Think Twice Before Buying Whole Life Insurance as an Investment
Consider a 30 year old male who is looking for $100,000 in life insurance. Like many of his peers, he has a family who depends on his income, as well as a mortgage. He has received an offer from an insurance company for a term life insurance policy which would cover him for 20 years at an annual rate of $130. The second offer he received is for a whole life insurance policy under which he would be covered for his entire life at an annual rate of $1,236. He is looking for life insurance as a way to ensure that his family is taken care of in case of his death and is considering whole life insurance since he will be covered for his entire life (as long as he keeps paying the annual premiums), but the annual premium seems high.
If he chooses the term life policy and invests the annual difference between the policies ($1,106) every year on his own, he would have $49,500 by age 50, in addition to $100,000 worth of life insurance coverage for 20 years (this assumes a conservative 8% annual rate of return). In comparison, the guaranteed cash value of the whole life insurance policy would only be $21,700 at age 50, with no guarantee that the death benefit would be any higher than the original amount of $100,000. At this point, the man would no longer have any life insurance since his term life policy has expired, but he would have $49,500 put aside for his family in case of emergency, or about half of the value of the whole life policy. He is taking on additional risk as the whole life insurance policy has expired, but at age 50, he would hopefully be more financially secure and able to accept this risk.
If the man continues to invest the annual premium of $1,236 in place of paying for the whole life policy and does not touch the $49,500 that he has already saved, he will have $116,400 at age 60. At this point, the cash value of the whole life insurance policy would be $38,300 and again there is no guarantee that the death benefit would be any greater than $100,000. If he lives to age 75, which is the average life expectancy, he will have accumulated $369,325 if he saves on his own, versus a guaranteed cash value of $65,000 with the whole life insurance policy and potential death benefit of $184,000 (assuming that the policy has appreciated at a rate of 5.5%, which the insurance company has done in this case). In the course of 45 years, he has outearned the insurance company payout by 100%, just by investing regularly on his own.
The amount and type of life insurance to purchase is a purely individual decision which must be made considering each person's unique financial situation and the level of risk that he/she is willing to take on. However, in analyzing the numbers, whole life insurance must be considered as just that - an insurance policy in case of premature death - and not as a strong investment tool.
Published by C.M. Paulson
C.M. Paulson is a versatile writer and analyst with extensive business experience working for 2 Fortune 100 companies. View profile
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- It may make sense to use term life insurance and invest the difference in the premium costs
9 Comments
Post a CommentThere are a number of errors in this article. First and foremost, when did an
8% become conservative? The article completely ignores the fact that even if you got such a return, a third of that would go to taxes (depending on the tax bracket). As pointed out earlier it is highly misleading to assume that your return in whole life is only the contract value. While it is not guaranteed that a policy will receive dividends (Mutual companies regularly pay, and have paid dividends without fail for decades) which serve it increase cash value as well as increasing policy amounts.
Suffice it to say that while there is some truth, the truth only serves to confuse those who don't look beyond the printed word
This author is misleading, First a whole life 100k policy does not cost 1100 monthly. I know because I have a 111k policy. I spend 3k a year. Also My death benefit goes up EVERY year. I have had my policy for 1yr and it is at 120k death benefit. Meaning I put in 3k but got 9k (3times) worth in policy value. Not to mention I have cash value in my policy after having it just a year. My policy gets 4.5 percent a year on my cash value and 4 percent on my policy value. This is completely tax free and never declines. I do not know where this author got his numbers from but they are completely false and mis-leading.
just read TAX FREE RETIREMENT BY PATRIC KELLY and you will be convencined to buy whole life insurance. just dont believe this author.
Oh my. This uthor is either in 3rd grade or getting kick backs to from the mutual companies. Do some research, would you. That's like stating CD's are good and the FDIC has guarantees. Just an awful summation. Email bbyrne13@comcast.net if you want to know the real deal, with real numbers. My WL policy is on track for 8.2% when I retire. I sleep well.
can you contact me about your company policy rsvinton@msn.com
miked(guest)
I am trying to find a whole life policy that is
Dividend paying
has flexiable PUAR
Non-Direct recognition
long term track record of paying dividends
(at least 50 yrs)
rated very strong by independent rating agency
anyone have this email rsvinton@msn.com
Whole life insurance is not made to be a short term investment. if you can wait it out until you are 65 you will see a much greater return than you could possibly get in any other 100% safe investment. also what this author fails to mention is that whole life insurance can never go down in value, for example in year 40 if your cash value on the account is 200,000 and the stock market falls 50% like some of your 401(k)'s guess what? your money is still worth 200,000 at the end of the year. the company i work for is paying a 6.5% yeild this year on its whole life insurance while the stock market is down nearly 50% from its high. Im not saying put all your money in life insurance, but its by far my favorite investment. Term should only be bought where whole life cannot be afforded. Don't invest the difference, statistics cant lie.
It is rather disappointing for me to read this article on using Whole Life as an investment/savings vehicle. I believe the author has taken a completely simplistic view of the issue. Issues you have overlooked include the impact taxes will have on either the build-up of the separate investment or on it eventual distribution, risk involved with its growth and a very limited knowledge of the Whole Life product. Whole life becomes a very worthwhile vehicle when a dividend paying policy is used. There are companies that have paid a 5-7% dividend annually for the past 100 years. With the proper advise, this young client could have far greater cash values than you have determined and significantly more death benefit 20 years out than 100K, and definetly more than the 0 death benefit the term policy will have in year 21. Properly structured, a whole life policy will produce a stream of Tax-free Income for this client when he is in retirement, try obtaining these type of benefits from a
the problem with your assumptions here is that you assume an 8% return on your investments every year and you use the "guaranteed cash value" for the whole life policy. Typically, the whole life policy will perform better than the guaranteed return. Talk to anyone who's looked at their returns in their IRA vs Whole Life policy over the last 2 years and see what's performed better....Also, if you buy whole life, you're insuring that your beneficiary will have a death benefit that they more than likely would depend on if something happened to the insured. Whole life insurance by no means gives you the best potential for a ROI over 30 years, but it is a conservative investment that adds a nice mix to your portfolio.