My Own Life Insurance Assessment; What's the Best Policy
These are the whole life premiums I shared:
| Description |
My Policy |
Her Policy |
$50,000 whole life - pay to 65, standard
(there's no elite option) |
$65.16 |
$41.27 |
$100,000 whole life - pay to 65, elite
(minimum coverage to qualify for elite) |
$115.00 |
$67.95 |
So, I did a little analysis on the numbers, and here's what I've found.
Note: To keep it simple, my calculation assumes 8% investment growth rate (CAGR), no yearly capital gains, no fee, and invested at the beginning of each year instead of monthly.
| Description |
My Policy |
Her Policy |
| Lifetime premium paid (note, I'd have to pay for 30 years and my wife for 37) |
$24,240 |
$18,324 |
| Years to reach $50,000 |
23 |
28 |
| Years to reach $56,500 (since insurance payout is non-taxable, we actually need $56,500 to get about $50,000) |
24 |
29 |
| Investment value at 65 |
$104,162 |
$108,614 |
| Investment value at 75 |
$224,879 |
$234,490 |
| Investment value at 85 |
$485,496 |
$506,245 |
What does this all means?
Life Insurance sales agents often cite the fact that we are getting more than what we'd have paid - i.e., for $50,000 coverage, the total payment only adds up to $24,000 (for me) and $18,000 (for her). For these small sums, we are getting lifetime coverage of $50,000 each. So, we are getting a really good deal right? Well, not so fast.
I'd have a $50,000 portfolio in 23 years and my wife in 28 years if I invest our life insurance premium payments in an investment vehicle that returns on average 8% per year (i.e., the stock market). To account for the fact that our investment would be taxed, while the life insurance payout wouldn't be, we only have to invest about 1 more year each to accommodate that.
Now, this is where it gets really interesting.
- If we invest the premiums instead of using it to buy the policies, we should have more than $100,000 each
- If we stop adding new money once we turn 65, and keep investing what we have:
- By 75, we each should have more than $200,000
- By 85, we each should have more than $475,000
Wow, that's a huge difference!
How insurance companies make money with whole life insurance
Basically, this is how the insurance companies are profiting from your money.
- They ask you pay the whole life premiums upfront
- They invest your money and grow it at high rates of return - i.e., 7% or more
- They promise to pay you back a fixed amount when you die (or when you surrender the policy)
- Since only a small percentage of people actually die early, the investment turns out to be much larger than the payout (as you can see from the numbers above)
The Verdict
So it doesn't look like buying whole life insurance is the right thing for us. We could buy 20 years, or 30 years term lifeinsurance for the coverage that we need to cover each other and our child(ren). If we are disciplined, we can invest the difference and come out ahead of the curve.
Learn more about annuities