Finance Blog
Whole Life Insurance: An Excellent Investment Everyone Tells You Not to Buy
Financial advice is unique. Most of it is dead wrong. The advice given by brokers (or “financial consultants,” as they like to be called) frequently has nothing at all to support it.
If you ask most financial advisers about cash value life insurance, this is what you will hear: Buy term and invest the difference. For many people, this makes perfect sense, but most people buy term and spend the difference.
If you buy term and spend the rest, you will have nothing to show for it-no cash value and no ability to keep the policy in force because of the significant premium increases as you age. That’s why most term policies expire prior to the death of the policyholder.
I don’t sell insurance and have no interest in any entity that does. However, I do believe the right kind of cash value (also called “whole life”) insurance policy could be a worthy addition to your portfolio.
Let me give you an example:
If you are twenty-nine years old, in excellent health, and a nonsmoker, you could purchase a cash value policy for a premium of $17,000 a year, for twenty years. The policy would have a death benefit of $1.2 million.
After the first year, the cash value of this policy would be more than $15,000. After five years, the cash value would exceed the premiums you paid up to that point ($85,000). After twenty years, the policy would be fully paid up, and you would not have to pay any additional premiums to keep the policy in force.
You don’t have to die to benefit from this policy. You could take out the cash value of the policy, up to the amount of the premiums paid, tax-free (although these withdrawals will reduce the amount of the death benefit). If you hold the policy until death, the death benefit will be paid to your beneficiaries tax-free.
The after-tax return of this policy is illustrated to be 5.5 percent, which is significantly greater than what you are likely to earn on your own after-tax by investing in bonds. By holding this policy, you can consider more aggressive investments for the balance of your portfolio.
The stark reality is that most Americans in their fifties have not accumulated anything close to the cash value of this policy. For those people, having access to this fund during their life, and providing for their beneficiaries upon their death, would be a huge improvement over the dire circumstances they are confronting.
Here’s the problem:
Your insurance agent is unlikely to present you with the optimal policy that will maximize your cash value. What you should look for is a blended insurance policy, which means it combines whole life and term life into a single policy. A blended policy should result in higher cash values immediately, and higher death benefits at life expectancy, because of lower sales costs. Blended policies are sold by many excellent, highly rated insurance companies, including Northwestern Mutual, Guardian, New York Life, and Mass Mutual.
“Lower sales costs” means lower commissions. Insurance agents are motivated to sell you traditional, higher-commission policies.
If you are considering insurance where the annual premium will be $10,000 or more, you should retain the services of a fee-only insurance consultant. They give unbiased advice and agree to act as your fiduciary (meaning they have no conflicts of interest and look out solely for you). In most states, an insurance agent has no fiduciary obligation to you.
Learn about the other side of the story with term life insurance from Linda Rey at the Equifax Personal Finance Blog.
Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.
Watch Dan on YouTube.
Read More:
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Bonds and the Bonds Market: A Basic Primer
The Volatility Index – Much Ado About Nothing
Annuities: The Good, The Bad, and The Ugly
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Hi Daniel,
I totally agree with your view on "Buy term and Invest the difference". However you are wrong to say that thats what all (or most) Financial Advisors would tell you. The only big company that does promote and sells this currently is Primerica, which has other problems aside from this…
I am a dually Licensed Financial Advisor (Insurance and Investments) so for me personally doesn't make a difference which way the client decides to go, i just think it was a bit wrong to paint everyone with the same brush…
This article has explained well how important it is to be specific on the coverage an insurance covers. "Don't settle for anything less", as they say.
Your article made me thing because I was given the same advice – don't buy! I think that it also points out that we all need to be as knowledgeable as possible about the insurance products we buy.
I completely coincide with your idea. We should avoid getting whole life insurance at all cost. Though it has a lot of benefits compared to term life insurance, it is undeniably expensive. Most people cannot afford it.
Life Insurance Georgia
this blog has expressed well how important it is to be specific on the coverage an insurance covers.