Cash Value Insurance Vs. IRA/401K

In this article, I want to discuss a little bit about cash value life insurance, and compare it in a retirement scenario to a more traditional IRA, ROTH IRA, or 401k. I will show, that, in general, before the age of 40, whole life life insurance will outperform a ROTH or traditional IRA or just about any of that other mutual fund propaganda. In fact, it will usually outperform a 401k with company match as well.

I also want to clarify, I am not an insurance salesman, nor do I, nor have I ever, received any compensation from any insurance company or insurance broker. I just understand financial principles, and here is one product that fits the retirement mold so well, that I feel that it's important that people really look at this product.

But, I need to be clear. I am talking CASH VALUE life insurance, and whole life insurance in particular, not TERM insurance, which is what probably 95% of the US workforce is currently carrying.

The reason?

Because as soon as you understand economics of life insurance, you will see that in a whole life policy, you have $1 doing the work of $2.

First off there are fees involved, and there are commissions as well, and they are fairly steep, as they should be, because the Life Insurance companies don't really want people using this tool, because they make very little on the policy (compared to their other offerings, especially term), so that right there should tell you something, but anyway, with a good mutual policy once you pay for about the first 5-7years, the policy will actually pay for itself, and after the first 10 years or so, you will actually start getting paid to have the policy.

Did you read that? You will get PAID to have life insurance. How does that happen, you ask? It comes from a little axiom that I like to call, $1 doing the work of $2.

So, then comes the estate planning picture. Which we will examine in more detail later.

Now let's look at the current retirement age, 65 right? Where did that number come from? Isn't it changing all of the time? Isn't it just some government bureaucrats who are dictating to you when you can or can't retire? They are controlling you, by controlling the laws surrounding IRAs and 401Ks right? Doesn't that mean that they can change the rules whenever they like, and to adjust them to whatever fits their latest agenda? Is that a way for YOU to plan for retirement? I hope not!

Now, let's say that you get as big of whole life policy as you can when you begin your career, and that comes to 10% of your income into the WLI policy, (obviously there are hundreds of variables, but to keep it simple), as opposed to putting 10% of your income into a 401K or IRA. When it comes time to retire, you will have more money available to you than if you had a formal retirement plan. Why you ask?

Because, first off your cash value of the policy will have been earning dividends that are usually on par with a 'safe' mutual fund, so your cash value will be just about the same as an IRA anyway.... $1.

But, your death benefit value will be much larger, as your death benefit value grows by a good percentage each year as well... $2.

So, now let's do the comparison..

For simplicity sake, let's say that at age 65 the 401k/IRA has a value of $2M, as you were diligent and listened to the '˜financial experts' (yeah right!!). But, you carried TERM life insurance for your whole life through your employer. You figure that now at age 65 you don't need life insurance any longer because your kids are grown, and you now have enough money to pay off your house and live a life fairly comfortably during your golden years, great.

Now let's say that using today's dollars, you owe maybe $500k to paying off your house, your two cars, your motor home, and the balance of your kids college bills, and let's say that at age 75 you die, let's also assume that you lived off the interest of your retirement (401k/IRA) nest egg, so the principle didn't change...(also, we will assume that there are no big out of pocket medical expenses.. which we know isn't true)

So, now, at age 75 you die, and you pass onto your wife and kids, $1.5M, right? Actually it would be less, with all of the estate taxes and all of that, but for illustrative purposes, you passed on $1.5M. To understand, $2M in IRA/401K principle, went to pay off your house, cars, motor home, and your children's college bills, leaving you $1.5M to pass on to your family.

But, with any kind of medical costs, that number could be A LOT less, right? Also, with any market volatility that number could vary quite a bit as well, up OR down.

Now let's look at the whole life scenario.

At age 22, when you started working, you start putting 10% of your income into the whole life insurance policy while you are young and healthy.

Let's just say for practical purposes, that you could afford at that age a $1M policy... which is probably about right for a 22yo professional right out of college at 10% of his income.

Now you continue to put in 10% of your income, as it grows, and continue adding policies on top of each other as your income grows... by the time you are 40yo you could have about $3-5M in policies, depending on your income.

For our purposes, let's just say that you only have $1M in policies and as your income grew, you SPENT the extra money enjoying your youth and health.

Now, at age 65, your cash value of the policy would only be about $500k, but your death benefit would be around $5M... (my numbers may be a little off here, but not by too much). Now, you borrow against your $500k cash value as you need money to live for 10 years... you will be living pretty slim no doubt, but $50k yr isn't THAT bad, it's about the same as the first scenario. Now you die, and you have the same $500k in expenses, house, motor home, college etc, and your LI policy death benefit is $5M, but you borrowed $500k to live on, plus $500k to pay off your bills, so now you pass on $4M to your heirs.

In this scenario, you SPENT all of the money between the policy premium and 10% of your income throughout your entire working career, give your heirs 250% more money, fewer tax liabilities to your heirs, and you lived a better life while you were young, and you had the same standard of living in your retirement years.

Or the other scenario, which would be a more of an apples to apples comparison, let's say that you didn't spend the spread between the policy premium and 10% of your income, and 'invested' it into multiple WLI policies instead... now just multiply everything in the life insurance scenario by 3 or 5... now we're talking apples to apples.

That's the power of the economics of $1 doing the work of $2.