You've Been Warned: Life Insurance Is (Usually) A Bad Way To Save For Retirement
Life insurance policies have been around for centuries. The first policies cropped up in the United States in the mid-1700s, and Newark's Widows and Orphans Friendly Society began offering burial insurance in 1875. Today, the variety of insurance policy options a buyer has available to them is seemingly endless, with numerous specifications and riders (add-on) that can augment or supplement a standard insurance product. A tailored coverage that precisely fits your individual needs is a great thing to have, but the reality is that in many instances today, insurance policies may actually be a waste of money.
Lawrence Sprung, CFP, author of "Financial Planning Made Personal," and founder of Mitlin Financial, sat down to discuss this very topic with us recently. He shed some light on one of the many ways that buyers can misjudge the value of a life insurance policy. Sprung was quick to point out that life insurance policies "are complicated products that may not provide the results that you need before and up to retirement." Instead, saving for retirement demands a varied approach that takes all the unique factors of your lifestyle and future goals into account. Indeed, life insurance might be an option to consider, it's just not the silver bullet that some people might think.
It may not provide the return you're seeking
A whole-life insurance policy might be a valuable feature in some people's retirement planning. These funds are well-placed to care for your loved ones' financial needs directly in the event of your death, and a whole-life policy won't expire. In contrast, term-life insurance is built around a set time limit that hedges your earning power (in most use cases) to provide for family members during a predetermined period of time. This is often used to protect families while children are still young, or as a means to ensure that the remaining mortgage-paying years are covered for a spouse, as a few examples.
However, Lawrence Sprung considers life insurance to be a tricky thing to evaluate as a primary avenue for retirement planning. "Life insurance for the average person is not ideal to be used as a retirement savings vehicle," he said. "If there is a need for monies along the way or a strain on your ability to pay the premiums," then the policy might lapse, offering no coverage at all. Said Sprung, "We see life insurance used more heavily with high-net-worth clients where the premiums will most likely never be an issue to pay and if they have a cash need, the policy would not be the first place they would look to withdraw funds. In short, life insurance may work for some but for the majority of the investing public, they are not ideal." (Speaking of which, here are common habits of the world's wealthiest people.)
However, life insurance can be a brilliant buffer
It's true that even with a whole-life insurance policy's cash value that can be executed if the need arises, the insurance option remains a flawed choice for savers looking to bolster their retirement planning. In fact, whole-life insurance is one of Dave Ramsey's most-hated financial products, and for good reason. There are simply better ways to enjoy a great return on investment elsewhere. The stock market, for example, offers high-quality index funds that often average better growth rates over both the short term and elongated study periods.
Even so, life insurance is a must-have financial product for many consumers. For instance, sole earners supporting a young family might want to take on a whole-life insurance policy that offers this cash-value emergency ripcord alongside security in the event that a tragedy leaves the family with no income. A term policy is another good approach, but it'll take you away from the realm of retirement savings, but that's not a bad thing, though.
Your retirement savings should be aimed at high ROI and long-term growth opportunities. A life insurance policy — either a term- or whole-life selection — isn't focused primarily on this goal, even if it provides a secondary function that rhymes with long-term asset appreciation. Lawrence Sprung and many others in the world of personal finance join together in chorus to suggest that while life insurance can be valuable as a safety net, it lacks the bite necessary to provide an agile, powerful retirement savings vehicle for your money.