I'm about to buy Whole Life insurance, talk me out of it!!

I have often heard celebrities like Suze Orman or David Ramsey say that Term Life Insurance is best for you. Not to mention people on this forum who believes that same thing. I thought that is what I will buy when the time comes, however, I recently met with an insurance agent (who was a very good sales woman) and I am seriously considering buying whole life insurance -- the kind that has a cash value where I can stop paying premium when I'm 65 with no change in coverage.

Below are my reasoning. Can you talk me out of it???

Some basic information: I'm 33 yrs old, married with 1 young child, plan to have one more. Non-smoker, in very good health. Both my husband and I have maxed out our 401k and IRA accounts. We also have a 529 plan. The cost of whole life is affordable for us.

The main reason I'm considering whole life is that I want to leave a legacy behind for my children. I am actively saving for retirement and hopefully will not need to depend on my children in my old age. But what if we out live our savings due to serious illness and have to rely on my children? If they have to spend money to keep me in an old folks home, at lease when I die, they can have some inheritance to cover that cost. If things work out well, and I don't out live my money. Well, then the life insurance is just gravy! It can pay for my grandchildren's college or something!

You see, I came from a very modest immigrant family. My parents live very frugally. However, they are in poor health and will likely need assistant in their old age. It is very likely that they will out live their savings and need my assistance. They don't have life insurance and I can expect nothing upon their death.

On the other hand, my husband came from an upper middle class family. My in-laws live comfortably in retirement. They most likely would not need our help. On top of that, they have life insurance. So when they pass away, we can expect to get maybe $100K from the life insurance payout. Not a fortune, but a nice chunk to have to pay for my children's college or pay down the mortgage. Knowing that money is available to us in the future gives me a very nice feeling and makes me very thankful to my in-laws.

I want to give that to my chldren and grandchildren.

True, I can invest the difference between Term life and Whole life in a mutual fund. But just like my 401k plan, the result is dependent on luck. Some people who retired during the boom year had nice fat 401k. People who retired in 2008 were very unlucky and saw their retirement savings cut in half.

I want to be certain that I can leave behind a certain amount of money to my children no matter what. Not too much, or they become lazy trust fund kids. But enough to lighten the burden of mortgage, college, etc.

Figure how much Whole Life Premium- Term premium is and how much that invested over 30 years equals, likely its more than the policy.

motsuka said: Figure how much Whole Life Premium- Term premium is and how much that invested over 30 years equals, likely its more than the policy.

But what if I choose poorly in my investments? Or when I die the market was in a down turn, similar to 2008 where the market dropped 50%?

Also, what about taxes? The insurance proceeds is income tax free, and mostly likely estate tax free in my case. The money in the mutual f.und may be subject to estate tax or capital gain tax

three words: Variable Universal Life

a VUL >>>>>>>> term life >>>>>>>> whole life

if you run the numbers, the VUL > term life insurance after about 3-4 yrs. That's because the gains in the VUL are tax free (vs. buying term and investing the difference, whose gains are entirely taxable).

do a lot of research on VUL's. You'll see why they are much better than whole life policies.

http://en.wikipedia.org/wiki/Variable_universal_life_insurance

AveQ said: But what if I choose poorly in my investments? Or when I die the market was in a down turn, similar to 2008 where the market dropped 50%?People who retired in 2008 would have been idiots to have large equity allocation in their retirement fund. In fact typical age balance funds would have mostly allocated to bonds.

For your prospective whole life policy, the insurance company will basically invest most of the proceeds in bonds.

Also, what about taxes? The insurance proceeds is income tax free, and mostly likely estate tax free in my case. The money in the mutual f.und may be subject to estate tax or capital gain taxThat is about the only valid reason to look at a whole life policy. If you have exhausted all of your tax sheltering vehicles, by all means look into it. But estate tax is exempt for at least the first $1 million. Most likely the law will change again so that it will only tax the real rich estates.

skrangeo said: three words: Variable Universal Life

a VUL >>>>>>>> term life >>>>>>>> whole life


if you run the numbers, the VUL > term life insurance after about 3-4 yrs. That's because the gains in the VUL are tax free (vs. buying term and investing the difference, whose gains are entirely taxable).

do a lot of research on VUL's. You'll see why they are much better than whole life policies.

http://en.wikipedia.org/wiki/Variable_universal_life_insuranceThe fancier the scheme gets, the more expenses the insurance company charges you. No thanks, 'cause VUL and WL seems to have the same tax sheltering benefits. Excessive complexity never benefits the customer.

What about HSA?

My thoughts:

1) Disability Insurance if you both not covered already.
2) 30 year term now
3) Another term when second child is born enough to cover new mortgage and tuition.
4) Being neutral about whole life I would think a small whole life policy is prudent in certain circumstances.

svaish said: The biggest selling points he had for me were that the whole life policy had a guaranteed interest rate of ~4.5% per year, that it grew tax free, and that after so many years I could start taking money out of the policy (a loan to myself each year to prevent having to pay any taxes on withdrawals).

Couldn't you get a california 30 year muni bond giving the same tax-free return? I'm willing to bet any insurance company, including AIG will go under before any state in the US does.

Annuities are another instrument offered by life insurance companies. They offer a guaranteed income for life. In effect, it's a sort of insurance.

nycll said: People who retired in 2008 would have been idiots to have large equity allocation in their retirement fund. In fact typical age balance funds would have mostly allocated to bonds.
It's a little OT, but most target-date retirement funds still had a large equity allocation. Many of them came under a great deal of criticism for this fact.

The reason is that many people misunderstood the philosophy behind the allocations. Most target-date funds invest assuming that the person will retire at age 65 and then live to a typical life expectancy. The average person with over 20 years to live should, under most traditional allocation theories, still have a fair chunk of equity exposure to protect against inflation. However, many people thought the funds were designed to focus on capital preservation approaching retirement, on the assumption that people would annuitize their balance or do something similar (buy a bond ladder in an IRA, etc.).

People aren't necessarily idiots for having substantial equity allocations at retirement. It depends tremendously on their situation. For someone who isn't planning to annuitize, who expects to bequeath assets, and still has a long life expectancy, it would be highly unusual not to.

(Note that I'm talking about allocation at retirement in general. You can argue separately if imminent retirees were idiots for not predicting the 2008 market meltdown when most professionals failed to do so.)

AveQ said: I have often heard celebrities like Suze Orman or David Ramsey say that Term Life Insurance is best for you. Not to mention people on this forum who believes that same thing. I thought that is what I will buy when the time comes, however, I recently met with an insurance agent (who was a very good sales woman) and I am seriously considering buying whole life insurance -- the kind that has a cash value where I can stop paying premium when I'm 65 with no change in coverage.

Below are my reasoning. Can you talk me out of it???

Some basic information: I'm 33 yrs old, married with 1 young child, plan to have one more. Non-smoker, in very good health. Both my husband and I have maxed out our 401k and IRA accounts. We also have a 529 plan. The cost of whole life is affordable for us.

The main reason I'm considering whole life is that I want to leave a legacy behind for my children. I am actively saving for retirement and hopefully will not need to depend on my children in my old age. But what if we out live our savings due to serious illness and have to rely on my children? If they have to spend money to keep me in an old folks home, at lease when I die, they can have some inheritance to cover that cost. If things work out well, and I don't out live my money. Well, then the life insurance is just gravy! It can pay for my grandchildren's college or something!

You see, I came from a very modest immigrant family. My parents live very frugally. However, they are in poor health and will likely need assistant in their old age. It is very likely that they will out live their savings and need my assistance. They don't have life insurance and I can expect nothing upon their death.

On the other hand, my husband came from an upper middle class family. My in-laws live comfortably in retirement. They most likely would not need our help. On top of that, they have life insurance. So when they pass away, we can expect to get maybe $100K from the life insurance payout. Not a fortune, but a nice chunk to have to pay for my children's college or pay down the mortgage. Knowing that money is available to us in the future gives me a very nice feeling and makes me very thankful to my in-laws.

I want to give that to my chldren and grandchildren.

True, I can invest the difference between Term life and Whole life in a mutual fund. But just like my 401k plan, the result is dependent on luck. Some people who retired during the boom year had nice fat 401k. People who retired in 2008 were very unlucky and saw their retirement savings cut in half.

I want to be certain that I can leave behind a certain amount of money to my children no matter what. Not too much, or they become lazy trust fund kids. But enough to lighten the burden of mortgage, college, etc.

Suze and Dave don't know what's best for you unless they sat down and took the time to talk to you personally. Anyone giving one size fits all advice needs to be ignored. Anybody who thinks that term life is always the best needs to be ignored. Anybody who thinks that whole life insurance is always the best needs to be ignored.

Whole life is a product. It is neither bad nor good. It is appropriate or inappropriate based upon the situation.

Based upon what you are posting, WL may very well make sense in your situation. I don't let my clients even consider whole life insurance until they have accomplished the following five things.

1) No high interest debt
2) Adequate savings
3) health insurance
4) disability income insurance
5) term life life insurance

If someone has those 5 things accomplished, it makes sense to learn about the ins and outs of whole life to see if it makes sense. Sometimes it does. Sometimes it doesn't. In general for someone struggling, it won't make sense. For someone doing fine financially if they want to leave money behind at death, regardless of when death occurs, it often does make sense. However, even in this case, it is a combination of coverages that usually makes the most sense.

MoonlitHollow said: It depends, by taking the amount saved by buying term instead may be more profitable, but what about the recent downswings we have been hit with? Presume a modest inflation protected return to compare with a whole life policy's cash value.

You are looking at the wrong thing. The value in whole life isn't the cash value, it is the death benefit that never goes away. It's not really correct to say that WL has a cash value. It has a cash surrender value. It sounds like semantics, but it's really a fairly key point in trying to understand the product.

Argyll said: Have you thought of buying an annuity?

A non-qualified annuity is terrible when the idea is to pass money to your kids. This is because unlike other investments, it does not get a step-up in basis at death.

Ex. Jim buys XYZ stock. XYZ doesn't pay dividends. The value at purchase was $50,000. At death, it equals $500,000. His kid gets the stock with a basis of $500,000. If the money was in annuity instead and grew to $500,000, the kids would have a $450,000 gain that would be taxed as ordinary income.

skrangeo said: three words: Variable Universal Life

a VUL >>>>>>>> term life >>>>>>>> whole life


if you run the numbers, the VUL > term life insurance after about 3-4 yrs. That's because the gains in the VUL are tax free (vs. buying term and investing the difference, whose gains are entirely taxable).

do a lot of research on VUL's. You'll see why they are much better than whole life policies.

http://en.wikipedia.org/wiki/Variable_universal_life_insurance

Oy. Words like this seem to only be spoken by VUL salesmen who have never actually read the prospectus nor studied the cost of insurance.

Gains in VUL are not tax free. They are tax-deferred. VUL vs. WL is an apples to oranges comparison that can't really be done. VUL however is certainly almost always inferior to buy term and invest the difference. Conceptually, VUL might work better. However, it falls apart when real numbers are used. This is for a few reasons:

1)The insurance costs in a VUL policy are more expensive than what someone could otherwise get.
2)The insurance is annually renewable term insurance. Thus, the cost of insurance (COI) increases in cost every year.
3)This ever increasing cost of insurance must be paid every year or else, this "tax free" investment becomes taxable with all gains being treated as income.
4)All dollars going into a VUL policy usually have a front end sales load of 5% or higher with no break points.
5)There are often mortality and expense charges that are above and beyond the insurance charges.
6)In short, VUL combines overpriced insurance with overpriced investments.

Skrangeo, here's a challenge for you. Make up any facts that you would like and I'll easily be able to show you that the VUL policy is inferior to a strategy of putting the same dollars into a term policy and investing the difference in the identical funds as you use in the sub-account.

InsuranceExpert said: Argyll said: Have you thought of buying an annuity?

A non-qualified annuity is terrible when the idea is to pass money to your kids. This is because unlike other investments, it does not get a step-up in basis at death.

Ex. Jim buys XYZ stock. XYZ doesn't pay dividends. The value at purchase was $50,000. At death, it equals $500,000. His kid gets the stock with a basis of $500,000. If the money was in annuity instead and grew to $500,000, the kids would have a $450,000 gain that would be taxed as ordinary income.

Ok. Forget the annuity.

But buy the kids annuities?

Fbone said: My thoughts:

1) Disability Insurance if you both not covered already.
2) 30 year term now
3) Another term when second child is born enough to cover new mortgage and tuition.
4) Being neutral about whole life I would think a small whole life policy is prudent in certain circumstances.

Absolutely agree with looking into disability income insurance. This is critical for anyone who is working because they need the income.

tripleB said: svaish said: The biggest selling points he had for me were that the whole life policy had a guaranteed interest rate of ~4.5% per year, that it grew tax free, and that after so many years I could start taking money out of the policy (a loan to myself each year to prevent having to pay any taxes on withdrawals).

Couldn't you get a california 30 year muni bond giving the same tax-free return? I'm willing to bet any insurance company, including AIG will go under before any state in the US does.

Again, the value is the death benefit. Even if someone lives well past life expectancy, the death benefit of a whole life policy will pay more than this. Keep in mind that the guarantees of a whole life policy is not what one should expect to get. The guarantees are the worst case scenario. For example, in order to only get what is guaranteed in a whole life policy, an insurance company that has paid dividends every year for the last 100+ years would have to immediately stop paying dividends and never pay one again. If a dividend is paid even just one time, the policy will perform better than guaranteed.

AveQ, I understand the desire to leave behind money to your children so they can live comfortably. This is very common for people who have had to work hard to attain their wealth, especially among immigrant families. However, this typically stunts your children's desire to make their own money. Read a copy of The Millionaire Next Door before you go through with this plan, especially the stories about children who grow up expecting an inheritance from millionaire parents.

You have 30 years to retirement. Invest the money. When you get closer to retirement age, put it in a safer set of funds. The market goes up and down, but most mutual funds will average 10% over 20 or 30 years. I had a whole life plan that I traded in after almost 20 years and was only up about 2%. You are young enough to make some real money with a good fund: Vanguard and Fidelity have some excellent no load funds. Take advantage of them.

Nope, I'm not currently insurance licensed in every state. I'm constantly getting licensed in new states and having licenses lapse in other states. I get licensed as I need to do so. For instance, a client may start with me in my home state and then move. I won't bother getting licensed in their new state until it becomes necessary to do so. At any given time, I tend to be licensed in 15-20 states.

Securities is a different issue since I have to get licensed as soon as my client moves or my commissions will stop.

As for signatures, etc, I don't find that it matters. Quite frankly, I stink at forms and if I'm doing it instead of my staff, I'm going to miss a signature even if they are local and will have to e-mail/scan it to them anyways.