Have you ever wondered why you should avoid Whole Life insurance? These following two examples will show you why you should avoid purchasing a Whole Life policy.
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Lessons Learned: Whole Life Insurance Policies
First Example: Trust Yourself Not The Insurance Company
Just the other day I was looking at a whole life policy statement that began on June 2nd, 1980. The policy had a base plan death benefit of $15,000 and an annual premium due to the company of $304.60. As of the June 2nd, 2017 statement the cash value was $21,685.25 and a total death benefit of $30,256. Therefore, at the end of 38 years, the owner of the policy contributed $11,574.80 to this policy.
For fun, let's compare this investment above against the S&P 500 using the same values – the current value would have been $100,336.08 today. How did I reach this result? I used this very nifty calculator from Don’t Quit Your Day Job. Two other resources that I have used for similar purposes and are great for comparing historical performance can be found over at NYU and at ExtremeFomo. Yes, there is no guarantee with stocks like there is with a whole life insurance policy but based on historical data the risk vs reward by investing in the S&P 500 certainly outweighs the risk of putting your money into a whole life insurance policy.
Second Example: It has never been easier to invest. You can do it all by yourself!
Here is a second example using this same life insurance company from the example above. This particular policy began on February 2nd, 1990. The policy had a base plan death benefit of $32,725 and an annual premium due to the company of $800. Therefore, at the end of 28 years, the owner of the policy contributed $22,400 to this policy. If we were to compare this investment against the S&P 500 using the same values above – the current value would have been $91,736 today.
I wanted to show both of these examples to represent another important point. In the first example, only $25 was contributed on a monthly basis beginning in 1980 whereas in the second example $67 was contributed on a monthly basis beginning in 1990. The first example produced a result of $100,336 while the second only produced $91,736. Why? The longer the money is invested it's compounded time-value increases. The bottom line is that the sooner you are able to invest the better off you will be.
Term Life Insurance Is Much Cheaper Than Whole Life Insurance
Too often whole life insurance is sold as an investment instead of as insurance. As a result, the expense of owning a whole life insurance is much more expensive (usually 10x) than term life insurance. Here is a great explanation on this from Dave Ramsey…
The blog Mama Fish Saves has an excellent breakdown showing the cost of whole vs. term life insurance.
Term Gives Your Loved Ones Much More Protection Than Whole Life Insurance
You can get term life insurance much cheaper than you can whole because it has a set period of time that it is valid and it does not have any cash value. On average, you can get 10-12 times more coverage in term life insurance for the same cost of a whole life insurance policy.
Quick Update:
After publishing this original post – Reviews.com as well as Credit Donkey reached out to me asking if I would include their recently published content on term life insurance. The material is great. This is Reviews.com guide to life insurance and here is Credit Donkey's article which breaks down if term life insurance is worth it. Each of these resources provide further detail into the topic.