There are basically two competing types of life insurance on the market: term life and whole life (also called permanent insurance). Term insurance is sold for a term, generally 20 years, while whole life insurance is sold as an investment product allowing you to “invest” money, borrow against it while you’re living, and still have value left when you die. Generally, term life insurance is the best life insurance option available for the masses. Let’s do the math:
For a 30 year old male in good health, 20 year term life for $500,000 of life insurance coverage is $22 per month. A whole life (universal life) insurance policy for $500,000 of coverage is $213. That’s a difference of $191 per month!
But wait, the whole life is an investment. According to Fortune magazine, the average whole life rate of return is 2.6%, for universal life 4.2%, and for variable life (invests in mutual funds), 7.4%. Let’s do some quick calculations:
Whole life: $213 per month at 2.6% for 35 years = $146,817.19
Universal life: $213 per month at 4.2% for 35 years = $204,225.88
Variable life: $213 per month at 7.4% for 35 years = $414,222.09
Investing: invest the difference, $191 per month at 10% for 35 years = $683,306.64
Investing: invest the difference, $191 per month at 12% for 35 years = $1,108,097.46