Thanks Cory!

Dr. Cory S. Fawcett
Prescription for Financial Success

Hmmm. I would say that if a hybrid product bundles insurance and investment, it’s no longer just insurance or just investment… but both. And then I’d want to verify that the vendor doing the bundle isn’t charging too much for the “convenience” of the bundle.

I will also say that whenever some client asks me to look closely at the economics of a real-life whole-life policy, wow, the numbers don’t look pretty. It sounds like your experiences differ from mine… but what I see are expensive investments and/or expensive insurance premiums.

BTW, the point about people not successfully buying term and investing the difference seems good. But seems like someone should also take note of fact that people regularly abandon their whole-life policies early on. Which I think destroys the investment returns or means that someone massively overpays for their insurance.

The problem with buying term and investing the difference, which is basically what is mentioned, is that no one ever does it. Good in theory, but when we advise clients, we must advise for each one realistically. Doesn’t mean clients will follow it, especially when they are overwhelmed by uninformed, well-intentioned or self-interested, contrary information. (Think about paying for college: Lots of bad advice, I have seen only one method that works, and I can’t convince anyone to do it.)

It seems to me that the fundamental problem with something like whole life insurance and similar hybrid products is they become too complicated for both buyers and sellers to understand.

I also wonder if these products are largely out-of-date now that (1) the big financial services companies offer super-low-cost index funds and (2) other better tax-deferred investment options are available. (I’m currently working as executor for a family member who had cash-value life insurance as one of his investment options. Very sophisticated guy. So his choice surprised me for a minute. Then I realized it was really the only tax-deferred investing option available to him when he started investing fifty years ago.)

In any case, I would suggest that if someone does want to buy this product, they should look at the alternative which bundles a cheap term policy for the insurance (though only as long as someone needs insurance) and then a cheap index fund or collection of index funds that match the asset allocation of the investment component of the product.

Rather than paying $1,000 a year for term insurance from the AICPA and making a $9,000 contribution to my SEP-IRA for 30 years, I could have just paid $10,000 a year for a whole life policy.

Once one re-frames the choice this way–which requires something like Microsoft Excel so you can use the financial functions–someone can pretty easily determine which choice is better.

BTW, it would be pretty easy to use Excel and the AICPA’s schedule of insurance policy amounts by age to see what someone pays for $1,000,000 of term life insurance for 30 years and what amount they could then have leftover for saving into their IRA, 401(k), etc.

I would be surprised if the whole life insurance option compares favorably when someone makes this comparison.