What if what we believed to be true turned out not to be? I’m talking here about life insurance, but the concept could also apply to many other areas of our lives, especially in the scientific realm.
There is no shortage of pundits who constantly denigrate cash value life insurance. According to them, the vast majority of people should never buy cash value life insurance, but rather should buy term insurance and invest the difference in the market.
It is interesting to note that they do make an exception for whole life when it is used for estate planning purposes, that is to pay estate taxes so that the entire estate passes to the intended beneficiaries. In that case, they say whole life is appropriate because the insurance must be in force the day you die for the strategy to work.
Well what if I want my life insurance to be in force the day I die? According to them, I won’t need it because my investment account will be larger than the death benefit on a whole life policy would be. But what if it isn’t? What if I died in 2008-2009, when the market was down a third? Or what if I wanted to retire that year?
This isn’t meant as a knock on stock market investing. That is something that is appropriate for most people. But stock market returns tend to be erratic, unlike the slow, steady, guaranteed increases in a cash value life insurance policy.
By way of comparison, lets look at a life paid up at 65 policy versus a Roth IRA for a 35-year-old healthy male. Since the max Roth contribution for 2019 is $6,000, we’ll use that as the premium.
$6,000 purchases a face amount is $369,565, so obviously it would take some time for the Roth to catch up to that. At age 65, the values for the life insurance policy are as follows: $201,564 guaranteed cash value, $350,821 total cash value (includes current dividends, which are not guaranteed), and $643, 225 death benefit.
The Roth would have to earn about 4% to match the non-guaranteed cash value. The should be attainable, albeit with more risk than the life insurance policy. It should be noted that the current 30-year bond yield is only 2.65%.
The life insurance policy would produce an annual tax-free income (achieved by a combination of surrenders and loans) of $29,789 beginning at age 66 and continuing for 15 years. A residual death benefit of $196,027 would still be available at age 80.
Could a Roth IRA outperform these numbers? Of course. Is it guaranteed to? Of course not. The only thing guaranteed about the stock market is that it will fluctuate. Those fluctuations can be taken in stride during working years, but during retirement (and the few years before), they become much more relevant.
When viewed in this light, it’s hard to see, at least for me, how whole life is anything but a very competitive option.