Boss Blog: July 19, 2017
Buy Term and Invest the Rest????
Welcome back to the Boss Blog friends as we roll along with Life Insurance week here at Budget Boss. Today my topic is going to be about Permanent Life Insurance, sometimes known as Whole Life or Cash Value Insurance. There has been a debate going on for years about the value of Whole Life Insurance versus Term Insurance. A common statement that is thrown around is, “Buy term and invest the Rest.” People like Suze Orman and Dave Ramsey are vehement in this philosophy. While in theory, it is a very good concept, it doesn’t take into account many factors. Just like an investment strategy isn’t right for everyone, the “Buy Term and invest the rest,” motto isn’t for everyone as well. While the concept is fairly sound, it doesn’t take every scenario into consideration. In this post, I will go over why Whole Life Insurance can be a valuable tool in your financial plan.
1) Term Life Premiums Increase Dramatically over time, Whole Life does not
Life Insurance premiums naturally increase the older you become. Here is a table to prove my point.
Male Standard Non-Smoker, $100,000 Death Benefit, 20-Year Term Policy, Monthly Premium
Age 25 – $11.61 Death Benefit – $100,000
Age 45 – $51.30 Death Benefit – $100,000
Age 65 – $287.46 Death Benefit – $100,000
Whole Life Insurance premiums remain constant throughout the life of the policy.
Male Standard Non-Smoker, $100,000 Death Benefit, Whole Life Policy, Monthly Premium
Age 25 – $129.96 Death Benefit – $100,000
Age 45 – $129.96 Death Benefit – $143,421
Age 65 – $129.96 Death Benefit – $235,393
Age 105 – $129.96 Death Benefit – $462,811
What do these tables mean and why are they important? The answer is that although Whole Life starts off dramatically more expensive than Term Insurance, eventually it surpasses Term in value and Death Benefit. It also maintains premium for life. While this is true it still raises a few more questions. The First one is: “What if I only need that level of coverage for a limited amount of time, ie: 20 years?” Another problem is that it still doesn’t answer the “Buy Term and Invest the Rest” theory.
2) There are Permanent needs that only Whole Life Insurance can address
Term Insurance covers a temporary need, while permanent insurance covers a permanent need. If you determine you only have a temporary need, then Whole Life is not for you. Temporary needs include debts like loans, mortgages, lines of credit and even income replacement for families. Permanent needs include legacy planning, final expenses, estate taxes and many others. If you noticed in my table, the Term Insurance table didn’t extend past age 80. This means that you cannot obtain coverage after age 80. If you have a permanent need then you are out of luck with Term Insurance. Well, you might then say: “Can’t I still buy term and invest the rest to cover a permanent need?”
3) Whole Life is part of a Comprehensive Financial Plan
Buying term and investing the rest is a very assumption based strategy. It assumes you will actually invest the rest of the money. Often times it is “Buy term and spend the rest.” It also assumes that you have allocated portions of your savings for specific goals such as leaving money for the kids, or a charity. For many people, the basic financial plan includes:
- TFSA and RRSP for tax efficient savings
- Cash for Liquidity
- Insurance for Protection
- Home for Living and Investment
If we used everything as it should be used than Whole Life wouldn’t be as useful. It takes discipline to not dip into retirement savings or home equity; it also takes discipline to save that money, to begin with. Leaving a permanent legacy using Whole Life eliminates that discipline dilemma. The death benefit is there from day 1 and will grow unless money is withdrawn. During Market Downturns, Whole Life also stands the test. It provides guaranteed growth whereas Investments fluctuate with the market. That stability is necessary especially when down markets make you want to run for the hills. Whole Life just chugs along at a slow and steady pace.
Summary:
The debate of Buy Term and invest the rest versus Whole Life is far too simplistic to me. My simple answer to that debate is, “Why not do both?” If you are looking to cover a temporary need as well as a permanent one you can have a combination of both Term and Whole Life. For Example:
25-year-Old Male Non-Smoker, Monthly Premium:
$25,000 Whole Life Policy Death Benefit at age 65
$36.52 Premium $47,673
20-Year Term Insurance $500,000 Policy
$20.48 Premium until Age 45 (Cost of premium goes up after 45)
With those 2 policies, you have covered you temporary need of debt cancellation and permanent need of final expenses. You will spend $57.00 a month for 20 years and then only $36.52 a month after then when the term of the policy ends. As needs grow more complex than the need for Whole Life does as well. If budget constraints are an issue than Whole Life becomes less useful. The key is to understand what your needs are and then find the appropriate products to fulfill those needs. That may include Whole Life or it may not. My job as an insurance advisor is to understand my client’s needs and then direct them to the best product available. You can only find that out by asking the right questions. Simple blanket slogans fail to address what someone’s wishes are.
“If people understood what Life Insurance does, we wouldn’t need salesmen to sell it. People would come knocking on the door.” – Ben Feldman
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at www.budgetboss.ca.