“It is better to debate a question without settling it than to settle a question without debating it.”
– Joseph, Joubert

 Should You “Buy Term and Invest the Difference”?

insurance-debateIn a recent comment from a reader on a post about Universal Life Insurance and Indexed Universal Life (IUL),  a reader left a comment containing many common life insurance lies and misunderstandings. Since these misleading ideas are out there all over the internet, we thought we’d use this as an opportunity to address them, point by point.

 

(The comment): 

Hello All,

I came across this website as I was trying to find information on WHY UL and WL polices are NOT recommended products for middle income families .

Let’s get to some basic and simple facts with whole life.

You pay for 2, and get 1 in return. WL provides this false “savings or money pool” that clients are fooled into thinking is actually theirs! Upon death, the policy will ONLY payout the face amount and not the cash value.

The now “savings” that is within the cash value, is held with the insurance company and if the client ever actually needs it use THEIR own money, the funds can be taken out as a loan. WHY ON EARTH WOULD YOU PAY THE INSURANCE COMPANY INTEREST TO USE YOUR OWN MONEY????

When you read the policy, you will note that between, the first 2-6 years…sometimes longer, as I have seen 9 years, the cash value is ZERO! A client is better off putting the over payment in premiums under their pillow and they will still have more money! Not to mention, the cost to cover 100k is far too expensive for the middle income or young family. Usually 3-4 times more for the same face amount as term. The need cheap protection and a lot of coverage in the event the income earner dies. Term, provides just that. Pure insurance…no BS tied to it. It provides larger face amounts that can be enough to pay off mortgages, provide survivor income, fund the kids education and pay off debts and funeral expenses.

While the family is properly covered with term insurance, the difference should be used to fuel investment funding or paying off some existing debt.

WL is a combination of two things… insurance and savings. However, the client only gets one at death. The insurance company keeps the cash value. So all that “savings” goes to waste and not to the family. I always advise all my client to buy TERM INSUREANCE and invest the difference outside of an insurance product. When you unbundle the two, you give the client more power over their money and more options on investing.

The simple truth is that insurance agents sell WL for the only one reason….they make huge commission. BUY TERM AND INVEST THE DIFFERENCE is the only way to go for most, if not all families. 

Dear Shehan, it’s clear you have very strong opinions on this matter, regardless of the facts. As you assert many things that are falsely believed by too many Americans, it’s worth responding for the sake of all of those who have been told the same lies.

First of all, we won’t try to defend UL or IUL, as we don’t typically recommend those types of life insurance. (Although there are situations when a policy may be worth keeping, and we’d be happy to help anyone with a Universal Life policy determine if it is worth keeping or set to explode like a time bomb.) So we will speak to Whole Life here: 

  1. “You pay for 2, get 1 in return. WL provides this false “savings or money pool” that clients are fooled into thinking is actually theirs! Upon death, the policy will ONLY payout the face amount and not the cash value.”

That’s a misleading half-truth. The fact is that is in a properly set up whole life insurance policy, the death benefit INCREASES along with the cash value. So if you begin with a $200k policy and save/build $200k in cash value, your death benefit will now be worth $400k or more. It IS true that the family will not get to keep $600k, only $400k, but the death benefit will grow so that the family is getting back the amount of the cash value PLUS the original death benefit, often more. 

  1. “The funds can be taken out as a loan.”

Nope, never. However, you can WITHDRAW your  cash value at any time (of course with no interest) or you can borrow AGAINST your cash value, while it stays in your policy and keeps growing. 

  1. “Why on earth would you pay the insurance company to use your own money!?”

See #2 – it’s not your money. You’re paying interest to use the INSURANCE company’s money, with your cash value as collateral.

If you can tell us where we can borrow money from anyone with no interest – and it’s not a teaser rate, let us know! But there are many reasons why people would choose to borrow against their savings rather than simply withdraw the funds:

A) They want to purchase a car, remodel their home, or pay for school tuition (or 100 other things.)

B) They want to keep their savings intact and growing, rather than liquidating the nest egg.

Once withdrawn, money can’t be “put back” into cash value like a bank account. Since there are tax advantages to keeping money in the policy, many people would rather borrow against it and repay the loan if they can do so quickly.

C) They might not be able to qualify for a loan elsewhere when they need it most.

D) They may wish to loan the money or invest it where they will earn back more than the cost of the loan.

E) Cash has an opportunity cost, and liquidity creates flexibility and security. People choose to borrow money and leave their savings intact in many situations… they may a home mortgage or a car loan even if they could liquidate savings or investments to pay cash. Nobody gets upset about these things. 

  1. “…between the first 2-6 years…sometimes longer, as I have seen 9 years, the cash value is ZERO!”

Well, if anyone is ever offered a policy like that, they should NEVER take it! We agree on that point. We recommend policies with maximum paid-up additions so that you’re likely to have an amount equal to ALL of your premiums in cash value in 10 years or less. And remember – you still have the amount of your original death benefit (or more) in addition! 

  1. “the cost to cover 100k is far too expensive for the middle income or young family…They need cheap protection and a lot of coverage in the event the income earner dies.”

We partly agree. Oftentimes young families and middle-income families may want additional term insurance. And if they cannot afford whole life at all, they should start with term to make sure they have some temporary coverage in place.

We disagree that whole life is “too expensive” because we believe that saving money should be in everyone’s budget. The more people can save, the better. If a few hundred dollars a month breaks a family’s budget, they may need to look at their spending priorities.

6) “(permanent insurance is) …Usually 3-4 times more for the same face amount as term… (which) provides larger face amounts that can be enough to pay off mortgages, provide survivor income, fund the kids education and pay off debts and funeral expenses.” 

You are correct about the value that life insurance can provide to the survivors. Though 99% of term policies never pay a claim, because such policies are only affordable when someone is young or (at most) middle-aged. Price a renewable term policy from age 65 to 95, and you’ll see which is more expensive! (This is also the problem with many Universal Life policies, by the way.)

Companies that offer whole life often write policies for people to age 85. Depending on health and many other factors, purchasing whole life in your 80’s may not be a sensible move. However, with policy riders offering benefits in cases of critical illness and disability, a whole life policy over age 50 might make a lot of sense, as it can replace or supplement other insurances, while building cash value and allowing the policyholder to leave a sure legacy to heirs, rather than a 1% chance of a legacy.

7) “I always advise all my client to buy TERM INSURANCE and invest the difference outside of an insurance product. When you unbundle the two, you give the client more power over their money and more options on investing.”

We also don’t believe that you should “invest” through an insurance policy because it is not the most efficient way to do so. However, whole life offers a great way to SAVE and store cash safely. Too many investors start “saving” in mutual funds or their 401(k), neither of which is actually SAVING, as money is at risk and not available to be used as collateral in most cases.

By combining savings and insurance, the death benefit becomes a guaranteed legacy. And by unbundling savings and investing, people end up with many MORE options because they have liquidity. But you’ve got to save first!

When you compare whole life with any other long-term savings vehicle (one that is safe and secure and you can’t lose money) and you also count what you’d be spending on equivalent term insurance, whole life delivers much better returns than any savings vehicle we know of.

It does take a few years to see the liquidity; it is similar to buying a house, it takes a little time to build equity, but it is worth it. At the same time, you are maintaining insurance that is guaranteed to last for life! And when you factor in that, the rates of return are very strong. 

8) “The simple truth is that insurance agents sell WL for the only one reason….they make huge commission.”

Because of all of the false and misleading information on the internet about whole life insurance, whole life is actually one of the hardest products to sell! So it’s not the “easy money” that many suggest. Because I refuse to put my clients’ money at risk, I gave up selling stocks and mutual funds years ago. I will only sell products that are in my clients’ best interest.

As far as commissions go, front-loaded products are very misunderstood. Think you’re saving fees and commissions by “buying term and investing the difference?” Nope! Case studies done by the Palm Beach Letter (a financial newsletter, they don’t even sell insurance) and author Pamela Yellen reveal that investors will pay as much as 8 – 10 times MORE in commissions and fees in the long haul by doing it your way than putting money in a properly constructed whole life policy (which give you more cash while decreasing commissions substantially.)

Insurance agents do NOT earn ANY commissions on the savings portion – the cash value, while fund and brokerage fees keep skimming off the top for decades. As I illustrate on calculators in Busting the Retirement Lies, an investor can end up paying MORE in fees than they even put into a retirement account – even twice as much!

We don’t expect you’ll change your opinions, but we appreciate the opportunity to set the record straight on many of the life insurance lies out there! Hopefully you’ll share more accurate information with the clients you’re advising to get temporary insurance policies.

Sincerely, the P4P team. 

Do You Want to Know the Truth About Life Insurance?

BFPL-coverWe certainly won’t solve the whole-life-vs. term-insurance debate in a single post! (And we believe in both, depending on the situation.) Yet we hope we’ve offered some clarifications.

We think this is such an important topic, we’re starting to work on a new book, Busting the Life Insurance Lies! It won’t be available for some time, however, we encourage you to pick up one of Kim’s other myth-busting books today! 

Busting the Financial Planning Lies  includes a chapter about life insurance.  Busting the Retirement Lies  demonstrates that 401(k) and other qualified plans aren’t all they’re assumed to be. And Kim’s first book, Live Your Life Insurance,  is an excellent handbook for getting the MOST out of a whole life policy.

What About YOUR Life Insurance?

Is it time to evaluate YOUR life insurance strategy or existing policies? We can help you determine if whole life makes sense for you, and we can get you a no-obligation quote on how a policy might perform for you.

And as you may need TERM life insurance (or both) we also recommend our partners at P4P Rewards. They can give you the BEST quotes on term insurance. (Click on the link or, to find out more about P4P Rewards, click here or on the “Prosperity Rewards” image in the sidebar.)