Assume husband and wife are 30 years old
A) Whole life insurance
Husband: ,000 coverage
Wife: ,000 coverage
Total coverage: 0,000
Monthly premium: 3/month
B) 30 year term insurance
Husband: 0,000
Wife: 0,000
Total coverage: 0,000
Monthly premium: /month
If they invest the difference of /month for 30 years,
@ 0% return: ,280
@ 4% return: ,425.42
@ 8% return: ,012.17
@ 12% return: 9,435.86
Would you go with A or B?
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April 12th, 2010 at 9:06 am
There is a lot of information missing in order to truly recommend the correct course of action for a real client; however, I will say this: a lot of agents sell on the "buy term and invest the difference" model, but the problem is, MOST people FAIL to invest that difference. Furthermore, if there truly is a life insurance need and they don’t have a policy with a conversion feature, you’ve just sold them short.
Having said that, it would depend on what the life insurance need is. Frankly, if it’s a premium issue, I would sell them a permanent policy with a term blend, but I would sell UL, and not whole life, unless they were adamant that their premiums be level. UL gives better return, even with a fixed rate, and they may be able to purchase a cash accumulating UL and use that cash value for investments or whatever later, as long as their policy remains in force. Whole life is expensive when compared to UL on the vast majority of cases. Furthermore, dividends aren’t guaranteed.
It would all depend on what the need is, and the client’s tolerance for savings and risk.
April 12th, 2010 at 9:06 am
B of course.
Life insurance can’t protect your life, but it can replace your income. The problem is that most people don’t have lots of money saved and if they provide more than 50% of the income to the family, that loss of income would be devastating if the person had no life insurance. As the person gets older, the need for life insurance declines as the person is nearing retirement. By buying term and investing the difference, you are protecting the family’s income and at the same time, building wealth for retirement.
April 12th, 2010 at 9:06 am
The answer is B. Problem is most insurance agents will not tell you that because they earn a lot more money on A.
B is in the best interest of the customer and provides the most insurance for your dollar.
April 12th, 2010 at 9:06 am
Depends on the situation, in most (re: 95% of the time), answer B will be correct. B becomes a better value if the policy is guaranteed renewable and automatically renews to a level term product in case they wish to keep their coverage.
April 12th, 2010 at 9:06 am
Your info is incomplete. In any event, the "correct" decision depends on many other financial and family factors.
April 12th, 2010 at 9:06 am
Well, it’s IMPOSSIBLE to know, because you didn’t state the GOAL that you want the insurance to acheive!!
First define the goal, THEN pick the product(s).
April 12th, 2010 at 9:06 am
I always tell people to use life insurance to protect themselves from financial risks and not to use it as an investment tool.
Term and whole life insurance offer totally different types of risk protection and each individual needs to assess what risks they are trying to cover with the insurance. Obviously whole life insurance does not provide the same returns that a mutual funds provides but whole life policies do usually provide level coverage for a level premium for the rest of a persons life.
As a side note, don’t forget that the scenario B will also have some kind of guaranteed cash value accumulation as well at the end of 30 years.