Dave Ramsey followers know if there is anything he hates more than collection agencies, it’s forms of cash value life insurance. He likes to call it “the payday lender of the middle class”. Still, I could only ever really catch bits and pieces of why cash value life insurance was such a scammy product. I needed to know more and as someone who has taken forever to even become insured, I decided I needed to do a little research. If you know, you know, I love any excuse to make a spreadsheet so that is what I did to compare Leo and my personal quotes for both term and cash value life insurance.
Term life insurance
This form lasts only for a specific amount of years, we are going with 20, but had options of 10, 15, 20, 25, and 30 years. Choosing 20 years means we will pay a locked in premium and after that time is up we could renew should we want to. It’s important to keep in mind that as we age the premium will become higher if we choose to wait. This is because we are closer to death (sorry) and it’s possible we may have developed diseases that come with old age as well (also sorry). For this reason, it’s to our benefit to lock in a low rate while we are younger.
Term life insurance also offers low rates. It’s like paying for a monthly subscription, for just one low price of $17.49 a month (my best salesperson voice) we can steer our family away from financial hardship during the most devastating times of their lives, our death, knock on wood (actually knock on wood please). This $17.49 (my personal quote as a healthy 25-year-old) provides a death benefit of $500,000 which equates to paying just $210 a year and $4,198 over the life of a 20-year policy. According to the Bureau of Labor Statistics this is just under 5 weeks of pay for the median wage earner.
Cash value life insurance
Cash value comes in forms of whole, universal and variable life insurance and lasts a life time, so long as we are paying the premiums. The cash value feature means part of the premium we pay is invested and separate from the death benefit. This part was always where my confusion came into play.
So, you mean to tell me, cash value life insurance saves my money and invests it? How is this a bad thing? Term life insurance provides just a death benefit and my premium doesn’t go towards anything but keeping the policy alive…
WHY WE DON’T CHOOSE CASH VALUE LIFE INSURANCE
My quote for cash value life insurance was 1308% more expensive than term life insurance. One thousand, three hundred and eight percent. I’m serious. I did the math. I was quoted $244.56 a month, as opposed to the $17.49, for the same $500,000. This is fine though right because your premiums are saved in cash?
Well first, the amount we pay for the cash value policy is split between funding the cash value and death benefit, not just the cash value “investment”. Secondly, when we die our beneficiary does not receive the cash value we “saved” and instead just the death benefit of $500,000. Based on my quote, my annual contribution (not all of which goes towards the cash value) is $2,935. Premiums paid for one year and it’s already more than half the amount of my quoted term life policy for 20 years. Over the course of 20 years I would have paid in $58,694. With assistance from the future value function in Excel, invested at 4% (generous for insurance investment, low for an investment in general) the $58,694 would grow to $87,390, but again, this assumes every dollar paid for the policy goes straight towards the cash value which is does not.
Now wait a minute, I’ve gotten $87k in 20 years, I still don’t understand how this is a bad thing?
To reiterate, when we die with cash value life insurance, with $87k in cash value, our beneficiary only receives the death benefit of $500,000. When we die with term life insurance, with no cash value, our beneficiary still receives the death benefit of $500,000. In the same scenarios, we had term life insurance, paid $4,198 over the course of 20 years and our beneficiary still receives the same $500,000.
Insurance should not be an investment, it’s a just-in-case. That $244 you would pay a month for whole life insurance is better off paid to a retirement account, an IRA or 401(k). Why? Invested properly we will likely have a greater ROI (return on investment) and when we die our beneficiary receives our retirement account and the $500,000.
Cash value life insurance should only even be a second thought for those maxing out all retirement accounts, $18,500 annually with a 401(k) and $5,500 with an IRA. But even then we’re better off investing in something not meant to solely insure. The point of insurance is to keep us secure during a time we know will come but we’re not sure when. Like auto-insurance, we’d like to hope we can prolong an accident as long as possible, but at some point, it’s bound to happen.
At some point, we’re all going to die (sorryyyy). While we are not as financially secure as we’d like this insurance is necessary from the bad becoming even worse. The best part about paying such a low rate for life insurance is that you have the excess money to invest in your retirement and other forms of investing that would actually benefit your family. When our policy ends, whether we picked 20, 25 or 30 years we are more likely to be financially secure by then and not even have the need for life insurance. This is what being self-insured is and it’s a goal for me as it is for many. In today’s world, you don’t have to make a six-figure income to become a millionaire if you’re wise. If we’re millionaires in our mid-40s that’s our money we’d leave behind as insurance for our family. At that point, who needs life insurance? ;)
TL;DR: term life for the win, invest in yourself, not your death.
If you’d like to compare your own term and whole life insurance quotes for fun click here for the spreadsheet. You can use sites like Policygenius and Zander to find your own specific quotes (not sponsored, but call me…).