Hypothesis

I’ve heard there were ‘breakpoints” with term life insurance where the insurance gets cheaper.  The classic example is that if you buy just more than $1 Million it can be dramatically cheaper than buying just less than $1 Million.  I wondered if that’s actually true, so I thought I’d check.

Methods

I used a 30 year old male non-smoker with excellent health in my state and took quotes from Term4Sale on 12/20/2012 from three companies, Banner, Pruco, and Cincinnati Life.  I obtained the annual price for each level of insurance, and then divided it to get the price per $10K of insurance and plotted it against the amount of insurance purchased, from $100K to $3M.

Results

Coverage Banner Per $10000 Pruco Per $10000 Cincinnati per $10000
50000  $               –  $               –  $        172.00  $        34.40
100000  $               –  $               –  $        146.00  $        14.60
200000  $               –  $               –  $        217.00  $        10.85
300000  $      266.00  $          8.87  $      286.00  $          9.53  $        270.00  $           9.00
400000  $      333.00  $          8.33  $      353.00  $          8.83  $        335.00  $           8.38
500000  $      400.00  $          8.00  $      420.00  $          8.40  $        410.00  $           8.20
600000  $      467.00  $          7.78  $      487.00  $          8.12  $        477.00  $           7.95
700000  $      534.00  $          7.63  $      554.00  $          7.91  $        544.00  $           7.77
800000  $      601.00  $          7.51  $      621.00  $          7.76  $        611.00  $           7.64
900000  $      668.00  $          7.42  $      688.00  $          7.64  $        678.00  $           7.53
1000000  $      715.00  $          7.15  $      745.00  $          7.45  $        735.00  $           7.35
1250000  $      877.50  $          7.02  $      910.00  $          7.28  $        900.00  $           7.20
1500000  $  1,040.00  $          6.93  $   1,075.00  $          7.17  $    1,065.00  $           7.10
1750000  $  1,202.50  $          6.87  $   1,240.00  $          7.09  $    1,230.00  $           7.03
2000000  $  1,365.00  $          6.83  $   1,405.00  $          7.03  $    1,395.00  $           6.98
2500000  $  1,690.00  $          6.76  $   1,735.00  $          6.94  $    1,725.00  $           6.90
3000000  $  2,015.00  $          6.72  $   2,065.00  $          6.88  $    2,055.00  $           6.85

I don’t see any big “breakpoints.”  It looks an awful lot like a continuum, at least once you’re buying $300K or so.  Let’s plot it out just to be sure.

I think I can hallucinate a very slight change in slope at $1 Million, particularly with Banner, but for the most part it appears to be a continuum.

Conclusion

If an insurance agent tries to get you to buy more life insurance in order to get to a “breakpoint”, I’d be awfully skeptical, at least for any amount appropriate for a typical doctor or similar professional.  There is a breakpoint at $1 Million, but it isn’t particularly significant.

However, it is clear that the more insurance you buy, the cheaper it is per unit of insurance.  That makes sense, since the administrative costs are similar whether you have a $100K policy or a $1 Million policy.  One lesson you can take away from this exercise is that you may be better off buying one big fat policy rather than 2 or 3 smaller ones.  There may still be very good reasons to have more than one policy aside from simple diversification.  You may want one policy that expires in 20 years and another that will last another 5 or 10 years beyond that.  Or you may simply buy them in step-wise fashion as your income increases.  However, you should realize that buying them that way is costing you money, and the smaller the policies, the more it is costing you per unit of insurance compared to one large policy.