Approximately 70% of all life insurance sold is Whole Life. This fact alone will lead most people to believe it is the most substantial and solid life insurance you can buy. People feel extremely safe with the status quo and will not think out of the box when it comes to life insurance. Whole life is a good product, but to disregard all other types is foolishness. Do yourself a favor today and think out of the box with me.
Whole life insurance is an insurance policy that combines insurance protection and an investment into one package. You probably have heard the investment segment referred to as “cash value”. The name, “Whole Life”, means you will be protected your whole life and the policy doesn’t have an expiration date. You can see why over the years this has been a very comfortable approach to life insurance; mainly due to the advertising of the insurance companies. You have been sold on the idea that the investment feature in a whole life policy will help you retire wealthy.
Term life
Consider Term life insurance as you are thinking outside the box. First of all, Term life is life protection only, no investment feature included. As the name “Term” indicates, it is for a term, normally 10 to 20 years, and then it expires in the same manner as auto insurance expires at the end of a “six month” or “twelve month” term. It would be absurd to think the automobile insurance company would owe you anything other than a phone call informing you that you need to renew your auto policy.
So why on earth would anyone want to buy Term life insurance? let me explain. A 40 year old man in good health can buy a $500,000.00 Whole life policy for $3000.00 per year. The same man can buy a $500,000.00 Term life policy for $300.00 per year. Yes, you read that correctly, that is a $2,700.00 per year savings on the same amount of protection.
Let me explain it another way. The whole life policy allocates the same $300.00 for insurance protection, and the $2,700.00 goes to pay commissions and expenses for the first three years. Starting on the fourth year, most of it goes into a saving account with a return that will average 2.6% per year for your whole life. Oh yes, you can borrow against the money that you paid in and pay interest on it until it is paid back to the insurance company. If you don’t pay it back then a like amount is deducted from the death benefit upon your death. If you cash in the policy, all you receive back is the accumulated cash value, this is easy to understand and accept.
Face value only with whole life
Here is the really, really bad part; with whole life, the savings that you paid in with your hard earned money at a ridiculously low yield doesn’t go to your beneficiaries upon your death; they only get the face value of the policy, the $500,000.00. Here is something else to think about, say you purchased a 20 year term life policy and died in the last month (19 years and 11 months) and all you did was stuff the $2,700.00 per year savings under your mattress, your beneficiaries would get the $500,000.00 policy death benefit and $54,000.00, that is if they knew where you hid it.
I know, the next question you are going to ask is, what if you die after the 20 year Term life policy expires. With whole life your heirs will get the $500,000.00 even if you die after 40 years. Yes this is true, but do you realize you are going have to pay $3,000.00 per year and still all they will get is the face value of the policy. Are you thinking out of the box yet? I’m sure that you are at least thinking.
My recommendation is to buy the 20 year term life policy for $300.00 per year and put the $2,700.00 saving into a mutual fund,
or some other fairly conservative investment; stay away from high yield high risk investments because this is your retirement you’re dealing with. After the 20 year term policy expires you can say good by to the $300.00 per year premiums. Over a 20 year period, if you were diligent in investing the $2,700.00 per month in a decent mutual fund or facsimile, you should have approximately 2 to 3 million to put under your mattresses. If you were 40 when you started, and now you are 60 with your kids grown and out of the nest, the house is paid for and you will be self-insured with your mutual funds. Your poor spouse will just have to be happy with the 2 to 3 million and suffer without the comfort of having life insurance to fall back on.