Buying term insurance is not so that you can ‘invest the rest’

TWO months ago, I wrote a column revisiting the age-old debate on term vs whole life insurance. The conclusion was that in most situations, term insurance is the most suitable. As expected, not everyone agreed with that position. The crux of their objections was that when you buy term insurance instead of whole life plans, there is no cash value. So, let’s look at five of the common objections associated with having no saving component to an insurance policy

“You are wasting your money because you get nothing back”

For every premium dollar you pay for your whole life plans, a portion goes into paying the cost of insurance and the rest of it is invested into the insurer’s life fund. The cost of insurance portion is never returned to you. The only reason why you get money back from a whole life plan after a period of time is because you gave the insurers extra money to invest in their life fund. But when you buy a term plan, you are effectively paying only the cost of insurance, and that is why you get no money back at the end of the term. So while the claim that there is no cash value is true, it is only a half-truth.

“You are not saving towards your retirement”

With term insurance, because you are buying only pure insurance with no extra money given to the insurers to invest for you, you are not saving towards your retirement, so the argument goes. But from column B and C of the accompanying table, you will see that even after 25 years, your whole life policy has barely broken even from the total amount of premiums paid. Yes, you might have accumulated a sum of money, but with nil or almost no returns. Instead, if you simply buy a term plan and invest the amount saved from buying a whole life plan (column E), even at 2 per cent p.a. (F), you would have done better.