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July 09, 2014

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Term insurance through my work which is 2 times my salary. Work pays for it.

No debt,sufficient 401k, other investments, college education covered for my two sons, wife works and has a pension in 3 years.

If something were to happen to me my family will be self sufficient.

I'm primarily in the buy term and invest the difference camp. The reason is you typically need insurance to protect the income coming in, why? Because you have people dependant on that money who aren't earning it on their own. The reason is you can get so much more insurance for a much more reasonable cost and focus your other income for you other needs, like feeding those dependents. As a comparison I just checked an insurance site for $1M policy on a healthy 30 year old.

20 year term $560 a year
20 year term $1870 a year
with premium
payback at the end of term

Whole Life $10520 a year
Whole Life 15 $16550 a year
years premiums payments

I just see the higher costs of permanent insurance either giving you less overall insurance protection because of the cost of premiums when you are at your worst financial strain or it has to become your primary saving vehicle, and it isn't a good one for the bulk of folks with even a decent amount of financial discipline. Even if the costs dropped by half for a $500K policy, I see most families earning $60K or less having to spend over 10% of their gross for an insurance policy with a savings addition.

I feel there are situations where permanent insurance is useful, but not for the bulk of the population IMHO.

I have sufficient term policies that cover our family needs. About 5 years ago, my company was bought out by a larger firm that had much more extensive benefits. One piece of the benefit plan is an executive life insurance program. The company pays the premiums for a whole life policy thatbis worth 2 times my total pay (base plus bonus), in the event I pass away. Upon retirement, it turns into a fully paid up policy at 1 times my last year of compensation. It also builds up a cash value. The company has been paying a very large premium, yet it is surprising how slow the cash value builds. It just confirmed for me how bad of a deal whole life can be. Since this benefit is free, it doesnt worry me much, but I also hate to see the company making a poor investment.

I have a small term policy via work. I don't have any dependents so I don't even really need that, but, if I did, I'd just get larger term through work. Most dependents will eventually cease being so over the course of your life. I imagine planning is more complicated if you have, e.g., a permanently disabled child.

As a former planner, I'll chip in: it just isn't that simple, suffice if you need instant liquidity at death, and you live long, your term insurance will be long gone. Yoiu need both permanent and temporary (term).I started buying permanent insurance young (age 26) and when I retired at 47, it was 53% paid up, thus I have coverage FOREVER now, NO premiums forever and a cash value growing at 5% each year should I want that dollar amount instead. Best part, instant liquidity not encumbered at death to assist in settling my estate - which at $3M~ will take some time. IT's not a lot of insurance but, it'll cover those final expenses and take care of continuing things till settlement is final. I'd recommend virtually anyone consider a solid whole life policy - say $50K-$250K as a rough face amount when young and pay for 20+ years. You won't lose!

Unfortunately when you are young, married, and have children you have no idea at all how your actual future will turn out.

There are quite a few very bad scenarios that could happen but if you attempt to cover all the things that could possibly go wrong and elect to use permanent life insurance it will be very costly over time.

When I was in this position I used term life insurance and some term disability insurance and eventually as our lives played out and we started accumulating wealth we allowed the term insurance to expire.

Luck and good fortune are nice to have, and we had both, so in retrospect we are glad that we didn't depend upon insurance very much at all. Now we are 79 and 81 respectively, are debt free, and have a very large investment portfolio so we are just coasting along, staying out of trouble, and trying to stay as healthy as we possibly can. The only insurance policies we have are homeowners, auto, and umbrella. For health insurance we are both on medicare and covered by my former employer's
policy with United Healthcare for a total of $326/month.

If you need some "instant liquidity" on death, put that money into a TOD/POD/Totten trust account at your bank or your broker. Generally speaking, it should pass to the named beneficiary without probate. It's a good thing to do if, e.g., you live in a different city than most of your family and think whoever will come deal with the immediate aftermath of your death might be inconvenienced by having to wait for reimbursement of expenses.

And there's no whole life account that I'm aware of that can *guarantee* that premiums will be paid out of returns forever. I am, however, aware of companies that got sued for misrepresenting such a guarantee.

Sarah,

You are very incorrect, and "Liquidity", (example) if you are 26 YO and have a net worth of say $25K~ (like I did) that $50K of INSURANCE coverage is instant and more than any acount I could have. Remember, you have to BUILD that net egg first. And children, job loss, medical expenses may delay of forego that opportunity.

A TOD/POD must STILL have the proper documents and be unencumbered to pass to heirs. MANY simple WL policies can pay up - contractually guaranteed! Simply use the RPU or EPUO features of the contract, if you aren't familiar with those, well, then you aren't a licensed agent are you? This is very different from an intrest sensitive or vanishing premium non-guaranteed product.

Permanent or temporary, NEITHER insurance is perfect for all situ's, it's fact - most people WILL need both. One lasts forever thus is good for everlasting needs (INCOME to a spouse or disabled child as example, taxes, final expenses including medical deductibles, etc.,)the other covers needs till those pass - temporary (college, debts, etc.,) Once the need is gone, dispose of the coverage.

I had over 1600 clients and managed almost $200M~ of assets in my practice.

I retired at age 47 a multi-millionaire. I practiced what I preached very successfully btw :)

Insurance plays a VERY important part in succesful financial plans!

And, I don't regret spending "pennies" that will be tax free "DOLLARS" - guaranteed at my death! Or, should I choose, when living via my GUARANTEED cash value!

Should I tell you about another wonderful product called a variable annuity? Oh, wait, the untrained media hates 'em but, I LOVE mine! :) Sold it to myself! For ALL my retirement deferred funds! Imagine that...

Don't believe the magazines and "big hat", "no cattle" writers. They don't sell you advice, just advertising and articles!

Jeff, you clearly SOLD very successfully. Telling me that a salesman of a financial product retired well off does not generally persuade me that the product was good for clients. The opposite, in fact.

A single person without dependents whose net worth is $25K has no need for an immediate $50K of cash on death. A TOD/POD account is very simple to set up (I did it in less than ten minutes on a Vanguard account recently) and, um, why would you encumber it if you intended it to provide for that particular circumstance? The sales talk approach with a flurry of buzzwords is really not convincing in this context. You didn't sell advice. You sold a product, and the more profitable the product was for your employer, the more money you made. Your clients may not have been aware that that meant your interests were not aligned with theirs, but more sophisticated people do know.

I’m currently into a permanent life insurance where the premium amount ‘ve to invest is quite significant. It’s really making a hole in my pocket for sure. Believe me. I was not aware of the term deposit as my financial adviser didn’t refer to it as such. Only after reading this post I got to know so much about Term Deposit. In fact, I’m interested to make some investment in this as you say it will give me more to save and invest more in other areas. I now have started to feel that having permanent life insurance is really a loss of opportunity cost in other avenues. Is it possible to stop the permanent life insurance after 5 years after its initiation? How can I stop that and then divert that money in a Term Life Insurance? Is it possible? Please help. I want to know it urgently.

My understanding was that you would buy term, invest the difference and then drop the term when you can self-insure. I got caught in whole life once...for a few years. Stopped that nonsense quickly. Had term for awhile, but can now self-insure. Insurance is a pool of money that people use to cover 'catastrophic' events that otherwise would wipe them out. To use it for other purposes is wasting your money. If you wish to invest, use other vehicles which have a better return.

K, Bruce, I'll be glad to respond to the catchphrase, "Buy term and invest the difference," a strategy which made its 'official' debut in the late 1970's when football coach, Art Williams, created the marketing company, A. L. Williams. Formed inline with the MLM concept of recruiting your brother-in-law to sell the term life insurance policy to his friends and family members, after you wrote his policy first as to not lose out on the commission! After many years of huge success Coach Williams sold the company to Primerica for a nice piece of pocket change.

As a member of the life insurance industry since 1979, I have seen the "buy term and invest the difference" (BTID) philosophy unable to help the middle class families which was the focus of this concept: 1] with at least 93% of the American adults not able to set and accomplish desired goals the "invest the difference" part of the formula was/is nonexistent; 2] the BTID plan was presented to the prospects with the understanding of the importance of saving/investing so, when the life insurance term ended the families would be self-insuring, hopefully protecting the family against unexpected costs of critical illness and/or death of a loved one. Well, that didn't and won't ever happen with the "93%"; 3] Life Insurance Marketing Research Association (LIMRA) says that more 60% of policy holders owning whole life insurance instead of term still have their policies after 10 years! Since a huge majority of people won't follow through with "investing the difference" I recommend every family own permanent, aka whole, life insurance along side term life insurance. The Universal Life policies written by Mutual companies, a company owned by its policy holders with no stock holders to please, have great advantages over term life. Since more than 60 out of 100 policy owners will continue to own their whole life insurance policies 10 years after purchase they will also have some great options: a] paid up life insurance; b] cash value for emergencies; and c] a guaranteed tax-free income for life (check with your tax man/woman)!

Whoa! A guaranteed tax-free income for life? For those of you who commented comparing the cost difference of term life insurance and whole life insurance might want to talk with a professional of the industry...tax-free income is hard to bea

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