The Investment You Don't Need; Cash Value Life Insurance
As a longtime trader I have a rule about investments and insurance
. I use investments and my trading ability to make money. I use insurance to protect the things I can't afford to lose. Further, never should the two asset classes meet. Insurance is a lousy investment, but it's great to protect against loss.Over 75% of life insurance policies sold today are cash value policies. A cash value policy is a policy that combines insurance and savings together. Your well intentioned insurance agent will tell you that a steady investment in cash value insurance over your lifetime will substantially find your retirement.
Nothing could be further from the truth. If you are smart, you will get up running and screaming from the table and leave the insurance man two packages wares and go home. I want to point out that insurance agents are not bad men; they are trained to sell insurance and that is exactly what they do.
Most insurance agents will present themselves at your doorstep with a nice print-out of potential values of your insurance policy when you reach age 65. The numbers seem very impressive, almost astronomical. I need to point out that these numbers are simply projections and mean absolutely nothing. Further, while the numbers may look astronomical in today's dollars, they may not be so impressive in 30 years when you retire. Why? Inflation. Insurance projections never take into account inflation.
Most cash value life insurance policies are either whole life or universal life policies. There are subtle differences in the packaging of these policies, but essentially both build cash value at an alarmingly slow pace. Let's take a look at a real life example. In researching this article, I submitted applications to several insurance sites and got some quotes on a hypothetical 27-year-old man in good health. In the example, I assumed the young man needed $15,000 life insurance policy. Here's what I found:
Two insurance companies (who I will keep anonymous, but they are both in the top five life insurers) offered policies for my 27-year-old with a premium of $100 per month. At the end of 10 years both had an approximate cash value of $12,000. If you do the math, this is just about what they have invested in their policies over the past 10 years.
On the other hand, the 25-year-old could buy a level 20 year term policy for 9 dollars per month. At the end of the same 10 year period I compared the whole and universal life policies to, our 20-year-old would have invested a total of $1080 in the term insurance policy.
Here's the important part, the 25-year-old would have been free to invest the $91 he didn't put into the cash value policies in income producing assets like stocks, mutual funds, or perhaps even a house. Using a conservative rate of 8%, this $91 dollar a month investment would grow to $19,182.19.
What happened to all the money?
Insurance companies are among the most profitable corporations in America and their insurance agents are well paid. Investing in a cash value insurance policy over a ten-year period costs this 27-year-old nearly $7000 as opposed to buying a 20 level term policy.
And there's another issue to be considered when calculating your actual rate of return. At death, only the death benefit is paid to the beneficiaries. If the insurer had accumulated $60,000 in cash value on their $150,000 policy, the beneficiaries would only get $150,000 and the insurance company would get the $60,000 cash value. I would point out though, that proceeds from a life insurance policy are paid tax-free to the beneficiary.
It is obvious that cash value insurance is not a great idea for anyone other than insurance companies and insurance agents. Well-known financial planners have been preaching this message for a long time, yet 75% of people who purchase life insurance policies still purchase cash value policies. This is truly a testament to the sales ability of a company's insurance agents.
A wise man will buy term insurance and invest the rest and a Roth IRA, or some other tax advantaged investment for his retirement. In the end, he will be hundreds of thousands of dollars ahead by avoiding an investment in cash value insurance. The facts speak for themselves, and they have been trumpeted by leading financial planners for the past decade. How come no one is listening?
by: David S Adams Life Insurance for Your Life Situation Life Insurance Brokerage Exclusively: Bloodthirsty Cut-throat Information Knockout Delivery Compare Life Insurance Have A Better Knowhow Of Life Insurance Policies Watch Giles and Sue Live the Good Life Season 1 Episode 4 Burial Life Insurance Buy Latest Gadgets: For an easy and smooth life The Importance Of Getting Life Insurance Why Life Insurance Is So Important Low Cost Life Insurance Analysis: Purchase Lower Costing Term Protection Positive Ways To Find Competitive Building And Contents Insurance Why Are Life Insurance Leads Important? Why Do You Need To Compare Life Insurance Quote? Life Insurance No Exam: The Quickest Way To Get A Life Insurance Approval