Whole Life Insurance vs. S&P 500 Returns over 20 Years, Compared
The returns on my whole life insurance policy after 20 years shocked me.
In 2003, my first salary was a measly $2,500 a month.
I had a friend who became an insurance agent with a major insurer and insisted that I buy a whole life insurance policy from her.
Long story short, I bought it.
And now, 20 years later, I can rejoice having finished paying 2 decades worth of insurance premiums!
With the insurance company portals readily available, I logged on as a policy holder to check the cash surrender value of the Whole Life Policy that I shall call ‘X.’
And got the shock of my life.
What is the cash surrender value of a whole life policy?
It is the liquid amount you can actually cash out from your whole life insurance policy.
Unlike a term life policy, there is a cash surrender value attached to your whole life policy that you can withdraw in your lifetime.
However, as I’ll explain later, this is not something you would want to do, under normal circumstances. It is something you can do, nevertheless, under duress, if you are short of cash and need money urgently.
First, let’s talk about why I have a whole life insurance policy. To be fair, pros exist.
There are a few pros to whole life insurance policy, despite all the naysayers.
There is a cash surrender value to the whole life policy, where you can recoup some of your premiums paid. This cash surrender value can also be withdrawn within your lifetime.
As its name suggests, you only pay the insurance premiums upfront and then stop when they are fully paid. After that, you are covered with the insurance policy for your whole life.
This is unlike term life policy, where you have to pay every year that you want to enjoy insurance coverage. To be fair, term life policy premiums are substantially lower than whole life policy.
In overall terms, you are very likely to pay less for term life insurance than whole life insurance. However, this may change the longer you hold on to your insurance. This is because whole life insurance has a cash surrender value that increases over time.
If you’ve held on for 20 years like me, you may wish to cash out your whole life policy if the surrender value significantly exceeds the amount of premiums you have paid.
What are the 20-year returns on my Whole Life Policy ‘X’?
Coverage over whole life: 80 years (that’s an assumption of life expectancy)
Total amount of premiums I paid over 20 years (excluding accident and critical illness riders): $40,580
Surrender value on Whole Life Policy ‘X’ after 20 years is: $68,645.
Based on the surrender value, the Compound Annual Growth Rate (CAGR) of Whole Life Policy ‘X’ is: 4.17% p.a.
Surprisingly decent returns that outperform the CPF Special Account. Then again, much depends on the performance of the insurer you choose.
Note (i): Bear in mind, I no longer have to pay any premiums from now on. Yet I am fully covered by the Whole Life Policy ‘X’ for the rest of my life.
Note (ii): The 4.17% p.a. return does exclude the cost of insurance, which is the risk that the insurer may have to pay the par value of the policy to your beneficiaries should you expire (i.e. die) early.
Note (iii): Your policy surrender value and CAGR may vary depending on (1) Who your insurer is; (2) How markets perform; and (3) How long you hold onto your Whole Life Policy.
What if I had (1) Bought term life policy and (2) Invested the rest of the whole life policy ‘X’ premium into the stock market?
Would I have done better, if I had bought term life policy instead?
Coverage over whole life: 80 years
Total amount of premiums paid in Term Life Policy for 20 years: $4,292
Total amount of premiums saved by buying Term, not Life: $40,580 - $4,292 = $36,288; or $1,814 a year.
What happens if I invest $1,814 of savings a year into the stock market for 20 years?
Total value of stock market investment after 20 years: $100,041
CAGR of buying Term Life Policy and Investing the Rest: 7.26% p.a.
Note (i): The stock market investment here I used is the SPDR S&P 500 ETF. CAGR of Buying Term and Investing the Rest depends on (1) What stock market you buy; and (2) How the stock market performs over the time period.
Note (ii): Buying the STI Index may underperform buying the SPY ETF. Buying the Nasdaq 100 may outperform buying the SPY ETF. Variability of returns depends largely on which stock market you choose to invest in.
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