Insurance
While universal life may generate a higher rate of return than whole life policies, there is still one drawback to using insurance for investment purposes: When insurance companies take the money paid in by policyholders and invest it, they buy some of the same stocks, bonds, and real estate that you could buy on your own. By investing directly in financial markets, you can pocket all the proceeds yourself (minus brokerage commissions) instead of giving a cut to an insurance company.
That's the basis for the traditional advice to "buy term and invest the difference." The advice makes sense the tax-deferred status of money invested in an insurance policy. You've got to compare apples to apples and figure out if you will come out ahead without that shield from the tax collector.
The other issue is whether once you've bought term insurance, you really will invest the difference. Most people who by term insurance don't. They take the money they've saved by not buying whole life or universal life and use it for a trip to beaches, or to buy new clothes, or a used car, or whatever prospects tell them they only want term insurance is, "If you save as much in the next ten years as you've saved in the last ten years, will you have be satisfied?" Most people must answer no, because they have not been saving or investing. Their money has been slipping through their fingers.
Cash value life insurance has been a boon to millions of Americans, because it has forced them to save in spite of themselves. They've had to pay their insurance premiums or lose the coverage they knew needed; in the process they built up cash value in their policies. (In this, life insurance replicates the savings function of a home mortgage; homeowners must make their monthly payments, and thus build up equity in their homes, if they don't want to lose them.) The return on such insurance0driven savings (at least in whole life policies) has been low, but at least there have been savings.
Be honest with yourself. If you're unlikely to develop and maintain your own investment program, or you don't want the responsibility or cares of doing so, then you would be well advised to buy universal life. You and only you can decide if you're willing and able to invest on your own initiatives on a relentlessly regular basis. Only you can decide whether you're willing to shoulder the risks involved in making your own investments. And you have to weigh the tax consequences of investing on your own versus letting assets accumulates on a carefully thought about all that, you may very well decide you're better off buying pure insurance from an insurance company and doing your own investing.
The other issue is whether once you've bought term insurance, you really will invest the difference. Most people who by term insurance don't. They take the money they've saved by not buying whole life or universal life and use it for a trip to beaches, or to buy new clothes, or a used car, or whatever prospects tell them they only want term insurance is, "If you save as much in the next ten years as you've saved in the last ten years, will you have be satisfied?" Most people must answer no, because they have not been saving or investing. Their money has been slipping through their fingers.
Cash value life insurance has been a boon to millions of Americans, because it has forced them to save in spite of themselves. They've had to pay their insurance premiums or lose the coverage they knew needed; in the process they built up cash value in their policies. (In this, life insurance replicates the savings function of a home mortgage; homeowners must make their monthly payments, and thus build up equity in their homes, if they don't want to lose them.) The return on such insurance0driven savings (at least in whole life policies) has been low, but at least there have been savings.
Be honest with yourself. If you're unlikely to develop and maintain your own investment program, or you don't want the responsibility or cares of doing so, then you would be well advised to buy universal life. You and only you can decide if you're willing and able to invest on your own initiatives on a relentlessly regular basis. Only you can decide whether you're willing to shoulder the risks involved in making your own investments. And you have to weigh the tax consequences of investing on your own versus letting assets accumulates on a carefully thought about all that, you may very well decide you're better off buying pure insurance from an insurance company and doing your own investing.
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