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For sophisticated money managers like the Humble Dollar crowd, Universal Life insurance (UL) might prove a valuable “protection asset” (not to be confused with an investment asset).
With UL, you can essentially pay the premiums whenever you want (provided you have enough cash value in the policy to provide this flexibility), and in whatever amount you want (even treating it as a term policy by paying only the “Cost of Insurance” each year), and can think of it as a “life insurance bank account”, where you have the full death benefit protection as long as there is some cash (value) in the policy.
In my younger years, with high child-raising expenses and mortgage payments, I paid only the term costs on my UL policies — or even skipped payments in some years, when expenses were particularly high — and kept a low amount of cash value in the policy.
Now, as I approach my 60’s, I’m building up the policies’ cash balances to pay for the higher premium costs that will come due in my retirement years.
I’ve owned these policies for over 30 years, and they saved my bacon, because I became uninsurable in my 40’s, and would have lost my life insurance coverage if I had “bought term and invested the difference”.
For the Humble Dollar crowd, who would manage their “protection asset” as they do their investement assets, Universal Life could prove to be a beneficial option.
My own personal experience is that it helps to diversify term and permanent life insurance. My wife and I bought term insurance primarily when we had large mortgage debts that we wanted to cover. A 20 year level term policy was perfect to cover our mortgage debt.
We bought some permanent whole life policies that were paid off when we reached retirement (age 65) because we no longer wanted the insurance bills in retirement. These started as term insurance policies that we converted to permanent insurance about age 50, because life insurance is tax free and we wanted to leave money for any potential estate taxes.
The best policies we bought were variable universal life indexed to the Vanguard S&P 500 stock index. We bought these when we were young enough to get a very low cost of insurance, but most of the monthly premium goes to an S&P 500 index fund, which has compounded significantly over the decades. Part of our rational was we could always take a policy loan against those compounded earnings if we ever needed emergency funds. We still contribute a small amount per month (around $100) but the compound earnings from the S&P 500 index fund are a large multiple of that.
Not always. Estate planning circumstances can warrant using whole life/cash value life insurance as a means of transferring assets out of the estate. If we indeed see lower estate tax exclusion limits, whole life plans could get a fresh breath of life. Hopefully, the sales charges and fees come down versus what they have been though.
For the vast majority of non-super wealthy people term life insurance is the way to go.
I agree with Joe — term isn’t always better. I see a few use cases for whole life: for example, to fund the estate tax in families that own a highly valued private company.
I guess the key word in this question is “always.” Based on my experience, I would say no, term life is not always better. I understand the mantra to always buy term and invest the rest because it makes sense in most situations. However, as I look back at my decision to buy some whole life in my 20’s, it has turned out to have been a great investment decision.
Several decades have passed since I bought it, I’m still alive, so the death benefit hasn’t mattered. But since my mortality charge is locked in as a 20 something, or a very low cost now, the investment returns have been around 5% tax free. I look forward to seeing how much the cash value increases each year in this zero rate environment.
In addition, I’m in one of the best mutual life insurance companies, so the investment risk is almost nothing. So I look at it as a nice piece of asset diversification with a great yield compared to the risk. Also, it still has a death benefit along with numerous ways to tap into the cash value if I want it now.
The alternative of buying term and investing the difference would have given me more exposure to equities, and perhaps increased my net worth. But, I am a conservative investor and having cash value life earning north of 5% tax free in a riskless investment is a part of my safe asset allocation. It frees me up to invest aggressively elsewhere. So, yes, whole life can be a good deal.