They are only 66 and 67 years old.  One of them will likely live longer than 20 years.  That $240,000 will be lost.

Have them invest the money in your retirement accounts.

Yeah...who wants to turn $240k into $1M.  It isn't $240k lost in your scenario it is $760k made.  If they take the money and invest it over 20 years, at an annual 10% net it is at $760k.  at 8% it is $590k.  I don't know how you do math, but both are worse than $1M.  PS with the right policy, you can get solid returns.  They may not being paying for 20 years if the policy is structured correctly or if they choose to pay that long it may end up with more death benefit than $1M.

That's good.  They probably have a poor over will if the trust is in place, but that helps as well if something is missed

I don’t know how you do math, but 240k after 20 years at 10% is $1,614,600, and at 8% it’s $1,118,630.

The scenario isn't a $240k lump sum.  It is $1,000 a month for 20 years...try again

I’ve read the thread in bits and pieces as posts have come in since the thread was made, and may be misremembering/assuming something I shouldnt, but I’m under the impression his parents have assets. (Which would be in a lump sum somewhere, 401ks, iras, whatever) and from this lump some income is taken and used to pay the life insurance premiums. So yes... currently it is an invested lump sum already and my calcs would be correct

That isn't relevant.  They could have $5M sitting in the bank.  The point was whether you take $12k a year and gift it so that it can be put into a personal IRA or if they are better off putting $1,000 a month into a second to die life insurance policy that would pay out at least $1M when both are gone.  Nothing is happening with their lump sum.  It is a question of what is the opportunity cost of getting the policy.  Can you take $1,000 a month and reasonably assume that it will get to $1M or more well within the life expectancy of two individuals.  You can't.  I have done this calculation with people who have large estates that manage money for a living.  It isn't worth their time or the gamble that they will outlive the break even time frame.

If you want to worry about the $240k lump sum, plug it into a calculator with whatever return you want and kick off $1,000 a month in income to pay for the life insurance.  At 10%, which is a retarded number to use for a lot of reasons, the life insurance is paid for over 20 years and they still have $1M in lump sum based on the initial $240k.  The death benefit and lump sum are still worth more even with a 10% number that is well outside of being a reasonable assumption.

If someone has money that they don't need and they want to pass along as much as possible to their heirs, they should take all of the money that they don't need and put it into a second to die policy.  So, for example, his parents would probably be better off putting $100k lump sum into a policy instead of $1,000 a month if they had $100k they didn't need.  The more money in the policy, the less the life insurance costs you and the faster it grows.

Tell me where I'm going to get consistent annual 10% returns each year, every year.  Or even 8%.

I don’t know how you’ve done the calculations, but if it was true that the life insurance company lost money on these things, even just lost money more often than not, they either wouldn’t write a policy like that or would go out of business. Maybe the actuarial tables say one should live longer than 20 years, or maybe the $1000 a month was rounded when it was quoted to OP and the premium is actually $1400. Maybe a combo of things. Who knows. But one thing is certain, on average they make money, not you. And yes, the original question was between an Ira or the life insurance, but other options were being discussed, one of which could be “none of the above”.

You can’t, those were his numbers, not mine. I was just pointing out that the math was wrong. Or maybe more correctly, his math wasn’t wrong, but IMO he was doing the wrong calculations because he is looking at the problem incorrectly.

I was speaking to both of you.

"Muh 10% average annual rate of return" is dangerously deceptive.  A 10% average annual rate of return doesn't work out to "it compounds by 10% each year."  If it did, it would be a compound annual growth rate, not an average annual rate of return.

I'd go so far as to say "average annual rate of return" is useless unless you're trying to trick someone into an investment.  yes, I said "trick."

I can invest money, have it grow by 100% this year, dip by 50% in year two, grow by 100% in year three, dip by 50% in year four.  My average annual rate of return is 25%, yet I have no more money than when I started at the beginning of year one.

So when people throw around "I can grow Muh Money by 10% a year!", it's bullshit unless the account value never has a negative rate of return in any year.

10% is a ridiculous number but I used it to prove a point....which is that even assuming ridiculous numbers the portfolio wouldn't  do better than the life insurance unless they lived well past life expectancy.

I wasn't implying that you could or would.  I was pointing out that if you did it wouldn't matter.

He can tell me that I don't understand the scenario all he wants but one of us has people who put millions into these products and has done these calculations plenty of times and one the other is a guy on a gun forum with an opinion.

Lol. People put money into all kinds of silly bullshit they shouldn’t. Question for you: On average, life insurance companys make money off of you on these products, yes or no? If no, how does the life insurance company stay in business? If yes, how can this be a good deal for OPs parents?

I got bored and did some calcs myself. According to mortality tables, it appears the odds of one of OPs parents being alive don’t fall below even for 24 years. That’s 288k in premiums (Actually more than that according to OP, we just don’t know how much more exactly) 288k only needs about a 5.33% (will need less than this because the premiums are actually over 1k. At $1100 for instance you need only 4.91%) rate of return to break a million in that time frame. Thats doable. And according to OP, investing this money for future heirs shouldn’t be an issue, as his parents are both concerned about leaving something for heirs,  and have enough saved that they are not even planning on withdrawing from the Roth IRA for instance. We’ve also eliminated the risk of missing a payment, one of OPs parents outliving the 30 year term, etc. So can you walk me through again why they should take money from investment accounts that in all likelihood will outperform the life insurance, and put it in life insurance which will in all likelihood underperform the investments it already should be in?

Your still doing the wrong math.  I am not telling you that your math is wrong, but you are doing the wrong calculations.  A lump sum of $288k may only need 5.2%, but if you are contributing that $288k over 288 payments made over 24 year it is a totally different number.  In the scenario that is actually happening, they need 9% net of fees and taxes if they want to contribute the money that would be premiums into a brokerage account.

Assuming you could net 9% easily, which isn't easy, you then have to factor in that elderly parents might not make it 24 years.  If they are both gone in 20 years, you would have needed to net 12% to get to $1M.  If you want to use a more conservative return of 6% net, you need 30 years of payments made.  So, you are essentially gambling on them living 30 years or more.

Without having eyes on the policy, I don't know how it is being run/funded.  If they live a long fruitful life, it is possibly that the death benefit actually grows which makes the break even more difficult.

To your other point, insurance companies make a TON of money on life insurance policies.  Most of those policies are term policies.  People buy term policies to cover things like mortgage debt, to make sure that kids have college funded etc.  Some people die early for whatever reason and a small percentage of those policies pay out....like less than 5%.  What ends up happening on term policies is that by the time people get old enough to be near life expectancy, the policy is too expensive to buy and people die without life insurance if they are dying at life expectancy.  In other words, the insurance company collects 20-30 years of premiums and has no liability on the books for most people.

With a well funded permanent policy, you start to self insure.  For instance, a $1M policy that is well funded, they might end up having $500k in cash inside of the policy when they die.  So, the insurance company ends up with $500k of death benefit instead of the original $1M.  If they live a very long time, it is possible that the amount of actual "insurance" is almost zero.

And given this bit on wisdom.... what are the insurance companies investing in?  What ever it is must be pretty good since they have to not only cover policy payouts but huge salary and overhead costs.

This.  Life insurance has a place.  It is a gamble on whether or not you will get a return on your investment, and the house almost always wins.  It doesn't make sense as a mechanism to pass on wealth to future generations.

My wife and I both have life insurance but for different reasons.  If one of us dies, we don't have enough money to offset the loss of income through retirement.  The life insurance is meant to protect the surviving family members from financial hardship due to lost income.

Once we reach retirement, we will no longer require life insurance because there will be no more income to replace.  At that point it is just a bad gamble on whether or not you get a return on your investment.  The premiums would be better spent on something that generates positive income that can be used if needed in an emergency or passed on otherwise.

Not only does it make sense, but the wealthy specifically funnel massive amounts of money into permanent life insurance policies.  It was more common with estate taxes being an issue at lower levels before they aggressively bumped them up, but plenty of them still do it because it is guaranteed compounding of their money and they don't have to worry about getting the growth that they would need to get the same result without insurance.  Everyone is different and I am not telling you that you need to do anything, but stating that it "isn't a mechanism to pass on wealth" is crazy because that is exactly what it is for and how it is used.  It was so effective as a tax shelter that they instituted the MEC laws back in the 80's (if I recall) so that people couldn't shove all of their money into the policy.  One thing that you are forgetting is that there are only so many places to stick money without creating a massive tax liability.  For someone that wants to put a lot of money away or perhaps can't use things like a Roth, life insurance is a no brainer investment plan.  Do they pay for cost of insurance, sure they do.  What they aren't paying is tax on the growth of the cash inside of the policy or tax on the cash they take out of the policy (as long as it is structured correctly and they don't let it lapse).  So, if someone has cash that they don't need and they want it to grow.  Would you rather pay taxes as the cash accumulates, or some cost of insurance in a plan that accrues tax free, can be tapped tax free for any reason at any time and passes tax free to your heirs?

It is also a way to provide liquidity in an estate if there is a business and multiple heirs but maybe only one is working in the business.    It happens with farms all of the time.  They want to create liquidity so that they can leave something to two kids not working on the farm without having to mortgage the farm to create liquidity and pay them out.  That way the 3rd kid can keep the farm free and clear and everyone is happy and you don't have too many cooks in the kitchen when running the farm (or whatever the business might be).

For the record, your exact scenario, assuming you live to retirement, is precisely why insurance companies make money (I outlined this scenario in my earlier post).  You buy insurance for 20 or 30 years and then drop the policy because it either isn't needed for your original purpose or it is too expensive.  That is why it is literally something to the tune of sub 5% of all term policies pay out.

I sometimes think that insurance companies started the "buy term and invest the difference" concept because it makes them so much money.

Sorry to keep going on these rants, but when someone makes a blanket statement that is so wrong that it couldn't be more wrong, I feel like the other side needs to be shown.

@kchustle

Save your breath.  The people who rant against life insurance are either irrationally prejudiced against it, or  refuse to understand it.

Insurance companies are not charities. The have well-paid employees and offices in the most expensive real estate available. Where do you suppose all that money comes from if they're multiplying wealth all the time?

The place where insurance companies make money on the insurance side is term insurance.  Most people buy it until they get near retirement and it is expensive.  They then die without insurance after paying for it for 30 or 40 years.  He is talking about permanent life insurance which is a different kind of product.  They also get to take the money that people are paying and invest it to offset expenses.  0% interest rates haven't helped them on that side of the equation, but the rates are moving in a favorable direction so it will help.

"All that hate's gonna burn you up, kid."

If their estate is under whatever the millions of dollars estate tax is now, whats the problem? They die, their estate is tax free, it gets split between your sister and yourself, as a tax free inheritance, right (assuming cash)?

If that is correct, then all they should do is do some modest investing, give everyone they love the 15K gift every year, and live their life.

My folks did the same thing.  Worst investment ever.

The agent said that after x number of years the policy should be generating enough income to pay the premiums.  Never happened.

I get a premium notice every year saying I need to send them something like $25k; if not paid then it becomes a loan against the cash value of the policy at some above market interest rate.

Mom died 10 years ago, Dad is still around.

If he lives long enough the premium loans against the policy will exceed either the cash value or the death benefit, at that point the policy is worthless.

The underwriter was sued in a class action about 20 years ago for this bullshit (saying income would pay the premiums), we did get a low 5-figure settlement.  Underwriter when from a mutual to publicly traded a few years after that and we got shares in their stock worth the mid 5-figures.  The settlement and going public were the only good things about the investment.

I'm betting that was a Universal Life policy. They were sold a lot in the 1980s/1990s based on high interest rate assumptions that didn't pan out.

Actually, it's the present value of a monthly $1000 payment at some specified interest rate.