Yes, Life Insurance Can Be a Smart Investment

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Graver markerI don't sell life insurance, and I have no interest in any entity that does. However, I am concerned with the lack of planning I see in the financial statements of many investors I advise. One common mistake is that many investors follow this oft-repeated advice: Buy term life insurance and invest the difference.

Suze Orman tells her readers ". . .the only type [of life insurance] you need is term insurance, because it's simple and affordable. Other plans include investing components, but you'd do better to buy the cheaper term policy and invest on your own."

Dave Ramsey says "no way" to buying cash-value life insurance. He also advises buying term.

Not Such a Good Idea

I have a problem with this advice for several reasons.

First, most people who buy term insurance don't "invest the difference." They "spend the difference."

Second, for those who do "invest the difference," there's no assurance their investments will be profitable. Many investors don't understand risk and lose a significant portion of their invested funds.

Third, most term insurance policies lapse without paying out a claim. Premiums for these policies increase as you age, making them unaffordable when you need them most. At that time, you may not be able to obtain any life insurance if you have serious health issues.

The Problem With Insurance Agents

What are the alternatives?

The primary problem with exploring insurance options is the necessity to consult with an insurance agent. Most people don't understand that their insurance agent isn't a fiduciary. The agent has an interest in generating commissions, and that creates a conflict of interest. This can mean an agent won't necessarily present you with the low-cost alternatives that may be in your best interest.

The solution is to not rely on agents. Instead, if you're considering life insurance where the annual premium will be $10,000 or more, you should retain the services of a fee-only insurance consultant. These little-known specialists charge an hourly fee, and they have no interest in any policy you may purchase. They provide unbiased advice and act as your fiduciary.

A competent fee-only insurance adviser should save you many times his fee. Glenn Daily, a fee-only insurance adviser, has a list of other advisers on his website. As he notes, there aren't many of them.

Building Cash Value


I interviewed one insurance adviser, Scott Witt, who's a former actuary for a large insurance company. I asked him to give me an example of a policy that would be a wise purchase but that an insurance agent would be unlikely to recommend.

Witt said a 29-year-old, in excellent health and a nonsmoker, could purchase a cash-value life insurance policy with a death benefit of $1.2 million and pay a premium of $17,000 a year.

Here's the kicker. After only one year, the illustrated cash value of this policy would be more than $15,000. After only five years, the total premiums paid would be $85,000, but the illustrated cash value would exceed that amount. In 20 years, it's extremely unlikely that any additional premiums would have to be paid to keep the policy in force.

At that time, the illustrated cash value would be $584,132, representing an internal rate of return of 4.9% on the amount invested in the policy. This is a higher after-tax return than you're likely to earn by investing in high-quality bonds.

When our hypothetical 29-year-old gets to age 49, she'll have insurance in force of $1.2 million. She can take the cash value out of the policy if she wants, up to the amount of the premiums paid, tax-free (but this would reduce the death benefit). When she dies, the death benefit will be paid tax-free to her beneficiaries. Do you think she believes she made a dumb investment?

Lower Sales Costs = Lower Commissions

Why is your insurance agent unlikely to present you with this type of policy? Because it's a "blended insurance policy," meaning it combines whole life and term into a single policy, resulting in higher cash values. It can do this because of lower sales costs. Lower sales costs mean lower commissions. Now you have the answer.

Several large, highly rated insurance companies sell blended policies, including Northwestern Mutual, Guardian, New York Life and Mass Mutual. According to Witt, these companies have a history of using reliable illustrations, based on recent experience.

No single type of insurance is suitable for everyone. But for some well-advised investors, buying this kind of cash value life insurance can be a very smart choice.

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24 Comments

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Vera Chang

The truth is that whole life insurance earns agents way more money. It is completely unnecessary for most Americans to own. Unless you have a lot of money and you have an estate tax possibility, or if you need to break up your assets fairly among your kids you don't need insurance past retirement age. Cheap term can be found online at places like LifeAnt ($15/month), and you don't have to waste a big portion of your money on someone else's commission. Whole life has a use, but for most people it shouldn't even be in the discussion.

April 08 2014 at 11:22 PM Report abuse rate up rate down Reply
Thomas Rockford

If you bought a whole life policy 35 or 40 years ago, that policy has been paying its own premiums for 20+ years, and in our case is now worth enough to cover a year at the highest level of care in a care facility. Much better investment than my mother's long term care policy, into which she has now paid more than they will ever pay out in premiums. Not as good as properly timed stock investments or T-bills, of course, but those don't come with insurance.
-Thomas from http://www.lifeant.com

January 23 2014 at 5:15 PM Report abuse +1 rate up rate down Reply
Tristan Tandberg

here is a joke I saw about investing in life insurance,
http://ponderingstuff.com/2011/06/04/life-insurance-drug-problems/

June 05 2011 at 11:00 AM Report abuse rate up rate down Reply
kathompson555

In fact, Dodger300, if you bought a straight Whole Life policy, your point labeled #1 is completely untrue. Traditional Whole Life policies build up Paid up Additions while the premium remains level. Look at the Cash Value within the Life Insurance policy and compare it up against the amount of Paid Up Additions you have at any given point in the policy and I'll tell you that the amount is comparable. For example: The 400k Whole Life policy I purchased in 2004 for about 2500 in annual premium is now 215k in Death Benefit with about 10k of Cash Value. I've put 14k into the policy - which is reflected in my Paid up Additions which have increased the death benefit of my policy. Moreoever - since the policy works with compounding factors and relies on dividends and not interest, I am seeing growth in my Cash Value (tax deferred, mind you) at about 6%. Where else would I get this return? I can reduce my Insurance amount to my beginning point of 200k (Internal Surrender of Additions) or loan the money out of the policy (92% if I don't want the policy to lapse) without paying taxes on the money (basis first, allow the death benefit to pass tax free to my heirs - basic rule of life insurance 101). Now, had I invested the 'difference' between what I would've spent on my Term Insurance, I'm thinking that 2008, 2009, and now most of 2010 wouldn't have treated that investment very well. Instead, I have Whole Life Cash Value that will NEVER be a negative asset as a portion of my nest egg. Granted, I don't rely on it as my 1 form of retirement cash (as no one should), but I know that I can remove DOLLAR for DOLLAR my Cash Value as Tax Free Income up to basis. This should help when my otherwise 'invested' dollars aren't there when the market goes sideways, correct? In fact, as you reference a Loan in your third reason, you do, in fact, pay your bank to access your savings account by allowing them to credit less than 1% on Cash. Do you not think they have their own general account that they are making interest on your dollar? It's called Investment Risk. Furthermore, many people utilize Life Insurance Cash Values as their 'own bank'. Should you decide to use a loan as one of the ways you remove the Cash from the policy, you can actually increase your

October 26 2010 at 3:47 PM Report abuse rate up rate down Reply
kathompson555

own interest rate and pump more Cash into the policy - especially during down market times like we have seen for the past 3 years. This actually inflates your Cash Value, compounds the dividend on the overage of interest you pay, and allow for a larger cash value down the road. Think about it. You save or loan money at a bank. If you save, you don't get a fraction of what they are making on your dollar. If you loan, you're obligated to repay them plus interest. Since you control the interest rate and are actually the benefactor of repaying the loan to YOURSELF, doesn't it make more sense to, dollar for dollar, reduce your own Cash Value, nominate your own interest rate, enhance not only your Cash Value but your basis within the contract, and allow for you to access your own Tax Free funds as a supplemental feature in the future AFTER you've been able to self-finance whatever obligations you needed the money for in the first place? So, Dodger300, I assume you watch your Suze Orman very closely since she's covered all of these topics in the episodes that rerun between the 1 - 5 am informercials. If you listen to some of the advice she gives out, you may want to pay more attention to the demographic of callers that are looking for it. Blue collar, debt ridden, and won't consider sitting face to face with an adviser. They, in fact, shouldn't be pursuing Whole Life because, realistically, they need to pay down their debts. They are Term Life candidates and I'll agree with that. However, explain to me why Suze Orman maintains 13m of a Whole Life contract with one of the more reputable carriers out there. Then explain to me how McCain used his Whole Life contract to finance his campaign. While we're at it, let's review how Doris Christopher (Pampered Chef founder) used a loan on her own Whole Life policy to fund the startup company that she sold to Warren Buffet for 900m. Lastly, JC Penney would most likely not be in existence if the founder used a loan on his Whole Life policy during the 1929 Great Depression. Where do you think he'd be had he 'bought term, invested the difference?' All in all - like any other financial strategy, it's not for everyone. You have to meet with an unbiased adviser to determine if you have the long term horizon and budget to meet it. However, your statement contains 3 false statements in a row - leading me to believe you are either a Stock Jockey or just misled. Articles to Look Up: Medical Economics: New Life for Life Insurance BusinessWeek: The Right Insurance for a Rocky Economy or... any rebuttal you'll find in response to Cramer's "Whole Life is Awful" articles. There, you'll find some intriguing responses to his own "Buy Term, Invest the Difference" philosophy - directly from the purchasers of varieties of Insurance that didn't have their crystal ball at the time of sale

October 26 2010 at 3:47 PM Report abuse rate up rate down Reply
Dodger300

So you want me to pay extra to get "cash value" (not real cash) along with my life insurance. 1. When I die my family gets the face amount of the insurance, but not the cash value. It is the exactly the same as making the insurance company the beneficiary of the cash value that I worked hard to save up, instead of my wife and children. Would you recommend that I leave my retirment plan and kids college fund to the insurance company, too? 2. If I decide take the cash value, the insurance policiy terminates, just like term insurance. With whole life insurance I would actually be paying for two features when I can only ever collect one of them. 3. Oh wait, you mean I also have the option of paying the insurance company interest to borrow my own cash value that I have saved? SHould i also be willing to pay interest to a bank when access my own savings account? How stupid would that be? Mr. Solin, you better keep your day job. You are never going to get ahead pushing this schlock...

October 12 2010 at 8:19 AM Report abuse rate up rate down Reply
1 reply to Dodger300's comment
kathompson555

I'm not a fan of ignorance, so see the lengthy, modestly abusive response above.

October 26 2010 at 3:48 PM Report abuse rate up rate down Reply
schuted

Mr. Solin has made some valid points but he could have done a much better job. IF and only if you have the extra cash flow, permanent (cash value) insurance offers a better conservative investment return over a long period of time.

If your family needs 1 million dollars of coverage and term is all you can afford, that is what you should buy. If you were more concerned with investment and you bought a $100,000 permanent policy with the same premium with which you could have bought a $1,000,000 term policy AND YOU DIE, you didn't do a very good job for your family. Let's remember WHY we primarily buy life insurance.

When buying life insurance, you should ask & answer the following question in order:
1) HOW MUCH DO I NEED?
2) HOW LONG DO I NEED IT?
3) WHAT KIND SHOULD I BUY?
4) WHO SHOULD OWN THE POLICY?

August 13 2010 at 6:48 AM Report abuse rate up rate down Reply
schuted

James,

They need to take your license away. You clearly do not understand what you are selling.

August 13 2010 at 6:31 AM Report abuse rate up rate down Reply
drhodges4u

Mr. Solin...you assume people are so stupid they need a cash value life insurance policy to force them.

Term policies lapse because they come to the end of their term and aren't renewed or they're converted. How many cash value policies lapse?

Lower Sales Cost = Lower Commissions is the only smart thing you wrote. A $1950/yr term premium vs. $17,000/yr premium for cash value makes a huge difference...$975 vs. $8500 based on 50% commission rate for either product...wow!!! And the beneficiary still gets $1.2 million.

For someone who claims to be so smart, writes books on being so smart, is an advisor giving advice, yada yada...you are way off base on this one.

Wondering how much money have you invested in this dumb investment???

August 13 2010 at 1:48 AM Report abuse +1 rate up rate down Reply
jandjellis

Dan, Yes, indeed. Buying cash value life insurance is a GREAT idea for most people. I have been in the life insurance business for over 40 years and proud of it. My experience shows that for most people, the cash value of their policies are an EXCELLENT source of funds for later in life. Monay for college expenses for kids or grand kids, for added retirement income and emergencies is vital. On the golf course I have heard fellow golfers complain about their investments tanking. NEVER have I heard anyone sound worried about the cash values in their life insurance policies. I have used the cash values in my own policies numerous times in my life and the cash values continue to climb each year. The peace of mind knowing that the money is there and when I die the money will still be there for my beneficiaries, payable TAX free. Where else could someone invest their money on a tax free build up and then take it all tax free later for living benefits as well as at death? There is NO substitute for Cash Value life insurance.

August 13 2010 at 1:43 AM Report abuse rate up rate down Reply
1 reply to jandjellis's comment
drhodges4u

The IRS has this weird thing...if you make money on your investments they want some of the profit in the form of taxes...no profit equals no taxes...premiums paid minus cash value..oh my..no profit..tax-free. YES there is a substitute.

August 13 2010 at 1:59 AM Report abuse rate up rate down Reply