Whole vs term life insurance: which one should you invest in? Income Expert Marc Lichtenfeld explains why he believes there’s a solid winner between the two.
It’s hard to believe it’s this time of year again. Where has the time gone?
No, I’m not talking about back to school, tight pennant races or the changing of the leaves.
It’s September, so that can mean only one thing – Life Insurance Awareness Month!
Do you have your decorations up yet?
I have been a life insurance customer for 20 years. After picking my jaw up off the floor, the first thing I did after my wife told me she was pregnant was research life insurance.
We wanted to be sure that if something happened to either or both of us, our kids would be taken care of.
We were willing to pay an insurance company a yearly premium to assume the risk that if we die, it’ll pay a big chunk of money.
So far, knock on wood, it was a good bet for the insurance company. We were both young and healthy when we signed the contract. And I’m thrilled the insurance company made a profit on us. I hope it continues to as long as our policy is in effect.
That’s the way insurance should work. You pay an insurance company to assume the risk of disaster.
You pay your auto insurer to take on the risk of having to pay for damages in the event of an accident. Your homeowners insurer is paid for the risk that your house may burn down, have a tree fall through the roof or undergo other calamities.
Without insurance, you are exposed to significant cost should something go wrong. Insurance is a worthwhile product, and I wholeheartedly endorse term life insurance to replace your income should you pass away unexpectedly.
But that’s it.
That’s the only reason 99% of people should own life insurance.
With term life insurance, you insure your life for a certain period. If you die, the insurance company pays your survivors a lump sum. It’s very easy to understand, and it’s the cheapest option.
Unfortunately, the insurance industry has all kinds of complicated products aimed at solving problems most people don’t have or that could be addressed much less expensively.
Whole vs Term Life Insurance: Bank on Yourself, Not Insurance Companies
Several years ago, the “bank on yourself” plan became popular. The case that many insurance providers made for this plan was that Wall Street is a casino and you should buy a whole life insurance policy to ensure you have the money you need.
I don’t gamble in casinos. I do invest heavily in the markets. There is a very big difference.
In a casino, you could get lucky and win a bunch of money in the short term. Long term, the odds are against you and you will lose.
Wall Street is the opposite. Short term, anything can happen. The market could tank, your stocks could go down and your portfolio could be lower. Long term, markets go up.
Over rolling 10-year periods since the Great Depression, the stock market has been up 91% of the time. The only times it was down over rolling 10-year periods were if you sold in the middle of the Great Depression and in 2008 and 2009. In each instance when the market was down over those 10-year periods, you were back in the black within three years – though typically much sooner.
In any given year, the market is higher 70% of the time. If players at Caesars Palace had a 70% win rate, you’d have a second home in Vegas so you could spend as much time there as possible.
But what’s more dastardly about the bank on yourself movement is that you use whole life insurance for investment purposes.
In my book You Don’t Have to Drive an Uber in Retirement, I state…
A whole life policy is one of the worst things you can do with your money. If you’re considering a whole life policy, just take your insurance broker to the car dealer of his or her choice and put down the down payment on the car they want. At least you’ll get the satisfaction of seeing them smile as they drive away in the car you just bought them.
Whole life policies (and similar policies) are expensive and put a lot of your money in the pockets of the person and company that sold it to you. Additionally, they are complicated. They can come with guarantees that you won’t lose money, but you will pay through the nose for those guarantees. Guarantees you probably don’t need, considering the strong odds of success in the market.
You are much better off taking the money you’d contribute to one of these policies and investing it in the market for the long term. If there is a portion that can’t be risked or that you need in the short term, then you can keep that cash separate in a low-risk investment, like a certificate of deposit.
This way, all of your money is invested, rather than some of your money going to commissions and some more of your money going into an insurance product that you don’t need.
Over the past 100 years, the average annual stock market return is 12.3%. A 12.3% annual return more than triples your money in 10 years. The market works quite well for long-term investors without sharing it with insurance companies and their brokers.
If you need life insurance, get term life and invest the rest of your money. If you don’t need life insurance, just invest. There is no reason to get involved with one of these products despite the feel-good name of the program.
My insurance policies help me sleep at night. Knowing there are people who invest in whole life policies, thinking they’re helping themselves out, makes me lose sleep.
Don’t buy expensive and unnecessary insurance products.
Oh, and happy Life Insurance Awareness Month!
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About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.