Hello everyone,

I have a 250K whole life insurance policy for which I pay $1200 per year and this amount will not change. I am 28 years old. I've been researching whether it makes sense to keep this policy or get rid of it and replace it with term life insurance. I have noticed that many Mustachians recommend term over whole life insurance, however, the numbers seem to be in favor of whole life insurance in this case. I would appreciate your perspective.

If I opted to invest the premiums in index funds with an average annual return of 7%, the breakeven point would be 40 years from now, when I am 68. Assuming my life expectancy is 90, I will have lived 75% of my lifetime before reaching the break even point on whole life insurance before market returns would exceed the 250K limit on the policy.

That would mean that if I die at any point before 68, it would be better to have the whole life insurance policy. From my perspective, the additional expense of the premiums that are in excess of what I could have received from investing the funds does not compensate for the risk I am assuming by doing so for 75% of my lifetime.

What are your thoughts? Please feel free to provide your counterpoints. Thanks.

A few things:

**1. ** Why use 7% a year, when accounting for a 40 year span? Estimating 7% a year, a little more than half the long term average/CAGR of the market, can be a useful buffer when looking at shorter term timeframes, but it's not needed IMO for long timeframes. There has never been a 30 year period in history that was less than 8.5%, so you are calculating for worse than the worst possible scenario ever seen.

Set that to 11.5%, and here are the numbers:

20 years: $82,488

30 years: $265,541

40 years: $809,199

Set it to the worst 30 years ever, 8.5% (worst 40 years is probably 9.5% or 10%, but can't find anything on it right now) and it's:

20 years: $58,563

30 years: $150,213

40 years: $357,432

Now what about setting it to the best 25 years ever, 17.24%?

15 years: $69,771

20 years: $163,002

25 years: $369,512

**2. **As someone stated already, comparing life insurance payouts if you die, to liquid money in an investment account, really doesn't make sense. The investment money is available to improve your quality of life, through an earlier FI date...etc. Furthermore, based on my 10 second google search, we have about a 25% chance of dying before 70. A 25% chance of receiving the insurance's $250,000 payout. So the expected return from now until you're 70 is:

250,000*0.25 = 62,500

Which leads us to...

**3. **As MMM said,

**all** insurance has an expected negative return (for you anyway). The way you're talking, it seems like you're expecting the math to work out in your favor. It won't. The insurance company does the math, and sets the price high enough for covering the expected payouts, pay their bills, pay their employees, pay their stockholders...etc. MMM said it best:

The first thing to understand about insurance companies is that they are making money off of you – lots of it. They do this by employing a team of brilliant mathematicians called Actuaries who analyze detailed mountains of statistics about the average behavior of people like you, and thus how much money they expect to pay out to you in claims. They then strategically set your premiums to a level where on average, they can pay your claims, pay their employees, and still make a large profit for their shareholders. So they have, of course, rigged the odds against you. So when buying insurance, you will most likely pay in more than you get out of it.

http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/**4. **From what I can see, you don't need insurance right now. Despite that, your employer is already providing you with $940,000 of insurance. From what you've stated, I see absolutely no reason to be paying $100 a month for even more insurance with this whole life policy.

Personally, I'd get rid of all additional (above the free 190k) insurance right now, since you don't need it. Re-evaluate this when you leave your job, which might not happen until you're FI. Then, when you're FI between 10-15 years from now, you won't need insurance then either...as you'll be FI.