At http://www.insurance-forums.net they discuss buying term insurance and investing the difference?

Question

Is that a good idea? http://www.insurance-forums.net/

Answer 1

The idea of "buy and invest the difference" begs the question "invest what?"

This is an old argument regarding the relative expense of temporary insurance (term) vs. permanent insurance (whole life or universal life).

Truth be known, all life insurance is term insurance. That is, every year, the risk of our dying increases and so the cost to insure us increases. You "cover" that with the most basic component of life insurance - annually renewable term (ART). Some companies still sell it.

A person who has an ART policy pays a little bit more every year as the premium is reset higher to offset the increased risk to the company that the insured might die. ART becomes so expensive later in life that it is virtually unaffordable. Most carriers that still sell it won't continue the policy past a certain age, typically 65 or 70 years old.

The most common temporary (term) insurance today is level-premium term. All the carrier has done with this type of policy is level out the premiums for a specific period (5-, 10-, 15-, 20-, 25-, or 30-years). The premium payor doesn't see the annually increasing pricing because they are paying more than for the ART design during the first years that this type of policy is in force. At the end of the level premium period, the premium soars and the coverage is usually allowed to lapse by the premium payor for non-premium payment.

Permanent life insurance is ART with a levelized premium many times higher than any type of term policy because the policy has got to be profitable for the company no matter how long the insured lives. Because you overpay so much money for this type of coverage, the carrier provides a "cash value" which can be accessed by the policyowner.

"Whole life" is the most expensive kind because the company guarantees the death benefit as long as premiums are paid. "Universal life" is less expensive than whole life because the company only guarantees the death benefit as long as there is still cash value in the contract.

If you stop making premium payments in a whole life contract and do not authorize the company to keep the policy in force by borrowing the premium payment out of the cash value, the company will lapse the contract and send you a check for any cash value in the contract (overpayment of premium plus any return of premium for a given year - called a dividend - that is in the policy at that time).

If you stop making premium payments in a universal life contract, nothing happens as long as there is cash value to pay for those annually renewable term costs. When the cash value runs out, the policy lapses.

So, what's all the buzz about "investing" the difference? People are saying that instead of loading up an insurance contract with permanent coverage and associated costs, buy term for the period that you are going to need a death benefit, and put the money that you would otherwise have paid for premium and save it or invest it elsewhere, like mutual funds. The theory is that you can get a better return on your money by doing so.

Is it a valid argument? Sure. But, you have to factor into the equation that money growing in an insurance contract is not taxed until it is taken out (if ever) and that the payment of a death benefit to the beneficiary(ies) is not an income-taxable event, in most cases. Investment funds are usually taxed annually as interest or dividends are paid, and may be taxed again when either past to the next of kin or the next of kin sells the investments to reinvest or get the cash out.

Which path is better? It all depends on your ability to get a better after-tax return on your investments than the tax-deferred growth of cash value in an insurance contract.

With the advent of other tax-deferred investment instruments, however, such as IRAs, 401(k) accounts, etc., the tax advantages of permanent insurance policy cash value build up have been trumped.

Enter the "variable" permanent insurance policy, where the cash values can be "invested" in mutual funds. Does that design trump the buy-term-and-invest idea? Some think it does. Others think it's just a gimmicky design fraught with several drawbacks, not the least of which is the administrative costs of the variable insurance contract design.

If you are really interested in delving into this financial discussion, speak with either a qualified financial advisor or Certified Financial Planner (CFP), a competent tax advisor (CPA), and an honest and forthright insurance agent or analyst. Then, make up your own mind.

Answer 2

This question has been asked since 20+ years ago when term life was invented. People voted with their checkbooks. Most people today buy term.

It is interesting to note that health insurance is going the same
way 20+ years later today. Hardly anyone can afford the "whole"
package -- health insurance with very low deductible. So the
unbundling here goes -- buy a HIGH deductible health insurance
and save a bundle on monthly premiums. Then with the money
saved get a discount plan on the front end that will save you
money every time you go to a doctor. At the end of the year,
bottom line, you will keep more money in your pocket for the
same services in most cases. When buying insurance, go for the
HSA compatible one.

Answer 3

relies upon on the time-physique you choose for the coverage for. Get term if its 30 years or much less. If longer you will ought to do an entire, usual or variable existence. even possibly only get yet another term some years down the line. finished existence form of sucks because of the fact the value of return on the contract value or money stability generally sucks. usual existence is a little extra suitable and Variable must be the final yet there is not any assure on the value for the reason it extremely is assigned to mutual money. avert utilising existence coverage as an investment. in case you should get some extra close to-term tax breaks look into the classic IRA. in case you're searching for long term tax breaks the roth is extra suitable (after retirement) It seems such as you will have your finished economic image regarded at. the final element to do is to seek for a economic consultant on your section. enable them to propose the final thank you to set up all of it. The worst element you should do at this element is communicate over with a existence coverage agent.

Answer 4

The alternative is buying whole life insurance and accepting a lower interest rate from the insurance company. So yes, buy term and invest the difference.

Answer 5

Sure beats buying whole life insurance!!! It's MUCH smarter.