Sometimes there are things we do for our family that we don’t necessarily enjoy doing, but we do so anyway because we love our family members dearly. None of us enjoy writing a will because it reminds us of our own mortality. The same is very true for having life insurance. Far too often one of the spouses becomes permanently disabled or dies suddenly and unexpectedly leaving the other spouse high, dry and in a financial mess. If any of your family members depend on your income, such as your wife or children, you need life insurance.
So let’s say you do the right thing and decide to go buy some life insurance. If you walk down to your insurance person and tell them you would like to get a policy, 70% of the time they will try to sell you whole life insurance (also called cash value, universal life and variable life), even though these products are really a bad product to buy! They pitch their whole life plans because they make a much higher commission than if they sold you some good old fashioned term insurance. Term insurance is always a better by than whole life insurance!
Let’s take a look at an example. If a 30 year old non smoking man has $150 a month that he can invest in life insurance and shops around to find the best rate, he’ll probably be able to buy around $200,000 in whole life insurance which will pay his family in the event of his death. The insurance agent will also tell that gentleman that his policy will build cash value which can be part of retirement savings! Sounds like a great deal, huh?
If the same man were to purchase term insurance, the policy would probably cost around $10-15 a month for a 20 year level term policy! If this man were to invest the other $135 a month into a savings account over the course of twenty years in a very nice mutual fund, he would have $133,549 in his mutual fund if it averaged the 12% rate of return which the stock market has averaged since inception.
If he put it in his cash value plan, he would earn anywhere from 2.6% to 7.4% depending on which type of whole life insurance that he gets, according to Kiplinger’s Personal Finance Magazine. Instead of being able to invest that money for the full 20 years of the term, instead the first three years are eaten up by commission and fees, so he would only have 17 years of savings. Let’s say the man got an average of 5%, which is pretty decent for whole life, he would have $43,270 in his cash value, a whopping $90,000 less than if he had taken the term insurance and invested the rest into quality mutual funds inside of a retirement account!
But there’s a dirty little secret with whole life insurance. If that man were to die, they would pay his family the value of the policy, $200,000 and keep the cash value that was built up inside of it! What kind of savings plan keeps your money after you die? Doesn’t sound like much of a deal to me!