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October 14, 2010


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There are a lot of details missing, but here is my answer as a former Financial Advisor and Certified Finacial Planner. Whole Life is insurance not an investment. That is the first thing to consider. If you have liabilities that will need to be paid if you die (like debts or to set up funds for dependents that count on you for their survival) then insurance is the right move. However, if your money is just for investment purposes then other investment vehicles would be a better choices. To decide which more details are needed.

I would not pay $2025 a year just to provide income to my decedents. I imagine there are a lot of other things that are more fun that could be done with that money.

But, that is just me.

If you invest the $2025 a year for 20 years at 3% (in a US bond, perhaps), you would have $55000 after 20 years. Sounds like you could create your own insurance plan with that money.

Whole life is tax shelter, as life insurance is not taxed. There are other implications other than cost to consider with this purchase.

As an aside, whenever you hear Warren Buffet talk about the estate tax, remember his bread and butter income comes from selling life insurance. Discount it accordingly.

You are only talking about approximately 2.15% interest rate. You can probably get a better interest rate elsewhere, however, insurance will guarantee the money if you don’t live another 20 years. So the question is do you want insurance or an investment?

If the purpose of the 50K "investment" is for the children and grandchildren and assuming that the grandchildren have not yet graduated highschool, then the best investment is in their education. I would split the money into several different coverdell education savings accounts (ESA) -- The yearly contibution limit on these accounts are $2000 and the gains are tax-free. This way, I would know exactly where my money was going and I wouldn't have to worry about my family fighting over the 50K after I've passed.

Furthermore, it helps the children and grandchildren pyschologically in the future by not teaching an attitude that relies on handouts.

Think about it this way. If the insurance company sells 1000 of those to 1000 people your age they will have to pay their overhead costs and make a profit and the rest will be paid out to the 1000 people in time. In order to do that, that means on average every single person will get less back than they paid in after accounting for gains that the insurance company made by investing the premiums.

Certainly some people who died early will make out like bandits but unless you are betting on that, on average you will get less than you paid in. It must be that way or the insurance company would go broke.

So it's not an investment, its insurance and insurance is always an expense intended to spread risk. People use whole life as a tax shelter but it's not a money making investment on average.

Tax advantages, low investment risk (based on the insurance company failing), and unexpected death are all reasons for whole life. I don't know the answer to this, but would it also be protected from creditors similar to a 401K or homestead in certain states? This could also be an advantage over taxable investments.

All good advice. I'd also compare the costs of term insurance to the whole life deal. Term insurance yearly premiums might be a whole ( pun intended) lot less money.

Is there anything else you could use the money for? Pay off a mortgage maybe? Help contribute to grandkids college expenses?

Whole life insurance is not a 'good' investment in terms that it has fairly high fees and relatively low growth. As others have pointed out you'd do better putting money into treasuries which are safer.

At your age willhealth even allow you w/o a rateup. Do you know the cost? As a fin planner/agent/Principal of 16~ years I doubt you have done "all teh other things" FIRST before adding WL as an investment to your protfolio. However, at age 60, I'd love the commission to sell it to you! Insurance can and is a GREAT investment for higher income folks who max AA other retirement plans, lots of liqid savings,are in high tax brackets/states and have a lot of LONG TERM eadditional cash flow. THEN, consider it!

At your age, you're wasting your money on unnecessary insurance! You're better off investing in annuities, stocks, bonds, gold, CDs, etc. The type of insurance to "invest" would be either term or whole life that features "return of premium". For example, after 20 years of paying for the annual premiums, if you're still alive, the company will refund you all 20 years premiums as a lump sum. I find this a strong incentive to keep on chugging!

Lots of missing details here, but keep in mind that Whole Life policy is part life insurance, part investment. Only some of your premium accumulates towards the cash value. Part of it is taken by the insurance company to cover the insurance piece. If you need the life insurance to leave money to your heirs in case you die early, then you might consider it. However, if your goal is to have it "as an investment in case I pass 80", then why not just take what you would have paid in premiums and put it in a Roth IRA. With a Roth IRA, all of your money goes towards the investment, not just the part remaining after the insurance company's cut. As others have pointed out, you'd end up with more when you are 80.

Also, keep in mind that a $50K whole life insurance policy is going to have $50K in cash value when you turn 80. Most insurance companies set up whole life to "mature" (i.e. have the full face value in cash value) when you turn 95 or 100.

Also, much of your premium for whole life goes towards the salesperson's commission in the first year, so your cash value isn't going to grow very fast. Think of it as a high load mutual fund in that respect.

If you are still considering it, ask for an illustration and get an independent fee-based financial planner to go over it with you, so you can see exactly what you are paying for.

Generally speaking, whole life and the other exotic policies (variable life, universal life) are not only complicated but they are opaque in what you are getting. It's tough to compare them. A mutual fund, by comparison, is much more transparent.

CORRECTION: A $50K whole life insurance policy is NOT going to have $50K in cash value when you turn 80. Need to proofread better!

QUESTION: What cash value will the $50K whole life policy pay out when he turns 80 twenty years from now if what you just revised say it's NOT?

The whole life policy will only pay out the cash value if it is greater than the face value ($50,000) of the policy. If your cash value were $49,000, you would not get it, the insurance company would keep it and your family would get the face value of $50k. You never get both out of a plicy like this. Also, the fees are usually very high in whole life policies and the returns are very low. You are better off hanging on to your term policy, and investing in a mutual fund of some kind (IRA, 401k, ESA, etc...).

Felix: Depends on the policy but whole life policies are designed to accumulate cash value in a manner that they will have the full face amount in cash value by the time the insured is age 95 or 100. This is the maturity date of the policy.

Also, you have to keep in mind that cash value <> face amount. As Jason points out, if you DIE, you get the face amount (i.e. $50K) no matter what your age is. If you cash out the policy while you are still alive, you get the cash value, which is less than $50K.

I think all this underscores my point that life insurance is CONFUSING! Warren Buffet says that you should never invest in something that you don't understand, and I think most people don't understand life insurance, other than term life. Even a simple whole life policy is beyond the comprehension of most people.

If he buys a whole life policy his death benefit will grow with the paid up additions. So if he wants to leave enough for his family to bury him and still have tax free money left over to pass on the whole life is a good policy. He can not buy term insurance since he is 60. He would have to get whole life or universal. This is why it is so important to insure your children while they are young and healthy...the premiums are low and will remain that way throughout their life. I know people who thought they could wait to buy life insurance when they were older and then got rejected because of their health.
Do you know anyone who passed and had no life and the family members had to chip in to pay for funeral expenses? it happens all of the time. People blow
through their retirement money and don't leave enough for burial expenses.

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