Should I buy term and invest the difference, or should I buy permanent life insurance? The age old question that has industry combatants palavering which is more prudent for all people. I decided to break down some key concepts and shed light on this conundrum. Full disclosure, I own multiple policies in my household of both term and permanent life insurance.
Whole Life Insurance Is Not An Investment: I want to make this clear cut. Whole Life Insurance is an insurance vehicle that is meant to cover your whole life, hence the word. Term is an insurance policy meant to cover a term that is determined by the policy. A whole life policy has a cash value component that is a combination of premium payments and policy dividends. The cash value growth indeed offsets the exposure of the insurance company, however, many people do not understand that once you pass away you only receive your death benefit, not both the cash value and death benefit. Term insurance, on the other hand, is just that. If you outlive the term, the policy premiums go up exponentially, and all of the premiums that were paid into the policy are not longer accessible, however, there may be some companies that offer a return of premium.
Buying Term and Investing The Difference: Many believe by purchasing term insurance and investing the difference between the amount that would have been paid into a whole life insurance policy minus your term premium, you may be better off due to stock market growth. Some say to buy an index fund that matches index returns. Here is fact, YOU CANNOT OWN THE S&P 500! The S&P 500 is not like the normal investor. The S&P does not have trading cost, fees, 1099s on dividends, capital gains taxes, just to name a few. Also, the S&P 500 does not have human behavior. The average investor between 1997-2016 received just north of 2.3% according to a Dalbar study.
IT'S EXPENSIVE: It does "cost" more for the insurance, but it may not be "expensive". Term insurance is strictly an expense in which you have a high likelihood never to recover. Much like auto insurance, if you do not get into an auto accident the insurance company keeps those premiums. Whole life insurance may return a portion of the premiums back to you in the form of cash value, but also provides an increasing death benefit if designed properly.
Financial Representatives Make More Selling One Vs Other: Financial representatives may indeed make more money due to higher premiums selling whole life insurance Depending on how pay is structured, representatives could make anywhere between 50-100% in regards to the premium amount. Some representatives may have an incentive to sell one product over the other, which is why it is important to have a "balanced" individual on your team. Choosing a fee-only or fee based financial advisor while making sure they are fully disclosing any conflicts of interest is a key consideration.
So which wins out? The answer, whichever makes sense for your particular situation. Beware of those so-called professionals giving financial advice and not even knowing your name or situation. How can someone say what is right or wrong for an individual when they have not even seen that individuals financial statements? Whether term or whole life fits your balance sheet, it is imperative to contact a financial professional and discuss your situation.
Whole Life insurance is intended to provide death benefit protection for an individual's entire life. With payment of the required guaranteed premiums, you will receive a guaranteed death benefit and guaranteed cash values inside the policy. Guarantees are based on the claims-paying ability of the issuing insurance company. Dividends are not guaranteed and are declared annually by the issuing insurance company's board of directors. Any loans or withdrawals reduce the policy's death benefits and cash values and affect the policy's dividend and guarantees. Whole life insurance should be considered for its long-term value. Early cash value accumulation and early payment of dividends depend upon policy type and/or policy design, and cash value accumulation is offset by insurance and company expenses. Consult with your Guardian representative and refer to your whole life insurance illustration for more information about your particular whole life insurance policy. Some whole life polices do not have cash values in the first two years of the policy and don't pay a dividend until the policy's third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.