Well, life insurance is not an investment. It is, however, a valuable family asset and a tool that tends to shift over time depending upon what stage of life your clients are in. While whole life insurance has the cash value element, it still is an insurance product. It is unfair to compare whole life insurance to the stock market as that would be like comparing apples to oranges.
As financial planners, we understand diversification is essential in a comprehensive financial plan. Diversification goes beyond asset classes. Some may argue tax diversification is more important. One of the Big Four accounting firms, Ernst and Young, recently released an analysis on how permanent life insurance and deferred income annuities increases income potential in retirement and outperform investment-only approaches.
The study shows integrated retirement planning approaches tend to increase legacy assets and, more importantly, give clients better peace of mind and more confidence in their financial plan. Advisors must have an open mind around planning and investing strategies so we can better serve our clients and communities.
Whole life insurance provides a tax-advantaged solution. How, where, and why someone saves their money should really depend on their short, mid, and long-term financial goals. For long-term goals such as retirement, individuals have limited options when it comes to saving their income each year.
Whole life insurance gives individuals more planning opportunities in retirement. While the tax-free death benefit cannot be discounted, individuals with whole life insurance and significant cash value built up are positioned with more planning opportunities than those who only have term insurance.
Whole life insurance owners who may not have a need for the death benefit later in life can consider using the cash value to pay for long-term care insurance premiums on a tax-free basis or convert the policy to an income annuity for guaranteed income to help supplement social security.
And, as the Ernst & Young study indicates, an integrated retirement planning approach may result in more assets under management for your client, leading to greater peace of mind. A side effect of more assets under management is a more valuable investment practice.
While considering insurance coverage, you may hear the mantra "buy term and invest the difference." That might be good advice in some circumstances, but it's best to evaluate all of the alternatives and understand the benefits and stipulations of each choice.
Term life insurance policies last for a specified number of years. For example, 30-year term covers you for up to 30 years, as long as you continue paying premiums, and you can stop paying premiums if you decide you no longer need coverage. Your coverage ends when the term ends, and you'll need to apply for a new policy if you want continued coverage.
That's where the debate over term life insurance (or buying term and investing the difference) and permanent insurance comes in: Should you pay higher premiums in pursuit of permanent coverage and future cash values, or should you buy term and invest the additional money that would have gone toward permanent insurance premiums?
The approach described above might make sense for basic life insurance needs that you know are temporary. For example, if you're otherwise protected, but you just want extra coverage until your child becomes financially independent, a term policy could do the trick at a lower cost.
Term insurance can ease the burden on your monthly budget and help provide essential protection against the death of a breadwinner. But permanent insurance has its place when your needs don't fit that mold or when you're using more advanced planning strategies. Ultimately, which approach is the best fit within your broader financial plan depends on your specific situation. It's often a good idea to talk with a financial representative to help determine what's right for you.
As great as they were when initially introduced, times changed, and term life insurance is now accessible for a fraction of the price of whole life insurance. A solid term life insurance plan costs between 10%-12% of what a comparable whole life insurance plan would cost, but it lacks the investment vehicle that made whole life policies so popular.
So with this new option to consider, what is the smartest approach to life insurance from an estate and retirement planning perspective? Is it better to buy a whole life insurance product or buy a term life insurance product and invest the difference between the term premium and a whole life premium? How can you maximize your legacy, protect your retirement, all while safeguarding your family in the meantime?
Guessing how much money you can make off a given investment is a complicated process because return rates are far from certain, unlike death and taxes. We know that a well-diversified, index fund-based portfolio can be expected to return about 6% to 10% a year before taxes.
A 40-year-old male can expect to pay $347/month for a $250,000 whole life insurance policy. After 20 years, the policy will have a guaranteed value of $70,018, and its likely value would grow to $105,721 due to the performance of the investments held by the life insurance policy.
How much bigger? A non-smoking 30-year-old woman in excellent health could likely secure a 20-year- term policy with a $1 million death benefit for about $480 a year. If she died at 49 and after paying just $9,120 in premiums, her beneficiaries would receive a tax-free payment of $1 million.
If you are in an exceptionally high tax bracket, are facing uncertainty as to your physical condition over time and want the stability of a permanent life insurance plan, are maximizing other tax advantaged savings and investment accounts, or are looking for a way to reduce estate tax exposure, it is possible that a whole life or other cash value life insurance plan makes sense for you. While these policies are more expensive than their term life equivalents, their favorable tax treatment and ability to become self-supporting through the payment of dividends can make them an attractive option for people interested in legacy planning, providing long term support to family members, or charitable giving.
Generally speaking, the strategy of buying term and investing the difference offers better returns, lower fees, and more control. It is a ideal strategy to consider as part of your estate and planning process.
What is Buy Term and Invest the Difference, AKA BTID? Simply put, it is choosing to buy an initially cheaper term insurance policy vs whole life, since the latter requires more capital investment initially.
Buy term and invest the difference was first coined by Primerica Financial Services founder and longtime CEO Arthur L. Williams. Mr. Williams believed that life insurance was only for protecting the primary breadwinner and should not be used as a savings vehicle.
As a result, Williams launched a crusade to convince cash value life insurance policyholders to trade in their existing, more expensive whole life or universal life policies, and replace it with a cheaper term life insurance policy.(1)
His reasoning was that middle-income families would be better served by buying cheaper term life, since whole life insurance rates are often multiples higher than term life rates with a similar death benefit.
Many financial pundits, such as Dave Ramsey and Suze Orman, agree with Mr. Williams and use the slogan buy term and invest the difference whenever they are confronted with a caller who asks which policy is better, whole life insurance vs term?
Yes, you read that correctly. The best whole life insurance policy is one that blends term life into it, so that you can maximize the cash value growth and have a sizeable death benefit from the start.
You pump your savings into these maximum funded insurance contracts which act as a conductor for all your investments, but the whole life policy remains a stable, safe compound interest account providing you with dividends in excess of 6% from the top infinite banking companies.
But the death benefit and cash value in the whole life insurance policy keeps growing and growing, so it is no longer a true comparison between death benefits, since the term life death benefit remains at $2.5 million.
And estimates are that 98% of term policies expire worthless. That is a loss of 100%, without even taking into consideration the opportunity cost of that $4,000 a year you spent on a term policy that could have been used elsewhere (such as building up cash value in a whole life policy).
For decades, the rallying cry of the financial advice industry has been for clients to buy inexpensive term life insurance rather than more expensive whole life insurance and invest the premium savings on their own. The only problem is most clients never execute the second part of the equation, leaving many of them uninsured in later life and unprepared for retirement.
ANALYSIS FALLS SHORTTypical economic analyses that compare the cost of buying term and whole life policies fail to properly assess the guaranteed cash value growth component of permanent life insurance, Mr. Babbel said. He noted that cash value guarantees always grow, while a more volatile portfolio of stocks and bonds can rise and fall with the market.
Finally, traditional buy-term-and-invest-the-difference models, referred to as BTID models, ignore the valuable options of whole life insurance such as the flexibility to borrow against the cash value or to take tax-free distributions, he said.
A typical young client with a family may want to purchase a basic whole life policy with a face value of $50,000 or $100,000 and simultaneously buy a $250,000 term life policy that can be converted to whole life later, Mr. Blunt explained. As their income increases, they can shift more of their premium dollars from term to whole life. 781b155fdc