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A financial advisor (Northwest Mutual) told me I should buy a whole life insurance policy as an inflation-protected liquid cash savings. What he said is that while the yield is low, in the long term (not short term), it provides an account from which I can borrow in emergencies, and yields enough to deter inflation. He says it's better than keeping thousands of dollars in savings my whole life.

I already have a real cash savings, but I guess the idea is that I could shrink it over time in favor of the insurance policy.

Is this reasonable, or have I been sold a bill of goods?

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    Whole life insurance is never bought, it is always sold (except in India where everybody is enamored of whole-life insurance and people insist that the insurance agent sell them whole-life insurance and not this useless term life insurance crap). Yes, you have been sold a bill of goods. Those who really need the protection of a life insurance policy rarely can afford the premium of a whole-life policy with adequate coverage; they should buy the far-cheaper term life insurance and save the difference but, under the influence of an insurance agent, they buy inadequate whole-life insurance. – Dilip Sarwate Nov 26 '16 at 3:53
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    See many past answers re Whole Life and why it is an inherently bogus proposition. In brief, it is just term life plus an investment plan, and generally an investment plan with excessively high fees. There is no magic that gives it an advantage over buying term insurance and investing the difference yourself. – keshlam Nov 26 '16 at 6:02
  • (1) never buy a new car (2) never buy so-called-whole-life-insurance – Fattie Nov 26 '16 at 12:02
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TL;DR: You're being sold a bill of goods.

What Whole Life Insurance Is

A Whole Life insurance policy is made of three components, which you'll pay for:

  1. A life insurance policy
  2. An investment (The part that actually has the "inflation protected" money)
  3. The cost of running the life insurance policy
    • Most of the fees of whole life insurance are deliberately hidden. They'll happily tell you what your monthly premium is, and what your current investment account balance is, but finding the details of costs is difficult. This is not in your favor.

Every month, you'll pay the same amount (called a premium). Some part of that money will disappear, to fund the "life insurance" and "cost of running the company" parts - if you die that month, your beneficiaries will be paid. The rest of the money becomes part of the investment.

Here's a year-by-year example, assuming that 50% of your premium goes towards the life insurance and other costs, 50% goes towards the investment, and the investment pays a guaranteed 4% annual return (compounded annually, for simplicity):

  • Year 1: You pay $1000 in premiums. Your investment is worth $520 at the end of the year.
  • Year 2: You pay $1000 in premiums. Your investment is worth $1060.80 at the end of the year.
  • Year 3: You pay $1000 in premiums. Your investment is worth $1623.23 at the end of the year.

As you can see, this is not putting your cash in an inflation-protected savings vehicle; instead, you're losing half of what you pay to cover the cost of the insurance. If you want insurance, that's one thing, but if you don't want insurance, then you're paying for something you don't want.

There's one further disadvantage to whole life insurance: when you die, it always pays out exactly the same amount. If it's worth $100K, then on your death, your beneficiary will get $100K. If you die the day after you buy the policy, then the "investment" is worth $0, and the insurance company pays $100K. But if you die after 30 years of paying premiums, then the "investment" is worth, say, $90K, and the insurance company pays $10K, for a total payment of $100K to your beneficiary. If you want life insurance for the death benefit, then whole life insurance is the most expensive way to do it.

Other Options to Save Money

Savings Account

Compare that to putting your money in a savings account, with a 1% interest rate (which is typical in 2016), again compounded annually:

  • Year 1: You put $1000 in your savings account. It will have $1010 in it at the end of the year.
  • Year 2: You put $1000 in your savings account. It will have $2030.10 in it at the end of the year.
  • Year 3: You put $1000 in your savings account. It will have $3060.40 in it at the end of the year.

The interest you get isn't enough to keep up with inflation (which is 3% lately), but at least you get to keep all of the money you put in.

(Certificates of deposit earn a bit more - 1.25% to 1.5% or so - but you can't touch the money without taking penalties, which doesn't meet your requirement of it being an "emergency fund".)

Index Funds

These aren't an ideal emergency fund, since the value goes up and down with the stock market, but since they're diversified, they won't lose a lot of money. The total stock market has increased an average of 7% per year, so for most years, this investment will outperform inflation by a nice margin.

Or you can go for a bond index fund; these won't make you as much money, but they'll lose even less money in a very bad year. A bond index fund is pretty close to "inflation protected", but it's still not guaranteed.

Term Life Insurance

If you actually want life insurance, purchase term life insurance - for a period of X years, you pay $Y per month, and your beneficiary receives $Z if you die during those X years. This is always cheaper than whole life insurance for the same period, so much so that if you look at the cost difference between whole life insurance and term insurance, and put that money into any reasonable investment, you'll eventually have as much money in the investment as the whole life insurance's death benefit.

  • I submitted a change to fix your math; please double-check before accepting as I'm only human. – Joey Marianer Nov 26 '16 at 18:29
  • On another note, I disagree with your note about a CD; having to pay $tens to access a $thousands fund in an emergency could be reasonable, but the math gets more complicated. (I have such a set-up, and I'm treating it as being worth its balance minus the penalty; if I keep it to maturity, I get what I would have paid in penalties as a "bonus".) – Joey Marianer Nov 26 '16 at 18:31
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First of all, there are two types of life insurance : temporary life insurance and permanent life insurance.

Temporary life insurance is Term Insurance which is used to pay off temporary needs or expenses that have a foreseeable end like mortgage or saving for education or paying off a loan. Term is used to take care of major obligations and the duration of the financial obligations you want to cover will generally determine how long you term life insurance should last.

The premiums you pay for term are initially affordable but increases on its automatic renewal date (10 or 20 or 30 years), it can also be converted into a permanent life insurance plan at any time. The term plan have no cash value.

Permanent life insurance : they are set up to meet permanent needs and satisfy final expenses like funeral cost, capital gains, ongoing income etc. Participating life insurance are called whole life participating life insurance or universal life insurance. In this case you want to know more about the almighty PAR. Well, PAR can be position as a retirement strategy. This is how it works:

The premium(excluding the cost if insurance) you pay towards your participating policy go into a participating account (holds the cash value of your policy), which is pooled with premiums from other participating policy owners. The assets managers invest the assets int he participating account with the goal of managing risk and increasing its value. When the participating account performs well, you are eligible to receive policy holder dividends which can be received in cash or used to buy more insurance increasing the cash value. It is a practical option to grow your money tax-free within legislative limits inside your policy over time & asses the compounding cash value while you are still living.

Most people start contributing in their 20s /30s and asses the cash in their retirement years through a policy loan, withdrawals or tax - free collateral loan.

The death benefit is the coverage + cash value. If you use up a portion of the cash value, the death benefit is the total face value of the policy plus the remainder cash value.

The dividends paid depends on the dividends scale but a trustworthy firm like Sun Life financial have paid a dividends of around 6.25% for 200 years. I will say you should position both term and whole life policy in your retirement plan.

You should understand the tax consequences of withdrawing the cash value through a policy loan. Overall, PAR is a powerful instrument used to maximize estate with liquidity value.

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