term vs. whole life - question for prof. Kotlikoff
Hi everybody,
One of the most confusing problems is buying term vs. whole life insurance policy. I did a great deal of reading (books and web) about both of them. Some people say that whole life is biggest scam in the financial world (high comissions for agents, nonguaranteed premiums, doing better by buying cheap term and investing the remaining money into stocks, etc.) I am 38 years old and we have combined income of ~570K. I currently own level term policy. I recenlty talked to a financial advisor who ran few financial calculators on term vs. whole life. Point he tried to make was this: Guy A has only term policy and he accumulated 1 million by investing the difference (whole life vs. term) in stocks. Guy B also has accumulated 1 million as a cash value inside his whole life policy. Next day guy A's term policy expires and he only has 1 M while the other guy has 1 M and policy against which he can borrow in the future and it serves as a cushion - a bond if you will in a financial sense. He also stressed tax free aspect of whole life.
What do you think about this? Does matemathics support this? Am I missing something big here? Is whole life policy a sound financial investment in the context of problems you discuss in your book?:?:
Thank you very much
Dan
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Dan,
This assumes that you actually need the life insurance throughout your entire life. From an economic perspective, life insurance serves to insure the standard of living for the survivors. When it is no longer necessary, i.e., the survivor's standard of living are not impacted by the death, then life insurance no longer serves a purpose. ESPlanner very carefully figures out how much life insurance you need and for how long you need it. The money saved by no longer purchasing unnecessary life insurance can be invested giving you substantially more than the money you would have buried in the whole life insurance policy. Make sure that your financial advisor is taking into account the effect of inflation on the value of the life insurance (a $1M face value policy that pays off in 40 or 50 years isn't actually worth very much in today's dollars unless the face value is inflation adjusted, which they typically aren't).
I'm sure Larry will chime in at some point, but whole life is never a better deal than term life given that you purchase only what you need, only for as long as you need it, and then invest the savings appropriately when you no longer need it.
Best,
Dick Munroe
HI DAN, I WOULD STAY MILES AWAY FROM ANY WHOLE LIFE/CASH VALUE POLICY. GENERALLY THEY REQUIRE A PHD AND A MONTH TO FIGURE THEM OUT. GENERALLY THEY ARE SCAMS. GENERALLY YOU CAN DO A LOT BETTER BY BUYING RENEWABLE TERM LIFE INSURANCE AND SAVING ON YOUR OWN VIA, HOPEFULLY, A RETIREMENT ACCOUNT. BEST, LARRY
I would question the plausibility of accumulating 1 million in cash value -I have never spoken to anyone who has accumulated more than a few thousand, after years of holding their policies. Does anyone have a different perspective on that?
I couldn't disagree more about term vs. permanent life insurance. We could debate the topic forever but most people make it much more confusing than it should be. First, term insurance pays out less than 97% of the time, meaning from an economic point of view it's close to worthless unless of course you die. Secondly, very few people invest the difference at all, let alone do it in a conservative way so that they have enough money to cover needs at the appropriate time. Do I need to say anymore about what has happened in the markets over the last 18+ months to prove that just when you need it most it may not be there. Permanent (i.e. whole life) is not for everyone, and term does have a place. However, let's understand that from carriers that pay dividends (mutual insurance companies), the cash on cash rate of return after the initial few years, when expenses are highest, have proven to rival the yields on muni bonds and if you don't need the death benefit any longer, you can borrow against the cash value on a tax deferred basis for things such as supplemental retirement income.
Let's not be to quick to make the blanket statement the permanent insurance is a waste. A better understanding will undoubtedly yield a more balance view.
Larry