Whole life insurance

[jaxbusa]

Can someone explain whole life insurance in layman’s terms? I spoke with my financial planner and, for a second time, he suggested whole life. I currently have term. He said that you can borrow from it, if needed, at an 8% interest. And that’s where he began to lose me. I’m 38 years old and married. I don’t have kids, just a mortgage. My mindset is that I will keep the term until the mortgage is paid off. If I go with whole life, I will pay a lot and never see the money If I die. Would the money spent on whole life be better for my wife in deferred compensation, money market or other? Please explain how whole life insurance would work for me.


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[OETKB]

I've never been an advocate for whole life as an investment. Sounds like maybe your financial planner sells insurance also? I had a crap load of term insurance for 30 years while the kids were growing up, and let those policies lapse once the house was sold and paid off last year.

Be sure you have some long term disability insurance if you don't already.

 

[BrunotheBoxer]

You die. You family gets money. The end.

 

[HISSMAN]

Yep. I die, my fam gets 1 meeeellion. I sleep knowing that they can at least have a clean start and a step forward without me.

 

[BDF8]

400k through Prudential military


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[Pribilof]

I do not think whole life is a fit for most people. I recommend term life in most scenarios unless somebody has things like estate tax issues or most of their assets are highly illiquid.

What type of policy has your advisor purchased for himself. Ask to see a copy of his policy. I'd show you a copy of mine if you were a client. I have a 20 year level term policy.

Signed, an advisor to UHNW families.

PS, look at the year 1 premiums you'd pay for that policy... That's generally a good estimate of your advisor's commission on that policy.

 

[PaxtonShelby]

Get a 20-year term policy. Invest the difference between the low term premium and the whole life premiums over the next 20 years. You’ll be amazed at how much more $$$$ you are sitting on in the end going with term.

 

[13COBRA]

Yep. I die, my fam gets 1 meeeellion. I sleep knowing that they can at least have a clean start and a step forward without me.

Should you round up to $1.5 million? Just to cover those 5th, 6th, and 7th credit cards?

 

[HISSMAN]

Down to just two cards man...They should be able to sort it out...LOL!

 

[HISSMAN]

Get a 20-year term policy. Invest the difference between the low term premium and the whole life premiums over the next 20 years. You’ll be amazed at how much more $$$$ you are sitting on in the end going with term.

I'll be dead in 20.

 

[Jefe]

Term insurance locks in the rate at the time you buy it for a set amount of years. Once that term is up you can keep the policy but the rate will be based on your new age and it won't be pretty. Term insurance does not build a cash value but is great for making sure you pay your mortgage off. Another form of that is decreasing term life insurance which reduces the benefit and cost as your debt decreases

Whole Life runs to age 100 and can be cheaper because it requires medical testing. The healthier you are and your immediate family history is, the lower the rate. If you decide you don't want it you can cash out a good portion of what you paid into it minus a penalty. You can also take a loan against it at a percentage. If you live past 100 then you determine the payout structure.

I would look into variable life insurance. A portion of your payment pays for life insurance and the rest you can choose how to invest it in the stock market. In a short amount of time the cost of the insurance is greatly reduced and it starts building value fast. When I started mine it was $65/month and in only a few years the life insurance went from $44/mo down to $21/mo. That is mainly due to the stock market rising.

Always check with the Insurance company you have your Autos and Home Insurance through as Life Insurance makes those cheaper

 

[Ohio Snake]

Term insurance is life insurance specified for a period of time at a certain face amount. When utilized for specified length of time usually corresponds to a debt ( mortgage ), income replacement (typically age 65) or other need ( college funding in case of loss of parent).
Whole life insurance is an archaic policy type which guarantees the cost of insurance, interest rate, offers auto premium loan, guaranteed premiums throughout your lifetime. Essentially, the insurance company bears all risks of the policy enforcement as long as the owner pays the premium. Whole can be very expensive.
Universal Life is sort of a cross between the two ( term and whole life) whereas you have a specified death benefit, annual declared interest, current cost of insurance, flexible premium and or death benefit ( if you want to change). Universal life is less costly than whole life, but more than term. This policy type may be best utilized when passing an estate value to your children at the end of your lifespan.

Some policies cash value growth can be based of a market index (SP500) or variable ( securities with sub-accounts...looks like mutual funds). Variable should be utilized if your over -funding a life contract or transferring a larger lump sum from another contract ( 1035(a) exchange.

In your particular case ( based on what you you have stated), you and possibly your spouse should utilize term policies to cover your debt/s. Most term policies carry a conversion privilege which protects your health ( in case of dreaded illness) AND you have a need to carry the insurance beyond the specified period of time. Conversion allows you convert a term to universal life ( or possibly whole life) without underwriting. One caveat on premiums....the premiums are based on your attained age ( the older you are the higher the premiums at the time of conversion).
Utilize the savings for building a nice after- tax account for emergencies or investing. Keep funding your 401K or other ERISA plans, if offered).

BTW: Ask the Advisor what his/her compensation is on the whole life and that may answer your question on why the recommendation. All life policies pay a fairly large compensation to the agent ( can be 100% of the first year premium) with a trail.

Always read you contract for all details.

PS: Im a financial advisor. Hope this helps.


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[CV355]

From how I understand it, term locks you in at a lower rate the younger/healthier you are, but doesn't necessarily gain cash value.

Whole life / permanent / universal gains cash value, so it's a viable means to transfer wealth if 401(k)/roth/etc are maxed out and you're looking for ways to transfer without tax burdens.

I have two $250k term policies. I keep telling my wife she should run me over so we both win, but she doesn't want to do that for some reason.

 

[M91196]

Not a financial advisor or planner but I always believed life insurance was just that, insurance to protect your earning ability for people who rely on you.
When my kids are thru school and the house is paid I don’t need crap all for insurance, I’m not setting up the next guy in a lavish lifestyle or paying inflated premiums to leave my kids $$$.
Term and invest until it hurts!

 

[Ohio Snake]

From how I understand it, term locks you in at a lower rate the younger/healthier you are, but doesn't necessarily gain cash value.

Whole life / permanent / universal gains cash value, so it's a viable means to transfer wealth if 401(k)/roth/etc are maxed out and you're looking for ways to transfer without tax burdens.

I have two $250k term policies. I keep telling my wife she should run me over so we both win, but she doesn't want to do that for some reason.

Term does not build cash value.

UL and whole life build cash value. They may be helpful when transferring pre-tax accounts to non-spouses. Roth transfers federal income tax free to beneficiaries.

Some permanent policies my have long term care or chronic care built i n to the contract which may be appealing.

Keep in mind, everyone has a different situation for product need. I can get very in-depth on products for clients and various uses. I tried to keep as basic as possible with over doing it.


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[Ohio Snake]

Not a financial advisor or planner but I always believed life insurance was just that, insurance to protect your earning ability for people who rely on you.
When my kids are thru school and the house is paid I don’t need crap all for insurance, I’m not setting up the next guy in a lavish lifestyle or paying inflated premiums to leave my kids $$$.
Term and invest until it hurts!

Life protects more than just your earnings. It can do a lot more if written and sold properly.
There is nothing wrong with your philosophy when the kids are through school and the house is paid in full.

I have a variable universal life policy with an option B death benefit with over-loan protection, chronic illness and accelerated benefits with premium based on maximum non MEC level premiums. In other words, I have my policy set up as an investment vehicle for tax-free income or distribution under FIFO guidelines. That’s a mouthful on how I use my policy. It would be very rare for me to sell this policy as such to a client unless they fully understand the benefits.


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[M91196]

Life protects more than just your earnings. It can do a lot more if written and sold properly.
There is nothing wrong with your philosophy when the kids are through school and the house is paid in full.

I have a variable universal life policy with an option B death benefit with over-loan protection, chronic illness and accelerated benefits with premium based on maximum non MEC level premiums. In other words, I have my policy set up as an investment vehicle for tax-free income or distribution under FIFO guidelines. That’s a mouthful on how I use my policy. It would be very rare for me to sell this policy as such to a client unless they fully understand the benefits.


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I’m not a sophisticated investor, Fidelity say keep doing what your doing and you’ll retire at 65 and not outlive your $$$ and maybe have some to travel if the market doesn’t implode severely in the next 10 years.....

Were does that next level conversation happen about this stuff, a brokerage?
Certainly not my insurance agency.

 

[Ohio Snake]

I’m not a sophisticated investor, Fidelity say keep doing what your doing and you’ll retire at 65 and not outlive your $$$ and maybe have some to travel if the market doesn’t implode severely in the next 10 years.....

Were does that next level conversation happen about this stuff, a brokerage?
Certainly not my insurance agency.

Everyone has a different level of investment “comfort”. You should consult with an investment advisor or financial planner. A good advisor can make a difference.

A good CPA that works with your advisor is a big plus. Its not always about how much money you have, but how much you keep at retirement.

Im going to go out on a limb here. I will bet your Fidelity account is a 401K. Again, Im just guessing.
Read the assumptions carefully on the Fidelity website. It may state “based on distributions of 6% of your assets at retirement, this is what your annual income can be. Based on XX% ( typically 6%% which is a balanced approach) annually rate of return, this should be your account balance.” These assumptions are very typical.

Actuality:
The return of 6% average is fine if your a moderate ( balanced ) to aggressive investor. Not so good if your conservative.

Unfortunately, 6% distribution rate against the asset balance is way too high in today’s low but rising interest rate and reduced dividend yield. environment. Add a “bad sequence of returns” just before retiring and you have a disaster on your hands.

Best thing to is plan your distributions at no more the 5%, preferably 4% of the asset balance. If you run a Monte Carlo simulation on distribution rates, 4% will show a much lower failure rate than 5%. The current accepted distribution rate today is actually just under 3% to safe. Personal pension products ( annuity companies that guarantee your income at retirement) go no more than 5% single life 4.5% joint lives as an indicator. In other words, $1M of assets should limit distributions to $50k per year to so you don’t run out of cash.

Everyone has there own comfort zone on what they will do for retirement. Your philosophy is not flawed at all. Just recognize things can change by the time you reach retirement. Read about “ bad sequence of returns”. It will scare the dickens out of if retiring soon.
I will predict you one thing ( I never make guarantees). We will see a bear market within 2-3 years. May be as early as late 2019.


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[Ohio Snake]

Everyone has a different level of investment “comfort”. You should consult with an investment advisor or financial planner. A good advisor can make a difference.

A good CPA that works with your advisor is a big plus. Its not always about how much money you have, but how much you keep at retirement.

Im going to go out on a limb here. I will bet your Fidelity account is a 401K. Again, Im just guessing.
Read the assumptions carefully on the Fidelity website. It may state “based on distributions of 6% of your assets at retirement, this is what your annual income can be. Based on XX% ( typically 6%% which is a balanced approach) annually rate of return, this should be your account balance.” These assumptions are very typical.

Actuality:
The return of 6% average is fine if your a moderate ( balanced ) to aggressive investor. Not so good if your conservative.

Unfortunately, 6% distribution rate against the asset balance is way too high in today’s low but rising interest rate and reduced dividend yield environment. Add a “bad sequence of returns” just before retiring and you have a disaster on your hands.

Best thing to is plan your distributions at no more the 5%, preferably 4% of the asset balance. If you run a Monte Carlo simulation on distribution rates, 4% will show a much lower failure rate than 5%. The current accepted distribution rate today is actually just under 3% to be safe. Personal pension products ( annuity companies that guarantee your income at retirement) go no more than 5% single life 4.5% joint lives as an indicator. In other words, $1M of assets should limit distributions to $50k per year to so you don’t run out of cash.

Everyone has there own comfort zone on what they will do for retirement. Your philosophy is not flawed at all. Just recognize things can change by the time you reach retirement. Read about “ bad sequence of returns”. It will scare the dickens out of if retiring soon.
I will predict you one thing ( I never make guarantees). We will see a bear market within 2-3 years. May be as early as late 2019.


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[tt335ci03cobra]

There are two life insurance systems worth using.

1. Buy term and invest the difference.
+ if smart, this is all you’ll ever need.
- it will require hands on approaches and practicality.

2. When you have cash or assets eating a hole hole in your brain, you can look into max funded universal life/annuities. Very few people know about this. It’s tax free and very easy to do wrong.

-the soonest you can max fund these is 4 years and 1 day. You can do this in 25/25/25/24.999/.001% chunks.

These were never designed for the mass or public to use them as I’m about to describe. That said, large companies and wealth magnets have done this from Walt Disney to bill gates.

Max funding a well working and smartly tied policy will average 6-9% of completely tax free growth annually on the amount invested. This can then be surrendered and instead have the capital asset indexes against (your choice) smart indexes such as the nasdaq, etc. Very nice choice during election years as almost always, the markets are put into rally mode make the incumbent look great. Example, 2012 say over 17% in the nasdaq. A nasdaq-indexed max funded account routinely saw 15+% that year. Again tax free period. The government will never tax life insurance because the welfare costs would skyrocket in there stead. The collect e tax would never matter compared to the social security pay outs 5 years later.

Anyways... Let’s assume $100,000 is being put into one of these policy’s to be representing a $105,000 life insurance policy. Put tons in to have very little coverage. Sounds dumb but watch.

Year 1, $25k goes in day one, and you pay about ~$200/mo for the that year. This is the gap. It covers the insurance company if you died that year (en mass on those policy numbers). You’ll have paid an additional $2400 by day 1 of year 2.

Year 2, put another $25k in. Now your basically breaking even. Now interest made, but no money out. Your money is earning 6%, but the gap costs about that.

Year 3, put another $25k in. Now you are making about 3% completely tax free. You have $75k in. By the end of the year, it will be about $77,500. The other 3% of interest earned is being used to cover the gap.

Year 4. Put another $24,999.99 in. The day after, put a penny in. That year your money will make roughly 6-9%. You have $102,500 from day 2 of year 4 as collateral for a $105k policy. The gap is now about .1% as an assessed penalty. Meaning your $102,500 will grow basically at 6-9% that year depending on the markets etc. By the end of the year, you will have about $110k and your policy will now have evolved to about $110,500. It will raise to remain about .5% higher than your capital.

Here is the kicker. Unlike a 401k or Roth IRA, if the market takes a shit and drops 33% like 2008, the floor is growth based. Your money will not be dragged down. It grows with the market, but it’s not invested in the market, cash and loans against it held by the insurance company are invested and redistributed to you as reimbursement. When a terrible year hits, your $110k stays at $110k. When the market returns 1-2 years later, your money begins to grow agains. If you chose to index the capital, you cannot hurt the capital, you can only surrender the set rate of return. If that was going to be 6-9%, and you muck it indexing a bad tech sector, oh well. If you do well, you could net 17% (max cap unfortunately in many of these) on an otherwise flat year. Think about that, it’s completely tax free money.

You can also end the policy at any time and pull the money out. You can have multiple policy’s. You can also borrow against the policy’s cash, and again the policy death payout grows as your account increases.

That doesn’t sound very impressive as life insurance, but if you know anything about rates of return and general investing, especially passive investing, you can quickly see why I and many take the time to explain these. Almost no one knows anything about these.

Many real estate moguls will take loaner money and max fund these policys, and borrow against them to continue their venture. Within 3-4 years, they have made not only a great (hopefully) realestate addition such as a strip mall or neighborhood to their portfolio, but also have generated over 40% on the capital borrowed, and deducted the mortgage interest annually to counter balance expenses and capital costs.

Once they have the money in one of these accounts and it’s been over 4 years, they can choose to up the coverage to say $5,000,000 and put in what is needed to come within .5% of that. And again, it will be growing at a very healthy 5-6%. The idea is to start one of these very early in life with about $50k over 4 years and 1 day, then balloon it. You cannot balloon them very often, I believe there is a 5 year period between upping them.

But back to your question, anything except the two types of insurance I described are expensive and less than efficient.

Also, I am not a tax accountant, and most don’t have a clue about these. My own had no clue then was blown away when she read up on them... she’s 60 and very very smart.