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I generally agree with your analysis. An argument can be made to contribute into your 401(k) upto the point where you still receive a match and overfunding a variable life contract after that point. If protection is needed it may make sense.

An argument can be won using this philosophy if an individual has maxed out their qualified plan contributions (if so they are probably not eligible for a roth or a deductable IRA). This is why virtually every major fortune 500 corporation uses life insurnace to provide for tax favored, discrimitory supplemental retirement income for the key persons and executives. My point in the counter is to illustrate that the concept can work to your advantage in certain circumstances and it is not always a poor decision.

Jeff don't be so lame, give some numbers to back up your claim. Whats probably mean? It sounds like you haven't done your homework.

Keith

Hi Juice,
Thank you for the comments. With the first argument, that’s where we get back to the true need: insurance protection. If permanent insurance is the primary need, that’s the priority. But opting to divert dollars away from a 401(k) plan to a variable life insurance policy just for the investment element of it in most cases is inefficient for the individual. In the second argument, this is the realm where this alternative at least becomes a more viable option. If you are doing as much as you can within your tax advantaged accounts (401k’s, IRA’s, etc.) this may hold some value if you also have an insurance need. But with employer angle, remember the true motivation here: to provide upper management a benefit to motivate and retain them. As I mentioned in the entry, there are some circumstances where it may make sense, but these circumstances aren’t common.

Hey Keith,
Who are you kidding? It’s impossible to put a hard number figure on that. There is no universal cost structure for permanent insurance policies or outside investment accounts; it can vary dramatically from situation to situation. The issue here is underlying costs. And inherently, permanent insurance policies usually carry higher underlying costs than other investment account options. And costs count when you primary goal is to maximize your returns. That’s the point.

If you desire long-term growth and really believe that you’ll end up better in the end using permanent life insurance as an investment vehicle, go for it. But for most people it doesn’t make sense.

And for your reference:
Prob´a`bly
adv. 1. In a probable manner; in likelihood.

What about people's desire to protect their families for their entire lives? Did you know that the average fuinal expense costs are between $5-$10K dollars? That is a "hard number" that rings painful for many adult children mourning their parents death.

Whole life insurance can be a wonderful vehicle to help pay final expenses, late-in-life loans (new cars, credit card balances, etc.) and other costs that may occur after a 20 year term policy expires.

Regardless of whether your children are 5 years old or 50 years old, no parent wants to leave a burden on their children. And people who buy a term policy thinking it will cover the "crucial" years are fooling themselves. Your adult children will be left cleaning up your estate in their "crucial" years.

Your point is valid - any insurance agent who sells a universal or whole life policy as an investment vehicle is not taking their clients best interests into consideration. A life insurance policy SHOULD NEVER be purchased solely as an investment vehicle, it should be purchased to protect families.

Given the number of people who read your column and take your advice to heart, I am saddened by your buy term and invest the rest philosophy.

Hi Lila,
You shouldn’t be saddened at all by this article and I suggest you re-read it. I specifically mention circumstances where permanent insurance can make sense including for estate planning purposes. So you’re preaching to the choir here if the person has a true need. But if you’re looking at this as an investment vehicle first and insurance protection second, the tail is wagging the dog here in most scenarios.

Hi Jeff,

I want to thank as you have helped me greatly. I was going to purchase Permanent Life Insurance as a retirement planning tool as I do not have any dependents. I own a small busness and I was thinking of a SEP-IRA, SIMPLE-IRA or Profit-Sharing Plan but I was told by a financial advisor that Permanent/Variable Life Insurance is a better, more resonable choice. My gut feeling, based on readings and research, was that he was wrong. Thank you again. Your article makes great sense.

Can't believe this argument is still going? Yes there are times when whole life or cash surrender value life insurance makes sense and after 15 years of selling insurance I've ran across two instances!

Insurance is pretty simple in that most of us need roughly 10 times your income in term life insurance for as many years as needed. FYI, nearly all of us will not need life insurance when we're 75, have no kids, little debt and are living off our retirement savings and social security. What most of us need to do is max our your company's 401k plans, start Roth IRAs and or any other government plan we qualify for. Do that while planning on saving 1/3 of the cost of college for each kid and get out of and stay out of consumer debt as fast as possible.

Planning for the future isn't rocket science it's just that folks simply fail to plan.