Is Whole Life Insurance A Scam?
A lot of people have written a lot about the difference between the 2.
So instead of comparing them again, we recommend you read the difference in the link below:
The Case of Term vs Whole Life Insurance
Instead, I will go into the figures.
30-year-old male non-smoker planning for $100,000 in death payouts
Quotes are figures I got from CompareFirst.
I covered the insurance companies - but you can probably do a simple search on CompareFirst to find the insurance companies.
$1,094 per year in premium difference
In total, you pay $3,570 in premiums for Term, and $46,761 in premiums for Whole, a big $43,191 difference.
Had you took that $1,094 difference in annual premiums and invested it in an index fund that has a long-term returns of 6% annually, that pot of money would have grown into $120,815.65 by the end of the 34 years - and it would be a lot more if you survive longer than the 34 years.
To make it an even fairer argument, you invest that same $1,094 premium difference into an index fund that gives you a long-term average return of 4.75%. That too will grow your money to $92,747.59 by the end of the 34th year - still $25,700 more than what the insurance company gives you. Why the big difference you may ask?
Because most of these returns are derived from the insurance companies investing the money into stocks and bonds that you and I can buy as well, and if stocks and bonds give you an average long-term return of 6%, they have to minus away fees and costs before they give you the returns. So net-net you probably are getting only 4% to 5% returns each year from buying an insurance plan (the returns could be worse).
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Important Point to Note:
When buying life insurance, don't be cheated into the mindset that "if I bought whole life insurance, by the end of the time if I do die, I can get the guaranteed amount + additional investment returns."
More often than not, you will get better investment returns if you bought a term-life insurance, pay lower premiums, and invest the premium difference into say an index fund that gives you an average 6% annual returns (which is fairly low returns already).
People often think that "if I bought a $1,100 annual premium whole life insurance, after 40 years, I can get $100,000 (guaranteed) PLUS additional returns from the plan (unguaranteed portion), making my insurance a lot more worthwhile".
The fact is, if you had bought the $100 term-life insurance for 40 years, and invested that extra $1,000 in an index fund that pays you a long-term average of 6%, by the end of 40 years, the insurance plan would have lapsed and you get no money back - yes, $40,000 goes into the insurance company's pocket. But hey, the $1,000 you invested in the market that gives you a 6% return each year would have grown to about $164,000 - more than the $40,000 premiums you have made, and also more than the $67,000 given by the insurance company as 'cash value'.
The Psychology Behind Whole Life Insurance Plans
The reason people buy whole life is that it is hard for people to get over the fact that after paying tens of thousands in insurance premiums over decades, they are not getting anything back. This is a psychological trick that can end up costing you money in the long-term.
So, think twice before committing to a Whole Life Insurance Plan.
The 2 Advantages of Whole Life Insurance Plans
- Your beneficiaries will definitely get a payout because (touch wood) everyone will eventually pass away. Whole Life insurance is forever, hence it is a definite payout
- If you do not have the discipline of saving aside that extra $1,000 each year to invest in the stock market through a passive index fund, and let it stay in there for 40 years, then maybe whole life insurance may not be a bad plan because it ensures that you will definitely pay that extra $1,000 and it will invest and grow the money on your behalf (just at a lower return).
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