Investment and Savings Example
Let’s look at an example of these two in action.
Meet Greg. He’s 25 and wants to get $1 million of life insurance so his family will be okay if he unexpectedly passes away. A whole life agent pitches him a $234-per-month policy that’ll include the insurance coverage he wants and build up savings for retirement. On the other hand, a term life agent tells Greg he can get a simple 20-year term policy with $1 million of coverage for about $29 per month—an over $200 difference.
Let’s say Greg goes with the whole life cash value option. He now has a hefty insurance premium to pay every month. But he’s okay with it because most of that money goes toward his cash value “investments,” right? Well . . .
In truth, the additional $205 per month disappears into commissions and expenses for the first three years. Then, the cash value portion will offer a horrifically low rate of return for his investments (we’re talking 1-3% here!).
After paying way too much for 40 years, Greg’s 3% returns have built roughly $190,00 in cash value in addition to the $1 million of insurance. Then, Greg dies. How much does the insurance company pay out to his family? $1 million. But wait! What happened to Greg’s $190,000 in cash value?
You see, only Greg is entitled to that money. And Greg died before he had a chance to cash it out. So where do all his hard-earned savings go? The insurance company keeps the money.
Yep. Greg gets to roll over in his grave while his insurance agent enjoys Instagram-worthy vacations on Greg’s dime. Sound like a legal scam? That’s because it is.
So let’s go back in time. What if Greg chose the 20-year term life policy instead? He’d only pay $29 a month and could invest the money he saved by not choosing the whole life plan (roughly $205 per month).
If he invests in good growth stock mutual funds with an 11% average annual rate of return, he’ll have about $177,500 in investments by the time his 20-year term life policy expires and more than $1.8 million at age 65. That’s a lot of bang for his buck! We think Greg will rest much easier knowing his family will be taking selfies at that five-star resort.
