The best way to compare two options is to use the numbers to illustrate.
Here is a typical case:
- Male age 35, best health class
- Every month after paying all the expenses and savings, has $1,000 money left to invest
- Needs $1,000,000 life insurance coverage
- Plans to retire at age 65
Option 1. Buy Term and Invest the Difference
- 30-year $1,000,000 Term life annual premium: $815
- Annual investment amount: $1000*12-$815=$11,185
- Average fund expense ratio: 0.5%
- Average annual fund’s before expense return: 8%
- Investment horizon: 30 years
- Total principal contribution: $346,735
- Balance at age 65: $1,348,530 (pre-tax)
- Capital tax rate (Federal plus state): 20%
- After-tax balance: $1,148,171
Option 2. Buy IUL
- Annual premium contribution: $12,000
- Insurance face amount: $1,000,000
- Average annual return: 6%
- Cash value at age 65: $799,901
Buy Term and Invest the Difference is better because it yields higher after-tax balance at the retirement age 65.
For a long time, I belong to the Buy Term and Invest the Difference camp too, driven by the above analysis. However, I didn't realize two major flaws associated with the above comparisons, I will discuss the in the next blog post.