One of the first decisions a person
insurance options is whole
versus term. We have multiple
articles such as (excuse the lack of
Whole versus term
Why term life?.
Those are breakdowns of how insurance
works as a result of years of experience
but we want to provide a strategy to
accomplish the same effect of whole life
at less cost.
real quick refresher to start with.
Term life insurance is a fixed
amount of life
insurance benefit for a fix
period time with a fixed premium.
For the same amount of premium, whole
(in which we include variable,
universal, etc) life insurance as a
contract to term usually has a smaller
amount life benefit with the ability to
grow some sort of cash value over a
period of time and the policy does not
cancel as long as you pay the premium.
There may even be a time when the
dividends, investment, etc will pay the
premium after a certain period of time.
So that's the lay of the land. The
big difference is that Term is much less
expensive but it stops after a certain
number of years. If you want more
insurance after that term, it will
likely be very expensive. Now that
we have a basic comparison (and of
course it can differ in many ways
depending on the policy and options you
are looking at), let's look at a
different strategy that combines term
life insurance and investing or saving.
say for a given amount of life benefit,
term is 1/5th the cost of whole life.
It can be higher or lower, but let's go
with 1/5. For example, $100K of
life benefit immediately is $20/monthly
for 15 years of term and $100/monthly
for whole life. The difference is
$80/monthly or almost $1000 annually.
Now, proponents of whole life will say
that the benefits of whole life is that
you're building cash value. Make
sure to ask them for a schedule of what
that looks like. It will likely
resemble a drip and not a rush.
This is the simple truth. The
company is essentially
providing $100K of term life with $20 of
that $100 premium. They then take
the other $80 and invest it. A
portion of the investment gains are then
contributed to your "cash values" while
they keep the rest as profit or to run
their company. A key consideration
with any financial instrument is
"expense ratio" or how much a company
charges you to manage a given financial
vehicle whether it's mutual fund, ETF,
etc. We need to apply the same
thought to the management of this $80
from the life insurance company.
The number floated around for whole life
expense ratio's is 2-4%. It's hard
to know for sure since it's built into
their model. That's much higher
than most ETF's or Mutual Funds.
annually times fifteen years with
compounded interest/investment gains at
7% is almost $30K. That's 30% of
the term life amount. The next
time a company is so excited about whole
life insurance or any life insurance
tied to a cash value component, ask them
for the schedule of cash value over the
life of the policy. Quickly
compare this with a
insurance quote through our
site and then run the difference in
annualized premium through a
probably going to find that the
insurance company is charging you quite
a bit to "invest" for you through a
whole life policy. If not, then
you have your answer but at least you
can now compare apples and apples.
people then say...well...I don't know if
I will have the will power to invest
that $80 on my own. I might just
spend it. The question then is, do
you want to spend that money on
supporting a life insurance companies
profit or expenses? Because a big
chunk of that net difference will be
doing so. Unless you love giving
extra money to life insurance companies
(who knows...there's probably some one
out there...way out there) and or the
life insurance agents that market whole
life, you may want to run the numbers
life insurance and investing
is the right strategy for you.