There is only one basic difference between term life insurance and whole life insurance: One of these costs ten times as much and covers the exact same thing. Why do people pay more, then? Is it the raw deception, the raw numbers and the confusion they create, or is it the pure ignorance of most people that causes them to buy something “Permanent” to cover something that is truly “temporary”?
While you chew on that question, let’s look at the basics of life insurance anyway. Why do you have life insurance? What is it? One thing it’s not, it will not bring you back to life or restore your life to permanence. As you will recall, rising from the dead to enter the perfection of Christ’s eternal kingdom is the only permanent path to eternity, and Christ has provided it for you. Of course, this subject is recognized as theological, religious, mystical or spiritual in nature. But back here on earth, when a man dies, he leaves his family, on most occasions, with no income from his last job. So he buys “life” insurance from a reputable company whose actuarial team consists of some of the finest mathematicians in the world. Typically, you may also buy health insurance from the same company, with various products to choose from.
Now, back to thinking about life for a moment. Withing the context of living, all people are born, and normally then attend school for 13-25 years, depending on the profession they wish to enter. Then, they work about 35-40 years, hoping to save for themselves or find one of those ocmpanies who still provide a retirement plan, which will do the following: you get to retire on 70-75% of the income you couldn’t stretch far enough before. OF course, the house is supposed to be paid off by then, the kids are grown and out of college, marrying and buying their own life insurance and career paths through ther college degrees, and so the cycle goes.
Another basic financial fact of life regards building up your estate over the long term. That is what all those retirement plans are for, with their numbers corresponding to the section of the IRS tax code in which they are located. Whether 401(k), 403(b), 408(a)-“the famous IRA,” or 457 deferred compensation, you should always use one or two that are available to you, fully fund them, and make your retirement comfortable. At that point, you won’t need much life insurance, only enough to be put away appropriately.
But when you are young, under 25, with your first child, you have no money, unless daddy Rockefeller left you a lot, so you must prepare for the worst. A woman of 27 with three children and one dead husband is never a happy sight. But an appropriate amount of insureance will provide the money which should provide a “permanent income,” relatively speaking of course. Permanent enough to see those kids live comfortaby, in the same house if their mom so chooses, have enough for college, and providing that widow with all she needs for the future. By twenty-seven, most men will have only $4000 to $8500 socked away toward retirement so far. Enough seed money needs to be provided that the widow can continue to invest and bring her that comfort level they had discussed before, usually $800,000 to $1,000,000.
I can assure you right now, no whole life, permanent, variable life or anny other form of so called permanent insurance will ever be able to do this. You see, if you die too young, you’re usually nowhere near the income level to be able to afford these “permanent” products. A good term policy of $250,000, set at a level premium over 20 or 25 years is very affordable at around $79 – $90 a month. This coverage, when ensconced in a “permanent” package will cost around $690-$850 per month. Now ladies, let me ask you: At $850 oer month, after twenty years, what is the main question you will have of your husband?
There will actuallly be two (or three). “You know dear, are you scheduled to pay this $850 per month all the way to age 65? So far, you’ve paid $850 per month for, hmm 240 months. So, $850 * 240 = $204,000! Do you realize you will pay a total of $408,000 by age 65-to get $250,000 when you pass on? Who rooked you into this thing, anyway?”
You think of your friend and all those things he told you. “Wait honey! You’ve got to understand. There’s cash value in this contract. About $118,000 at this point!”
“Oh, well that’s good. So in reality I could receive $368,000 if you suddenly-?”
“Well, no, it’s not like liquid cash, exactly. You have to borrow against that cash value to get it.”
“WHAT!” Incredulous, your wife says, “Borrow your own money? That’s-insane!”
“The contract says the cash value is their cash, not yours. You just get to borrow it-“
“Oh, I’m sure at a measley eighteen percent, like a credit card! Wait, I’ll just borrow right before your impending demise and get it all.”
“No, you can’t. It’s tied into the policy.”
“I’ll never get more than $250,000.”
“Yes- but you’re wrong about the borowing rate. It’s only eight percent.”
“Well thank you-so very very much.” She turns to leave, but then asks you, “Why did you do this? Wouldn’t a term policy have been cheaper?”
“Yes,” you admit, “probably $90 per month.”
“Leaving you $760 per month to invest?” She picks up th phone in mock derision of the life insurance industry. “I’ve been robbed! I think they took all the money to New York.”
“Minnesota!” You correct her, now angry with yourself. Just knowing that the $760 per month at 10% rate of return would have built you a hefty nest egg of $577,120 by now causes a slow burn to start. Twenty further years with this investment would have brought you to $4,806,300! Even stopping the $760 per month would still leave you with $4,229,180. You remember back to your calculus class discussions of exponential functions. You form a plan.
The next day, you explain it to her. “Honey, we can cncel the insurance now, and we can get the whole $204,000 out of it. It just might take up to six months.”
“The contract , I suppose?”
“Yes, but then I can put it into something better, earning about 10%, plus the whole $850/mo.”
“So then-it should grow to-“
“In twenty years-about $850,000.”
She picks up the phone again, silently mouthing ‘We’ve been robbed!’ Then she looks at you. “Well, at least we;ll get something out of it.”
In this example, our friendly couple will get nearly one million dollars, but only if they prudently make this switch now, at age 45. The company in Minnesota gets the other $3,000,000! Hmm, the word “quiet” seems to pop into my mind.
So I guess the difference is about $4,000,000 per $850, so about $4,705,000 per $1000 of monthly expense over forty years. How you split it is up to you. 100% yours with term insurance, or 25-75 (75% “theirs”) with “permanent” insurance. But do you think the insurance industry really needs an extra $3,000,000 upon your retirement?
I’ll be better equipped to use that money, in retirement and in bequests, to my college and other important charities. So always provide your insurance man as little as possible. He’s not paying your bills, after all.