's useful to think about what a life insurance policy tailored specifically for cryonics would look like. Then we can find the real-world policy that corresponds most closely to the ideal.
Permanence
You want coverage until you die, because otherwise there's no point. This means that you should steer away from term policies, unless you expect to be able to self-fund in the future.
Flexibility
Your death benefit needs to cover the full amount of your cryopreservation at the time when you die. Since you can't know exactly when you will die or how much cryonics will cost at that time, ideally you would get the amount of coverage currently needed to cover your preservation, and your death benefit would keep pace with inflation as time went on. That is, essentially, it would pay out a certain amount of purchasing power, rather than a certain dollar amount.
If you're signing up for neuropreservation, your policy would ideally have the flexibility to switch to whole-body built in. This means your death benefit would be adjustable – for example, you could just pay higher premiums if you wanted to increase the death benefit amount.
Returns
Ideally the money you pay in premiums would earn interest for you. And of course, all else equal you want the price to be as low as possible.
TL;DR
An ideal policy for our purposes would:
- Be cheap, permanent, and flexible
- Have a death benefit that grows with inflation
- Earn interest for you
Axes of variance
Fixed term vs permanent insurance
All of the insurance agents I've talked to have recommended permanent insurance for cryonics, but I know at least two people who have chosen term insurance, so it's worth looking at both.
Term insurance
As the name implies, term insurance covers you for a fixed amount of time. You can get term insurance for up to 30 years. Generally, once the term ends, your coverage ends.
Term insurance is the cheapest option by a factor of ~two, which is the primary reason someone might choose it. However, term insurance is given to you basically on the condition that it's very unlikely that you'll die within the term – which is how they can afford to sell it so cheap. According to one agent I talked to, only 3% of term policies result in a death claim.
Permanent insurance
Again, the name is pretty self-explanatory – permanent insurance covers you until you die, whenever that may be. Since there are several subtypes of permanent insurance, there are fewer broad claims I can make here. But I can say that permanent insurance is more expensive than term insurance, and that there are more options available.
Which one should I choose?
Permanent insurance is overall a far better choice for cryonics, because the death benefit will pay out no matter what age you are when you die. Gordon Worley gives a good summary of term insurance:
[U]sing term life insurance is cheaper but riskier, since you might outlive the term and be too old to purchase additional life insurance at a reasonable rate when you need it, effectively canceling your ability to pay for cryonics unless you have in the intervening time managed to do financially well enough to self-fund.
However, if you're signing up for cryonics but are really strapped for cash, you might want to take out a term policy just in case you die soon, then switch to a permanent policy once you're more financially secure. If you're able to make the switch within ~5 years, or before the age of ~35, you should still be able to get permanent life insurance at a reasonable rate.
Cash value
From Policygenius:
Whole life insurance and universal life insurance both have a cash-value component. Each month, a certain portion of the premium you pay to keep the policy active goes into a tax-deferred savings account, known as the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) The policy's cash value grows over time.
Depending on your policy and how much cash value it’s built up, you may be able to use the cash value to pay your premiums, or take out a low-interest loan against your policy. However, both of these options come with some risk: if you die before you repay your loan, the amount you owe will be deducted from your death benefit. And if you use up all of your policy’s cash value to pay your premiums, your policy will lapse.
Some policies allow you to choose how your excess premiums are invested, while others invest them in the S&P 500 or just guarantee you a certain rate of return.
When using life insurance to fund cryopreservation, you should just not touch the cash value at all. But it's good to have it anyway because:
- If you surrender the policy because you can't afford it anymore, you can get the accumulated cash value back from it (less surrender charges and taxes).
- In some cases, the cash value is added to the original death benefit amount, and both pay out to your beneficiary when you die. This depends on your specific policy rather than just on your policy type; for more detail on level vs increasing death benefits, see Investopedia's explanation.
Guaranteed vs non-guaranteed insurance
Guaranteed
What parts of the policy are guaranteed?
- Premiums are locked in at time of buying and guaranteed to never change (either forever or until a certain very old age like 120)
- Death benefit is guaranteed to pay out in full
- Interest rates (if applicable) are fixed at a rate set by the insurance company
Guaranteed insurance provides peace of mind, but it also lacks flexibility, and interest rates (when applicable) are relatively low.
Non-guaranteed
Why would you choose something with the name non-guaranteed? Basically, because while you're losing certainty, you're gaining flexibility. Also, exposing yourself to more risk means leaving open the possibility of higher gains – the projected returns on non-guaranteed policies are significantly higher than those for guaranteed policies.
With non-guaranteed policies, premiums are dependent on market performance, so if the market outperforms projections, you won't have to pay as much into the policy as initially quoted. Conversely, if the market tanks hard for a long time, your premiums can rise basically without bound. This is why you'll be cautioned that "Non-guaranteed coverage has an inherent risk of becoming unaffordable, in which case you might find yourself unable to secure any life insurance."
Types of insurance
Term insurance
Term insurance is non-permanent; it lasts for 10, 20, or 30 years and is very unlikely to cover you until death.
Premiums
Term insurance is the cheapest option by a factor of two or more, but only if you're statistically highly unlikely to die within the term. If you're closer to death, term premiums become exorbitant. Term insurance is also brittle – your policy will lapse if you miss a single payment.
Death benefit
Term insurance pays out a fixed death benefit. There is no cash accumulation or death benefit growth.
Whole life insurance
Whole life is a guaranteed, permanent policy with cash value accumulation. It is expensive.
Premiums
Whole life is the most expensive type of policy. Whole life premiums can be up to 5x as expensive as term premiums and 2x as expensive as IUL premiums. However, they are also guaranteed to never change for as long as you live.
Cash value
Whole life has a cash value component. Excess premiums are invested at the insurance company’s discretion, usually with returns of about 2-6% per year.
Death benefit
Your death benefit is guaranteed to pay out in full. It increases somewhat over time; for me, the dollar amount would ~double between now and the time I'm 90.
Payment options (limited vs lifetime)
There are two payment options for whole life insurance: limited payment and lifetime payment. The differences between the two are quite straightforward.
- Lifetime payment is cheaper per month, but you have to pay every month for the rest of your life.
- Limited payment is more expensive per month, but after a fixed time, you will have entirely paid off your policy and you'll get to have it forever without paying anymore.
Assuming you're young and unlikely to die soon, choosing a 20-year limited payment ('20 pay') will result in a lower cumulative out-of-pocket cost before inflation. (For me it's lower even taking into account 2% inflation per year, but I'm quite young so YMMV). Conversely, if you, like my mom, are signing up when there are only about 20 years left in your expected lifespan, choosing 20 pay would be stupid because it would just be more expensive with no upsides.
TL;DR
- Expensive but guaranteed
- Static premiums
- Death benefit may grow a bit
- Cash value invested with 2-6% returns
- Option to pay off the policy in full in 10 or 20 years
Indexed universal life insurance (IUL)
IUL is a non-guaranteed, permanent policy with cash value accumulation. It is tied to the performance of the S&P 500.
Premiums
IUL is a relatively cheap type of permanent policy. Premiums are calculated based on the current crediting rate (~6% at time of writing), but you have to rerun policy illustrations every 5 to 10 years to check if the policy is underperforming. If interest rates decline, your premiums may rise, and in the worst case, your death benefit may drop below adequate coverage. On the other hand, if interest rates rise, your premiums may drop and you could potentially stop having to pay at all.
IUL premiums are also flexible. You can pay more into the policy if you want to increase the death benefit, or you can miss months and let the policy pay for itself out of the accumulated cash value.
Cash value
IUL has a cash value component. Premiums are invested in the S&P 500, and the interest you earn goes toward reducing your premiums, with the excess amount (after funding the cash value and the insurance company’s cut) going to increase the growth of the cash value.
Performance is capped – meaning that there's a limit on how high your returns can be, but you're also protected from risk. The connection to S&P 500 is tax-free and credit-protected.
Death benefit
The death benefit in IUL policies is flexible – you can adjust it up or down (within limits) by paying higher or lower premiums. It also grows over time – the accumulated cash value, if left untouched, is added to the death benefit, such that the payout upon your death is [the initial death benefit] + [the accumulated cash value].
In my case, with reasonable interest rate assumptions, I was able to get the death benefit to keep pace with inflation (in expectation) by paying a bit extra per month.
TL;DR
- Relatively cheap and risky
- Tied to S&P 500
- Pricing based on current interest-rate assumptions
- Flexible premiums
- Flexible and growing death benefit
Universal life insurance (UL)
UL is just like IUL except worse, because it's more expensive and your cash value disappears when you die rather than being paid out to your beneficiary. Another difference is that your premiums are invested at the insurance company's discretion rather than just being invested in the S&P 500.
This section is shorter than the other ones because no agent ever recommended that I consider UL, so I didn't put as much time into understanding it. I did talk to someone [LW(p) · GW(p)] who used a UL policy to fund his cryopreservation, but he got that policy years ago and the landscape has changed since then; the carrier in question doesn't even offer UL anymore.
Guaranteed universal life insurance (GUL)
GUL is a guaranteed, permanent policy with no cash accumulation. You can think of it either as a cheaper whole life policy without cash accumulation, or as a term policy that lasts until a certain age (or until death) rather than for a certain amount of time.
Premiums
GUL is the cheapest type of permanent insurance. Your premiums are fixed at the time of buying and guaranteed not to change until a certain age (e.g. 90 or 121), at which point you'll likely already be dead.
Death benefit
You have coverage as long as you pay your premiums. Since there's no cash value, there’s nothing to support the death benefit if you stop paying your premiums, so the policy is brittle. Your death benefit is guaranteed not to decrease, but it will also never increase.
TL;DR
- Cheap and secure
- No cash value or death benefit growth
- Basically a term policy that lasts until age 90 or later
Choosing a policy
The decision about what kind of life insurance to buy ultimately comes down to whether you care most about reliability, flexibility, or budget. It also depends on your personal insurability.
Why I chose IUL
When I started the process, I thought I cared most about reliability, and I was leaning towards whole life. But as I gradually considered more angles, and especially when I thought about the expected amount of inflation between now and the end of my natural lifespan, flexibility and higher expected cash accumulation began to sound a lot more valuable to me.
A lot of people and a lot of websites played up the risks of IUL to me. But I looked at the illustrations, and I looked at historical interest rates, and I think the risks were usually overstated. Yes, the risks are there, but I think they're sufficiently unlikely that the policy is overall a good bet. In addition, though I don't really understand The Economy, it seems to me that if the market tanks hard enough that my IUL policy lapses, cryonics providers are going to be in pretty big trouble anyway.
My recommendations
Here are my general recommendations, with the disclaimer that I am a layperson just trying to figure things out from Google and a couple hours of talking to insurance agents. Also maybe people without licenses aren't allowed to give advice on this kind of thing, so, um, this is not advice.
If you’re price-sensitive and expect to remain so:
- Go for a permanent insurance option with low premiums (either GUL or IUL), and get it now, before age and poor health make your premiums rise.
If you're currently price-sensitive but will be able to save a few hundred thousand dollars in the next decade:
- Get term insurance now so that you can pay the lowest premiums but still be covered just in case you die in the next 20 (or 30) years. At the end of the term, you'll have enough money to cover your preservation in full, at which point you should self-fund with a trust.
- (See this comment [? · GW] for my reservations about this option.)
If you just want to get the best thing:
- If it's not too expensive given your risk profile, I recommend IUL, because I think the flexibility makes it a good fit for cryonics.
If you're old:
- If you’re around retirement age, your premiums are going to be very high. Hopefully you've accumulated enough assets by that age to self-fund. But if you can't, the best life insurance option is probably GUL, because the premiums will be the most affordable, and you don't need as much built-in flexibility if you're closer to the end of your lifespan.
Obviously I haven't covered every possible scenario, but I hope that you now have enough context to be able to make an informed decision about what's best for you.
As always, feel free to ask me questions about any of this. I can't promise to be able to answer all of them due to my tenuous grasp on economics as a whole, but I do think that even with that deficit, I'm more equipped to answer questions about the life-insurance-for-cryonics landscape than almost anyone.
13 comments
Comments sorted by top scores.
comment by Josh Jacobson (joshjacobson) · 2021-06-07T21:19:48.827Z · LW(p) · GW(p)
Beyond eventual self-funding, there are other reasons to potentially consider a term policy:
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Even if you do not expect to self-fund, if your financial assets will increase in the future and are low right now, the much lower term-cost may be worthwhile. I pay $10 / month for my term coverage, and I would not have opted in to the ~$100/month average you project elsewhere.
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If you expect that technological progress will greatly increase during your lifetime, e.g. short AGI timelines, or curing all disease, you may be primarily interested in coverage for the next ~20 years vs. after that time.
comment by lincolnquirk · 2021-01-26T20:22:15.799Z · LW(p) · GW(p)
Great analysis!
I would strengthen the term+self-fund recommendation for readers of LW. You say it only makes sense if you "expect to be very wealthy"; however, it seems to me that it is pretty easy, over the course of 20 years or so, to plan to save up a few hundred thousand $ to self-fund after that point. If that doesn't sound easy then it is not so clear that cryonics is for you; and IUL isn't solving the problem because you still have to pay the money in expectation. It seems like IUL only makes sense if the term insurance gets expensive before you can conceive of a way to save the money on your own. I guess it also makes sense if you aren't conscientious about saving or making term payments. But it seems to me like you pay a lot for this convenience.
Replies from: mingyuan, FireStormOOO↑ comment by mingyuan · 2021-01-28T00:28:28.931Z · LW(p) · GW(p)
Overall I think this is a fair point, in that many readers may well be able to self-fund a decade or two from now. One of my main hesitations in recommending term+self-funding is that it requires fairly complex and proactive action on the part of your future self. People's values and priorities change a lot over time, and procrastination is already so common in cryonics; I don't trust me of 10 or 20 years from now to actually get around to setting up and funding a trust even if I have the money.
Maybe people who have made being a cryonicist a major part of their identity and have already been committed to it for a decade or more don't need to be worried about this, but that is not the majority of people who sign up for cryonics, and it certainly doesn't include me.
it seems to me that it is pretty easy, over the course of 20 years or so, to plan to save up a few hundred thousand $ to self-fund after that point.
Forgive me for making assumptions, but from your site activity I get the impression that you're a software engineer. My mom and sister, who are signing up with me, are a teacher and a young adult author, respectively, and they live in an area of the US where salaries are relatively low. Even though they keep their monthly expenses super low (they own their house wholesale, rarely eat out, and don't have expensive habits), saving $10,000/year for 20 years is definitely non-trivial, especially since my sister is planning to have kids.
Separately, I feel uncomfortable relying on my savings plan to work out. I was on track to save a couple hundred thousand dollars in the next few years, and then my company pivoted and laid me off, and then the pandemic happened, and I ended up having a net-negative year financially. I would hate to put myself in a position where my term policy expired, my insurance premiums had doubled or more, and I couldn't afford to self-fund.
If that doesn't sound easy then it is not so clear that cryonics is for you
This rubs me the wrong way, and I'm not sure I understand your point. Perhaps this can be resolved by my response to the following:
IUL isn't solving the problem because you still have to pay the money in expectation
This isn't actually true. If I live to be 85, the total amount I pay in IUL premiums will only add up to about half of my death benefit amount. See my math here [? · GW] for more examples. Presumably the explanation here is that the insurance carrier makes up the difference (and more) from its returns on investing your premiums.
Plus there's a huge difference between having $100,000 extra dollars on hand at any given time, and having ~$50 available every month. It feels to me a bit like the difference between buying and renting – sure, if I rent for 10 to 20 years I will eventually have spent enough to cover the cost of a house, but I may well never have been in a position during that time where I could afford to stash away a lump sum of half a million dollars. Also, I will have had ~$90,000 more in liquid assets available every year, which I value.
---
Finally, if I do end up able to self-fund, I can always just cancel my IUL policy. The premiums I paid in the meantime will be two or three times what I would have paid for a term policy, but unlike with a term policy, I can get cash out of my IUL policy if I surrender it. I'd guess that the surrender value wouldn't make up the difference in premiums, but it's not nothing.
Replies from: lincolnquirk↑ comment by lincolnquirk · 2021-01-28T02:46:39.830Z · LW(p) · GW(p)
All these are great points! You've updated me that the IUL solves a real problem.
The thing I felt (and still feel) that you aren't acknowledging is the investment returns on savings -- with the IUL, the insurance company will invest the money and take all the upside; whereas if you save it yourself, you can keep that upside. In the linked post you assume a 0% return on savings.
I did run through a few scenarios with nonzero rates of return. The IUL doesn't come out ahead in expectation, but it seems to have been designed well enough that if you want certainty, it wins:
Scenario A: $320/month saved for 15 years at 7% grows to $100k in those 15 years. Then you're done. (Obviously that 7% rate of return comes with substantial risk, so you have a chance of not being at 100k at that instant; but you still have 5 years to solve the problem before your term runs out!) This has a high chance of solving the problem in 20 years instead of 60, and you still have the rest of your life for that investment to keep growing. That said, it's still a risky strategy and I haven't accounted for the cost of the term life premium.
Scenario B: $88/mo for life (your IUL quote). You will reach $100k at the 60-year mark as long as you average a 1.5% rate of return; at 2% you only need 54 years; at 3% it's 46 years. Again, a risky strategy.
IUL gives you a certainty of death benefit with a relatively low monthly premium. The cost is basically all your upside, which is substantial, but like you said, I think it's probably worth it for people who have the problems it solves.
Replies from: mingyuan↑ comment by FireStormOOO · 2021-06-17T07:57:26.758Z · LW(p) · GW(p)
It seems a more durable policy has a much greater chance of surviving a bankruptcy, divorce, or other financial upset (far more common in a lifetime that folks care to admit) that could wipe out savings or assets. We shouldn’t underestimate the value of separation/legal protection for the assets we want to use to fund cryopreservation. This doesn’t seem to be covered at all in mainstream financial advice and that seems like a mistake. Specifics are hard to come by, but cash or investment accounts are effectively fair game if you owe anyone money for any reason. Accounts that have more strings attached on how you can spend the funds (e.g., various tax-sheltered accounts, trusts, presumably life insurance) seem to have proportionally more protection from being seized, at least to a first approximation, but as I said, seems to be very under documented. I'd be eager to hear about it if someone had more luck hunting down that info than I did.
comment by Gordon Seidoh Worley (gworley) · 2021-01-27T01:09:54.294Z · LW(p) · GW(p)
Something I'm just now thinking of: I wonder if cryonics could be funded using a retirement account? It has similar protections to life insurance in terms of being paid to a beneficiary instead of your estate, and I actually have Alcor listed as the beneficiary of my retirement accounts in case I die since that seems like the best use of my money at that point if I'm not going to be using it to fund a retirement. Maybe combine retirement account with term life insurance to get more cost efficient coverage? Possibly requires creating a trust to put those two things together.
I'm sure someone has already thought about this and may know reasons why it would or wouldn't work. For example, maybe the funds aren't as protected as with life insurance, which go directly to your beneficiary without having to first pay off debts in your estate.
comment by romeostevensit · 2021-01-27T09:11:09.429Z · LW(p) · GW(p)
Buying a cheap term policy makes sense if you expect to be able to self fund later.
Replies from: mingyuancomment by Ericf · 2021-01-26T20:58:59.457Z · LW(p) · GW(p)
Isn't anything with a cash accumulation just combining Insurance with Investment, and charging you ?unknown? extra fees compared to having Insurance from an Insurer, and Investing the money saved in a low cost dedicated Investment option? So, GUL or Term, depending on your relative $ position?
Replies from: mingyuan↑ comment by mingyuan · 2021-01-28T01:53:55.761Z · LW(p) · GW(p)
I think you're asking: Wouldn't you do strictly better to get cheap life insurance with no frills, and just invest all the money you'd save on premiums in index funds?
The honest answer is, I'm not sure. This is something I've wondered about a lot, and I haven't been able to get a firm grip on the math. That same math is also relevant to the question of whether it's more economical to take out a policy with a higher death benefit now, or to wait and purchase additional insurance later.
Note that however the math comes out, I'm still quite wary of term insurance for reasons mentioned in this comment [LW(p) · GW(p)]; but the math might well indicate that people should go for GUL. The reason I didn't give GUL more of a chance is that it isn't offered by the most cryonics-friendly insurance carrier, Kansas City Life [? · GW], and the situation of having to set up a trust and take out an additional life insurance policy seemed like a major enough barrier that GUL wasn't worth considering. Perhaps that was a mistake.
I also think, but am not sure, that IUL and GUL are generally pretty close to the same price, and which one is cheaper depends on your insurability. If it's the case that IUL is cheaper for me, I see no reason to prefer GUL.
Replies from: Ericf, Ericf↑ comment by Ericf · 2021-01-28T04:07:27.029Z · LW(p) · GW(p)
Another consideration is that cryonics might be proven to not work sometime in the next 10-30 years, and if you have a bunch of value invested in a no-longer-needed insurance policy instead of a liquid stock fund, that would be suboptimal.
↑ comment by Ericf · 2021-01-28T03:50:59.960Z · LW(p) · GW(p)
Yes, every situation is different, and if you did the math correctly, any given set of insurance & investment could be the correct choice. The important thing is to actually do the math if you are going to deviate from the naive heuristic of "pay as little as possible in fees."