Another Life Insurance Thread

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I currently have term life insurance policies for both myself and my wife at $200k each.  We need some advice before we go shop around about getting whole life insurance so we can drop the term policies.  

Wife: 31 
Me: 32
Son: 15 months
Daughter: Due in October
I'm getting fixed in December, so no more kids after my daughter is born. 

House: Owe $230k
Car: Owe $54k
Wife's salary: $102k
My salary: $104k
Retirement Accounts: $215k (401k and Roth)
Kids savings: $15k.  We put away $1k a month and plan to increase this amount over time.  

Neither of us smoke or drink.  We exercise regularly and are in great health.  We keep plenty of cash on hand and aside from the house and car, don't have any debt.  Our careers are stable and we don't expect to get laid off or downsized.  What would you recommend for whole life insurance and setting up a trust for our children? 

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I'm an independent life/disability/long-term care and health insurance broker in San Diego, who represents all of the ma... (more)

chislands18 (Nov. 11, 2016 @ 11:04a) |

My friend had a whole life policy... Great 4% "guaranteed return"...
$200k policy, $90/mo payments, of which "life insura... (more)

mwarrior (Nov. 11, 2016 @ 8:24p) |

If one looks at a policy purchased today and looks at the guaranteed column (so guaranteed return and costs) then at ass... (more)

dhodson (Nov. 12, 2016 @ 11:17a) |

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Why do you want whole life?

I don't see any reason to go with whole versus the term you've got.

RailroadTrack said:     What would you recommend for whole life insurance and setting up a trust for our children? 
 

  Zero in WL. Get sufficient term LI for both.
Set up a trust for your children to manage your assets (savings, life insurance etc.) in case both of you were to die.

jerosen said:   Why do you want whole life?

I don't see any reason to go with whole versus the term you've got.

  
I'd like to get it while I'm in good health and young, if I need it.  What do you recommend going forward? I don't want to have to revisit this 10 years from now and either myself or the wife possibly have health concerns.  FWIW, once the house is paid for in 2028 or sooner, I don't plan on acquiring any additional long term debt.  At that point, all I'll to worry about is college for the kids and my mid life crisis car.

RailroadTrack said:   
jerosen said:   Why do you want whole life?

I don't see any reason to go with whole versus the term you've got.

  
I'd like to get it while I'm in good health and young, if I need it.  What do you recommend going forward? I don't want to have to revisit this 10 years from now and either myself or the wife possibly have health concerns.  FWIW, once the house is paid for in 2028 or sooner, I don't plan on acquiring any additional long term debt.  At that point, all I'll to worry about is college for the kids and my mid life crisis car.

  
Buy term.

You've still given no reason to favor whole over term.

Term is drastically cheaper for insurance.    

 

RailroadTrack said:    
I'd like to get it while I'm in good health and young, if I need it.  What do you recommend going forward? I don't want to have to revisit this 10 years from now and either myself or the wife possibly have health concerns.  FWIW, once the house is paid for in 2028 or sooner, I don't plan on acquiring any additional long term debt.  At that point, all I'll to worry about is college for the kids and my mid life crisis car.

  You can get term for 20 years or 30 years. Both should comfortably cover a time period by which your kids will not be your financial responsibility. That would also be a long enough interval for the two of you to amass sufficient assets to not require insurance.

fwuser12 said:     You can get term for 20 years or 30 years. Both should comfortably cover a time period by which your kids will not be your financial responsibility. That would also be a long enough interval for the two of you to amass sufficient assets to not require insurance.
  
That would be the desired end state, to not need life insurance at all.  I've heard mixed opinions on that approach and haven't gotten smart enough on whether it's a good idea to not have life insurance after a certain point in life.  

RailroadTrack said:   
fwuser12 said:     You can get term for 20 years or 30 years. Both should comfortably cover a time period by which your kids will not be your financial responsibility. That would also be a long enough interval for the two of you to amass sufficient assets to not require insurance.
  
That would be the desired end state, to not need life insurance at all.  I've heard mixed opinions on that approach and haven't gotten smart enough on whether it's a good idea to not have life insurance after a certain point in life.  

  What is life insurance for?
To provide (financially speaking) for your dependents in case of your death.

Once your kids are adults and no one is financially dependent on you, there is no need for life insurance.
If you have sufficient assets that can provide for your dependents to live comfortably (till they can stand on their own legs), you dont need insurance.

ETA: What you should also keep in mind is opportunity cost? Insurance will pay out (to your beneficiaries) only in the event of your death. There is a cost to it --- the premium. Every dollar you spend on premium is a dollar you didnt save and enjoy in future. In short, buy sufficient term coverage to take care of dire situations --- you die in say the next 15-20 years when your kids are too young to take care of themselves. By that time save enough (by not buying a whole policy but a simple term policy for the right level of coverage) so that at the end of the 15-20 years, you would have accumulated enough to not need insurance anymore --- kids getting close to be on their own plus your savings that can sustain them for several years. If you dont die in the 15-20 years (which is what you wish for), you now have the savings to enjoy yourself.

You will find only people associated with the insurance industry recommend whole life.

If you wish to make the mistake and buy whole life then that's up to you.

RailroadTrack said:   
fwuser12 said:     You can get term for 20 years or 30 years. Both should comfortably cover a time period by which your kids will not be your financial responsibility. That would also be a long enough interval for the two of you to amass sufficient assets to not require insurance.
  
That would be the desired end state, to not need life insurance at all.  I've heard mixed opinions on that approach and haven't gotten smart enough on whether it's a good idea to not have life insurance after a certain point in life.  

You won't get mixed opinions here.  There's no reason for most people to have life insurance once the kids are grown and they approach retirement.  

As usual, you guys are on the money.  Thanks to all for your advice.  

What are your goals? We have friends (Nurse + Stay at home Mom) who bought two term life insurance policies that would allow them to live off the insurance until the kids would go home. If mom died, dad would quit and take care of the kids. If dad died, mom would continue to take care of the kids.

Their oldest is now 19, and their youngest 14; I'm not sure where they are now (except he still works for the same hospital in training instead of nursing, and she's still a stay at home mom)

micha8s said:   What are your goals? We have friends (Nurse + Stay at home Mom) who bought two term life insurance policies that would allow them to live off the insurance until the kids would go home. If mom died, dad would quit and take care of the kids. If dad died, mom would continue to take care of the kids.

Their oldest is now 19, and their youngest 14; I'm not sure where they are now (except he still works for the same hospital in training instead of nursing, and she's still a stay at home mom)

  
We plan to retire within the next 10-15 years and move outside the mainland US.  (Hawaii - current location, Caribbean is option 2, Belize is option 3).  That's the plan as of now and we're working towards that.  Our last resort is to move back to the mainland southern US, likely Virginia where our house is.  

Remember, having life (or any) insurance is betting on whether or not you are going to die during the term. And you're taking die. As with most bets, the house has the advantage. So you're making a bad (-Expected Value) bet on something that you don't want to even happen. Now of course for many people (like you, with 2 kids), it is a great idea to actually have life insurance. But your goal should be to have the least amount needed in case you win the bet (yay...) and even possibly decrease the amount over time as your assets (and children) grow. When you get to the point that your assets are enough for those who would depend on your income/assets/insurance should you unfortunately pass, there really is no point in having insurance anymore. Yay!

It's also important to periodically review your financial situation and try to keep your life insurance payout below the NPV of your projected future income, ya know, for reason...

(that part's a joke..mostly)

Whole Life insurance is like playing the stock market.
1) The company you bought the plan from is still around in 40-50 years
2) They invested your whole life wisely and made a good return. (You don't control what they invest in)
3) They didn't use your whole life policy to dump all their bad investments in it. (Remember you don't control what they invest in)
4) Some WLI comes with a guaranteed rate, please note that guarantee for the entire life of the policy, not each year. (4% over 40 years is nothing compared to 4% per year)

Here's a link
https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-inv...

Not much to add that hasn't already been said. Term4sale.com is solid, and what I've used (as per other threads here on FWF). Put what you save from not buying whole into retirement/other investments and retire once the kids are off to college.

forbin4040 said:   Whole Life insurance is like playing the stock market.
1) The company you bought the plan from is still around in 40-50 years
2) They invested your whole life wisely and made a good return. (You don't control what they invest in)
3) They didn't use your whole life policy to dump all their bad investments in it. (Remember you don't control what they invest in)
4) Some WLI comes with a guaranteed rate, please note that guarantee for the entire life of the policy, not each year. (4% over 40 years is nothing compared to 4% per year)

Here's a link
https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

  Comparing whole life to investing in stocks gives stocks a bad name.

Also they gave a false example of how the 4% guarantee works. If you take an actual in force illustration from a company with a policy purchased today and look at the guarantted column, you will notice that even the death benefit at expected age of death for your health rating is below 4%. It's likely less than 2%. The cash values in the guarantted column are even worse.

Even funnier is following the news of how companies are now investing in more risky assets for yield. They don't have any magical investments.

With that level of income, OP should be putting way more than $1,000 a month away. Living in Hawaii is very expensive. Is the Virginia house rented out?

Term of $200k each is way low. Consider 20 year term policies of $ 1million each.

BingBlangBlaow said:   keep your life insurance payout below the NPV of your projected future income
 

  100% true
I actually suggest going one step further.
The payout should be equal to the amount needed to live without any frills.  Your total income NPV may be much higher.

EradicateSpam said:   With that level of income, OP should be putting way more than $1,000 a month away. Living in Hawaii is very expensive. Is the Virginia house rented out?

Term of $200k each is way low. Consider 20 year term policies of $ 1million each.

OP said the $1,000/month was "kids savings."  I took that to mean college fund.

He's in his very early thirties with $215k in retirement accounts.  That reflects a pretty good contribution rate at that age.  I do agree that the $200k term policies are too low though, especially considering how inexpensive it should be at their age.  I'd probably go with a couple of million dollar policies and call it good.  With two breadwinners, neither policy needs to replace the entire household income.  

ssgcinty said:   
BingBlangBlaow said:   keep your life insurance payout below the NPV of your projected future income
  100% true
I actually suggest going one step further.
The payout should be equal to the amount needed to live without any frills.  Your total income NPV may be much higher.

  I meant it more so that the beneficiary wouldn't get any ideas.

RailroadTrack said:   I'd like to get it while I'm in good health and young, if I need it.  What do you recommend going forward? I don't want to have to revisit this 10 years from now and either myself or the wife possibly have health concerns.  FWIW, once the house is paid for in 2028 or sooner, I don't plan on acquiring any additional long term debt.  At that point, all I'll to worry about is college for the kids and my mid life crisis car.
You owe $54K on your current vehicle and you're already planning to buy a more expensive one???  This is FW for crying out loud.

Kid savings is a waste put it all to max your retirement and Roth annually when that is done consider paying off the car and house or a 529.  Manage your finances so you can live off one income and invest/save all the other and you will get wealthy very quick and probably can semi-retire at 50ish.  

DTASFAB said:   RailroadTrack said:   I'd like to get it while I'm in good health and young, if I need it.  What do you recommend going forward? I don't want to have to revisit this 10 years from now and either myself or the wife possibly have health concerns.  FWIW, once the house is paid for in 2028 or sooner, I don't plan on acquiring any additional long term debt.  At that point, all I'll to worry about is college for the kids and my mid life crisis car.
You owe $54K on your current vehicle and you're already planning to buy a more expensive one???  This is FW for crying out loud.


Cars are a weakness of mine. However, I won't be buying my midlife crisis car for quite some time. Surely won't be tomorrow. More like 10 years from now.

Lots of people didn't read your post. They're (maybe, partially?) right that for most people, a WL policy can often be outpaced by regular investments.

Your combined income is over 200k, and with state plus federal taxes, you could be in a 34% overall top tax bracket (my state, maybe not yours).
http://www.bankrate.com/finance/taxes/tax-brackets.aspx

That makes yours an unusual case.
If you get a policy with a 5.5% IRR and a terminal date on payments (not pay to age 100), it's the taxable equivalent of an 8.3% annual return. As an alternative to cap gains, it's a 6.5% taxable equivalent. Respectable, plus you don't have to pay those annual term premiums if you use WL in this way.

I know CFAs, CPAs, and attorneys who are in your tax bracket and all make use of a well-designed WL policy. I don't think they're all idiots. Be cautious taking advice from a dozen people who make 30 or 80 or 120k per year telling you with confidence that something is bad. They wouldn't know. And it's not just poor, anonymous people on the Internet who can have bad ideas.
Also, don't take advice from somebody in the insurance industry telling you it's good (that's me!).

Your yield on term premiums WILL be either 0% (return of premium term) or -100% (everything else). If you keep this in mind as you look at alternative investments, it really drags down the performance of your portfolio to add hundreds/thousands of dollars of expense to those other investments. You can argue with me (feel free), but you can't argue with math.

Do the math for yourself, get illustrations, compare to alternative vehicles, and get what's appropriate to you.

Thanks.  I'll send you a PM with a little more detailed info. 

Being in the top bracket is a poor reason to purchase WL. He is just an agent and as usual gives incomplete information to give the illusion that WL is a good investment. You should search the multiple WL threads here and you will find every one of agent arguments destroyed. You should also post at bogleheads and read the threads at whitecoatinvestor.com (notice those are docs who are in higher tax brackets).

Keep in mind illustrations have a guarantee column and an illustrated column. If you purchase a policy today and look just at the death benefit (since thats the highest amount you can get). You will see that if calculated out from a "good company" that the return at death (using anticipated death given your health rating) is less than 2% guaranteed. It will illustrate currently around 5.5% but dividends continue to fall like rocks and thus you might not even get that. You could get more if dividends rise but that doesnt appear to be on the immediate horizon.

He also gave you the impression that you should compare return on term giving you the idea you dont want to waste your money with term. What was failed to be mentioned was that the cost of insurance within WL is higher than a cheap term policy. If you look at all the "good performing" WL companies, all have very expensive term compared to lets say Banner. Also if these companies sell a UL policy and disclose the cost of the insurance then that too is more expensive then cheap term. This cost is also removed from your WL return but its actually a higher drag. Thats the actual math behind it. This bc there isnt any free lunch.

Its very easy even in a taxable account to pick a very tax efficient fund even the vanguard total stock and you will take a minimal hit on taxes compared to WL. You will also likely get a much greater return. When you compound that number over the multiple decades of your life, its a lot of money that you give to the agent and company instead of yourself and loved ones.

Also WL is tax deferred and not tax free until you die. About 80% of people surrender WL and when they do any and all gains (even if phantom bc of loans) are taxed at the higher income rates so that is very tax inefficient. If you keep until death then the death benefit is income tax free but guess what stocks also get a step up in basis at death.

So yes do the math. go to the sites mentioned. ask questions. be careful though when listening to agents. they dont present the full truth in my experience.

FatWalletLurker said:   Lots of people didn't read your post. They're (maybe, partially?) right that for most people, a WL policy can often be outpaced by regular investments.

Your combined income is over 200k, and with state plus federal taxes, you could be in a 34% overall top tax bracket (my state, maybe not yours).
http://www.bankrate.com/finance/taxes/tax-brackets.aspx 

That makes yours an unusual case.

  
Nope. We read his post. A 200k income is not unusual, especially around these parts. A WL policy is still a bad move. As you can see from the comments, no one who is familiar with life insurance options believes otherwise (except insurance salesmen). Granted, a WL policy is less bad if all truly tax-advantaged accounts are already maxed or unavailable. That said, for all people with all incomes in all life situations, term is superior form a financial standpoint.  If you frequent these forums, you should know why.

FatWalletLurker said:   If you get a policy with a 5.5% IRR and a terminal date on payments (not pay to age 100), it's the taxable equivalent of an 8.3% annual return. As an alternative to cap gains, it's a 6.5% taxable equivalent. Respectable, plus you don't have to pay those annual term premiums if you use WL in this way.
 

Is the IRR excluding the cost of insurance or is the return calculated by including the cost of insurance? Because if you want to claim "you don't have to pay those annual term premiums if you use WL in this way", you should account for the cost of insurance in the WL return calculation.

How does the cost of insurance in a WL policy compare to that of a term policy.

Are there WL policies available today that actually guarantee an IRR of 5.5% (or close to that)?

What happens to the IRR on a WL policy if after say 20 years, you are still alive but dont have a need for insurance. That cash surrender value must be not great compared to what you paid in premiums, will it?

What happens to the cost of insurance in a WL policy as you age?

You can get 20 yr term, $1m policy, for less than $50/mo at your age/health.

You shouldn't need insurance after 20 years.

Put pay yearly since the typically charge a finance fee to pay monthly which can be double digit interest rates.

Those fees are always in WL if you don't pay yearly which is a lot of money that doesn't go towards cash value or death benefit.

FatWalletLurker said:   Your yield on term premiums WILL be either 0% (return of premium term) or -100% (everything else).
  Since return of premium (ROP) term has been mentioned, let me say that they are usually a "feel good" product and not necessarily a financially good product. The big selling point is that at the end of the term (assuming you pay the premiums for the entire term) your entire premium paid is refunded (as cash surrender value) if you don't make a claim on the policy; i.e., are still alive.

Their premiums are significantly higher than regular term. Just stick with regular term and save invest the premium difference.

Here is quote I obtained from Prudential for a healthy 30 year old male, 20 year term, 1 million policy.
Monthly premium for term: $52.65
Monthly premium for term with ROP: $149.75  (cash value at end of 20 year term: $35,940.

If you had invested the difference of $97.10 per month you will need an annual rate of return of about 4% to get the same $35,940.

Caveats with ROP term policy:
1. If you don't keep the policy for the entire 20 years, you may not get back the premiums paid.
2. If you were to make a claim on the policy (due to death), you will get only the death benefit (no return of premium).

I had also looked into ROP a few years ago and realized that it was just a gimmick.
Please do not bite.

I'm an independent life/disability/long-term care and health insurance broker in San Diego, who represents all of the major carriers and is licensed in most all 50 states.

You do not need Whole Life - there are a TON of agents who will try to sell you WL, as they will make more $$ in commissions, but don't bite. These agents also typically think that they're Financial Planners or Advisors, when in actuality, many of them are not even accredited (ie: CFP, etc). You are much better off buying term and not relying on life insurance in later years once the kids are out of the house and your liabilities have lessened - Especially if you've saved and invested correctly.

Also, ROP term is about 2-3 times the cost of straight term and the insurance carrier only gives you a Return of Premium back after the 15-30yr period, with NO interest. They're making money on your interest, and that's how they're able to provide you with coverage, while returning your money to you at the end of the term. Some people like these ROP policies and think of them as "forced savings accounts", but they're typically the type of people who spend everything that they have and don't save. They're also usually not on a FW forum.

Lastly with an ROP term policy, if you for some reason you need to cancel it early, say at year 15 on a 20yr term, you will not receive 100% of your premiums paid.. You will only get a portion of what you paid, sometimes around 40-50%, depending on the year. Get a straight term policy that covers all of your liabilities (ie: replacement income, mortgage, college funding, debts/liabilities, etc.) and then call it a day. Insurance is the one thing that you pay for that you hope to not have to use, so a term policy is just a safety net, should the unexpected happen.

My friend had a whole life policy... Great 4% "guaranteed return"...
$200k policy, $90/mo payments, of which "life insurance premium" is shown as $110/yr, rest goes into the "cash fund" or whatever it is.

So, end of the year, $1,080 paid, $970 left, 4% interest given ($38.8 for first year), great deal, right? Except for that additional $12.50 they were taking each month, adding up to $150 a year in "Expense fees". So really, 4% actually became a 11% loss on the $970.

It's the fine print one needs to look at. But 30 term? Should be more than enough to be safe.

If one looks at a policy purchased today and looks at the guaranteed column (so guaranteed return and costs) then at assumed age of death for health rating even the death benefit is below inflation return. The cash value is even worse. A policy purchased likely illustrates around 5.4% return on death benefit.

Just think the return you mentioned was actually including dividends so that loss was actually better than the guarantee....



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