Forty years ago, my dad opened a whole life insurance policy for
me saying that no matter what, I’d always have some insurance. With a $10,000 death benefit, it may not have
saved my family from financial ruin if I died but the gesture was nice. But the financial impact of this decision may
have been very, very costly. For forty
years, we have paid $75 per year in premiums.
The policy has a cash value today of $4,200. If we keep making the premium payments, which
could be for roughly 25 years based on my life expectancy, it will some day pay
out $10,000 to my heirs. But what was
the alternative? If $75 per year had
been added to a balanced investment account of stocks and bonds, it may have
earned an annualized 7% over the last 40 years.
These annual premiums would have grown to around $15,000 today. In 25 years when I reach my life expectancy,
this money could grow to over $80,000 if it earns a similar 7% moving
forward. But I also still need to pay
$75 per year to keep the policy going. If
these annual payments were instead added to the investment account, they might
add another $4,700 to my value in 25 years for a total value of almost
$85,000. If I live five extra years beyond
age 83, this alternate-universe account could grow to $119,000. But the whole life policy will always pay me
$10,000 at the end. Let me think for a minute which I would rather have:
$10,000 or $85,000. I will have to sleep
on it. (Critics will point out tax
advantages of the insurance which is a weak argument in this case given the
difference in value and the stability of the whole policy which ignores the
fact that while stocks are volatile in the short run, they are not very volatility
over a 40-year period.) Be very careful
of turning money over to someone with a slick sales pitch when it may be very
costly to do so. And imagine how costly
this would have been for a $100,000 policy instead of a $10,000 contract. I’ll do the math for you. It would cost you three quarters of a million
dollars.
Larry Pike, CFA
Client Priority
Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com
Hourly, Fee-Only Financial Planning
and Advice.
No Commissions. No automatic, annual fees.
