Important Life Insurance Facts

If you've ever spoken with a life insurance agent, you most likely got the impression that cash value, or whole life coverage is the only acceptable form of life insurance. Agents and the life insurance industry in general try to convince consumers that purchasing term coverage is irresponsible, short-sighted, and financially wasteful. The push to cajole consumers into whole life coverage would explain why 70% of all policies sold are cash-value policies. This brings us to the crux of what you probably don't know about life insurance: for the vast majority of consumers, term life is actually the better option. Read on for additional information on why whole life, for most people, is little more than a money pit.

Life Insurance Is Not an Investment

Life insurance policies were never meant to function as investments. For one, the returns are pitiful. Your life insurance agent or company may show you robust predictions of growth and high returns, but these forecasts rarely prove accurate. Secondly, you have to consider the opportunity cost of pouring your money into a cash-value life insurance policy. You will spend more of your money on premiums every month, and that means less money for things like savings, health insurance, mortgage payments, etc.

Example Case

Let's say a 30-year-old male can spend $100 each month on life insurance. For this amount of money, the man can purchase a cash-value life insurance policy with about $125,000 of protection. He chooses a cash-value policy, thinking it will help augment his retirement savings. For the first several years of the coverage, most of his monthly premiums will go toward the insurer's expenses and commissions. After those first few years, he can expect an average annual return of 2.6% on whole life, 4.2% on universal life, and 7.4% for variable life. By contrast, if this same man had purchased a 20-year, $125,000 term life policy, his premiums would've been $7 monthly. That means he could take his $93 in savings on premiums and invest it in mutual funds of his choosing with an average return of 12%.

The Alternative to Cash Value Coverage

Instead of squandering your money on a cash-value policy, purchase a 20- or 30-year term policy and invest the difference on your own. Even with moderate investment returns, you should be able to accumulate a substantial nest egg by the time your term policy expires. At that point, you will be able to "self-insure" with your investments. Furthermore, when your term policy expires, it's unlikely that you will still have children depending on you, house payments to make, etc., so you will probably no longer need life insurance coverage. In the event of your death, your spouse could easily live off of the money you've built in your investments.