I want to first note that that it took me a long time in life to figure these out. With so many unknowns in life, it's hard to know what is the right insurance and what are pitfalls. Let me explain. When I was in the military, I agreed to buy a whole life policy. At 18, just out of the house, I didn't know what I was buying. The insurance agent noted that this would be used as a retirement account, and after 20 years, I didn't have to put in another dime. Of course, I could if I wanted more money. I don't remember the value, but something didn't add up and I cancelled. Later, when my daughter was born, my wife and I wanted a secure future for her and we fell into the whole life (cash value) policy trap once again. We were sold a policy for my daughter, my wife and myself into a cash value policy from an insurance agent that we had trusted for over 10 years. We thought we were all set! And guess what, when my son was born, we got him a policy as well. We kept going over the monthly bills of over $350. We kept questioning our agent how this could come out to be such a large amount in the future and guaranteed to be a 4% growth (of course this was a lot of money to us since we didn't know what I am about to show you below). One thing that I have learned now is that if it sounds too good to be true, then you need to study it and understand it. Once I did that, I decided to get rid of all our cash value policies.
You see, a whole life or cash value policy steals from you. You give the insurance company $, they invest it, and then at the end of your life, they pay... but only when you die! Wait. what? Here's the kicker. When you die, they pay you only for the policy and not the money accrued. So if you had a policy at 18yrs old, gave $100 until you were 65, you would have given the insurance company $56,400 for a $100,000 policy. You do not get that $56,400 that you invested? Correct, you get the $100,000. Did you catch that? The insurance company only has to make up $43,600! Ok, stay with me here. If you invested that same money into a mutual fund at 18yrs old for that same amount of time (47yrs) do you know how much you would have with a 4% guaranteed growth? Answer: $165,991. So the insurance makes $122,391 off of your investment. I admit that 4% is very low performing fund, so let's look at the high side of 12%? That's $2,726,871. Hmm.. what does that mean? Well, don't buy that whole life policy and get a term life for 20 years. It will cost you 1/4 of the cost, you invest the other 3/4 and if you die, you still don't get the money, but it will be the same amount to your loved ones.
Invest $100/month for 47 years @4% return
Invest $100/month for 47 years @12% return
But what about after 20 years? Glad you asked. If you don't have debt, and you do what I coach you to do where you get rid of all debt, you will have over the amount needed to become self insured. Here is what you do: Get a 20 year term life policy that is 10X your salary (these are not that expensive as for me, I pay ~300/year). In 20 years, your house if paid off, you have no debt, and you have been investing 15% of your paycheck year over year. Do you think you still need that term life policy? Of course not, that money is sitting in your retirement account and earning interest. You can retire with that amount and enjoy what you have worked so hard for.
See below, if you did this and saved in the other areas of your budget. Here's how to get a hold of me if you would like to discuss: Click here. Or if you would like to call me, 309-472-7239 and I would love to help you.