Tag Archive | "term life insurance"

Permanent Life Insurance Series: Achieving Financial and Spending Freedom

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Permanent Life Insurance Series: Achieving Financial and Spending Freedom


My friend Brandon is a very big advocate of Permanent Life Insurance. Him and I have gone the rounds on many occasions about permanent versus term. I decided that to be fair, I would present his argument in a series of posts here in Rabbit Funds. The series begins with a post about challenging the pre-conceptions about permanent life insurance. You can find links to the other posts in the series at the bottom.

Whole Life Insurance

The biggest thing that is left out of the mix when buy term and invest the difference comes up is how to actually spend the money. Sounds funny right? How many of us need help spending money?

If you opt for this strategy, then likely this is the only financial asset you may have when either retirement or death comes around. Maybe there will be a pension or social security to help out or maybe there won’t be. Either way, the nest egg will need to be very well taken care of because it has to provide an income for the rest of your life. And no one has any idea how long that will be.

Typically when someone gets to this point, the most popular option is to live off the interest, which might not sound so bad.

But here is the reality: when someone only has a nest egg to survive on, they have broken one of the number one rules of investing: diversification. The result is that this nest egg has a lot of pressure on it. It must provide an income, keep up with inflation, pay taxes, pay for the new car and the trips, and so on.

To accomplish all of this, the money must be left exposed to the market in order to attempt to grow. This is the kind of thing that will keep you up at night. Imagine being in this situation, desperately needing this money to survive, and watching the market take a tumble.

How much stress has just been added to your life?

If you visit a financial planner, you will be told that you can plan to spend about 4% a year from your nest egg if you are living off the interest. This is a conservative number, one that gives the greatest likelihood that the money will stay intact for the full time it is needed.

Let’s say that you have $500,000 in your nest egg. Four percent of that is $20,000. After you pay taxes, you are down to around $15,000 per year to spend. Will you be ok with that? Maybe, if you did actually manage to pay off all of your debts. But how many people will actually want to live on that kind of money? And don’t forget to factor in inflation; that $15,000 per year is in today’s dollars.

If you think it would be hard to live off of that money now, imagine what it will be like in 30 years. If we experience only 2% inflation, which is much lower than what is actually expected to happen, that $15,000 will only have about $8,200 of buying power in 30 years. You better hope that someone steps in, because all of a sudden things aren’t looking so good.

There are some very powerful spending strategies for retirement that require permanent insurance, strategies that will allow an individual to experience less risk, spend more money, and overall have more peace of mind in retirement.

So all things considered, buying term and investing the difference might not be all it’s cracked up to be.

But the talking heads don’t tell you this, they just pitch the idea. It’s up to you to understand the implications of your decisions and do what is best for you and yours. Ultimately, it’s not a bad idea to start with term insurance and put away as much money as you can for your future. After all, the more money you put away, the more you are likely to have.

But before you lock yourself into a strategy that you don’t fully understand, do some research or talk to a professional about your situation and see if there are some better strategies or ideas that will be in line with your goals. After all, we all want more or less the same things financially: stability and freedom. There are many different routes to take, just put in the effort on your part to make sure your path leads you as close to your goals as possible.

Here are all of the posts in this series:

  1. Challenging Pre-conceptions
  2. How Term Life Insurance Works
  3. Is 12% Realistic when “Investing the Difference”
  4. Returns, taxes, death benefit and debt
  5. Achieving Financial and Spending Freedom

For more money saving tips, follow RabbitFunds on Twitter.

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Permanent Life Insurance Series: Returns, taxes, death benefit and debt

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Permanent Life Insurance Series: Returns, taxes, death benefit and debt


My friend Brandon is a very big advocate of Permanent Life Insurance. Him and I have gone the rounds on many occasions about permanent versus term. I decided that to be fair, I would present his argument in a series of posts here in Rabbit Funds. The series begins with a post about challenging the pre-conceptions about permanent life insurance. You can find links to the other posts in the series at the bottom. Whole Life Insurance

Here is the reality of investment returns – 12% isn’t likely

Why? Because the markets haven’t supported that.

Also, there is a little thing called Average vs. Actual returns. It’s pretty easy to use a financial calculator and plug in a certain return, and a certain investment every month, and a time period and get a number saying how much money you will have in the future. That’s how I just came up with a $500,000 nest egg is what you will get if you invest $505 per month for 20 years and get a 12% interest rate.

But the market does not return a steady growth, year in and year out. Every year the market is up 20%, or down 18%, or up 4%; it moves all over the place. And that movement costs you money.

If you have $1,000 invested and have a 100% gain, you now have $2,000. But if the next day you have a 50% loss, you are down to your original $1,000—even though you had an average return of 25%. The movements of the market every day cost money when losses happen; not just the losses themselves, but the losses that occur because the ensuing gains now have to play catch up.

To project an average return and expect the results to be there is not realistic. For example, from 1995 through the end of 2004, the Dow Jones averaged a 10.89% return. According to averages, if you invested $100 per month in that time period you would have $21,566. But, since the markets move every single day, every single second even, and that movement causes losses that aren’t reflected in averages, you would actually only have $15,697.

I got this number by downloading the Dow Jones historical data from Yahoo.com’s finance section. The report shows the daily openings and closing every market day since 1928. A little bit of excel work later and I have a spreadsheet showing actual vs. averages.

I took 10 year periods every 5 years, meaning 2000-2009 and 1995-2004 and so on, all the way back to 1928 and compared average results to actual daily results. That means you lost out on 27% of your portfolio and your actual return was only 5.2%. You lost out on over half of your return because of something you couldn’t control.

When I compared all of these various 10 year periods, the actual return ended up averaging less than 6%. Hardly the 12% that is hyped.

And then there are taxes

If you have money invested, unless you have it all in a Roth account, you will owe hefty tax sums. And many people will not have it in a Roth, because of the contribution limits. Plus, if you have it in a Roth and need it because it replaces the life insurance when a breadwinner dies, you could have to pay some penalties to get it.

If we are very conservative and say you are in a 30% tax bracket, you automatically lose 30% of your nest egg/return. All things considered, according to historical data, you are safe estimating a 4% average rate of return (6% actual return less 1/3).

Now I sure hope this isn’t the case in the future and that everyone gets more than this, but if you choose to buy term and invest the difference, wouldn’t you want to plan your numbers very carefully? We are talking about the future financial stability of your family here. This is nothing to be anything but extremely cautious about. Even if you decide you don’t like the 4% number and want to assume a higher rate of return, you would be doing your family an injustice to assume an after tax, actual result of anything higher than 5%. In which case, to get your $500,000 self insurance fund, you need to invest $600 per month for 30 years, or $1216 per month for 20 years. A far cry from the 12% that many people are purporting.

My intention here isn’t to scare people out of investing money

But I do want each of you to realize that just because someone says a 12% return is realistic, or even if lots of people say it, doesn’t mean you can get it.

The biggest problem with people who so adamantly push the buy term and invest the difference strategy is that so few, if any, of them really understand the implications.

Another is that it is pushed with such fervor that everyone acts like it is the only financial strategy someone should consider. And when it comes to finances no two people have the same financial situation, so how can you possibly prescribe the same financial strategies to everyone alive?

Just know that if you do choose to buy term and invest the difference, you could potentially be forcing yourself into a situation in which the money you have to live off of will be whatever you can invest in 20 years, possibly at a much lower rate of return than initially anticipated.

Now what about the death benefit itself?

Is there a reason to have that? There could be depending on your situation.

The owner of the Miami Dolphins passed away in the early 90’s. Now as you can imagine, he was a very wealthy individual. So wealthy that his family had to sell the Dolphins to pay his $47,000,000 estate tax bill.

Very few people have a significant amount of cash on hand relative to their wealth. Most wealth is in the form of property or businesses. If you have an estate tax due, you might have to fire sell something in order to foot the bill.

If this person had permanent life insurance, the death benefit could have stepped in and paid this bill, preventing his family from having to sell assets quickly.

As an individual grows wealth, the purpose of life insurance changes from family protection to estate tax payment and estate preservation, among other things.

Another thing to consider is how one gives wealth to the next generation. While not everyone will have an issue with estate taxes, many people will have valuable and sentimental things to pass along.

Take for example if someone owns a home when they pass away. If there is more than one heir, then an issue of who gets the home comes up. If the home has sentimental value, then at least one of the heirs could want to keep the home, while the remainder will want the home sold and the proceeds split. These are the kinds of things that can really destroy family relationships, too.

It gets even uglier if someone owns a business and wishes to leave the business to one heir to continue on. If other heirs are involved, they will likely want the business sold in order to get their share of the wealth, while others might want the business to continue on since it is their livelihood. With a death benefit in place, one heir can have the asset and the others the cash from the life insurance.

The issue of debt and final expenses

An average funeral runs around $10,000 and in many instances, people do not have that kind of cash readily available.

Even more important though is the issue of debt. There are many assets that an individual would wish to pass on that might carry a debt. Homes, businesses, rental properties, vehicles; the list goes on and on. Whenever there is debt on an asset, it must be satisfied. And many times a potential heir will simply not have the financial resources to pay off the debt or even take over the payments.

In these situations some of the assets might need to be sold quickly, even at prices lower than fair market value, in order to complete the transfer of assets. Or consider if a business owner dies and has business partners. All of a sudden, the business partners are now in business with the spouse or kids—not a fun situation for anyone involved.

It is easy to say “Well, I plan to live debt free and have no debt when I die”, and that is an excellent goal. However, there is no way to guarantee that because sometimes life comes up and gets in the way of our plans.

Here are all of the posts in this series:

  1. Challenging Pre-conceptions
  2. How Term Life Insurance Works
  3. Is 12% Realistic when “Investing the Difference”
  4. Returns, taxes, death benefit and debt
  5. Achieving Financial and Spending Freedom

For more money saving tips, follow RabbitFunds on Twitter.

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Permanent Life Insurance Series: Is 12% Realistic when “Investing the Difference”

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Permanent Life Insurance Series: Is 12% Realistic when “Investing the Difference”


My friend Brandon is a very big advocate of Permanent Life Insurance. Him and I have gone the rounds on many occasions about permanent versus term. I decided that to be fair, I would present his argument in a series of posts here in Rabbit Funds. The series begins with a post about challenging the pre-conceptions about permanent life insurance. You can find links to the other posts in the series at the bottom.

Whole Life Insurance

Almost without exception, the phrase buy term and invest the difference is quickly followed by the statement, “the market has averaged 12% over the last 50 years,” or some other length of time.

Well, this is simply not true.

Every time I hear that statement, I ask what fund did that and what the time period was. Guess what? Not a single person has been able to provide a fund or time period that has had that kind of return.

Market returns are not nearly what they are hyped to be

If you invested $1 in the Dow Jones in 1930, by the time 1980 rolled around you would have had $1.14, an actual return of .22% over that 50 year period. From 1980-1999 is where all the growth really happened. The actual returns averaged 12.7% per year over those 2 decades. But from 2000-2009, the returns have so far been dismal once again.

Over the last 50 years, both the S&P 500 and the Dow Jones have averaged about 5.7% per year. Over the last 10 years they have averaged 3%. That’s why this decade is being referred to as the “Lost Decade”.

To make matters worse, many experts do not think the next period of investing will be as profitable as the past few decades have been.

Now I’m not saying it’s impossible to get 12% in the market, plenty of people can and have. However, to do it requires a lot of time, energy, know how, guts, and even some luck. Don’t think for even a minute that you can go and pick some random mutual fund and get your 12%. Even professional advisors that spend all day monitoring the markets and are paid hefty fees will not project 12%; most use 8%.

Let me give a couple of real life examples

Let’s say you want to buy term, invest the difference and eventually self-insure. The hype says that you can invest at 12% and be just fine. Suppose you want to have $500,000 to self-insure. At a 12% interest rate, and a 20 year term in which to get your investments up to the $500,000, you can put in $505 per month and get there. If you give yourself 30 years to work with, the number drops down to $143 per month.

This is plenty, right, because you will have no debt?

Well here is the reality: very few people have the financial discipline to get rid of all their debt.

It’s a great goal and one we should all work towards. But that new car is so tempting, and putting kids in a soccer camp will be good for them, so it’s worth it and on and on and on. The result is that life gets in the way, and people just don’t invest the money they need to, regardless of how motivated they might be.

And then the market moves all over the place, and people get nervous and pull money out. This isn’t in the projections, but it’s the real life situation that happens because losing 20% of your portfolio hurts and we want to try and salvage what we have.

Did you know that if you are one of the many emotional people who pull their money out of the market when it’s down, and waits to get back in until things are looking better, all you are doing is buying high and selling low?

Most people don’t invest any money outside of their work 401k, so there is really no “invest the difference” component. Instead it all gets spent. The buy term and invest the difference strategy is designed only for people who are extremely disciplined and can save and invest a good portion of money outside of their work’s 401k.

The reality is that very few people invest enough

Only 1 in 400 people retire with more than $1 million!

And the sad thing is that if you earn the average U.S. salary of $45,000, and put in a total of 8% into your 401k, 5% from you and 3% from an employer which is a typical 401k plan, and get 8% a year, you would have this $1 million at a normal retirement age. According to these numbers, most people should retire a millionaire, yet only 1 in 400 does.

Are you more financially disciplined than 99.75% of the country?

If you aren’t disciplined and try this strategy, you end up buying term and blowing the difference. In this case, you’d be better off by putting a good chunk of money into a permanent life insurance policy because it will force you to save some extra money.

Here are all of the posts in this series:

  1. Challenging Pre-conceptions
  2. How Term Life Insurance Works
  3. Is 12% Realistic when “Investing the Difference”
  4. Returns, taxes, death benefit and debt
  5. Achieving Financial and Spending Freedom

For more money saving tips, follow RabbitFunds on Twitter.

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Permanent Life Insurance Series: How Term Life Insurance Works

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Permanent Life Insurance Series: How Term Life Insurance Works


My friend Brandon is a very big advocate of Permanent Life Insurance. Him and I have gone the rounds on many occasions about permanent versus term. I decided that to be fair, I would present his argument in a series of posts here in Rabbit Funds. The series begins with a post about challenging the pre-conceptions about permanent life insurance. You can find links to the other posts in the series at the bottom.

Whole Life Insurance

Think of it this way

Let’s say you have a machine in your basement, a special machine, the only one of its kind in the entire world. When you use it, you turn a handle and it spits out money. You can do this as often as you like, as long as you like. And the best part is that the older the machine gets, the more efficient it is: it spits out even more money per turn as it ages.

Now if you had a machine like this, what would you do to protect it? Armed guards? Fancy security system? Would you buy insurance on it? How much? I bet as much as you could get. Would you have it spit out a few hundred thousand dollars and then get rid of it, because that’s all you need? Of course you wouldn’t, that would be crazy.

Well, you do have a machine like this. It is you, and your ability to work and provide an income.

So why would you not want to do everything you possibly can to protect the most valuable asset you will ever have? Why would you want a temporary life insurance policy, one that is designed to expire before you do? Because the reality is that 99% of term life insurance policies never pay a claim.

Why so many? It’s because of the way they are structured.

Term life insurance really is designed to expire before you do

When a term life insurance policy is priced, the issuing company will take a lot of health information about you. They will compare it to an incredible amount of data about how long people of a given height, weight, age, gender, and health status will live. Then they will put you into a particular risk classification. They might not know which of their clients will die in a given year, but they know exactly how many.

For an average 30 year old, it’s about 1 in 1000 that die every year

If each of these people wants $1,000,000 of protection, and the company knows that at the end of the year they will need to pay out 1 claim of $1,000,000, the company knows that it needs to bring in enough in premiums from this group of 1000 to cover the claim, profits, and expenses.

So the price of a $1,000,000 life insurance policy for an average 30 year old starts at about $1,000 a year (1000 people paying $1,000 each is $1,000,000). Once you factor in that the company can invest the money and get growth, you see the actual price go down depending on company performance.

With term life insurance, you are paying only for what is called the mortality risk, or the risk that you might die prematurely. This risk is relatively cheap for young healthy individuals, because you are sharing the risk with many others.

The down side to this, though, is that since you only pay for mortality cost, and you are sharing that risk with others in a similar situation, the cost of a term life insurance policy goes up significantly as you age.

Many people think they can simply renew a policy for as long as they like, but this is not the case. By the time you reach average life expectancy in the above example, your total premiums will be roughly $740,000, and your bill that year will be about $150,000. If you live 8 years past that, you will have paid roughly $2,190,000 and your bill that year is about $250,000 for a $1,000,000 policy.

Of course, the only people willing to pay that are the ones who have been told by a doctor they only have a few months to live.

Buying a term life policy is really a one shot deal

When you do it, you better hope you can actually save up enough money to self insure by the time that initial 20 year period is up, or you could be in trouble.

True, you might be able to get a new policy in 20 years but that is no guarantee. If you can’t get a new policy, your price skyrockets. I mean that within 5 years of your locked in rate expiring, your premiums have gone up over 10 times the original amount. Give it another 10 years, and the premiums have increased by another factor of 10.

Your affordable $500 per year policy now costs $50,000 per year when you are 65. And even if you do manage to qualify for another policy, your new 20 year rate will be about 7 times higher than it was initially.

Again, making this decision early on really forces you to stick with it. And if you haven’t self insured by then, you could be in a world of hurt.

Consider this example, which has happened to many families

The decision was made to buy term and invest the difference, with the goal to self-insure. Twenty years later, the breadwinner has become un-insurable and cannot get a new policy. The premiums on the original policy are growing too much, so the family is forced to go without life insurance, but they have invested a good chunk of money so they don’t feel too bad about giving up the coverage.

But all of a sudden, the market crashes and the self-insurance fund has lost half of its value. To top it all off, the breadwinner dies suddenly. After paying for funeral expenses and taxes, the survivors are left with less than $50,000.

Now you might be saying something such as, “Well that’s just too many things to go wrong all at once, how likely is that really?” But anyone who lost a breadwinner within the last two years could easily have faced that situation.

When you consider that you automatically lose about 1/3 of the total value in taxes, then pay $15,000 for final expenses, and top it off with a massive market loss…it becomes easy to see how that scenario could play out.

Here are all of the posts in this series:

  1. Challenging Pre-conceptions
  2. How Term Life Insurance Works
  3. Is 12% Realistic when “Investing the Difference”
  4. Returns, taxes, death benefit and debt
  5. Achieving Financial and Spending Freedom

For more money saving tips, follow RabbitFunds on Twitter.

Posted in InsuranceComments (0)

Permanent Life Insurance Series: Challenging Pre-conceptions

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Permanent Life Insurance Series: Challenging Pre-conceptions


My friend Brandon is a very big advocate of Permanent Life Insurance. Him and I have gone the rounds on many occasions about permanent versus term. I decided that to be fair, I would present his argument in a series of posts here in Rabbit Funds. The series begins with this post. You can find links to the other posts in the series at the bottom.

Whole Life Insurance

Buy term and invest the difference is one of the most common pieces of financial advice out there. It is promoted in books, on TV, on the radio and just about every place where you might find financial information. But is it really the best thing for everyone to do?

For people with financial responsibilities that will remain even after they are gone, buying life insurance is an important moral consideration. But the kind of insurance you buy is an economical decision.

In the end, everyone wants to have as much wealth as possible and the greatest opportunities to enjoy it; no one would turn down any financial strategy if they knew it would be beneficial for them in the end.

With that in mind, here are some things that you probably haven’t been told by everyone that is promoting buy term and invest the difference. I put this out there not to convince you that one way is better than another but because I have seen too many people make poor financial decisions because they were not well informed. And making the buy term and invest the difference choice early on can really set the tone, for better or worse, for the rest of your financial future.

Make sure you understand your choices.

First is the actual life insurance component. Everyone that promotes buy term and invest the difference also says that you should plan to self insure. You really can’t use one of the strategies without the other.

The idea is that you can save and invest enough money that your savings will be great enough to support your financial responsibilities even if you die. It sounds pretty good too. I mean, wouldn’t all of us like to get rid of a life insurance bill and have hundreds of thousands of dollars in the bank?

It’s strange to me that this self insurance idea is so popular

Think of the most valuable asset you have. You’re probably thinking of your home or your car, right? Wrong! Your most valuable asset is your ability to earn an income. Most people don’t realize that an insurance company will only offer you about as much life insurance as they think you are worth. And that is the greater of either your net assets, or your average annual income multiplied by the average number of years someone your age has left in the workforce.

For instance, the average 30 year old could only get a policy equal to 30 times his annual income. So life insurance is actually insuring your ability to earn an income. Like any other insurance, it is designed to replace something that is lost.

If you had your home completely paid for, and some money in the bank as a cushion, would you drop your homeowners insurance? You would save around $1,000 a year on average if you did. But I have yet to meet a single person who would drop their coverage because the risk of loss is too great. They don’t want to have to replace their home and all of their possessions if something happens, even if they have the money to do so.

So if someone doesn’t want to be out a few hundred thousand dollars to potentially replace a lost home, why in the world are people comfortable with their survivors being out much more due to lost future income?

It sounds absurd to say, “Well, we have enough money in the bank, we don’t need any more.” But that is essentially what people are saying by giving up life insurance.

Even more ironically, life insurance is the only kind of insurance that is guaranteed to eventually have a claim. No one is guaranteed to get sick, or have a car wreck, or have flooding in a home, but everyone will eventually die.

The issue is not that people don’t want insurance

If insurance were offered for free you’d take as much as you could get. The issue is that people don’t want to pay for it, at least until a claim is made. Then people wish they had more.

Did you know that over 50% of all new universal life policies are issued to people that are over age 65? Why? Because once someone gets to that age, they realize they want permanent life insurance.

Here are all of the posts in this series:

  1. Challenging Pre-conceptions
  2. How Term Life Insurance Works
  3. Is 12% Realistic when “Investing the Difference”
  4. Returns, taxes, death benefit and debt
  5. Achieving Financial and Spending Freedom

For more money saving tips, follow RabbitFunds on Twitter.

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Why you should not “Buy Term and Invest the Difference” [guest post]

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Why you should not “Buy Term and Invest the Difference” [guest post]


Disclosure: I recently wrote an article titled, 3 Reasons whole life insurance is not better than term life, in which I referenced an ongoing debate with a family friend. He has written a rebuttal argument for whole life insurance. While Rabbit Funds does not endorse the material presented in this article, I am happy to present it in order to be fair.

Buy term and invest the difference is a very popular piece of financial advice, but is it really a good idea? Here are a few things you should consider before practicing this strategy.

#1 It sounds good now, but how about later when it really matters?

Over half of all new permanent universal life policies are sold to people over age 65. Why? Well it depends on the situation, but there are some very compelling reasons to have life insurance in force for your entire life. One of the most frequent comments from older clients, even the very wealthy, is something to the effect of “I wish I’d done this when I was younger”.

#2 What do the pros say?

I’m not sure how “buy term and invest the difference” got so popular: I don’t know a single financial advisor that recommends this as a long term strategy to clients, and I work with a lot of them (the fee based kind that charge $15,000 for a financial plan, not the college kids that drop out after 3 months). And in discussing the issue with them, not a single one of them knew any advisors that advocated this idea either.You don’t often hear these advisors publically speaking out against it though, because they can’t. There are heavy restrictions on the ways advisors communicate financial advice. If an individual follows an advisors ideas and something goes wrong, that advisor can be sued and lose a license and/or job. As a result, very few advisors will publicly give out information, but instead will only deal with clients face to face. So if you are hearing financial ideas on the radio or web, it’s almost a guarantee that the ideas are someone’s opinion, someone who is not legally licensed to provide financial advice. In other words, not an expert. The person may have some great ideas, but they are not liable for anything they say. An advisor though, is on the hook and can be sued for every piece of advice he or she gives.

#3 It has nothing to do with commissions

In fact, most advisors would rather have the money go to investments, at least from a commission standpoint. In the long run investments pay significantly more in commissions than life insurance. And term insurance pays higher commission percentages.

#4 You don’t know when you’ll die

What if you can’t save enough money before your term policy expires? Once the initial term expires, prices can skyrocket and there is no guarantee you will qualify for a new policy. Even if you do, the price is likely to be around 7 times more expensive than the first policy. If you continue to pay your original policy, it will take about 5 years for the price to increase 10 fold. Another 10 years later and it will have increased by another factor of 10. Can you afford that?

#5 It’s a long term strategy in a short term time

The buy term and invest the difference strategy potentially forces you to live with the decision for the rest of your life, especially if you become uninsurable. Do you want to lock yourself into a financial strategy at an early age, not knowing what the future holds?

#6 Average vs. Actual

Many people focus way too much on the average return. If you have  $1,000 and get a 100% return in year 1, you have $2,000. If you have a 50% loss in year 2, you are back to your original $1,000, but you earned an average return of 25%. See the difference? Even though a fund may get an average return that looks good, the actual return will be worth roughly 60-70% of that.

#7 12% returns, are you kidding?

The notion that you easily get a 12% return out of the market, which is purported by many “buy term and invest the difference” guru’s like Dave Ramsey, is utterly false and should be criminal. From 1930-1979, the market averaged .22% each year. Yes, .22%. From 1980-1999 the average was about 12.7%. The last decade has been around 3%. Meaning the long term average is around 6%.

#8 Taxes

Roth 401k’s are relatively new and still rare. Most money is accumulated in taxable 401k’s. This means that if you have $1 million and are in a 25% tax bracket, Uncle Sam is entitled to $250,000 of that sooner or later. Right now, we are seeing some of the lowest taxes ever. But with the government spending money at the current rate, taxes aren’t likely to remain low. Factor in taxes of 33%, which is likely to be conservative, and all of a sudden, your actual return loses 1/3 of its value and is now down to 4%. That’s worse than many permanent life insurance policies.

A Real Life Example: I compared the actual cash value in a whole life policy for a top company to what would have happened had the same dollars been invested in the Dow Jones. The time period was 1981-2010. Keep in mind that this was the best 30 year period the market has seen. The results: cash value, a tax free $718,000 guaranteed not to lose value. The investment account: a taxable $1,050,000. Factor in taxes and those numbers aren’t too far off. Now I’m not saying you should invest all your money into a life insurance policy, but to ignore it as a resource would be a mistake.

#9 Emotions get in the way

The markets go up and down every day. Pulling out of the market because you’re afraid of losing money is too common. And it costs investors a lot in potential gains.

#10 The pitch is sexy, but…

Getting completely out of debt is a great goal, and self insuring sounds pretty appealing. But very few people have the financial discipline to do so. Not always because they are careless, but because life gets in the way of our plans. Is your life just like you pictured it 5 years ago? 10? How about 40 years from now?

#11 Money isn’t Math, and Math isn’t Money

Only 1 in 400 people retire with over $1,000,000. The worst part though is this: the average American salary is $45,000 per year. A typical employer 401k will put in 3% when you do 5%. A normal work-life span is around 45 years. This means that an average salary with a typical 401k plan and normal work-life expectancy will yield almost $1.4 million at 8% interest. Yet somehow only 1 in 400 can hit $1 million. Why? Real life gets in the way of the plans we make on paper.

#12 The death benefit itself

Unnecessary in the eyes of the self-insurance guru’s. But what if you are wealthy and have an estate tax due? Worst case scenario, a 401k could lose as much as 70-80% of its value in various taxes before the heirs get it, while a death benefit is less susceptible to this issue.

#13 Estate equalization

Few people have significant liquid wealth; it’s usually tied up in properties, homes, or businesses. What if you have a valuable asset to pass on to multiple heirs? What if one wants to keep and run the family business while the others want it sold to get their share? What if one wants to keep the family home but the rest demand it’s sold? This leads to fire sales and destroyed family relationships that could have been spared with some liquid cash from permanent life insurance.

#14 You want to spend your money

If you opted for buy term and invest the difference, you probably broke the number one rule of investing: diversification. You probably have all of your money in the market inside a 401k. If the market tanks, you are toast. For every $1 million you have saved, you can spend about $30,000 per year if you are living off the interest. Which you will have to do since it is the only bucket of money you have to pull from. Worse though, is that your money has to stay exposed to the market to keep up with the demands placed on it. This money has to provide an income, keep up with inflation, pay taxes, buy your next car, fund your vacations and on and on. All of a sudden this $1 million isn’t doing much for you because you don’t know how long the money has to last. Now you have a mediocre retirement income and are constantly worried about the market while you are retired.

#15 You want to enjoy your retirement

Here’s a retirement strategy that, fully explained and professionally executed, is worth several thousand dollars in fees. You want several different buckets of money to pull from in retirement – you want to be diversified. Having a Roth and a 401k is not diversification. If the market tanks you are out a lot of money. You want these buckets yes, but you want some locations to pull from that are not susceptible to the market losses. The only financial product I’m aware of that provides guaranteed growth every year, as well as guaranteed principle, is whole life insurance. At a 5-6%return or so, once paid up, the right kind of whole life policy can be a vital tool in your retirement plan. It is likely to out-perform even your investments in retirement.

Another Real Life Example: From 1973-1987, the S&P averaged almost 11.3%. If you had a $2 million nest egg and pulled $150,000 per year for 15 years starting in 1973, by the time 1987 rolls around you would be down to $900,000 because of average vs. actual returns.However, if you had a backup fund that was not tied to the market and, following down years, pulled money from your backup fund instead of your investments, you would have $3.35 million instead of $900,000. There are several retirement strategies that will allow an individual to spend a considerable amount more money in retirement and be less exposed to market risk. Permanent life insurance is a vital component of these strategies.

Conclusion

“Buy term and invest the difference” is a strategy that is widely known, but little understood. Those promoting it are typically good intentioned, but not dealing with individual financial situations. Instead they are promoting good, one size fits all philosophies, but not dealing with the intricacies of real life. In other words, the recommendations sound good on paper, but complex life situations get in the way sometimes.

On the other hand, a good, professional financial advisor deals with the what-if’s in life, creates a plan for them, and often understands complexities that would otherwise be overlooked. So before you make any financial decisions that could impact you for the rest of your life, do your homework, understand the issues, educate yourself, and talk to a few different professional advisors. In the end, the time you spend now could be worth millions later.

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