In the first post How Much Life Insurance Do I Need?, I worked with my insurance sales agent on how much life insurance my wife and I need. One of his suggestions is to buy a minimal amount of whole life insurance so that we have a little something to take care of our final expenses. The plan he suggested is the one that we would pay until we turn 65.
These are the whole life premiums I shared:
| Description | My Policy | Her Policy |
|---|---|---|
| $50,000 whole life – pay to 65, standard (there’s no elite option) | $65.16 | $41.27 |
| $100,000 whole life – pay to 65, elite (minimum coverage to qualify for elite) | $115.00 | $67.95 |
Whole Life Insurance versus Investing the Premium
So, I did a little analysis on the numbers, and here’s what I’ve found.
Note: To keep it simple, my calculation assumes 8% investment growth rate (CAGR), no yearly capital gains, no fee, and invested at the beginning of each year instead of monthly.
| Description | My Policy | Her Policy |
|---|---|---|
| Lifetime premium paid (note, I’d have to pay for 30 years and my wife for 37) | $24,240 | $18,324 |
| Years to reach $50,000 | 23 | 28 |
| Years to reach $56,500 (since insurance payout is non-taxable, we actually need $56,500 to get about $50,000) | 24 | 29 |
| Investment value at 65 | $104,162 | $108,614 |
| Investment value at 75 | $224,879 | $234,490 |
| Investment value at 85 | $485,496 | $506,245 |
What does this all means?
Insurance sales agents often cite the fact that we are getting more than what we’d have paid — i.e., for $50,000 coverage, the total payment only adds up to $24,000 (for me) and $18,000 (for her). For these small sums, we are getting lifetime coverage of $50,000 each. So, we are getting a really good deal right? Well, not so fast.
I’d have a $50,000 portfolio in 23 years and my wife in 28 years if I invest our premium payments in an investment vehicle that returns on average 8% per year (i.e., the stock market). To account for the fact that our investment would be taxed, while the insurance payout wouldn’t be, we only have to invest about 1% more per year to accommodate that.
Now, this is where it gets really interesting.
- If we invest the premiums instead of using it to buy the policies, we should have more than $100,000 each
- If we stop adding new money once we turn 65, and keep investing what we have:
- By 75, we each should have more than $200,000
- By 85, we each should have more than $475,000
Wow, that’s a huge difference!
For the Skeptics
Here’s the same table at 5% growth rate.
| Description | My Policy | Her Policy |
|---|---|---|
| Investment value at 65 | $58,096 | $52,847 |
| Investment value at 75 | $94,632 | $86,082 |
| Investment value at 85 | $154,145 | $140,218 |
What about cash value growth?
Some people will argue that I left out the cash value/death benefit growth feature of the whole life insurance. There are different variations and different companies offer different rates, but the average growth rate is typically in the 1-4% range after a few years into the policy.
At 65, it looks like the two options are about breaking even. However, your investment will continue to grow at the same pace even if you don’t put another dollar into it. With your insurance policy, you have a choice of either continuing to pay the premium to maintain the growth, or sacrifice the growth so that you can stop paying the premium.
The Verdict
So it doesn’t look like buying whole life insurance is the right thing for us; especially when we are fully capable of saving $50,000 without the help of a whole life policy. We could buy a 20-year, or a 30-year term life insurance for the coverage that we need to cover each other and our child(ren). If we are disciplined, we can invest the difference and come out ahead of the curve.
To be clear, this doesn’t mean whole life insurance is not a viable option. For us, we simply chose to separate the insurance from the saving/investing components.
In the third part, I will walk you through my analysis of term life insurance and share my decision with you.
Other articles in this series:
- How Much Life Insurance Do I Need?
- Should I Buy Whole Life Insurance?
- Is Term Life Insurance Right For Me?
- Making Progress Toward Buying Our Life Insurance
Here are some other good articles about whole life insurance:
- One Critical Thing You Need to Know About Life Insurance at Generation X Finance
- We’re Cashing Out a Whole Life Insurance Policy at Blogging Away Debt
- Top 5 Investing Regrets In My Life at Canadian Personal Finance Blog
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Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
You forgot to mention that when you die, your heirs only receive the policy’s face value amount and the life insurance company keeps the investment portfolio you worked so hard (against their astronomical fees and expenses) to build up.
I have $1.5 million on me with a 20 year level term. I’m seriously thinking about raising it even more so that my wife would never have to worry about anything. We have three children and weddings to pay for and grandchildren to dote on. If I’m not here, I want her to be able to live as full a life as possible and life insurance will help do that. I have to say that I’m completely against whole life, though I do have it on all three kids. I bought it when they were two months old and it… Read more »
@Kevin – I didn’t know that! I just sent my parents’ agent some questions. They were sold whole life policies that they have to pay until the day they die. I am looking into what we can do to recoup what we can at this point.
@Ron – That’s the other school of thought. One is to give them enough to keep them afloat for a few years; another is to replace your portion of income for the spouse entire life-time.
A couple other points. My wife and I are going through the same scenario. 1. Life insurance payouts are tax-free whereas you will have to pay taxes in many other accounts (roth’s would be an exception but you should probably fund one of those anyway.) And this could be a way to offset any estate taxes. 2. If your whole life policy is fully funded, you could borrow against it while you’re still living making it an investment vehicle if your pre-tax account balances would have you paying more taxes in retirement than you would while working. There’s a fed… Read more »
Insurance is always a difficult subject. It’s important to have especially if you have children but, like you mention how much is enough? I think a basic insurance package is essential but I think that insurance companies also prey on our fears about what can happen. If you combined a basic insurance package with a good savings programme, personally I think that this is a better option than investing large amounts in high coverage.
Whole life is a huge rip off for most people. Stick to a combination of a strong savings plan and fixed term life insurance. If 30 years from now you need a large death benefit you’ve done something wrong along the way.
Estate planning does have some use for whole life style policies but most people won’t have an estate that is large enough to need to duck the estate tax and gift tax laws.
I think a basic insurance package is essential. There is no point in going with heavy policies. And the insurance providers rob you off with the fees and charges
It is always interesting to read comparisons of whole life insurance to a stock portfolio at 8%. First, in terms of good asset allocation, whole life insurance should be placed in the conservative after tax style, such as fixed income vehicles. In other words, you should not be 100% in the stock market – EVER. Eight percent is a great average, unless you are 65 now, and have been invested in stocks only for the past decade. The S&P has only averaged about 3.5% in these past ten years. The stock market is a NECESSARY place for investments, and the… Read more »
@JF — That’s an interesting point you are making. I’ll be investigating the comparison of whole life insurance against these more conservative investments. If I recall my previous calculation, I think whole life insurance still underperform these.
JF’s points are important. I’ve preached “nothing but term, invest the rest” for a while. Recently, I’ve decided to become an insurance agent and have re-investigated the topic for myself. Even as a “Dave Ramsey-ite,” I’ve changed my opinions. It’s not as simple as buying term and investing the difference at 12%. Insurance contracts feature guaranteed returns and can’t be directly compared to stock market returns. They’re a different investment class and have to be factored into a complete investment portfolio picture. They’re much more stable, especially with established companies (e.g., Northwestern Mutual is more than 150 years old.) When… Read more »
JJ hit it on the head. A company like Northwestern Mutual has a long history of dividends and strong financial security. Right now you would be earning 7.5% on your cash value which most people on wall street wish there money was in now… Not to mention the death benefit, and the tax advantages….. I feel all people should own SOME whole life, and many times some term in their overall financial mix.
Whole life insurance is not a bad plan but it just depends on what the needs and preferences are for your family. There are many companies that are selling policies that might be good for your situation. It’s worth it to check them out.
The number 1 thing to remember is make sure you know what you want you life insurance to provide – most likely to provide your family with the financial support to make sure they live comfortably.
The number #1 thing everyone should understand first and foremost with the stock market is the difference between average and actual rate of return. Money managers preach average rate of returns of 7, 8, 9, even 10 percent. These numbers take certain time periods and average out the yields based on the number of years……this is completely inaccurate. The actual rate of return of the S&P over the last 100 years is 4.9%. You need to understand what Diviation is, the effect of managing fees have, the effect of taxes, etc. Whole life insurance is the foundation of any sound… Read more »
@Grant — I agree and I’ve written about the effect of expenses before. However, the last time I did my calculation whole life insurance return is actually less than inflation, so I can’t consider it an investment.
@Pinyo, Let’s not confuse asset classes. Whole life insurance is a saving asset, not an investment asset. If you really look at the benefits of whole life insurance when it comes to asset protection, sucession planning, tax minimization, disability protection, and the yield at the end, then you begin to have a shift of perspective as to what the product is. Whole life insurance should represent a percentage of your overall portfolio, it is not supposed to compete with higher risk products because that is not it’s function. Whole life is the rebar and concrete of your financial foundation, it… Read more »
It is worth it to check out your life insurance options with a local broker…especially if you have loved ones or a family. I am insurance with ING here in California and the rates are very affordable!
Grant, it sounds like you know a lot about the macroeconomic coordination of the protection, savings and growth areas of one’s life. Very nice! 🙂
It is totally off the mark to compare permanent life insurance to an investment. We are talking about two completely different things here. Life insurance is first a risk management tool. The obvious risk is that you will die and leave survivors financially struggling. There are other risks such as disability which with a waiver of premium rider can be added to your policy that would pay the premiums if you become disabled. There are other risks such as attachments by creditors which life policy cash values have limitations in many states with respect to creditors. Another big risk which… Read more »
So, do you think Insurance Companies can return 8% (or 7%) annually to their clients policies? I mean, that seems pretty unrealistic.
Could someone please help me understand my Knights of Columbus Whole life plan. I have a 100,000 plan that is active and up to date. I will retire in approximately 25 years. I understand the death benefit. However, I don’t understand the payout upon retirement. On my statement it says the “projected” monthly income for life at age 65 is 876.46. Does this mean that if I live till this age, the “projected” amount i would receive each month is this amount? Would I be taxed? I just don’t understand what the payout would be or how to figure that… Read more »
I have a question. I have a 8 yr old and 10 yr old and I talked to a rep last night with AIL about a whole life insurance policy for both of them at 25,000.00. My husband is all about dave ramsey and says I should have gotten them a term life insurance policy instead. Did I make a bad mistake or am I okay?
@Diane – I am not familiar with your plan. The best way to deal with this is to get the person who sell you the policy to sit down and ask questions. Based on my experience, they tend to make the policy sounds much better than it is. For example, on my parents policy the project income is really money that get added to the cash value (not payable to you) and this is not taxable in our case. And if we use the income to pay for the premium, the amount you get and how fast the cash value… Read more »
I never truly understand why people buy life insurance from there P&C guy. Liberty mutual is a personal lines of insurance company. I wish you put your ages on here because I would love to look and see how the prices compare. I would never, let me repeat never, recommend buying a whole life policy from liberty mutual. Don’t let their name fool you, they are not a true mutual company. Also their comdex rating is 78 which doesn’t even put them in the top 20% of insurance companies in terms of financial strength. I usually start at the top… Read more »
1. Kevin is completely wrong. If you were talking about Universal Life then he could be right but with a real whole life policy it pays the face amount plus a majority of the cash value at death. 2. NYFinancialPro quotes a dividend rate which means absolutely nothing and can be completely ignored for comparisons sake. 3. Grant, spell it with me and say it with me deviation. Also lay off the punch. 4. James sounds like a LEAP guy with Grant. 5. Why would you ever check with Genworth? I don’t feel like looking it up right now but… Read more »