I have clients tell me all the time that they plan on buying term insurance and investing the difference in a retirement account or individual account. They tell me they don’t like the returns on insurance. They tell me whole life insurance is a bad place to put money. They tell me they don’t like whole life insurance because they’re father/Uncle/Brother told them so.
I appreciate these feelings but soon came to realize that what they are trying to say is “Prove to me whole life insurance is a good idea.” So I do.
PROBLEMS WITH BUYING TERM AND INVESTING THE DIFFERENCE
Very few of us have the discipline to continue funding the separate account when times get a little tight. Let’s say the car breaks or the roof needs fixed, the first thing people do is stop funding the separate account. After that, it becomes harder each month to get back on track investing the difference. With whole life insurance, the funding is automatic and becomes part of your budget.
It is extremely clear that the market is quite volatile. Thru the end of June, 2011, the S&P 500 has produced a 2.72% annual rate of return (ROR) over the last 20 years. After taxes this ROR is under 2%! Whole life insurance does not have the volatility of the market, has built in guarantees while also producing a 4.26% return.
No matter where you invest the difference, there will be taxes involved. If designed and funded properly, whole life insurance will not incur any taxes on the growth or distributions of your money. Because of this, the spending power of your money has increased!
The Life Insurance is Needed Longer than Expected
It is my experience that people need their insurance longer than they originally expected. This usually happens for one of three reasons.
1) they are not as successful and haven’t saved as much as they thought they might and the insurance is needed as an income replacement for longer than they had anticipated.
2) They are more successful than they ever dreamed possible and they now need the insurance to pay estate taxes.
3) They are somewhere in between and they’re not sure. The point of having insurance is to cover the unexpected and if it’s possible you might need the insurance longer than the length of the term, whole life insurance should be considered.
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