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.
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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.
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
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.
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.
nycll said: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.
Yes, I have exhausted all my tax sheltered accounts. As I mentioned, we maxed out on 401k, IRA and 529. We have an emergency fund and are saving to buy a bigger house.
I've been looking into term vs. whole life as well. This past Friday I had an agent come to my house and give me the same story. 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). The hardest part was that he was using the recent downturn in the economy to pitch the offer.
A few things to keep in mind: 1. The agent gets ~90-95% of what you pay for the first year of a whole life policy compared with 20-30% for a term life policy 2. The agent gets paid a higher annual % for each year you renew the whole life policy vs. the term life
Statistically speaking you are unlikely to keep either policy for your entire life. That is why the insurance company is so interested in selling you something that accumulates "value" in the policy. If they were indifferent to which policy you choose, why do you get penalized heavily trying to take any money out during the first 10 years?
I found some general rules of thumb online (google life insurance term vs whole life). If you plan to keep a policy for less than 10 years, go with term. Greater than 20 years go with whole life. In between, expect plenty of arguments either way.
The more I look into it and the more I hear about how great it is from an agent, the more I'm reminded why they try so hard to sell you whole life. Hope this helps.
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.
Life Insurance should be mainly used to protect an income. In 20-25 years, no one will require your income if you pass away assuming all other planning is done correctly. This is why term life is such a good idea. If you're worried about outliving your money due to having to go into some type of nursing home, look into Long Term Care Insurance though you're likely way too young for it now.
If you were leaving your children mutual funds, they get the stepped basis at the time of your death. Therefore, if they sold on the day you died, they wouldn't pay any capital gains. And if you start to gather an estate that falls goes over the estate tax exclusion, then you can consider buy life insurance at that time to pay the taxes for your kids.
I always like to say that I buy insurance from insurance agents and investment/financial products from banks and brokerages.
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.
svaish said:A few things to keep in mind: 1. The agent gets ~90-95% of what you pay for the first year of a whole life policy compared with 20-30% for a term life policy 2. The agent gets paid a higher annual % for each year you renew the whole life policy vs. the term life
Disregard this OP ... it has very little if any bearing on you. For the AVG consumer i'd say remember this ... i figure by the time OP is going to be ready to sign the lucky agent is gonna be told to shut up ... only write a policy for this and then get out. I suspect the OP is going to be much better prepared than usual customer.
Basically what joaustin said is exactly the commonsense information you need.
Life Insurance should be mainly used to protect an income. In 20-25 years, no one will require your income if you pass away assuming all other planning is done correctly. This is why term life is such a good idea. If you're worried about outliving your money due to having to go into some type of nursing home, look into Long Term Care Insurance though you're likely way too young for it now.
If you were leaving your children mutual funds, they get the stepped basis at the time of your death. Therefore, if they sold on the day you died, they wouldn't pay any capital gains. And if you start to gather an estate that falls goes over the estate tax exclusion, then you can consider buy life insurance at that time to pay the taxes for your kids.
I always like to say that I buy insurance from insurance agents and investment/financial products from banks and brokerages.
AveQ said: 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! As someone who has delt with the process of getting someone on medicaid to pay for their nursing home I can assure you that whatever state you are in will require that you use your cash benefit portion of the whole life policy (or will make a legal claim on the policy proceeds after your death). If you outlive all of your savings then you don't leave anything behind. Your kids will understand hopefully. If you are old and poor and have a medical need the state will pay for your nursing home care after you have exhausted all of your assets. Your kids do not have to pay. FYI if later in life you work with an elder law lawyer you can also play some tricks to transfer the house to the kids (if they take care of you for 2 years and prevented you from entering a nursing home). Bottom line whole life insurance is still subject to medicaid recovery and is no more likely to reach your kids as an inheritance than a savings account.
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