After the recent birth of his new daughter, Yossi Sonnenshein wanted to start saving for future chasunah expenses. But what was the best way to do so? One life insurance agent insisted that buying a “10-pay” policy on the life of his child was his best bet. An investment adviser he mentioned this to scoffed, saying returns on life insurance were too low, and growth mutual funds were the answer. His chavrusa felt that making extra payments toward his home mortgage was the best use of any extra cash a young couple scratched together.
Thoroughly confused, Yosef wondered, Are these really good ways to prepare for wedding expenses? And if yes, which way is best?
In Gray Territory
Savvy financial planning usually isn’t black or white—there’s lots of gray in there. There are indeed multiple perspectives on the ideal way to save up for weddings, which can lead to much confusion. Everyone can have a differing but legitimate opinion, and brokers/advisers will tend to stress the potential favorability in the products they sell. There are advantages that life insurance has versus mutual funds versus paying off a mortgage etc., and vice versa. There are also potential downsides to each option, which makes the decision challenging to the layperson. While each path deserves its own article, here’s a brief overview of some possible savings plans.
Path 1: Buying a “Chasunah Policy”
One structure for chasunah savings is buying a whole life insurance policy. Unlike term insurance, whole life insurance has a savings component riding alongside its death benefit (which is paid out if the insured dies). If Yossi pays $2,000 annually for the first 10 years of his daughter’s life, at age 20 the policy could have a cash value of $30,000. The specifics will vary based on factors including the ages of the insured, commissions, and interest rates. But as long as Yossi pays in, a significant sum will accumulate, which he can either cash out or borrow against to pay wedding expenses.
Path 2: Riding the Stock Market
Some investment advisers criticize insurance-based chasunah plans, saying they are too restrictive, especially for young couples. If Yossi can’t pay in every single year, the policy can lapse, leaving him with a loss, as he still needs to cover the commissions built into the insurance product. Also, the potential growth of the policy premiums is much less than what the stock market has historically generated. Therefore, these brokers favor automated contributions to growth mutual funds. Thanks to superior earning potential, even just $12,000 invested in stock mutual funds can generate the same $30,000 over 20 years.
Of course, this glosses over the fact that from time to time, stocks collapse in value. If there’s a crash shortly before Yossi needs the money, he may be left with much less cash than he requires. Also, advisers recommending mutual funds can charge hefty fees. Those who are well informed can select their own mutual funds, but there’s no getting away from the fact that comparing volatile mutual funds to stable life insurance is like balancing the benefits of apples versus cucumbers.
Path 3: Pay Down the Mortgage
Some people hate all forms of debt and pour any spare penny they have into paying down their home mortgage. The interest savings generated by making additional mortgage payments is guaranteed and can be substantial. Say Yossi just began a 30-year $300,000 mortgage at 3.5%. Then, instead of paying just the obligatory monthly $1,347, he adds $300 toward principal paydown. These additional payments change the whole situation—instead of 360 payments, only 261 will be required (approximately eight years less of mortgage payments). And the savings in interest over the lifetime of the loan equals a whopping $56,482.
Paying off a mortgage can be a form of preparing for weddings. Having a small mortgage or none at all means that ongoing payments can be diminished or even eliminated by the time costs of chasunos and support really begin to bite. That frees up a lot of cash flow. Furthermore, if need be, home equity can usually be tapped to alleviate simcha financial responsibilities. Naysayers will point out, though, that mortgage debt is very low-cost. It can be financially advantageous to keep a mortgage for longer and instead direct savings to investments that have more potential and are more liquid.
Tax Management Adds Complexity
So, there are at least three paths recommended for formal chasunah savings. I personally favor using target-date funds, a variation on the second path. However, to make things even more murky, there are also tax components to be considered. Choosing wisely between buying life insurance, mutual fund investing, and mortgage payoffs is partially dependent on differing tax circumstances. Mutual funds can be held within a mind-numbing array of accounts—taxable, UTMAs, 529s, IRAs, and Roth IRAs—each with pros and cons taxwise. And the pros and cons shift as life unfolds—so these decisions are really educated guesses at best.
Just Do It
So, which option to choose? The one you will stick to! The greater problem most people face isn’t selecting the ideal path for saving and investing but actually following through on whichever plan they chose. As noted, I’m partial to using mutual funds (and specifically those offered by well-run 529 education plans) for basic saving and investing. But the other paths are usually perfectly legitimate too, and sometimes they are superior options. The thing that virtually guarantees that there will be insufficient funds for a large expenditure is the lack of systematic saving. So do your homework, then pick a path and stick to it!
The Value of an Adviser
In an increasingly automated world, some say human investment advisers are obsolete. I don’t sell or advise about any of these options—my business is corporate 401(k) plans—but this article helps highlight the continued value of personal financial advisers. The challenge of selecting from among the sheer number of options, and, more so, actually following through on a plan, is often better handled by a knowledgeable and motivated professional.