Maybe I just don’t understand what they’re doing. BUt it seems to me if I take out a 10 year policy that costs $100 per month, I’m betting that I’m going to die within that period of time and the company is betting that I won’t or that they won’t have to pay out. If I get to the end of that 10 year term, then I’m just out $12,000. What am I missing?
In: 116
Typically a term life insurance policy is the better value. Think about it this way: Pretend A term policy costs 100 per month. In that caase a similar whole life policy would probably cost north of $200 per month. The hook they get you with is that at the end you don’t lose the money, it just stays there and you no longer have to keep paying in.
The way the whole life policy can do that is because your payments have created a ‘lump sum’ that has become large enough to earn enough investment income to effectively become profitable for the insurance company. So you no longer need to pay in, the investment profit on that money is now covering your contribution. The kicker is that the lump sum stops growing. The insurance company is now collecting all the investment profit on that lump sum to pay the management fees as long as you remain alive. (Check your fine print because it’s also likely that if there is some sort of shortfall in the market you may still be responsible for ‘topping up’.)
Now circle back to the term policy. Buy the term policy so that you’re covered in the case of untimely, premature death, but also take the difference between the term policy and the whole life policy and YOU invest that difference. At a certain point your investment will grow beyond what the lump sum the whole life will stop at… and it will continue to grow. It doesn’t really matter if the term goes POOF because your savings is still further ahead. Remember, you don’t pay any management fees or finders fees on YOUR INVESTMENT.
Now, all this is dependant on how long you live but generally speaking a disciplined investor will be better off with term, and this difference will only widen the longer you can invest.
Latest Answers