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Financial JUSTICE | Life insurance: Which would you pick? |
Scenario: 30 year old purchasing a $250,000 policy. Would you buy:
A) Whole life insurance that cost $3100/year. By age 65, you will have $60,000 in the cash value.
B) 35 year term that cost $1500/year. If you invest the difference of $133.33/month with a rate of return of 12%, you can have $866,000. Or even at a conservative rate of 10%, you can have $510,000.
A or B?
I wish I learned about term and investing the difference a long time ago. |
 |
 
Doing the Right Thing
|
B because there's more value.
By the way, a dividend in a life insurance policy means the company is refunding you the excess premiums you are paying into the policy. It is not the same as dividends in investments. Dividends in investments comes only when profits been recognized and the company pays it out to their shareholders. |
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Matt P
 |
I don't know what contract would only have a cash value of $60,000 at the age of 65 based on contributions of $3,100 a year. I checked with my financial rep (a close friend) and based on your info (30 years old and $3,192 a year, assuming a non smoker) your cash value on a whole life policy at 65 would be $375,901 with a death benefit of $669,536.
For option B one thing to consider are taxes. Your rates of returns don’t account for any taxes being taken out on either the gains or the distributions. Using a tax rate of 28% 10% would = $267,246 and 12% would = $377,281. With all investments you have a risk. Over the last 30 years common stock has had a rate of return of 8.99% with a standard deviation (risk) of 18 and this whole life was 9.07% with a deviation of 2.
It would be nice to know what you would be investing the difference in (Roth or Mutual Funds etc) but all things being equal if you were to become disabled your investments would not pay for themselves and with out disability insurance you would not be able to contribute to your investments. In fact you would probably have to pull your investments out to make ends meet and that may or may not have tax consequences or early withdrawal penalties. The nice thing about this company’s whole life product is if at any point you become disabled they make your premium payments for you and you’re entitled to the cash values as if it was you paying the premiums the whole time.
Cash value life insurance covers you whether you live, die, quit or become disabled. With the life insurance there are also no contribution limits both money and age. There is also no age where you have to start taking distributions. Life insurance is also tax free to your beneficiaries when you die where your investments probably won’t be.
You also have the ability to be your own banker with cash value life insurance. You can borrow up to 90% of your cash value and pay it back on your own terms at any time. Or better yet you can assign it as collateral on a bank loan. There are many living benefits to life insurance.
Say you don’t want to pay your premium any more. When your 45 this policy will pay for itself if that is what you want. Cash value life insurance gives you more options. Be careful when choosing your company. This company is the only company to have the highest ratings from A.M. Best, Standard and Poors, Fitch and Moody's Investors Service. They are also the only company of any industry in the world to receive the #1 ranking for their industry from Fortune Magazines Most Admired Company list all 23 years they have had this award. Not even Wal-Mart or Microsoft has done that. I’m biased though, I’m a client, and I hear about it every time I meet with my rep. I used to think like you but when I was educated on the topic it was a no brainer. |
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Celina J
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I would go for B |
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mbrcatz
 |
Well, B, but your math is off. Your term policy is NOT going to cost that much. |
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billyshears
 |
Are you single? Married? Do you have children? Who depends on your income? How did you come up with $250,000?
With A, if you died at age 65 your policy would pay $250,000.
While it is true that with B if you died after the term of the policy your beneficiary would not receive the $250,000, BUT there would be the amount of your investment, which according to your calculations is much more than the face amount of A. And if you died prior to the end of the term, there would also be the $250,000. Another question to consider: Why would you really need that much protection after 65? If you had children they should be grown and on their own with their own policies and investments. Your spouse should be able to live on the investments you've made. Don't ignore the fact that if you are married your spouse needs insurance too. You don't state if you are male of female, but a wife needs to be covered too. Even if she is not working, you might have to think about child care and so on. |
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Rob D
 |
Well, here's the issue that the "buy term, invest the difference" folks overlook. A participating whole life policy will normally begin paying its own premium from dividends somewhere around the 12th to 15th year. You can expect to pay about $40,000-45,000 and have coverage for life. Keep in mind that dividends are not guaranteed, but most well rated carriers have never missed a single year.
In your example, you will pay a total of $52,500 in term premium. At the end of the term, you will no longer have coverage, and new coverage or policy conversion will likely be cost prohibitive.
The cash value in the whole life is not relevant in this discussion. It just gives you more options. |
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Joe
|
It would be best to invest in B. However to be fair, you should also mention: C) Universal life invested in stocks. This would do much better than A, but it would not do as well as choice B, so I would stick to B.
For most people it is best to buy term life insurance. Life insurance plans that builds up a cash value like whole life, universal life, et cetera are rarely the best choice.
If you look at financial sites not run by insurance companies, they are almost unanimous in recommending term life insurance. Look at big name sites like Yahoo,CNN, Motley Fool SmartMoney.com and Kiplinger's, and they all recommend term life insurance for most people.
However, you will find many websites out there that promote whole life insurance and disparage term life insurance. They are almost all run be insurance companies. Insurance companies make more money from these policies and it is in their interest to push them.
Whole life has the advantage of having a built-in savings program, but you lose a lot of money to high commissions. As you point out, it is usually better to buy term life insurance and invest the money you save in an IRA, 401K, or mutual fund.
Sources:
Term vs. Whole Life Articles:
http://www.fool.com/insurancecenter/life/life06.htm
http://finance.yahoo.com/insurance/article/101749/Term_or_Whole_Life?
http://money.cnn.com/pf/101/lessons/20/index.html
http://www.smartmoney.com/insurance/life/index.cfm?story=whichtype0205
http://www.kiplinger.com/basics/archives/2003/03/life3.html
General Information on Life Insurance:
http://www.fool.com/insurancecenter/life/life.htm
http://finance.yahoo.com/how-to-guide/insurance/12823
http://money.cnn.com/pf/101/lessons/20/index.html
http://www.kiplinger.com/basics/archives/2003/03/lifeinsurance.html |
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View from a horse
|
1) Most good permanent policies (i.e., 'whole life' or universal life) will be far less than $3,100 annually for a quarter mill at age 30 (considering good health); and, you'd very likely have more than $60,000 CV.
2) 10% AFTER TAX return is *NOT* conservative, it is very aggressive, and no 20-year period in the history of the stock market has averaged anywhere close.
3) What do you do about the $52,500 you THREW AWAY when the term is over and you have no coverage?
4) Insurance *IS NOT* an investment vehicle, and it is illegal to infer that it is.
5) Making an incomplete or inaccurate comparison is illegal in EVERY state.
6) Even discounting a participating policy with dividends, you can quit paying on a whole life after several years and take a reduced paid up policy; or, let the cash value pay your premiums for you for a number of years. If you quit paying on your term policy, you're S-O-L.
7) The client deserves a recommendation that is designed just for them. That *MAY BE* term insurance in one case; it *MAY BE* permanent in another; it *MAY BE* a combination of the two in a third; and, yes, in some cases, it *MAY BE* that you recommend NO additonal coverage at all. Each case is unique; and, just as two people may wear different sizes of clothes, they may have different needs for life insurance protection.
Glad I learned about ethical and professional representation a long time ago! |
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ravi C
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for life insurance i will search on
http://www.insurance-assurance.110mb.com/ |
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Mousepad99
 |
None.
What's the difference between rotting in a fancy case or not. But if the point is to make your family profit from your the policy, just use the calculator. The one that gave you most and doesn't prevent you from buying stuff.
So..
If (Choice #1 > Choice #2 AND choice #1 doesn't interfere with my life style) {
Buy choice #1;
}
elsif (Choice #2 > Choice #1 AND choice #2 doesn't interfere with my life style) {
Buy choice #2;
} |
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