July 13, 2009

Another Example of a Whole Life Insurance Policy

I've talked about a couple previous examples of cash value insurance investments. I gave an example of a universal insurance and an example of whole life insurance. I was watching the Suze Orman show again this weekend and they had another caller ask about their whole life insurance policy. Here are the details about the callers policy:

$150,000 death benefit
$10,000 cash value after 10 years
Premium payments of $261 quarterly
They were told they would have a 4.4% interest rate.

So their cash value in the policy is now roughly a little less than the premiums they've paid over the 10 years. The death benefit of the policy has effectively eaten up all their interest.

I ran a quick test in Excel and found that at 4.4% interest growth you would need to save about $818 annually to accumulate $10,000 in 10 years. They've paid $261 quarterly or $1,044 annually. So they have paid about $226 a year to get $150,000 in insurance in addition to putting $818 away into the cash value investment.

I searched for quotes on term insurance over at QuickQuote and found that a 38 year old man should be able to get a 20 term policy with about $250,000 to $300,000 coverage.

So you have 2 options: the whole life policy the caller bought or buying a 20 year term policy and invest the rest. Lets see how those compare:

Whole life:
Cost: $1044 a year for 10 years
Death Benefit : $150,000 for as long as policy is maintained
Savings: $10,000

Term life + savings :
Cost : $226 for insurance and $881 for savings
Death Benefit : $250,000 for 20 years
Savings: $10,000

Overall I think that in this comparison term life and investing is a better option. Isn't it better to have $250,000 of coverage for 20 years than $150,000 coverage?

This whole life policy isn't a horrible one and they could have done a lot worse. But even this policy isn't as good as term life.

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