Evaluation of the Performance of Whole Life Insurance Versus Buy Term Insurance and Invest the Difference
Open Access
- Author:
- Wendel, Shawn A
- Area of Honors:
- Finance
- Degree:
- Bachelor of Science
- Document Type:
- Thesis
- Thesis Supervisors:
- James Alan Miles, Thesis Supervisor
James Alan Miles, Thesis Honors Advisor
Timothy T Simin, Faculty Reader - Keywords:
- Life insurance
whole life insurance - Abstract:
- Whole life insurance is one of the longest-lived financial contracts an investor could enter during one’s life. It also is one of the most complex investment vehicles available in the vast financial marketplace. This is partly because whole life insurance combines an investment element within the insurance contract. This paper attempts to analyze how that investment value, also known as cash value, performs over the life of the insurance contract. One of the main purposes of life insurance is to provide dependents of insured replacement of the insured lost income in the event of premature death. Therefore, this has to be taken into account when analyzing the performance of whole life insurance. The analysis of the whole life insurance contract will be done by comparing it to an alternative option for insurance protection. Because the insurance coverage is the primary function of the insurance policy, an insurance element would have to be included for the alterative option. This requirement is satisfied by term insurance, which does have the permanent protection of whole life. However, it is significantly cheaper. The cost savings from purchasing term insurance will be invested for long term future use. Essentially, this is creating a proxy whole life policy where the investor takes the burden of the investment risk. This paper will show multiple models comparing whole life and the buy term/invest the difference strategy explained above. I will use my access to insurance data from my work experience at Northwestern Mutual to determine the insurance premiums. The results should serve as a useful guide for life insurance purchasing decisions.