On today's blog, we're comparing life insurance with high-yield savings accounts. We'll include an investing opportunity, assuming the same investment results for both options. We'll look at a 10-year and a 30-year timeline to weigh the pros and cons of each.
Overview and Assumptions
- A 35-year-old male with preferred health invests $60,000 per year.
- An investment opportunity pays $24,000 per year from a $100,000 investment repaid over seven years.
- We'll use a 6.5% interest rate for calculations, which is on the higher side, to keep things fair.
Life Insurance Policy Details
- Policy started with figures from a real illustration: $60,000 per year with a $50,000 first-year return.
- By the third year, an investment is made but assumes limited liquidity.
- The cash value adjusts based on loan repayment and investment income.
Note: Returns shown are calculated presuming a 0% interest on extra cash.
High-Yield Savings Account
- Assumed 5% interest rate, although it's historically higher than typical rates.
- $60,000 annual contribution, adjusted for interest.
- Withdraw $100,000 in the third year, reducing annual interest gain.
- Simulated tax-free savings for simplicity.
Comparative Analysis
- Adjusted for taxes: Introduced a 15% and 25% tax rate for high-yield account interest.
- Life insurance offers a death benefit exceeding $3 million, which savings accounts do not.
Long-term analysis shows that when adjusted for realistic interest and tax rates, life insurance might have a slight advantage.
Long-Term Look: 30 Years
- As time progresses, life insurance becomes more beneficial due to $4.6 million in death benefit versus 1.9 million in cash after paying back loans.
- After 18 years, life insurance outpaces savings accounts through accumulated cash values even while keeping additional investment at zero earnings.
Conclusion
The comparison shows a noteworthy benefits array for life insurance. Although high-yield savings offer upfront gains, over longer periods, life insurance offerings such as cash value and death benefit provide substantial value.
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