DeShawn is 38 years old and is married with 3 children, ages 2, 4, and 6. He makes $45,000 a year and is planning to retire when he turns 60. From the following three options, DeShawn decides to buy the $900,000 20 year term policy. Given DeShawn’s scenario, assess whether DeShawn made a wise decision.

Question

DeShawn is 38 years old and is married with 3 children, ages 2, 4, and 6.  He makes $45,000 a year and is planning to retire when he turns 60.  From the following three options, DeShawn decides to buy the $900,000 20 year term policy.  Given DeShawn’s scenario, assess whether DeShawn made a wise decision.
Annual life insurance premium (per 1,000 dollars of face value) for age 38. A 20-year term for male is 15 dollars and 38 cents, and for female is 14 dollars and 88 cents. Whole life: for male is 22 dollars and 40 cents, female is 20 dollars and 4 cents. 20-year endowment: male is 30 dollars and 5 cents and female is 29 dollars and 63 cents.
a.
DeShawn would be safer buying whole life policy.
b.
DeShawn would have more money in the long run if he invested in the 20-year endowment.
c.
DeShawn’s current policy will cover his family for an adequate period of time at his current salary.
d.
DeShawn’s current policy has too high of a face value and does not cover his family long enough.

GPT-4o mini · Answer

Let's analyze DeShawn's options and his decision to purchase a $900,000 20-year term policy based on the provided information and assess each statement.

Understanding Needs: DeShawn is 38 years old, has a family (wife and three children), and earns $45,000 annually. He plans to retire at 60, meaning he has 22 years until retirement. A term policy provides coverage for a specific time frame—in this case, 20 years, which means coverage until he is 58. This could be adequate for protecting his family during the years when they are dependent on his income.
Cost: The annual premium for a 20-year term policy for a male at age 38 is $15.38 per $1,000 of face value. For a $900,000 policy, the calculation would be: \[ \text{Annual premium} = 900 \times 15.38 = $13,842 \] This premium appears to primarily provide life insurance protection rather than the investment potential of other products like whole life or endowment policies.
Comparative Analysis of Options:
- (a) "DeShawn would be safer buying a whole life policy." - Whole life policies offer lifelong coverage and could serve as an investment. However, they come at a higher premium (approximately $22.40 per $1,000). Given DeShawn's current income level and the fact that he has young children, term insurance may be more suitable for his needs at this moment due to lower premiums and a significant coverage amount.
- (b) "DeShawn would have more money in the long run if he invested in the 20-year endowment." - A 20-year endowment could potentially yield a cash value over time, but it has higher premiums than term insurance. It would depend on whether DeShawn can afford to pay higher premiums while also ensuring immediate coverage. This statement depends on his investment strategy and the guaranteed return from the endowment policy.
- (c) "DeShawn’s current policy will cover his family for an adequate period of time at his current salary." - This statement is likely true. The $900,000 is a substantial amount of life insurance that would provide financial support for his family's needs in his absence, especially with young children. Given that he has 22 years until retirement and a 20-year term policy, he should be covered for most of the years his children need support.
- (d) "DeShawn’s current policy has too high of a face value and does not cover his family long enough." - The face value is not too high considering he has dependents. It actually provides a critical safety net. Furthermore, a term policy lasting until age 58 is just under the time at which kids will potentially be adults, covering the peak financial need years.

In conclusion, the most reasonable assessment is that (c) "DeShawn’s current policy will cover his family for an adequate period of time at his current salary" is correct. DeShawn made a wise decision by choosing a term policy that provides high coverage at a lower cost while ensuring protection during the critical years of raising his children.