Those who say that life insurance is a bad investment are not relating to real life.
Since everyone dies, we know exactly what the end result of a life insurance program will be. But because we don’t know when any individual will die, we don’t know how financially efficient the program will be.
• Walt purchased a $1million life insurance policy at the age of 47 and died from a brain tumor at age 53. Anyone disagree that (no matter what Walt paid for it) he made a good investment buying that policy…an Internal Rate of Return (IRR) of about 92% per year?
• Sharon purchased the same kind of policy at the age of 63 and died at the age of 93. After 30 years of paying premiums….an IRR of about 4.5% per year. Should have put her money in a mutual fund. Who knew?
Most folks sell life insurance for a living must concentrate on the “need”. That is what all the critics of insurance and the financial press focus’ on. How expensive is it, and do you really “neeeed” it? They will sell only to those clients to whom they can effectively point out that the individual’s untimely death will leave a significant deficiency in the financial condition of those he/she leaves behind. Then they must be convincing, and good at motivating the client to take action to “purchase” the policy so the money will be there “in case” they die.
On the other hand, those of us who deal with life insurance in the context of our clients overall financial and retirement planning clearly have a different perspective when we consider the investment aspect. We can see the value in our clients’ portfolio and to their family when a portion of their assets are “invested” in a life insurance policy. But just like any other investment, it is impossible to tell what the final rate-of-return outcome will be because we do not know when the insured will die. But we do know the range one can usually expect. In most cases the tax free rate of return is about 3.5% if one dies at age 93 and much greater (8.5%/yr.) if our client dies at 85 (about life expectancy) and EVEN GREATER (24%/yr.) if death occurs at 75.
Now consider the risks of Critical, and Chronic Illness that (in many cases) occur before death. Just think of the rate of return on your money (and what a wise decision you made) if you were to have a heart attack or kidney failure or need a lung transplant after only 10 or 15 years owning and paying for that policy. That is assuming your advisor was wise enough to make sure the insurance you were “investing in” contained an “acceleration rider” allowing you to access some or all of the death benefit while you are still alive and need some serious money to cover the cost of that lung transplant.
The critics of life insurance are many; mostly because of a lack of understanding of what it does and how it works. They miss a fundamental concept in financial planning; that the only time one can judge success or failure is when it is time to spend the money. Until then, all investing and insurance is a work in process. The big difference between “investing” in life insurance versus mutual funds (for example) is that with life insurance you always know “what” the end result will be, it’s only a matter of “when”. With the mutual fund you don’t know the “when”. But you also don’t know the “what”. But that’s OK because, given enough time in the mutual fund it also could be much more. That’s why having some of both increases predictability of results, reduces volatility along the way and (for most people) reduces stress.
We understand the value of committing a portion of a clients’ portfolio to insurance that creates large assets just at the time they are needed, no matter when that may be. And yet….if it is never needed, the heirs will think the client a hero for doing such a good job of protecting the portfolio from life’s many occurrences that could have befallen their folks and maybe caused great damage to their portfolio…. just when it was about to make great gains in the upcoming bull market.