I recently had a heart-to-heart with my parents where I convinced them to cash in a whole life insurance policy that they bought for me when I was very young. They bought it for me when they were concerned that I wouldn’t live very long due to some poor health in my early childhood, but as an adult, I’m quite healthy. They’ve been paying the premiums every month since I was tiny and so now that I don’t need the insurance as badly as they could use the monthly premium amount and the cash-out value (which will pay off all of their outstanding debt and pay for their upcoming vacation).
Instead, I am covered by a thirty year term policy which cashes out to a very nice amount in the event of my death. The premiums each month are really small – I’m young, healthy, a non-smoker, and I only drink a couple glasses of wine a week (which is actually a health benefit, apparently) – and thus I just pay it for the peace of mind.
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At first, my parents thought this was reckless. They both have whole life policies for themselves and they wondered what I would do for life insurance when I got older. “Your term insurance will go away when you’re 58 and you’ll have nothing to show for it!” they shouted from the rooftops.
You know what? That’s just fine by me. And here’s why.
First, the monthly premiums on a term policy are substantially cheaper than a whole life policy. This is especially true at my age, where insurance companies are glad to offer me a term policy for a tiny premium: there is very little risk for them having to pay out by the time I’m 58. Statistically, I’m pretty close to money in the bank for them.
Second, the difference in premium prices can be invested. I pay about $60 less per month with my term policy than I would with an equivalent whole life policy ($500,000). If I invest that at an annual 10% return, I’ll have $137,003.40 when my term insurance expires. If I stop investing then and just let it build, on my 72nd birthday, the investment will exceed the value of the insurance. After that, it just goes on to the moon.
Third, my “excess premium” investment and my other investments will be enough to be my “insurance” in my dotage. I’m currently living a fairly frugal lifestyle that is enabling me to save and invest significant amounts of money each year. When I reach the age when my term life policy expires, I won’t need it. I’ll have more than enough money in my estate to pay for any expenses my family would incur in the event of my death, plus I’ll be able to leave a chunk of change to all of my children and grandchildren.
For me, whole life insurance is a poor deal; although it does build up some real value, the premiums are significantly higher and I have limited control over the investments – and the investment return. My feeling is that anyone under the age of forrty who is committed to a good financial life plan shouldn’t invest in whole life insurance, but that’s just one man’s opinion – don’t use it as the basis for your decision. Do your own homework.