Last week, I began a discussion about the two most common kinds of life insurance: term insurance and whole life insurance—and which one makes the most sense for you.
Specifically, we examined this commonly-asked question: “What if, instead of buying a more expensive whole life insurance policy, you opted for a less expensive term policy and then took all the money you’re saving and invested it?”
Our big takeaway was: When considering life insurance coverage, “Should I get term or whole life?” isn’t the first question we should be asking.
Before you settle on a particular “kind” of insurance (i.e., whole life or term) you first need to calculate “how much” coverage (i.e., death benefit) you need.
Why? Because when you pass, your loved ones won’t care about the kind of insurance you had. They’re going to be concerned about the amount.
Now, that doesn’t mean the “what kind” question is irrelevant. Since most people who buy life insurance don’t end up dying prematurely, it is a very important question.
Advocates of “buy term and invest the difference” usually tell a story like the ones financial guru/author Dave Ramsey often repeats on his popular radio broadcast/podcast.
Take a young couple who are 30 years old. Let’s say they have two young children and are making an average income.
Dave recommends these folks obtain insurance coverage equal to 10 times their income. If this couple is earning $100,000 a year, they would need to obtain a $1 million, 20-year level term life insurance policy. (Currently, a policy like this for a male of average health runs about $50 dollars a month. Compare that to a whole life insurance policy for the same amount…you probably looking at about $950 a month.)
Dave exhorts couples like this to buy a term policy, take the difference (in this example, $900 a month), and put it into Roth IRAs (that are invested, ideally, in an index like the S&P 500, which has averaged a 9.90% return over the last 30 years)
Twenty years later, after the kids are grown and gone, those Roth IRAs will be worth $680,200.
At that point in his hypothetical story Dave usually says something like, “So, if daddy passes away just before his term insurance policy expires, momma will have a house that’s paid for…” (because this is another financial strategy he strongly advocates). “And she’ll have $1 million in insurance coverage, AND she’ll have more than $600,000 dollars in retirement savings.” Typically, he then adds with just a touch of sarcasm, “I think she could probably make it on that.”
It sounds so logical and easy. But does “investing the difference” always work out this neatly? Not really. Most people find out that the theory and their reality are two very different beasts.
For one thing, stock market projections—based on the stock market’s past performance—are always iffy.
There’s also this: A gross income of $100K, after taxes and Social Security, is really only $80K net. Subtract another 30K of housing costs (mortgage, insurance, and taxes) and our young couple is down to 50K in spendable income.
How many families at that income level can afford to put 20% of that (i.e., $900/month) into an IRA…especially when they still have to buy groceries, pay utilities, make a vehicle loan payment (plus pay for gas and upkeep), purchase clothing, and make charitable gifts?
If you’re thinking, “Yikes! That’s a problem!” I hear you.
However, there is a way to solve the life insurance puzzle, and we’ll talk about it next week.
It’s a solution you can afford now—and one that won’t leave you high and dry later.
Meanwhile, as you ponder insurance options, you may also be wondering about your best options for turning your retirement nest egg into regular retirement income. If so, I have a free gift for you. It’s a short quiz called the RISA (which stands for Retirement Income Strategy Assessment). Just as one kind of insurance strategy isn’t a great fit for everyone, so your retirement needs will differ from your neighbor’s. The RISA can help you figure out the strategy that’s best for you. Email me (bmoore@argentadvisors.com) for your link to take the free quiz.
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