Here's a comment that was left in response to my post titled What Do You Think about "Buy Term and Invest the Difference"?:
I was a New York Life agent from 1985 to 1988. I still have my 50K whole life I sold myself and the dividend is just now approaching the size of the premium. There is no way ANY form of permanent insurance is as good as 30 year term combined with a Roth IRA using comparable premiums. It is true that many people do not invest the difference but those same people also quit paying their whole (variable) life premium when times get hard and cash in the policy to pay bills or buy a vacation. Anyone who has the intestinal fortitude to pay whole life premiums for 50 years has what it takes to make buy term and invest the difference work!!!!
This is why I've always bought term and invested the difference and it's worked like gold for me.
That said, there is one point I'd dispute. Sometimes undisciplined people need a "bill" (like one for a life insurance premium) to get them to save. They simply don't have the discipline for buying term and investing the difference -- instead they buy term and spend the difference. For these types of people, permanent insurance is a way (an expensive way) to generate at least some savings -- which, in my opinion, is better than spending it and not saving at all.
This is what my parents did. They asked me many, many years ago about buying permanent insurance and I told them to "buy term and invest the difference." Instead, they bought term and spent the difference. Now, they have much less savings than if they'd have purchased the insurance policy. Yes, technically, my advice was correct. But since they didn't follow all of it, it put them in a worse financial situation than if they had purchased the policy.
Just an example of how when it comes to money, there's often not one "best" answer.
I could use some advice on this issue. I'm in complete agreement that there's no need for permanent insurance. Unfortunately, my wife and I are saddled with four permanent insurance policies, none of which are that much individually but together add up to perhaps 40% of our life insurance "portfolio." One policy is a modified endowment contract set up by my wife's father 10+ years ago, and the rest we set up ourselves in the last 3-5 years when we as wise as we are today.
Ideally, I'd like to dump these policies, start over, and buy term only. But is there any way to escape the surrender charges and taxes on the policies that are less than 10 years old? And our agent keeps telling us how difficult it is to break modified endowment contracts, so is that even an option?
I'm just wondering if there's anything I can do besides waiting a few years until the hit from surrender charges isn't so bad, then dropping the permanent and buying term.
Posted by: Dan | January 26, 2007 at 10:28 AM
Dan --
Your situation is waaaay over my head. If I were you, I'd find (through friends, family members, etc.) a good CFP or the like and ask him/her for an honest opinion.
Posted by: FMF | January 26, 2007 at 10:34 AM
FMF, this is great to read. I had posted a while ago asking if anyone was in a whole life policy, and essentially whether they were happy or not.
The CFP study materials highly encourage the use of whole life. But the biggest reason for whole life seemed to be the level premiums and "permanent" insurance. With respect to level premiums, I ran calculations on the State Farm web site, and found that the level term premium on a 30 year policy would still have lower payments 30 years from now than a whole life premium would have today.
Posted by: LAMoneyGuy | January 26, 2007 at 11:42 AM
One thing that people don't talk about is the default risk of life insurance companies. If you buy a 30 year term life, for example, you have to be pretty damn sure that the insurance company will still be around during the entire 30 years. What happens if they default or go bankrupt? Also, buying insurance from the big names (State Farms, etc) tends to be alot more expensive. One thought that I had was to buy smaller term life from several different vendors. For example, lets say I want $100K of term life. I was considering buying four $25K policies from different vendors.
Does anybody have any comments on this?
Posted by: MikeK. | January 26, 2007 at 12:16 PM
MikeK:
My understanding is that each policy has built-in overhead charges regardless of the payout value of the policy. So 4 $25K policies would cost more than a single $100K policy.
And such an approach only makes sense if you want a level term policy and are concerned that the insurance company will go bankrupt.
But why buy level term? How long do you expect to need death insurance? When your kids are grown and gone, you don't need as much coverage. Sure, non-level term rates will increase with age but your total need will decrease.
Posted by: EMF | January 26, 2007 at 01:19 PM
I'd have to say that everyone who is putting down cash value insurance is not being exactly accurate in their assessment. Life Insurance is just a tool. A tool that be misused.
I was recently reading about the average cost of a variable annuity/life insurance vs. the cost of buying the same mutual fund directly. Everyone assumes that the Mutual Fund purchased directly would be cheaper but the fact of reality shows the opposite. The cost is actually cheaper to go with the life insurance/annuity option.
Also, I think the "anti-permanent life insurance" crowd is forgetting that Universal life, which is permanent *IS* term and invest the difference.
I've done comparisons both ways...depending on your age and health condition, it *might* be better to forgo the insurance, but for the average joe with average health, the insurance/annuity can be made to work. Ask your agent to "solve for the face amount". It lowers his commission (which may be why he never told you about this option) but rapidly starts building cash value. Compare this with your mutual fund alternative and you might be surprised at the results at the 10 year and 20 mark (assuming you accept the fact that investing is a long-term activity).
Posted by: dcl | January 26, 2007 at 02:22 PM
As far as solvency goes, you are best to go with a New York regulated insurer and checking up on their AM Best or S&P ratings.
Are people undisciplined enough to buy term and invest also too undisciplined to stay with whole life? Difficult to say.
Posted by: Lord | January 26, 2007 at 03:14 PM
To add. There is not an agent out there that is capable of telling you how much money goes toward the premium vs. how much goes toward the savings. I got all kinds of answers, like it varies depening on how much you save or how what the interest rate is or what ever. In term lifepolicies, I pay x$ per year for 20 years, with no variables. You at least know what you get.
Posted by: MJ | January 26, 2007 at 03:20 PM
Comparing whole life and term without talking about tax free advantage of cash value is a waste because the tax free access is a huge reason that people buy cash value life insurance.
BTW the Roth IS great but the income limitations preclude a lot of people from being able to dump money in. and if you convert your IRA you have to pay taxes. Anyone ready to pay all their income taxes on their IRA's right now?
Posted by: Harry Schwartz | January 27, 2007 at 03:31 PM
>>>To add. There is not an agent out there that is capable of telling you how much money goes toward the premium vs. how much goes toward the savings. I got all kinds of answers, like it varies depening on how much you save or how what the interest rate is or what ever. In term lifepolicies, I pay x$ per year for 20 years, with no variables. You at least know what you get.<<<
This is, at the very least, misleading. For whole life policies this is true, but for universal life (the better of the two IMO) your policy breaks down the cost of insurance because it is a term base with a savings component.
If you were going to spend $20/month on a term policy and invest the "difference" of $100 you can know exactly how much goes where with the UL policy. for better cash accumulation just take $120 and tell your agent to run an illustration for you that "solves for the face amount" or tell him/her you want that $120 to "maximum fund" the policy (which does the same thing as solving for the face amount). Like I said, it cuts the agents commission, but you make out much better.
Posted by: dcl | January 27, 2007 at 11:49 PM