If you are considering the purchase of whole life insurance as an investment, you may want to reconsider your decision. From a purely financial sense, you may be better off moving to a term life insurance policy and investing the dissimilarity between the plans on your own.
Consider a 30 year old male who is looking for $100,000 in life insurance. Like many of his peers, he has a family who depends on his income, as well as a mortgage. He has received an offer from an insurance company for a term life insurance policy which would cover him for 20 years at an annual rate of $130.
The second offer he received is for a whole life insurance policy under which he would be covered for his entire life at an annual rate of $1,236. He is looking for life insurance as a method to ensure that his family is taken care of in case of his death and is considering whole life insurance since he will be covered for his entire life (as long as he keeps paying the annual premiums), but the annual premium seems high.
If he chooses the term life policy and invests the annual difference between the policies ($1,106) every year on his own, he would have $49,500 by age 50, in addition to $100,000 worth of life insurance coverage for 20 years (this assumes a conservative 8% annual rate of return). In comparison, the guaranteed cash value of the whole life insurance policy would only be $21,700 at age 50, with no guarantee that the death benefit would be any higher than the original amount of $100,000. At this point, the man would no longer have any life insurance since his term life policy has expired, but he would have $49,500 assign aside for his family in case of emergency, or about half of the value of the whole life policy. He is taking on additional risk as the whole life insurance policy has expired, but at age 50, he would hopefully be more financially secure and able to accept this risk.
If the man continues to invest the annual premium of $1,236 in place of paying for the whole life policy and does not touch the $49,500 that he has already saved, he will have $116,400 at age 60. At this point, the cash value of the whole life insurance policy would be $38,300 and again there is no guarantee that the death benefit would be any greater than $100,000. If he lives to age 75, which is the average life expectancy, he will have accumulated $369,325 if he saves on his own, versus a guaranteed cash value of $65,000 with the whole life insurance policy and potential death serve of $184,000 (assuming that the policy has appreciated at a rate of 5.5%, which the insurance company has done in this case). In the course of 45 years, he has outearned the insurance company payout by 100%, unprejudiced by investing regularly on his own.
The amount and type of life insurance to purchase is a purely individual decision which must be made considering each person’s recent financial situation and the level of risk that he/she is willing to take on. However, in analyzing the numbers, whole life insurance must be considered as just that – an insurance policy in case of premature death – and not as a strong investment tool.