This is not another blog about “buy term and invest the difference.” I believe many people would be well served by purchasing whole life insurance. Buying term insurance is often a mistake.

Term insurance purchasers don’t “invest the difference.” They spend it. Even if they have the discipline to invest the difference, there’s no assurance a significant portion of the invested funds will not be lost.

Term insurance gives low cost protection against premature death, but it can lull you into a false sense of security. The premiums increase as you age, making it prohibitively expensive when you need life insurance the most.

Insurance is a complex product. The insurance industry likes it that way. Prospective purchasers need to be aware of a number of issues including the type of coverage, company choice, identification of “too good to be true” illustrations, assessment of required coverage and time horizon. Few insurance buyers have the sophistication to sort out these issues.

The right kind of whole life policy can be a valuable part of your portfolio. The problem is you are unlikely to be presented with the “right kind” by your friendly insurance agent.

I recently advised a client to seek the services of a fee-only insurance adviser prior to making a decision on a life insurance policy. Most people don’t know these advisers exist. Unlike insurance agents, they agree to act as your fiduciary, meaning they can have no conflicts of interest. Your agent is likely a representative of an insurance company. Fee-only advisers are not affiliated with any insurance company or product. They act only on your behalf. You can find a list of them here.

The fee-only adviser designed a policy with a death benefit of $1.2 million, but here’s what surprised me. The cash value was almost equal to the premium paid by the end of the first year. The illustrated cash value exceeded the premiums paid by the end of the fifth year. After twenty years, it was extremely unlikely any additional premiums would ever have to be paid to keep the policy in force. At that time, the policy had a very significant cash value, with an internal rate of return in excess of the after-tax return possible in a fixed income investment of similar risk.

The fee-only adviser explained this was a “blended insurance policy,” which combined whole life and term into a single policy. The commissions to the selling agent were slashed to the bone, resulting in a more rapid build up of cash value.

By any measure, this policy was vastly superior to the policy my client was about to purchase from his insurance agent.

When I asked the fee-only adviser why the insurance agent didn’t recommend this policy, he told me “he could, but why should he commit financial suicide?”

I get howls of protest from commission based insurance agents when I suggest that an independent review of their recommendations might be in the best interest of life insurance purchasers. The agents claim they always act solely in the best interest of their clients and question the value of the fee-only adviser.

The fee-only advisers tell me they rarely see a recommended policy they can’t improve. They claim if you are spending more than $10,000 a year on premiums, they can save you many times their fee.

In my experience, their view has proven correct.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Here is the trailer for my new book, Timeless Investment Advice.