Whole Life Insurance is a Bad Investment, Right?

joshua daniel 1I was in a bit of an online argument (don’t worry I’m ok) the other day with a guy on some random website comments. These are unproductive, for the most part, and Dan Thompson would be telling me it’s a waste of time.

Probably true.

To continue, we were about done with it all when he attempted to seal the deal with his little emoticon. We were talking about whole life insurance and he said, “I’ve been getting 11% on my money in my retirement fund. Good luck getting that in your whole life insurance policy :).”

Smiley face slam. What could I say?

Listen to the Audio

Well, I didn’t respond to him because I really didn’t want to keep it going. But it arises a very good question. Is 11% in a retirement fund better than a whole life policy? Let’s look at the facts and why this really isn’t much of a difference. In fact, in may actually be worse.

It’s the number I use often, 6.52% over a 27 year period. That’s what one life insurance study shows for growth. Now understand, they didn’t really have high cash value life insurance policies 27 years ago. This was just a regular 10 pay whole life policy.

Now 6.52% is nothing compared to his 11%, so what could I say.

But that isn’t necessarily true. There are some factors that play into all these numbers. Taxes, fees, and life insurance costs (he’s buying term right).

Taxes, this is the huge one. Let’s calculate his taxes. Let’s say he pays 30 percent. That’s 3.3% of his growth. Now his overall rate of return is down to 7.7%.

Now, I really could just stop there. I would say, is it worth 1.2% growth with all the risk in the market today? The risk of market loss? The risk of taxes going up? The risk of not being able to access your money?

Because, let’s be honest, the future is quite unclear. Making the assumption that you can get 11% in the next 10 years? That’s a lot of pressure to put on yourself, and Wall Street.

But Wall Street doesn’t care, they are getting paid whether you make or lose money.

Now, that’s the next portion. Fees. Let’s just say he pays 1.5% in fees.

7.7% is now down to 6.2%.

And that’s not even a massive fee. It could be 2%, 3%, or even more.

And just like that, all the sudden reality sinks in.

6.52% is not bad, in fact, actually it’s pretty good.

I won’t include insurance costs here because, what’s the point? I could feed you some term insurance costs and factor that in, maybe shave another percent off, but I’m not trying to make this some epic battle.

I’m just merely trying to paint a picture here, the truth about tax free returns.

It is nice to also know that the 6.52% growth in the whole life insurance is after all fees, the death benefit cost was already taken out before the growth was calculated.

Whole life insurance is not a bad investment. On top of all this, I would say it has some benefits that make sense to put down really quickly here. Which make that 6.52% much stronger.

1. Accessible – The government sponsored plan is not accessible. If it happens to be in a place where he could access it, he would have to pay a 10% penalty, further reducing the rate of return.

That government sponsored plan is his investment, and he is stuck. If he has unexpected expenses, an investment or business opportunity, or needs emergency money, he will have a hard time getting that from his government sponsored plan.

In a whole life insurance policy, money is easily accessible to borrow, or to liquidate, for your own personal use; purchasing any items, funding any ventures, or using it for emergencies.

2. Death Benefit – The second is the death benefit. Although we aren’t buying this policy for the death benefit specifically, it has a death benefit associated with it. A nice addition.

3. Safety – Another huge benefit. If the market drops, The cash value is not affected. Cash value cannot go down based on the market, it’s locked in every year. We don’t have to hope every year that the market won’t crash, or spend years recouping money lost to a market crash.

On top of this, if taxes go up, or the government decides to start tapping 401k’s before he retires, he may find himself with even more taxes or fees he wasn’t planning on. Where do you think taxes are going to be in 10, 20, or 30 years? It could get ugly.

The point of all this is, slow and steady wins the race. People are always saying whole life insurance returns are minimal and worthless. But they never take the time to do some research first. I believe rate of return is important.

And the rate of return in a whole life insurance policy is solid.

2 thoughts on “Whole Life Insurance is a Bad Investment, Right?

  1. Aren’t taxes for most investments taxed at the long term capital gains rate of 15% vs 30%?

    Also, most fees for a low cost index fund are around 0.1%, not 1.5% :-) That changes the numbers quite a bit…

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