MSN Money gives us a new (at least new to me) rule for buying life insurance. It's meant to help people determine which type of life insurance product is best for them -- term or permanent. While they admit that there are many variables that could impact what's best for any specific individual, they do offer a general rule-of-thumb:
Even with all of these variables, there are some guidelines you can follow. The key is how long you plan to keep the policy. If the answer is less than 10 years, term is clearly the solution.
If it is more than 20 years, permanent life is probably the way to go. The big gray area is in between. Here is where you need an expert to run the term vs. permanent analysis for you. Of course, this assumes you keep the policy in force. Most people drop their policies within the first 10 years, but if you do your homework now, that shouldn't be the case for you.
A couple years ago I met with the guy who sold me my term policy a few years before that. I asked him if permanent insurance would work for me and we discussed the pros and cons, the assumptions, my goals, and so on. The net result: if I did truly "buy term and invest the difference", the difference was probably a wash. So I kept the term and kept saving, preferring the maximum amount of flexibility since this way allows me to control more of my assets and have access to them if I need them.
But would it have been a different story if I had asked him this when I was in my 20's? Not sure, but it may have been. And MSN Money seems to think permanent life insurance would have been the way to go in this case.
Anyway, what's your take on this "20-year life insurance rule"? Is it a good rule-of-thumb or, like other basic financial principles, is it simply too "general" to be a valuable guideline for any one individual?
At my 60, term is the way to go.
Posted by: robert w. | August 27, 2009 at 04:11 PM
My dad convinced me to purchase a whole life policy at age 19. It was for 50K of insurance and the premium was $469 per year and it was supposed to "abbreviate" after 7 years. We all know what happened with all of those policies. 9 years in it had not abbreviated. Prudential was the company and they got a class action suit on them for misleading whole life insurance sales. I submitted a claim and described why .... namely I asked my dad's agent point blank how likely the projected returns were to materialize and he said nothing was guaranteed but that prudential had nearly all of the money for these policies locked up in 30 year bonds at over 9% interest (this would have been in 1989 so that was doable then). Except he is a big fat liar because if that was true then my policy should have performed nearly as projected. Only it didn't. I was awarded all of my premiums plus interest back in exchange for terminating the policy, which I did. 5 years ago at age 34 I took out 20 year level term on a 750K policy. Premium .... $402.
So if you do the math on that .... 15 years older, 15 times the insurance, and all that for 15% less money (odd convergence of 15's there which is just coincidence).
So that means that if I had taken out a 750K whole life policy when I was 19 presumably it would have cost me $7000 per year for atleast 9 years and with the way interest has been it would likely have been a lot longer than that and then the performance probably would not have been as good as projected.
How many 19 year olds can afford $7000 for a life insurance policy. They can't so they end up taking out a 125K policy for $1500 per year (still way too much) and they are vastly under insured.
And in the end all of your money is tied up and you can never actually get at it. I know you can borrow against it and thats the sell pitch but you have to pay interest on it and then borrow more to pay the interest and I haven't tried to sit down and pencil it all out to see if there is a problem there but it seems kind of like a reverse mortgage that might work for a while but eventually you owe so much that it just eats up the policy in interest and I am not sure what happens then.
Given all that, why would I not just pay the pitance of insurance I pay now locked in for the next 15 years still and forget about all the extra headache. And in addition, if I want more term when I turn 54 in 15 years, I have checked, I could get another 20 year term at that age for about $1500-2000 per year for 750K again (and likely by then with improving life expectancy the term rates will be a little lower). Still way less than a whole life premium that I don't know if it will ever abbreviate. And if I am uninsurable at that time, my policy is renewable, I can just go year to year on it and pay whatever the annual rate is at the time, which will be high but no higher than the number listed above (probably less in the first decade).
I married into a family of insurance salesmen. My father-in-law made all his money on hail insurance and whole life insurance. I have heard all the arguments. I have never purchased a policy from him. My wife has three that he purchased when she was little and they do carry themselves now but they are for like 10k and 20k. This is the kind of thing I see with whole life policies. Little pitance policies that barely cover a funeral. It's not real insurance. Its like having medical insurance that pays the first $1000 dollars and then says the rest of the bill is on you now. Whole life is not affordable as insurance if you get enough to cover your families needs for 2 decades.
Posted by: Apex | August 27, 2009 at 04:33 PM
Apex makes a good point that life insurance purchases should also take into account the age of the insured. Whole life is much more expensive than term life, and as an actuary who has priced life insurance, there are very few situations where whole life insurance is the right choice.
Agent commissions are usually around 50% for premium paid in the first year and 2-10% in the next 2-10 years, depending on the particular company and product sold. Agents also get paid sales bonuses, trips to luxurious locations to celebrate their production and bonuses for keeping the policies they've sold on the books. Where does this $$$ come from? It's funded from the premiums the customers paid and reduces the dividends paid on par whole life policies.
I would say that
a. life insurance should only be purchased if you need to replace income for the surviving dependents
b. life insurance need only cover the period of time where the dependents will be dependents
c. there's no need for life insurance if your assets are substantial enough to provide your surviving dependents with the financial support they need.
There are some reasons for high net worth individuals and corporations can benefit from whole life insurance, but that should only be done with the help of accountants and independent, responsible financial professionals.
Posted by: Angela | August 27, 2009 at 07:02 PM
I'd go with a term policy.
I bet that 20 year 'rule' came from an insurance salesman.
I haven't yet seen a single example of a permanent cash insurance policy that was really a good deal. Yet examples of how cash value insurance turned out to be a poor investment seem pretty easy to find.
Most people are underinsured and would do best to get more coverage with term and forget about using insurance as an investment.
Posted by: Jim | August 27, 2009 at 07:06 PM
I have a permanent policy through Northwestern Mutual and am thrilled with the product. I bought it at age 22, and will use it to "retire" before 65. I'm surprised no one has mentioned the tax benefits of permanent insurance products --- especially considering taxes are likely going to increase significantly over the next few decades. . .
Posted by: Amanda | August 27, 2009 at 10:06 PM
I agree with Angela. There are only a few instances in which whole life insurance makes sense. Other than that, life insurance is supposed to replace lost income (or expenses not made if mom stays at home, for example) in case of death. A savings or investment account is supposed to help you grow your savings or investments. Whole life insurance tries to do both and charges the buyer high (hidden) fees for providing these two services in one package. Check the return you are getting on your whole life insurance policy - good luck with that! - and you won't be so happy about the tax efficient way of having your money grow because your money grows so slowly that the tax advantage is not worth it.
Posted by: ctreit | August 28, 2009 at 10:36 AM
Responsible parents should feel the need to obtain life insurance, and I might add, also disability insurance, early on when they have young children to raise, and their savings are quite small.
I have been retired for 17 years so I don't know if employers still provide their employees with life insurance, as they did in my time. If they don't then term insurance is the way to go. When you are young and healthy, term insurance is very reasonably priced. The disability insurance is also quite reasonable and guarantees a certain percentage of your income should you become disabled and unable to work for an extended time.
Don't buy permanent life insurance, but make the maximum possible contribution to your 401K plan and save as hard as you can to build up money for emergencies such as having to find a new job in a hurry and move your family to another state. Once you have your emergency money secured then it's time to direct your savings into long term investments.
There are two good ways to become financially independent over time, one is by learning how to invest in the stockmarket, preferably using mutual funds for their added diversity, the other good way is to start buying rental properties. I have owned one rental property during my life and soon found that I didn't have the temperament to deal with renters not taking care of my property which is a very common complaint I hear from friends that own 5-10 rentals. My choice turned out to be the stockmarket and that was fantastic during the nineties, but right now I would have to say that in this economic climate that owning rentals will be the better way to go for many years into the future, especially since starter homes and condos can be purchased at discount prices right now and there are a lot of previous homeowners that are now looking to rent. Rental homes also offer great income tax savings since they can be depreciated in addition to all of the other writeoffs. This is where a successful saver can really move ahead. If you have the downpayment, resources, and good credit that allow you to buy a rental then you can take the first step towards becoming wealthy. Don't buy in rundown neighborhoods though whatever you do.
Back in my early days, limited partnerships were also great investments and I used them to pay hardly any taxes. However when Ronald Reagan became President the first thing he did was to do away with the tax benefits of limited partnerships and instead, drastically lowered the highest tax rates. Those were the good old days when you could invest $10,000 in a real estate partnership, get a $30,000 tax writeoff, receive monthly interest payments, and then get your $10,000 back when the partnership ended in about 5 years.
Posted by: Old Limey | August 28, 2009 at 10:41 AM
As to Amanda's point about the tax benefits, yes there are tax benefits but as I mentioned, you can't actually get the money, you have to borrow against the policy and pay interest albeit to yourself but still, it seems like a bit of a mess that I am not sure will work out so well if you live to 95.
If you can put 5K a year into a whole life policy, why not just put 5K a year into a Roth IRA. That too is tax free. It has no wasted money going to an insurance agent for commission, no money going to administrative overhead for the insurance company, no money going to fund a death benefit that continues in perpetuity (the premium is always there even when you are 90, its just funded out of the returns of the policy, lowering your overall returns). And on top of all that the Roth IRA is your money. You can take as much of it out at any time (after 59 1/2 tax free and before then you can even take the principle back out after 5 years with no tax and no penalty), you never have to pay it back or pay any interest.
The Roth IRA basically made the tax argument for life insurance moot (unless you are trying to protect 10s of millions).
Posted by: Apex | August 28, 2009 at 11:00 AM
First, I don't sell life insurance. My views on it, and finances in general, may by on the other end of the stick for some. Maybe that's not a bad thing...
Most say to buy term insurance...and it's mostly because people don't know how to utilize this unique product. The foundation of our finances is whole life insurance. Why?
Premium Cost is Guaranteed
Premium Consists of Guaranteed "Cash Value" and Death Benefit
Cash Value Grows Tax-Advantaged
Policy Pays a Dividend
Option to Have the Insurance Company Pay Premiums if You Become Disabled
Provides Wide Flexibility
Can Borrow From Your Policy
Cash Value Can Be Used as Collateral
Cash Value is Exempt from Creditors
Best of all, you can use the policy to create a bank for yourself and start earning the interest you would have otherwise paid to other banks.
Term is cheap and there's a reason. Less than 1% of policies pay a claim. People don't die within the time frame the policy. As you live longer, it gets more expensive. (The cost of being alive and healthy eh? =))
I suggest people to do your homework. Buy term and invest the difference suggests that term insurance costs less than whole life. It's cheap, but it doesn't cost less. Once you understand the potential behind whole life insurance...the answer is clear.
Posted by: bgb | August 28, 2009 at 11:27 AM
It is always interesting how many people there are who are vigorous defenders of the whole life plan who have a lot of assets tied up in that plan. They have been sold on this idea and are materially and psychologically invested in it. And if you are going to make that "no turning back" decision I guess you have to be.
However, no one ever offers a numbers comparison to show how it is better. They just list the same talking points the salesman uses to sell them. They don't actually know how the numbers work out compared to doing something else with term.
It's also worth noting that I don't know of any stories at all (zero) of people going from rags to riches on whole life insurance (some super rich do use it for tax benefits during estate planning but they didn't use it as an investment vehicle to get there). Old Limey is a perfect example here. He went from nothing to 5 Million. He didn't do it with life insurance. The people who evangalize life insurance as an investment vehicle often talk about how they are going to retire on it. Thats their plan. But they appear to not have much else for assets. I am not sure how well off they really are and I am not sure if they know either. And when they start borrowing against it I wonder how many years they will get into it before the borrowing consumes the policy and then what?
I am just saying, I don't know of anyone who get very well off financially by buying whole life insurance (other than agents)
Posted by: Apex | August 28, 2009 at 11:38 AM
I felt vulnerable during the period between the birth of our first child until the third and final child left home. I used the very significant amount of free, employer provided life insurance plus a small supplemental amount of cheap term insurance. The term insurance was cheap because I was very young, only 23 when the first child was born.
Now I don't have a dime of life insurance and don't need it. What I do have is all of our money invested in CDs in our IRAs and in Municipal Bonds in our Trust account. Unlike permanent life insurance these investments have no maintenance fees whatsoever and are generating almost 5% income which is either tax deferred or tax exempt.
I know that life insurance can be used to shelter estate taxes but right now estate taxes are in limbo. They go to zero in 2010 and then Congress has the task of redefining them for 2011 onwards. The estate tax exclusion will probably stay at the current $7M for a married couple which is in the ball park of our total net worth so we're not rich enough for it to be a big issue.
Posted by: Old Limey | August 28, 2009 at 12:30 PM
Amanda, If your policy is great then how does it work exactly? As I said I've yet to see a cash value life insurnace policy that is actually a good buy. What is the annual cost for your policy? What is the death benefit? What is the cash value? How long have you had it?
Posted by: Jim | August 28, 2009 at 12:31 PM
Old Limey said: "I don't know if employers still provide their employees with life insurance, as they did in my time."
I assume it depends on the employer. I assume many employers do but many don't. Mine does provide some insurance but its only 2x my salary. Plus we can buy extra through their group rate.
Posted by: Jim | August 28, 2009 at 12:51 PM
"Permanent Needs" (Income for survivors, final expenses, estate tax costs, probate, and the like) are THE reasons for PERMANENT policies. "Temporary Needs" (such as paying off mortgage, debts, college, child care for a surviving spouse, etc., - needs that will go away over time) are the majority and call for TEMPORARY coverage- thus term....If you don't think an agent will earn their commissions than look to a "lower load" policy such as from USAA, etc., however, very strong co's such as NW Mutual and the like have always managed their portfolios well and the coverage you get with VERY strong companies literally is "free" over the long term. "but term - invet the rest SOUNDs gret but, in practice rarely works as most folks spend the $$ that otherwise supplement the teerm, THEN the term expires and the $$ aren't enough accumulated to keep a lifestyle! (Ever wonder why TERM is THE biggest profit maker of ins cos???- figure it ut- 96%~ is cancelled/expires BEFORE a death payout!!) I have two permanent policies (Whole Life) that are long paid up - but, I have an INSTANT death benefit to cover probate, funeral, house bills etc., that WILL occur before any/my estate is settled. And, I can borrow againt the cash value if I wish - these policies were a GREAT long term decision in an overall financial plan starting at age 26! It's NOT an "either/or" question but, a question of "how much" of EACH type of coverage one desires AND needs. Permanent polices can also be a great asset planning tool for the multi-millionaire types that 97%~ of the population rarely understands. I was a financial planner and licensed agent for 16
+ years, there is a need for both, though typically lower and middle america is served best by loads of term w/ a small WL or even guaranteed UL "base" of coverage. If you cannot realize paying the premiums for 20~ years, regardless, then don't consider permanent coverage! But, realize, you'll want it when you ARE successful and older and health, age costs may close the opportunity!! Group or employer term is not a binding legal individual policy but, a group contract via employer/insurer! Retire, quit, leave, change employment and you may have your coverage disappear w/ the job and your health/age may not permit you to replace it - so be careful and use group as a supplemental option. Life isn't as simple a a free blog/post indicates...and I'll compare my financial success against the VASt majority here. (I retired at age 47 BTW...)
Posted by: jeffinwesternwa | August 28, 2009 at 02:59 PM
If you want the numbers run I would suggest reading Missed Fortune by Douglas R. Andrew. Looks like you can read it for free on google: http://books.google.com/books?id=W5rna-866BoC&dq=missed+fortune+book&printsec=frontcover&source=bn&hl=en&ei=0jmYSr-TJt2e8QaItPnFAQ&sa=X&oi=book_result&ct=result&resnum=5#v=onepage&q=missed%20fortune%20book&f=false
I am 27 and haven't made a decision on whether I think this is a good idea or not partly because so many have strong opinions against it. I think the main thing is you have to go into the mentality that you are keeping it for life so it is a big commitment. If you cash it out it isn't going work as expected.
Posted by: Cory | August 28, 2009 at 04:17 PM
@jeff
You retired at 47 but is that because of your WL? I don't think so. And any contribution from the policy could have been accomplished just as easily by contributing all that money to an IRA, 401k, Roth or even just a straight investment fund.
"Ever wonder why TERM is THE biggest profit maker of ins cos???- figure it ut- 96%~ is cancelled/expires BEFORE a death payout!!"
Care to back that up. Insurance companies incentivise their agents to sell Whole Life vastly over Term. My father-in-law is an agent and he says repeatedly that there is no money in it for the agent to sell Term so he aint interested in talking about it. But they know all the things to say about WL. Ever wonder why companies give agents such an incentive to sell WL? Figure it out, the premiums are huge and they reap far more than they ever pay out.
Using your own numbers (which I don't know if they are accurate) 96% of term policies are cancelled or never pay out. Ok, I pay $402 per year for 750K insurance. So I let that run for 20 years and it costs me $8000. So if 96% don't pay then 4% do pay. That means 1 in 25 would pay the 750K and they would receive 8K times 25 policies in premiums. Thats only 200K in premiums and they would lose money. Obviously the payout is even less than 1 in 25. And it should be. Its not supposed to pay out, its insurance. I don't understand this concept that insurance is supposed to pay out. Do you buy car insurance expecting it to "pay out" Home insurance expecting it to "pay out" No, you hope they never do and for 98% of people they will never get paid what they pay in premiums. Thats how insurance works. You all pay a little and the person who has a catastrophy gets the pot of money to cover their exposure.
So how does whole life work then? Well the company takes an exhorbitant amount of money from you. uses it for 60 years. Makes 25 times what you paid them in returns on that money. Pays the agent a nice chunks, keeps a nice profit and gives you 10-15 times what you paid them in returns and convinces you that you got a good deal.
I have heard the arguments my father-in-law uses. "Look at this, this policy is now paying more in dividends than the annual premium."
yeah? So what, you had to pay in premiums for 25 years to get it to do that. Meanwhile the company had all that money for all those years, and I did not. If you don't run the future value of money formulas very carefully its easy to get impressed by the numbers. But they aren't as impressive as they seem. People are easily fooled by think they got money for free (or insurance for free). I assure you nothing is free. Insurance companies don't get subsidies from the government. They have administrative costs and make profit. If they didn't they wouldn't exist. And those profits come out of your returns, they must, there is no where else for them to come from. And there is nothing wrong with that. They are providing a service and deserve to make profit on it. But you should be aware that its not free, and you are not getting some kind of magical formula to "bank on yourself" or get free insurance or insurance that pays for itself. You paid for it. All of it. You just might not realize that you did, but you did. Its Newton's 2nd law of money ... Conservation of Money .... Namely money cannot be created without taking it from an exhisting source of money. Any money that is added to one source (insurance company profits) must reduce the supply of money in another source (your policy's total value).
Perhaps someone who believes there is such a big benefit to this policy could explain what the insurance company does with the money that allows them to pay administrative costs, keep some profits and still return to you more money that you would have if you just kept the money and invested it yourself. Do insurance companies have access to special investments that vastly exceed normal market returns? (In fact they usually have to invest in very safe investments that tend to underperform over long periods of time because they cannot afford to take risk with that money as they have obligations to pay out on the policies).
Posted by: Apex | August 28, 2009 at 05:13 PM
no WL did not make me wealthy but, as someone who HAS (earned and invested) a LOT of money, I relaize it (insurance-PERMANENT) can/is a VERY important part of a financial plan, for those w/o money, or those who have have ever assisted (many) survivors of death when WL was the ONLY coverage left in force can understand...realize much term does get "converted" to Whole life, so that's part of the 96%, ..$100 invested for 10 years will "pay" $$$ in an amount no where NEAR the amount of a death benefit, yet often if the $$ are invested instead they are "spent" or taken as income later in life, or needed when the market drops (1973, 1987, 2001-2003, 2009-10, etc.,) and thus, cannot be used properly to insure an estate or survivor, permanent insurance CAN, by this time in life, term has expired or the cost has become prohibative to buy, ...did you ever price term in your 60's/70's - provided you're healthy enough to try to buy it when your group term or old term policy has expired? I've seen the looks of those who have, it's not pretty financially! whole life OR term, (usually BOTH) that is why life insurance, so overlooked is probably the early component of a long term plan. As a FIDUCIARY and registerd principal I was charged with HAVING to make the BEST receommendation to a client, not just "suitable" and often, level, or decreasing life insurance coupled with a base of Whole LIFE was the first recommendation. I got paid the same rate of commission BTW, WL OR term! I don't regret having coverage FOREVER, I only paid for 15~ years, for what is tax free, instant and guaranteed for MY survivors. Probate, household bills, estate settlement, final expenses, final medical, etc., bills., will all be paid from MY whole life, the rest of my estate (multipe million) CAN be passed on, without liquidation or selling....I think THAT is smart! It cost pennies in the past to buy DOLLARS in the future, not THE answer but, a good one for survivors! Nothing in life is freee nor w/o cost - that is WORTH much, permanent insurance can be looked at as very close to when used as a 20, 30, 40 year component of a plan! No regrets here.....none, ever! Spent 2 areers in the military and in fin planning seeing it work for survivors EVERY year of both!
Posted by: jeffinwesternwa | August 28, 2009 at 06:19 PM
And don't forget, one CAN buy stock insurance from co's where a DIVIDEND is NOT paid and the premiums are slightly cheaper, I did THAT for my Whole life BTW. No dividends to project nor worry about, just a tax free, guaranteed 1) premium, 2) death benefit 3) cash value, MY Whole Life will outlive my term I hope! And pay WHEN it is needed, he's RIGHT!
Posted by: chynnalemay | August 28, 2009 at 06:21 PM
@jeff
The idea that most people won't invest the difference is another common talking point of insurance salesmen. My father-in-law uses it all the time.
So the argument goes, most people are irresponsible so its better for them to give the money to us and then force them to have a savings fund.
I concede that for irresponsible people they are better off getting a worse deal by buying expensive insurance with carrying costs than by blowing it on snow mobiles and plasma TVs.
For those of us who are responsible, its a worse deal. Still have not seen one argument to prove otherwise. Just more typical talking points.
As to the argument about $100 invested for 10 years wont return you anywhere near the death benefit????? Of course it won't. Thats why you have term for that period of time.
Posted by: Apex | August 29, 2009 at 09:08 AM
Jeff, what were the premiums you paid on your cash value insurance? How long have you had them? What is the death benefit and what is the current cash value?
Posted by: Jim | August 31, 2009 at 12:27 PM
Term is temporary and runs out. Whole life is guaranteed and permanent. That’s it.
Once the term runs out, then you must take on the full risk of becoming your own life insurance company. This is very expensive and dangerous – especially at retirement. What you’re really doing is gambling.
You place your entire future at the mercy of the unknown: market losses, interest rate fluctuations, bond defaults, real estate drops, rising inflation, tax increases, additional family needs, changes in your health, planned obsolescence, personal consumption, world and national problems, etc. If that’s your plan, then I would start practicing your excuses right now… because you are going to have a lot of explaining to do to your family after something goes wrong and you lose money. Again.
People who only “buy term and invest” pay more taxes, pay higher investment costs, lose money – then retire with no insurance, live smaller and worry about every little penny they spend.
On the other hand – whole life offers a firm foundation of guarantees, benefits and tax advantages, over which you can build a strong investment portfolio of growth. If anything changes, you’ve got more options at your disposal. You control your money, instead of your money controlling you.
Smart, rich people buy whole life insurance because they understand how to use it as a financial tool for long term wealth and success. It never fails.
I have been selling life insurance for over 26 years now – both term and whole life. My advice to you is to find a good agent (you may have to interview many) who really understands whole life insurance and knows how to make it work to your greatest advantage. If you can’t afford WL right now, then start with term and implement a plan to convert to WL over time.
Posted by: MTR | August 31, 2009 at 01:55 PM
There is a lot of misinformation and misunderstanding about how whole life insurance works. I think much of this information can be attributed to those who make “rules of thumb” like “buy term and invest the difference”. This mantra gets pounded into our heads, and make it very hard to see any other options. Maybe the “truth” about whole life is going through the 3 stages... (First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.)
As a disclaimer, I own both term and whole life.
First, lets talk taxes. In any scheme, 401k, whole life, IRA, etc, there are basicly 4 times you could pay or avoid tax: On investment, borrowing from the account, at retirement, and at death.
Here's a quick run-down of the taxes on each:
401k/SIMPLE/IRA: Borrowing, retirement, death. So you could pay tax in 3 of the 4 possible places, however, this makes it a poor place to borrow money from, so likely you will only pay tax when you pull money out at retirement, and depending on the law at the time, your estate may or not pay tax on any remainder.
Roth IRA: Investment, borrowing, death (maybe). Still 2 out of 4, at best.
Whole life: “Investment” and maybe death, but this can be avoided. So we only pay tax in 1 of the places! This could be good right?
@ robert w. - At age 60, term may be the way to go for you. However, permanent life insurance can help many people your age with estate planning. If you have $100K cash that you are never going to touch, which may grow at 5-7% in the market, you could buy a $200-300K life policy that could be passed to your heirs tax free.
@ Angela – if you are only using life insurance to insure life/income, you may be right. There are many other benefits outside of this alone. Life insurance can have LIFE benefits, not just death benefits.
@Apex – You need to do some research instead of throwing around stories and random thoughts. Do your reading, then come back and make a solid criticism instead of ranting. This makes you seem less credible.
Here is an example of how I am using my policy...
I invest in real estate, so when I decide to purchase a property, I allow my real estate company to borrow the money it needs from my insurance policy for the downpayment. I generally lend it to the company at a 10% interest rate. This does a couple of things. 1) this increases the amount of interest that my real estate company pays (a deductible expense) so I pay less taxes using this tactic. 2) money that I borrowed for my company gets paid back into my policy, which isn't taxable, further reducing my tax liability vs paying it to myself outside of the policy 3) this increases my returns into my policy because I get to choose the rate that at which I lend money and my policy grows more quickly than it might otherwise since the 10% return is greater than the 7% it would earn if I didn't borrow the money out.
On my last property, I put $25,000 down out of my policy. In the first year I will pay about $2300 in interest to myself/policy. If I had been paying market interest to a bank, I would have paid $1400 (and then the bank would keep the money, not me. So instead of watching $1400 disappear, I will have an extra $7-800 in my policy versus not using the money in the policy for a net gain of about $2100-2200. And avoiding taxes all the while!
I'm sure I'm glossing over some obvious details here. Feel free to call me on it.
Posted by: rxjohnk | September 02, 2009 at 06:01 PM
rxjohnk --
I think much of the problem is the confusing and complicated nature of permanent insurance that the insurance industry has appeared to set up on purpose to disguise a boatload of fees.
Posted by: FMF | September 03, 2009 at 07:56 AM
FMF-
When you go to a restaurant to buy a meal, do you complain that their markup on the food is 400 percent or more? Or do you realize that if they don't make a profit - enough to cover goods AND service, they won't be in business very long, and you won't have a place to eat?
As long as I get what I want, I don't care about what the agent's commission is or that I don't know where every dollar over the mortality cost is going - can you think of many transactions where the buyer knows exactly what the "cost" to the seller is?
As one of the others readers stated, they are a business and they have to make money to stay in business. I have my policy with a MUTUAL company, which means that I am a policyholder AND an owner/shareholder.
I have determined for my self that a system that allows me to reap such huge benefits is worth the cost. Just on that one piece of property I retained $1400 in interest that I would have paid to a bank if I put my money into a 401k instead of whole life. You could call that a $2800 positive swing in my direction! (in my example above I didn't because my insurance policy pays a 7% dividend - this actually increased from 6 to 7% in the last year despite the economic environs - so I would make about $1400 even if I didn't touch the $25k) The 5.6% return ($1400 on a $25k downpayment) is not only tax-free (which would equate to an 8% pre-tax return) but also all of the cashflow comes from the rent on the property, which is also paying down the primary loan. And finally, all of this remains within my control - maybe not totally, eg. the rental market could decline, etc. - but it is within my comfort zone.
I have a few questions for all of you out there:
Have any of your investments increased their dividends in the last year?
Do any loans that any of you take allow you to keep the interest, not pay taxes on it, deduct it and then immediately borrow the money again with no questions asked?
I have yet to find another system that offers such significant benefits, but I would love to hear if anyone has heard of anything.
Posted by: rxjohnk | September 03, 2009 at 02:44 PM
rxjohnk --
I was trying to answer your question about why there's so much misinformation out there.
As far as the 400% mark-up, it's better to pay it on a meal than on a several thousand-dollar insurance policy, right?
Posted by: FMF | September 07, 2009 at 06:08 PM
I'll forgive the misunderstanding. I didn't ask a question. I stated my belief that there is a lot of misinformation.
I am going to respond to your question even though I assume you intended for it to be rhetorical, however.
First, I haven't seen a whole life policy with a 400 percent markup. I don't even know what that would mean, really. That said, I think using a life insurance policy as a ready source of financing for all of life's many expenses is a great idea. If you could fund this by "sacrificing" a few meals out on the town, than I think that it may be better to pay some commission and mortality cost to an insurance company to accomplish it than to pay relatively much higher prices for a meal simply for the convenience of having someone else prepare it and serve it to you.
I can tell you that in my policy, I retained about 70 percent of the premium in the first year and 85 percent in the second year. So if my premium was $10,000 in year 1, my cash value was $7k, and in the second year, my cash value was $15,500. However, in year three my cash value went up by $11,000. In the coming year, it will actually increase much more than that since I am borrowing money from it and paying it back at a relatively higher interest rate than the internal policy rate of return.
Is this a great return on my investment? I "lost" 22.5 percent if you want to look at it that way... However, how much would I have lost if I put that money into a low cost index fund in the same time period? Well in the last 2 years, $20,000 in the Vanguard Total Stock Market Index would be worth $14k more or less.
Is that typical? Maybe not, however, that is sort of the point to doing this... In this plan, it doesn't matter what is going on in the market, it is ALWAYS a useful tool that allows you to save money in a tax-advantaged way and use that money during your lifetime to further accumulate wealth by paying money to yourself instead of a bank.
Again, I challenge you to find something that is as useful instead of just nit-picking at an idea that you just don't understand clearly.
Cheers!
Posted by: rxjohnk | September 08, 2009 at 08:45 PM
rxjohnk --
"an idea that you just don't understand clearly."
Isn't that what I said? Aren't you agreeing with me? Don't you think part of the reason people don't buy/like whole life is because they don't understand it? And why is it that they don't understand it?
Posted by: FMF | September 09, 2009 at 07:36 AM
Maybe they just aren't smart enough to understand how their money can work for them (whole life) and instead would rather have their money work for someone else (term).
This self-inflicted financial bondage reminds me of Hosea 4:6: "My people are destroyed for lack of knowledge. Because you have rejected knowledge, I also will reject you from being My priest. Since you have forgotten the law of your God, I also will forget your children."
Hosea is talking about knowledge of God, but I feel that this is analogous to the way many people treat their finances. They perish financially (take on excessive debt, lose their homes, file bankruptcy) because they fail to gain the financial wisdom that will serve not only themselves, but also future generations.
"It isn't what we don't know that gives us trouble, it's what we know that ain't so." - Will Rogers
Posted by: rxjohnk | September 12, 2009 at 01:22 AM
rxjohn --
Nope, I don't think that's it...
Posted by: FMF | September 13, 2009 at 06:37 PM
Well thought out response.
Thanks!
Posted by: rxjohnk | September 13, 2009 at 10:01 PM
rxjohnk --
You're welcome. It was deserved since you've totally ignore my point.
There are two ways I look at the topice of permanent insurance. From a business/marketing standpoint (I have 20 years' marketing experience with top-flight companies), if you have a really great product that delivers, you make it as easy as possible for people to buy it. If they have trouble understanding it, they won't buy. So you make it SIMPLE. You explain it in terms they can get. Then, once they do, they buy like crazy.
On the other hand, if you have a bad product, you try to mask all its faults with complicated terminology, you sell more on emotion, etc. -- everything the insurance industry does with permanent insurance.
From a personal standpoint, I have run the numbers on several permanent life insurance policies. After dragging many of the details out of various agents, it has always come down to the fact that permanent insurance is a wash when compared to buying term and investing the difference. Except by saving yourself, you have a lot more flexibility. So I've opted for the latter.
This isn't to say that in some cases permanent insurance is a good idea. Almost anything can be a good idea if the situation is right. But for most people, I believe that permanent insurance is not a solid financial move.
Posted by: FMF | September 14, 2009 at 05:17 PM
In my personal opinion, it sounds pretty generalized. If you are left to make a choice between term life and insurance and whole life insurance, how would you choose between the two? Basically, it comes down to how much you are willing and able to pay for your premiums and how much coverage you are looking for. If you can afford to pay a higher premium for your entire life, a whole life policy is the one for you as it also brings with it a cash value along with the death benefits. If you have a young growing family and want to protect it from hardship after your death, a term life policy comes highly recommended. The death benefits can be used to pay for funeral expenses, mortgage bills, education loans and help maintain your family’s standard of living even in your absence. But whatever you choose at the end of the day depending on your individual requirements, ensure that buying a policy – any type – is non-negotiable.
Denise at AccuQuote
Disclaimer: I work for AccuQuote and this is my personal opinion.
Posted by: Denise | September 29, 2009 at 02:53 AM