Couple sitting on the beach sandIn talking about the best ways to save for retirement, an interesting idea is to compare investing in retirement plans to saving money via a whole life insurance policy. One misconception with life insurance is the myth that someone has to pass away for life insurance to be of any benefit.  

Nothing is further from the truth.

Life insurance inherently has benefits that can be used while you are alive but these never get mentioned in mainstream media. A few television personalities emphatically say that term life insurance is the only way to go because it is inexpensive and the extra money can be used to invest in mutual funds rather than purchasing whole life insurance. This does not work for the majority of people.

The mantra of “buy term and invest the difference” usually turns out to be “buy term and spend the difference.” It simply illustrates that people do not know what they do not know.

Term life insurance is straight forward. It is inexpensive life insurance at younger ages that covers you for a certain number of years (typically 10-30) after which it terminates.

Whole life insurance however is the opposite…it covers you for your whole entire life, is more expensive than term insurance because it accumulates cash value (term life insurance does not). 

The reason whole life insurance premiums are higher than term insurance is because the coverage costs are averaged over your entire life time. Therefore whole life insurance premiums are higher if purchased when you are younger and less costly as you age.

To use a simple analogy, whole life is like buying a house (builds equity) and term is like renting (no equity).

If this were the only difference between the two types of insurance than the television pundits might have a case however the devil remains in the details. A whole life insurance policy should be the foundation of any financial plan, even ahead of a qualified retirement plan (for example, 401k). Lets compare the features.

Qualified Retirement Plans:

Tax deferred/tax deductible; IRS approved; limits on contributions; employer match..sometimes; can invest in the stock market; loan provision (typically limited to 50k and loans must be repaid or become taxable); limited to the plan’s investment options; creditor protection; must have income to contribute; subject to taxation at ordinary income tax rates; no guaranteed retirement income.

Whole Life Insurance:

Tax deferred (not tax deductible); no limits on contributions; tax-free income and withdrawals; no mandatory withholdings; tax free to heirs; penalty free access to money under age 59 1/2; no required minimum distributions at age 70 1/2; has guaranteed costs, expenses and contribution amounts; can take a loan over 50k (no limits) and no loan repayments required; unlimited investment options (i.e. rental real estate); can be used as collateral (i.e. small business loan); estate tax free; liquid (access to funds at anytime without penalty;no hardship required); disability protection (automatic funding of retirement if you become disabled); use as your own bank (a source of financing); self completing (provides income for spouse if you die and college education for children); judgement proof (protection against creditors and lawsuits in many states); potential for dividends (more beneficial than employer match as it can potentially guarantee future tax free retirement income); protection from future income tax rate increases; guaranteed to grow every year (you know what the account will be worth in the future); guaranteed retirement income (if structured correctly); not stock market based (protection against market risk); long-term care benefits (protects against the costs of health care in retirement); retirement income flexibility (allows you to spend down your other assets in retirement); provides money for terminal and chronic illnesses; and last but not least..death benefit money when you need it most.

So why aren’t these benefits ever mentioned by the media? Because it takes too much time to obtain them or is the “status quo” an easier way to inform people? Max out your 401k and buy term insurance. Realizing how difficult it is for people to look outside the box for alternatives from what a person is accustomed to however when looking at the benefits provided by whole life insurance, the extra “perceived” cost (versus term insurance and qualified retirement plan) certainly makes it worth consideration.

Qualified retirement plans, like the 401k, were never meant to be a primary source of retirement savings but were deemed a supplement to social security. 

Whole life insurance should be in almost everyone’s financial plan and definitely deserves a serious look.