Buy term and invest the rest is a respected financial strategy
A Simple case study of my actual Life insurance policy
What are the best life insurance strategies? Back to the age old question of permanent life insurance with cash value vs term life insurance and invest the rest. What is a better policy to buy? Lets talk first using my policy as an example that I bought 20 years ago. I was 27 years old at the time with a steady job (not in the insurance industry) with a fiance. I had little to no clue about life insurance or retirement planning etc. I sat down with an agent who talked about combining my life insurance with investing for retirement etc. Term life insurance was never really mentioned. But at the time I was less interested in the life insurance vs the investment vehicle and liquid cash value if I needed it down the road. I did want some type of life insurance just in case. I purchased a Variable Universal Life Insurance policy. (basically a policy with a cash value component). Where does my policy stand today and how well has it performed? Since my premium has always been flexible my average payment into the policy has been about $150/month with a death benefit of $300,000. My current cash value in the policy is about $27,000 and I have a loan on the policy for $5000 (lets say without the loan the cash value is $32,000). At the time if I were to have bought a 30 year term policy it would have cost me about $30/ month. So I am paying a $120.00 more into the policy than if I would have bought the term policy. Here is how my life insurance strategies have worked so far.
- If I would have just saved the extra $120.00 into a saving account I would have roughly $28,800 vs $32,000 in my policy.
- Not much of a difference and I know. If I invested the $120.00 I would have a higher return then the cash value in my policy. But there would be no guarantee.
Did my life insurance strategies work?
It probably depends on which expert you ask? Yes, at this point if I bought term and invested the difference more than likely I would have more money. But there would be two problems I face in ten years. In ten years I would still need life insurance and probably for at least another 20 years. Assuming I am in average health based on today’s rates I would be pay $250.00 month. But I also may not be insurable for some reason? I know somebody would say “why don’t I just buy a new 30 year policy today?” I could for about $300.00/month for a $300,000 death benefit. But the reality I see is very few people buy a new policy before there previous policy expires. What are the chances I would have invested the extra $120.00/ month?. I have an IRA + a couple other financial vehicles that funds are invested. So for me the extra cost of the policy really acted as a forced savings plan. It really acts like a Roth IRA. Otherwise I would have just spent the $120.00 on daily life occurrences.
Did I buy the right policy 2 ?
- For me the policy works for what I needed it to accomplish.
- I will have insurance coverage for life
- I can borrow against the cash value if I need to (I have in the past)
- At some point if I really needed to I could sell my policy for a decent chunk of cash
Maybe what my policy doesn’t do
1. As a retirement investing vehicle; I will never put enough money into the policy to build a large retirement account. To be honest most people will not as well.
2. The tax advantages during my lifetime will never really make a big difference? But maybe my heirs?
Buy term life insurance and invest the rest?
My actual life insurance policy is a good example of how a policy may work over a period of time. My goal is to have it in place another 30+ years. Based on my personal insurance needs the strategy of Buy Term Life insurance; invest the rest does not really work. I wanted 3 specific life insurance strategies to take place.
- Permanent life insurance until I die
- I wanted Cash Value that could use during my lifetime
- I wanted a tax free investment vehicle
If I bought a term life policy I would have run into a couple problems
- I would have to buy a new policy in ten years
- I may not be insurable
- My policy cost would be around $300 / month for the same coverage at age 57
What are some of the life insurance strategies I would recommend?
- I would over pay the life insurance policy as much as possible early on
- I would add an “Long Term Care” rider into the policy
- I would look at this as a long term investment cash accumulation
Why I would not use this strategy
- I only need coverage for 20 years or less
- An emergency fund you may need to use in less than five years
- The policies tend to work best for clients under 45 when first purchased.
The biggest issue with term life insurance.
For decades, the calling card of the financial advice industry has been for clients to buy inexpensive term life insurance rather than more expensive permanent life insurance and invest the difference on their own. The only problem is most clients never execute the second part of the equation, leaving many of them uninsured in later life and unprepared for retirement. What typically happens is that people rent the term, let it lapse and spend the difference. And even the minority of those who do invest the difference are prone to the real-world emotional investing when individuals investors tend to buy high and sell low, perennially under performing market indices.
With a traditional term life insurance policy, a coverage term of 15, 20 or 30 years is typically selected, and a fixed annual premium is paid. If the insured lives beyond that term, the contract ends and no benefit is paid. The insured has paid only for the “risk” that he or she might have died.
If you are going to buy return of premium term insurance might be a better option
Most ROP term life policies give 100 percent of a premium back or part of the premium back at the end of the term if no death benefit has been paid. The key here is that you get a percentage back, tax-free, locked in for 20 to 30 years guaranteed.
Unfortunately if you speak to 100 different agent you get 100 different opinions. Do your homework and get yourself protect.