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January 11, 2007

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Since you asked...I agree in most cases with the buy term and invest the rest. Although, in one instance I tend to disagree. If one stands to inherit or earn and amass great wealth, putting them into a serious estate tax issue, cash value life insurance is one tool that can help mitigate the costs of passing great wealth to heirs.
I belive the tool used in the industry to accomplish this is an irrevocable life insurance trust. Essentially you place the permanaent policy in the trust and use the dealth benefit to pay taxes due upon the transfer of wealth over and above the allowable amount.

I agree. Separate out the death/disability/medical insurance from investments. I have crunched the numbers on a few products and, without exception, "whole of life" or investment linked insurance policies are lousy investments. The implied rates of return in the longer term on the products I looked at were no better (and sometime worse) than cash in the bank and none of them came close to matching the returns on a low cost index fund. In the short term they are even worse - the penalties for getting out early are outrageous which leads to a loss of flexibility.

Of course, the fact that the policies are usually written in incomprehensible gibberish and sold by commission agents with a vested interest in ensuring that you do not understand the product (at least not until after they have pocketed their commission) should be enough to warn any sensible person to stay well away.

For a contrary view, see the following explanation:

http://www.searchlightcrusade.net/posts/1157461708.shtml

The author concludes with a critique of term insurance and makes a compelling case for some varieties of whole life insurance. The particular product he applauds, Variable Universal Life Insurance, can only be sold by someone licensed both in securities and insurance transaction. This may limit its exposure to potential buyers depending on the licenses held by the firm selling the insurance.

Duane -- Are you getting paid by SLC to post their links here? ;-)

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!!!!

Like someone mentioned above, the main reason for a whole life policy is generally for wealth transfer. Someone in their 20s through 50s would be better off buying term and investing the difference. Then once in retirement if there is likely to be substantial assets to pass down a SPWL (Single Premium Whole Life) policy may be a great vehicle for some of the assets.

Many times these policies will underwrite someone for a policy for 100-200k without any medical exam. So effectively (depending on age) someone who is 65 could drop 50k into a SWPL and have an immediate death benefit of say $100k (just throwing out numbers, every policy is different). If something were to happen, the beneficiaries receive a decent amount of tax-free money (although it could be subject to estate taxes if certain conditions apply.

You could argue that someone could take the SPWL premium and invest it to amass even more than the death benefit, but that would be taxable income to the beneficiaries, which if it is any significant amount of money could reduce the payout significantly. So the returns needed on that premium would have to be quite significant to offset the taxes.

Anyway I'm getting off-track, but bottom line is that for someone in the accumulation phase of life, term policies while investing the difference is the way to go. Later in life depending on the situation and size of the estate, cash value policies can be a tremendous tool in the wealth transfer process.

The person that most needs insurance, the young person with dependents, is the one that can least afford it. This is why term insurance is a must for them. If they can't save, then a small amount of whole life may be beneficial, but there is no way on earth they could afford the amount of insurance they need buying whole life. This is why whole life is not just bad, but evil.

What about the face value advantages of whole life insurance investments? I'm not a life insurance expert but my understanding is that cash value in a whole life insurance policy is not a reportable item. In particular, if I bought whole life insurance for my kids, I would not have to report the assets when applying for college financial aid but could use the money in the policy to pay for college.

Also, doesn't the term and IRA v.s. whole life debate depend on the ratio of the premiums and the return you'd get from you're whole life policy? If your whole life premium is $600 ($500 to cover the cost of the policy and $100 invested), you're in a different position if your term premium would be $400 than you are if it's $300. Assuming 10% return on an IRA over the next 30 years, you're in a different position if your whole life is assuming 5% return than you are if it's expecting 6% return, right?

"Are you getting paid by SLC to post their links here? ;-)"

Not at all. In fact I lean toward the "buy term and invest the difference" camp. I do it myself, but the linked article makes a strong case for the alternative viewpoint. Much of the decision depends on how large of a safety net one has when starting a family. If a family endeavors to become first generation middle or upper-middle class they are exposed to a lot of risk and term is the most affordable way to protect their standard of living while feathering the retirement nest.

I'm just "yanking your chain." I think you referred to them in another comment as well (I could be wrong, my mind comes and goes these days.) Just having some fun with you! ;-)

I'm an investment advisor rep who does both investments and life products. I used to always agree with the buy term and invest the difference theory, but looking at a 50 year old investing $5000/year into an IRA @ 7% generates $134000. Minus taxes he has to pay out (30% roughly) puts him at $94,000 real money.

A whole life product with paid up additions will generate that same return PLUS death benefit on a non-taxable basis. I've been looking at it and don't see where my errors could be. let me know what you think

Mike B:
If the IRA is taxed at withdrawal, then the contributions are tax-deferred. Are the premiums on the death insurance policy? Doubt it.

To make a valid comparison, the IRA should be a Roth IRA since the contributions to it don't change the taxes you pay this year. How does the insurance policy compare to a Roth IRA? Wouldn't part of the cash value of the whole death insurance policy be taxable, either on an on-going basis or when withdrawn?

I doubt a whole death insurance policy is worth considering unless you've funded your Roth as much as allowed.

I am interested in CIWOOD's comments about the SPWL insurance. S/He said, "So effectively (depending on age) someone who is 65 could drop 50k into a SWPL and have an immediate death benefit of say $100k." Is there anywhere i can go to get more information regarding this issue? can you speak more to this? I know of a person who claims to be making a fortune investing in businesses somehow using this insurance and i'm curious as to how that would work. please respond if you have information.

Brandon,

When you put money into a whole life policy (in my opinion, the only permanent life insurance worth buying) you are the owner of the policy and have access to the cash value. My guess is that this person is borrowing the money from his/her policy and lending it out at 10-12% interest, thus growing the policy by more than the insurance company's dividend rate. The problem is maintaining your cash value. Usually a significant percent goes to underwriting and commission charges, and using VUL, you also pay probably 8% sales load. So 50K will only leave you 35-40K cash value that you can borrow against, and usually you can only borrow 90% of your cash value. Look at putting 15K into the policy and purchasing additional paid-up insurance with the other 35K and have your ins. agent show you the difference vs. a 50K policy. email if you have questions - joh[email protected]

Term is always better ... the only issue is renewal.

Its a fact u will be better off.

There never is a reason to buy something other than term in the case of 'insurance $$' at death.

I have 10 times the assets by virtue of doing term instead of other choices.

pjc - You might say that you have 10 times the assets in spite of buying term insurance. Figure out how much you have put into your term policy and how much it is worth to you now. No matter what you pay in, the value is always $0. Don't even think about mentioning policies that offer your premium back to you. You buy insurance in case you die, then you buy insurance on that insurance in case you don't die? Be smart people - insurance companies are manipulating you!

Here's something to consider - only about 2 percent of term life policies ever pay out anything! Compare that to over 90% for permanent (whole) life policies. Life insurance is the only product that "insures" something that is certain. Auto, home, personal liability - all of these insure just in case.

I'm sorry to be the one to break it to you, but you are going to die. In fact, when you think about term life insurance, the insurance company is "betting" on you to live, at least until you can't afford the premium any more! Why are you buying term and betting against them? In reality, 98% of money spent on term policies is WASTED, compared with maybe 10% in whole life policies.

Do you think banks know a thing or two about money? Why are they the largest purchasers of permanent life insurance? Why don't they buy term and invest the difference? This article has more information:

[LINK DELETED BY FMF. Argue the point yourself versus having a press release do it for you.]

Do some research for yourself.

Don't accept those things your parents and teachers told you as facts.

The truth will set you free!

Actually John I think one could argue far more convincingly that the extra money spent on a 'permanent' policy is wasted, since you would get far better returns by investing the difference. You conveniently ignore the entire "invest the difference" part.

I think you should "do some research for yourself" and find an unbiased source (i.e. one that is not selling expensive insurance) that recommends whole life over term life. Just one!

Skott-

You've got the forum, make an argument! All you have done is repeated what someone else has told you.

Make an argument and I will listen!

FYI - I do not sell insurance, but I buy quite a bit of it.

You make your argument for term first, then I will make more for whole life, since my previous arguments weren't convincing enough.

The ball is in your court!

I argue that pasting a link is the same as 'repeating what someone else told you'.

I further argue that a person's need for life insurance is temporary, and they only need it for so long as they have dependents. Only in exceptional cases does that exceed 30 years.

!

I will argue that there are very few new ideas under the sun. Just about everything you can imagine is in written form on the internet and easily accessible to many by using the web address for that resource. I feel it is a waste of my time to rewrite something when someone else has already done, so, unless I feel that I can add something that has not already been written,then, I feel that the use of links is an optimal means to convey information that I do not want to rewrite.

Also, I used that article to show that banks buy permanent life insurance, not that its superior to term.

I am giving you the opportunity to learn from my mistakes, and if you can give a compelling argument for term, I will invest a significant amount of my valuable time to make my full, compelling argument for permanent life insurance.

You've stated that one could argue more convincingly for "term and invest"... Why don't you be the one?
For the sake of this argument lets assume $20K to do with as you choose? Either term and invest, or whole life? I come to this number using $15,500 for maxing out a 401k, and $4,000 for an IRA, and I round up to $20,000 from $19,500 for simplicity.

I will listen with an open mind, and I will appreciate if you do the same.

Sincerely,

John K.

John K. --

You're not making an argument at all. You're stating made up facts (unless you van verify that "only 10% of money spent on whole life policies is wasted") and arguning something that doesn't make sense -- that you should buy something because you get money back from it? How about buying into my new super duper investment plan -- for every $1 you give me, I'll give you 15 cents back. It must be a good deal, right? You are, after all, getting money back.

BTW, are you an insurance salesman or have a vested interested in insurance some way? How about into mortgages? I find it interesting that you're arguing for whole life insurance and extended debt throughout a person's life (the latter on another post).

FMF-

Your comments here are elegantly hypocritical. If you had read the entire thread, as you suggested I do here:

http://www.freemoneyfinance.com/2008/01/how-i-paid-off.html

you would have read in my response to Skott that I do not sell insurance! Do I have a vested interest in insurance? The answer is yes in that my wife and I own a fair amount of whole life insurance.

I have a vested interest in mortgages, as I have mortgages on 3 properties, but no interest in ever selling mortgages, as you seem to think I want to sell something.

If you find it interesting that I argue for these things, why do you feel that it is necessary to undermine the information that I am providing? i.e.-Deleting links to potentially helpful information. You as a blogger should know the value of links to other resources. I wouldn't have found your website if not for GRS, and I'm sure that's the case for many others here too.

I stated my case for paying off a mortgage as slowly as possible at the link above, and I won't do it again here.

You have shown to be very unhospitable to new ideas, contrary viewpoints (and the facts), so I will not be spending anymore time on your blog, unless your other readers request information. (You already know everything!)

Meanwhile, I urge you to think about the extra money you are leaving on the table by discouraging the open sharing of ideas about money.

Good luck... I have a feeling you may need it.

John K. --

I think it is best that you leave since you already know everything. Good luck on your own blog.

My grandmother took a whole lfe policy out on her son 50yrs. ago which would be (MY father). He just recently died in april at the age of 56. the face value is $5,000.00 is this worth anything more than 5,000.00??/ We dont under stand and she is in a nursing home still somewhat coherent, need advice or help.

James -

I'll post your question in a week - stay tuned.

I know this is an old thread, but good posts live on for quite some time. I read the posts by "John K" on this and the thread about paying off mortgage.

The best solution is a combination of what he believes to be true (whole life vs term) with what he disagrees with (paying off mortgage.)

First, it is always best to not have a mortgage. No debt = more money to invest with the benefit of having a low monthly budget, which equals more time freedom and perhaps not having to work 50+ hours a week (who decided that was a good thing for a family?)

Second, if you have no mortgage AND "invest" that money in a whole life policy, you'll be that much ahead because unlike a mortgage, you will have access to borrow against that money, plus you can pull it out tax free (not tax deferred) in your retirement years as loans until you die, at which point the policy will pay back the loans and pay your estate with whatever is less.

I know we all have opinions; listening to those which are not ours is how we learn, so I am just sharing mine. I wish I knew about the value of whole life and how to use it (while I am living as opposed to when I am gone) many years ago. My net worth would have been different to the tune of several hundred thousand dollars as I could have borrowed from myself instead of greedy lending institutions and better survived the real estate crisis that made a huge dent in my net worth. Thankfully, I am recovering well, in spite of those losses.

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