Price is what you pay. Value is what you get. — Warren Buffett
“Do you have the best life insurance policy to protect your family?” asked a friend of mine who sells insurance.
With myriad of different types of short-term insurance policies and long-term insurance polices, it’s easy to forget that the purpose of a life insurance policy is simply to protect your family members in case if you die.
Me: I have the term insurance.
Friend: Well, you are not thinking about your future. If I were you, I would buy a Whole Life policy instead.
His knee jerk response didn’t surprise me. In fact, I expected this response as I know that he works for a large insurance company.
Me: I do think about my future, so I buy term insurance and invest the difference in an Index fund.
Friend: That’s good, but most people don’t have the discipline to invest. Most people spend the difference. As time goes, they find it to be harder to invest as their expenses grow.
Me: Term insurance is the best life insurance policy for the smart people. Now, may I ask you a question and expect an honest answer?
Friend: Of course. I am your friend first.
Me: Imagine that I own a bank. I wanted to know if you will be willing to open a savings account. Trust me, it is insured by FDIC. Don’t forget that I am your friend first; but you have to comply with some requirements.
Friend: What are they?
Me: The bank will use all of your first year deposits to cover our costs, but don’t worry because part of it will be saved to protect your family if you die. Also, we will charge 2% fees from the second year to manage your savings account. You can borrow money at any time, but you will have to pay interest on it. Last but not least, if you die then we will protect your family for the coverage amount. The cash value will be ours to keep.
Friend: Am I a fool to do that? I can find a bank myself that can open a savings account without any strings attached. Why do I ever wanted to throw money away for the first year and pay you to manage my savings account?
Me: Precisely, that’s the question I am asking you. What I described is the nemesis of my beloved term life insurance policy. The ball is in your court, my friend.
Friend: I think I have the best insurance policy for you that can provide best of both worlds — coverage for the death benefits as well as cash value — if you die. Why don’t you buy the Universal life insurance policy? Our company always thinks about you — the client — first.
Me: I know that you are my friend, and you work for a well-known insurance company. The only problem I have with the Universal life insurance policy is its rate of return in the long haul. The average rate of return is only 2.19% in 25 years, and measly .99% in 50 years. I thought that Social Security run by our government returns better than that. Don’t forget that if you add average inflation rate of 3%, you are losing money by investing in a Universal Life insurance policy.
Friend: I think you are overlooking the fact that you are not a professional money manager. You can lose everything, if you invest money yourself in equities.
Me: Don’t worry. I have John Bogle on my side. He is kind enough to think about a common man with common sense. I can buy the life protection part of the insurance cheaply with a term policy, and invest the rest in any of his funds randomly to beat the smartest fund manager on Wall Street consistently.
Friend: Our company allows you to invest in growth funds, and they return in double-digit. Don’t you think that is a better strategy than simply investing in index funds?
Me: That may be true, but I did say that John Bogle’s index funds beat most mutual funds consistently. You will always find funds that can return in double digits for several years, but not consistently. Since I am not as smart as these fund managers are, I would rather invest in an index fund with no fees.
Needless to say that my friend had an urgent call from someone else, so he has promised me that he will put facts together for my benefit. I am still waiting for the best insurance policy to protect my family.
Readers: Have you thought about different types of insurance policies? What are your thoughts on the best insurance policy?
Elsewhere:
Vehicle Insurance — Better Safe than Sorry @ Modest Money
Taking Care of Elderly Parents and Your Options @ Work Save Live
Which is Better — Term or Permanent Life Insurance? @ My Money Design
Why I Bought a $500k 20-Year Term Life Insurance Policy and You Should Too @ PT Money
What Types of Insurance Do You Need? @ Barbara Friedberg Personal Finance
Photo by: milliondollarinsurancepolicy
fine analysis of term v. whole life here, Shilpan….
and I always enjoy your dialog format posts.
No question, term/index fund beats whole life hands down. seems the only financially savvy people who don’t get that sell whole life insurance.
come to think of it, most I’ve met aren’t actually very financially savvy. They seem to really believe what their companies have trained them to believe.
As for us, we’ve never bought life insurance of any kind. Both my wife and I worked and we lived on 1/2 our income. being able to do that provides more security than any insurance company. Even after our daughter was born, had one of us died the other would have carried on just fine.
One insurance I have always carried is an Umbrella Liability policy.
Is Umbrella Liability same as an added umbrella policy to cover liability law suits?
yep.
Agreed. I have to carry $2-3 million minimum for commercial investments(mainly franchised hotels) to protect franchise company from liability.
Insane law suits have spawned a new and thriving industry.
We have always carried term insurance. You get a lot of insurance for a small amount. For most folks it’s a cost effective and important part of your personal finance picture if you have anyone depending on your income!!!
Agreed. Term insurance is very cheap. I don’t know why someone wanted to invest money in an instrument designed to protect your family for an income loss. There are plenty of vehicles to invest, so you should never mix insurance with investment.
Great article!!! – Most people don’t go home at night or wake up in the morning thinking about how much life insurance they need. Most people think that nothing is ever going to happen to them, but I think in your early 40’s you can start to see things happening to people around you as I have seen in the past six months. Smart financial planning means not only looking at your overall financials, but assessing what types of coverages you will need at different ages in life.
You’ve hit the nail on the head, Ted!
” Smart financial planning means not only looking at your overall financials, but assessing what types of coverages you will need at different ages in life.” — I like it.
Thanks for stopping by.
Term life insurance is what we own and I believe is the perfect product for people that are building wealth and will eventually become “self-insured.” Whole life and Universal have their fits but they’re for people that aren’t disciplined and will always need life insurance.
Agreed, Jason! Whole life or Universal life insurance is for those who are not disciplined to saver.
But you can make an argument that if someone is disciplined to make insurance payment, why can’t he/she be disciplined enough to invest in an index fund without handing money to an insurance company.
The fees you pay, on average 2%, adds up quickly.
I have a term policy. Life insurance didn’t spring up because people needed another tax deferred savings account with horrible returns, but because people die. Soon, they’ll want us to invest through our cable bill! AGH! Death is the only reason for life insurance, losing site of that fact is just stupid money management.
Great thinking, Jacob! Life insurance is for the death benefit, and not for the long-term investment.
We have 20 year term policies. I don’t see a need to carry life insurance until I’m 80. We used to have whole life policies when we were younger when we didn’t do much research. We are smarter now and do invest the difference. It’s quite a savings.
You are very wise with your money, Kim!
With me, the best place to invest your money is in yourself. The present matters more than the past or the future.
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