Life Insurance Question

personally I don't like whole life policies.  but seeing that you (your mom) have paid in for 7-years I would say keep it going.  eventually you may not be paying anything at all for the policy.

eta:  I am not a life insurance guy.  if I was in your situation I would have an advisor explain the existing policy to me and other options available. 

Edited by rayd 2010-05-11 12:45 PM

Yes, "it depends"

Many variables here:   health? any family health issues?  married? kids? other life insurance (maybe thru work)? financial plan? income? etc, etc.   For example, if single, then why have life insurance at all except maybe a tiny plan to cover your funeral expenses.  If married and/or kids, then a whole different story, and I would recommend rolling life insurance into an overall financial plan.

Never, ever buy whole life insurance. There are many better investment vehicles than a whole life policy. If you need insurance, "buy term and invest the difference."

That being said, you need to evaluate your need for insurance. Who is dependent on your salary? Who will be affected financially if you are no longer here. Not everyone needs life insurance no matter what the insurance industry tries to tell you.

x 1,000,000

Steve,

Assuming nothing has changed in your life and you're still single, you don't need life insurance.  I'm actually getting rid of my term life policy now that Nancy and I are officially done.

BUT...look into Disability Insurance.  THAT is something that you may need and will certainly pay off.

Which part wins?  The whole thing?

FWIW, I am single, probably will be married in the next five years.  Kids will probably happen also.  But as these aren't immediate and aren't certainties, I suppose I'm leaning now toward canceling it.

that might be your best option but before you do educate yourself on the exisinting policy.  I would not recommend whole-life to anyone.  But many of these whole-life policies after paying into them for about 10-years the permiums decrease considerably, or might even go to zero.  If that's the case for you then it might be worth it to pay the premium for a couple more years and have the insurance until you die.  Especially knowing that eventually you plan to marry and have kids.

I agree with rayd. We spent a long time dealing with insurance and after consulting with a couple unbiased financial planners we decided that whole life was not worth it (a friend from college was selling Northwest mutual whole life as financial planning advice) in the end we went with term. That being said, depending on how long your mom has been paying into your whole life plan, it may make sense to continue it. Depending on what it's worth, how much longer you need to pay into it (some are a defined period after which you have the policy but no longer have a premium to pay, others require you to continue to pay).

Knowing that marriage and kids are possible I'd find an unbiased financial adviser to review the policy and help you decide if it's worth keeping or not.

I would only consider who depends upon you financially. If it is just you (er, me), then I'd pass. If you have wife and kids, then maybe you want to think about how they can replace your income. Enough money to pay off the mortgage and set aside money for kids and say X years of your contribution to the costs of living will help them grieve without having to stress so much about work for awhile.

Whole life policy - the seven years are a sunk cost. Look at the premium you would continue to pay and compare the payout versus how much you can earn in some other investment. Quantify it and then you won't have to weigh a dozen opinions and DING DING DINGs.

As a financial planner, I would suggest that you make an appointment with an independent insurance agent in your area.  Any agent worth their salt should be able to have a comparison done between your existing policy and some possible replacement policies.  You can then figure out what time frames are most advantageous to your needs for the different choices/costs.

Never, ever cancel a policy until you have a new one in-force or have officially decided you are no longer in need of it.  Worst case would be that you want to replace your policy with a term policy...cancel your current policy...and die before you have a chance to replace your policy.  Now you are dead AND you have no insurance for your survivors.

Edited by crazyyella 2010-05-13 11:52 AM

Add my voice to the "whole life sucks" group. This is pushed by agents as an "investment", which it's not. Same for universal life and variable life insurance policies.  In fact, any kind of insurance pushed as an "investment" is a scam. The only one who benefits is the agent who sells it because of the big commision.

If you are reasonably healthy, there is no reason not to get level term life, which should be about 10x your annual income. If you are single, you don't need that much, maybe just enough to cover your funeral.

OTOH, if you are married, your term should be enough for your kids to reach adulthood, by which time you should hopefully be debt free and building your own wealth. If someone depends on your income, you need term life.

Now, get the term life FIRST, then cancel your whole life policy and ask for a refund. Term life doesn't cost much, and is WAY cheaper than whole life.

If you want an investment, go with mutual funds. You'll get WAY better returns.

For the terms of this discussion, permanent insurance is likely unnecessary.  However, certain variations of universal life are very important for setting up things like Irrevocable Life Insurance Trusts. 

Another technique used with Term policies is to have overlapping term policies when certain life events dictate you have more insurance.  In this event, sometimes it is often not cheaper to ditch the first term and add a second higher term...instead having 2 terms policies of different face value and/or length. 

What situation would be appropriate?

This is bad advice to offer without all the details. Lots of variables. Whole like is perfect for many people. In fact most folks should own some whole life.

Depends on age, for folks over 50 mabye a fixed index annuity is a better way to go. for many people preservation on principal is far more important than risk associated with being in the market.

And Finally, my last $0.02. Just remember that life insurance costs are based on you age and health status. Not knowing your health status i would say keep the whole life and add other term coverage since you may be uninsurable in the future due to health issue's. We all think we are gonna live forever.

The way that whole life works (by my understanding) is you pay a set monthly premium. For the sake of argument, let's say it's $50/month. This goes into a fund. Each month, the "cost of insurance" is deducted. When you are 20 and healthy, the deduction is minimal. The leftover amount goes into an account that earns interest. The interest rate varies, based on your plan - some guarantee you will earn X amount of interest over the life of your policy, some change the interest rate every so often.

So, for the first few years, the COI is say $3 per month or something like that. So each month you have the remaining $47 going into a fund and earning interest. But that COI is going up every single month...just by a couple of cents maybe, but it's still going up.

Fast forward to when you are 70 years old. Your COI is now $100 per month, because it is expensive to insure you (this is just based on your age, they can't assess you for health or anything at this point). So your cash value is rapidly decreasing, meanwhile you still have to pay premiums.

I just asked for a rate quote for a whole life policy for myself. It said for a $100,000 whole life policy, my premium is $77 per month. I think I pay $36 monthly for a 30-year $500,000 term policy. If you took at that $77 per month and invest it at an average rate of 10%, in 30 years you would have over $100,000. I think the average annual return on the stock market is something like 10%.

In my opinion get term life (assuming you don't have some sort of horrible illness that will make your rates insane), invest what you are paying in premiums for your whole life in something that is actually going to go up in value in the long term. In the example I gave you, if I die in the next 30 years, my survivors get $500K. If I die after 30 years, my survivor gets the more than $100,000 that has accrued in my investment, which is still better than the $100,000 whole life policy. If I don't die for 50 years, my investment could be worth over $1 million (if I'm doing my math right)! And at that point, who cares if I have a life insurance policy or not?

I've seen too many old people not understanding why their cash value keeps going down when they get older and need the money for one thing or another. They get sucked into continuing to pay premiums they can't afford just because they've had the policy their whole life and can't get any other life insurance policy at that point. Universal Life is even worse - it works the same way, but people get to pick what they pay. So they pay little amounts up front...then when they are old their COI is hundreds of dollars each month, and they have to pay it because they have no cash value to pay it with. I am not a life insurance agent or anything like that, just used to work for an insurance company so I have seen some pretty bad situations.

Life insurance is NOT an investment. If your looking for return rates, don't by life insurance. Insurance is a transfer of risk.

In reality, you should be a multimillionaire after 30 years, cause you SHOULD be investing a lot more than $77 bucks a month! Just maxing out a roth IRA every year will give you a fortune.

But yeah, term life is the way to go.

And there are other ways and strageties to invest to reduce estate taxes or not need annuities through any kind of whole/universal/variable life policy.

Sorry...but if you are very wealthy, and healthy enough to get insurance...the absolute highest leverage way to reduce/replace estate tax burden is through the use of an Irrevocable Life Insurance Trust.  The reason you would not use term life for this is because if you outlived the term, you've totally screwed the estate planning...that is why we use guaranteed universal life policies for this (not variable).  Any other way involves GRATs/GRUTs/CRATs/CRUTs and there are minimum time restrictions on these.  If you don't outlive them, well, you've just screwed your estate planning.  Also, some of these involve charitable giving, and not all wealthy families are charitably inclined.  Outright giving assets away can involve depleting your lifetime gift exemption and certain gifts need the donor to survive 3 years or else it is considered part of the estate anyway.  Selling assets below value will cause taxable events to trigger, possibly for both the donor and the donee, so this could hurt the estate planning as well. 

Curious as to what other strategies you know of that don't involve those I just mentioned, and the possible shortfalls. 

I agree with your other points, however, as they pertain to the normal/average family or individual. 

I agree that there are some times when whole life insurance is good/necessary for estate planning. But I would say for 95+% of all people, whole life insurance is a waste of money. I don't know a whole lot about the benefits of using a whole life policy because I'm not that wealthy yet so I've never had to look into it! Maybe someday though! I do listen to Dave Ramsey and he says generally the same thing, that it can be used but it should be after all other avenues are used (maxing out contributions to ROTHs etc.).

ETA: Also wanted to add that I have seen people who are kinda rich, but not super rich, try to use whole life insurance policies as investments/estate planning. They pay hundreds of thousands of dollars in premiums each year for policies worth millions of dollars...then they get freaked out because their COI is so high (literally thousands of dollars each month) that it is depleting their "investment" much faster than their "financial adviser" (who makes thousands of dollars of commission every time his clients make a premium payment!) told them. They stop paying premiums, and within a year or two their policies are worth zero and lapse...and they lose all the money they "invested". So...just be very, very careful. It's so important to have a good financial adviser that knows what he is doing. It never hurts to get a second or third opinion. Google your FA before you give him any money...that alone should tell you if there are complaints against him.

Edited by brynn 2010-05-20 8:47 AM