Damning of whole life insurance:
For example, a nonsmoking 30-year-old woman in excellent health might be able to get a 20-year term policy with a death benefit of $1 million for $480 per year. If this woman dies at age 49 after paying premiums for 19 years, her beneficiaries will receive $1 million tax-free when she paid in just $9,120. …
Do you really hate the idea of potentially “throwing away” almost $10,000 over the next 20 years? What would happen if you invested $480 per year in the stock market instead? If you earned an average annual return of 8%, you’d have $25,960 after 20 years, before taxes and inflation. Considering the opportunity cost of putting that $480 per year into term life insurance premiums instead of investing it, you’re really “throwing away” $25,960. But if you die without life insurance during those 20 years, you’ll leave your heirs with almost nothing instead of leaving them with $1 million.
What if you bought permanent life insurance instead? The same woman described above who purchased a whole life insurance policy from the same insurance company could expect to pay $9,370 annually. The whole life policy’s cost for a single year is just slightly less than the term life policy’s cost for 20 years. So how much cash value are you building up for that extra cost?
… After 20 years, the policy’s guaranteed cash value is $181,630, and you will have paid $187,400 in premiums.
But after 20 years, if you had bought term for $480 a year and invested the $8,890 difference, you’d have $480,806 before taxes and inflation at an average annual return of 8%.
Sure, you say, but the permanent life insurance policy guarantees that return. I’m not guaranteed an 8% return in the market. That’s true. If you have no tolerance for risk, you can put the extra $8,890 a year in a savings account. You’ll earn 1% annually, assuming interest rates never go up from today’s historic lows. After 20 years, you’ll have $208,671. That’s still more than the permanent policy’s guaranteed cash value of $181,630.
Great article.