Why life insurance is a smarter bet than a lottery ticket

You can’t beat the return on investment the Powerball jackpot winner got recently — $590.5 million on a $2 lottery ticket.

But if you’re really serious about leveraging dollars for your family, life insurance is a smarter bet than the lottery.

Both are built around the leveraging concept, says Jim Saulnier, a Certified Financial Planner in Fort Collins, Colo. With life insurance, you pay a relatively small premium, and the policy pays a big benefit to your loved ones when you die.

The average cost of a 20-year, $250,000 level-term life policy for a healthy 30-year-old is roughly $150 a year, according to LIMRA and the LIFE Foundation. (See: “How to evaluate term life insurance.”)

Sure, the lottery produces a bigger bang for the buck. The latest jackpot, in fact, was the largest in Powerball history. The sheer magnitude brought reporters from around the country to little Zephyrhills, Fla., a town of about 13,000 outside of Tampa, where the winning ticket was purchased last week at a Publix supermarket.

But the odds for winning big with a lottery ticket are infinitesimal. Your chance of winning the Powerball jackpot: 1 in 175 million.

Permanent life insurance, on the other hand, has a guaranteed payout to your beneficiary. And even term life, which covers you for a certain number of years, has far better odds of paying out than the lottery. (See: “5 keys to choosing permanent life insurance.”)

The chance of dying after age 25 before reaching normal retirement age is 1 in 6 for men and 1 in 9 for women, a 2007 Milliman Inc. study for the LIFE Foundation found. ( See: “Understanding life insurance table ratings.”)

“To me, life insurance is the Eighth Wonder of the World,” Saulnier says. Besides a policy’s leveraging capabilities, the proceeds are generally free from estate and income taxes if the policy is structured right.

Lottery winnings face a healthy bite from the tax man. Some states don’t tax lottery proceeds, but the IRS does. Twenty-five percent of lottery winnings are held back for federal taxes.

The Powerball winner can take the jackpot as a lump sum of $370.9 million or the full amount in annuity payments. If the winner takes the lump sum, the tax bite up front will reduce the payout to $278 million.

The get-rich-quick aspects of the lottery are tough to resist, especially as the jackpot grows. On the evening of the big Powerball drawing, for instance, the lottery ticket sales pace reached $36,000 a minute in Texas alone.

Philip LeBlanc, principal of Longfellow Benefits in Boston, recalls working two summers in college as a courier for the Massachusetts lottery some 30 years ago. He picked up and delivered tickets and lottery supplies to convenience stores.

“I used to see people lining up to purchase lottery tickets,” he says. “They were allured by the thought of a payday.”

Many of them didn’t have much of a payday on their own.

“Too many people don’t think about defensive financial planning,” he says. “They’re more interested in offensive planning — stocks, quick riches and immediate impulse thrills like the Powerball.”

Life insurance — if you have financial dependents — along with at least three to four months of income in savings, disability income insurance and health insurance are musts for a defensive strategy, he says.

Once a defensive strategy is in place, you can look toward the offense.

“Yeah I had $20 of tickets,” Saulnier says of last week’s Powerball drawing. “I didn’t win.”