Posted: 9/3/2007 6:25:29 PM EDT
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Ok, I met with a financial planner the other day and after reviewing my assests and income available for savings he suggested purchasing "whole life" insurance. He explained it as the following; basically you put a large chunk of money aside each month and an insurance company invests it for you. When you die your heirs get the principle and interest tax free. You can remove money from the plan during your lifetime, but the amount you invested continues to grow. When you die, whatever money you removed, (or "borrowed" tax free from yourself) will be deducted from the payment. The tax-free savings sound nice, along with fact that the principle never decreases. Susposedly the principle and interest is compound exponentially over time, tax free. The catch seems to be that the interest rate is only around 8% and I haven't been able to determine the broker's fee yet. Anyone familiar with this plan? I already have mutual funds, Roth IRA and a 401k through my work. Would I just be better off investing the money in mutual funds and expecting a higher rate of return, even after taxes. Just wanted the hive's opinion along with any good questions I should be asking along the way. TIA. |
Well, I'm looking at it as an investment and that is how the agent has been selling it. His point is that this "investment" will grow tax free without the principle being reduced by any deductions that I borrow against it. What do you think whole life insurance is best suited for? |
making your broker money I just read a column by Dave Ramesy just the other day talking about what a bad investment whole life really is. You could probably find a ton of similiar articles if you did some searching. The stuff I have read suggest that you: 1. have 6-12 months of cash set aside 2. max out 401k 3. max out Roth IRA 4. invest in college funds (since you mentioned heirs) You might change the order for #4... |
| IF you have someone that depends on your income buy TERM and term only. It's cheaper and when you don't need it anymore you stop paying for it. Of course that's only my opinion but I have seen little use for any other kind of life insurance. Brokers make about half your first years premiums as an incentive to sell you a policy. S |
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Whole life insurance certainly has its place. It is an asset, but I wouldn't consider it an investment. It is a good thing to have if you have certain types of retirement plans. If you have a defined benefit plan, WLI can be used to maximize your retirement income. Of course, there are fewer and fewer defined benefit plans. Only about 2% of term life insurance policies are paid out. Most policies are dropped by the insured because they become too expensive as the insured ages. Term policies are very profitable to insurance companies. But that is not to say that they are very good policies to have. All depends on the circumstances. |
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There have been numerous huge lawsuits, settled by some of the country's largest insurance companies, over the past 10 years, regarding agents' selling life insurance as a retirement plan. Not that your agent is doing that, but he is trying to sell you a pig in a poke. He's not a "financial planner," he's a "policy peddler." Your heirs don't get the principal plus interest (cash value). They only get the death benefit. You don't know what the 8% interest means in that policy, and, more-than-likely, neither does your policy peddler. 8% with one company doesn't mean the same thing as 8% with another company, as would be the case in any other financial transaction. You'll get 8% of "something", but you don't/won't ever know what that "something" is. What that "something" is, is whatever cash value is left after the initial load (Agent gets AT LEAST 50% of the first-year's premium, but might get over 100%, if his company's not NY licensed), the mortality costs, and other expenses that are unique to that particular company. Invest somewhere else. Figure out what time horizon you need for life insurance protection and buy that much level term insurance. Shop around for level term. For most young folks who won't likely incur estate tax problems, 30-yr level term covers most of their contingencies. For others, 20-yr fits the bill. |
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Ask him how much commission he makes off of it. I will promise you it is a good bit. My wife used to sell life insurance. one whole life policy of, say 10K would make her more than a 250K term policy. WHich is why the salesman likes you to buy whole life. If you bought a 10K whole life from her, basically she would make nearly the whole first year in premiums in commission, then less and less each year. A 250K whole life would shock you how much commission she made. A term policy would be about a one time payout, then drop down to little to nothing the next year, while the whole life would pay her some for a while. Don't believe me?
link: http://personalinsure.about.com/od/life/f/lifefaq3.htm GR |
Any permanent/cash value life insurance is best suited for any situation where you want the policy to be in force when you die (which most likely in old age). By the time folks' 30 year term life expires, one is hoping the need for coverage is also gone. That is not always the case. By then coverage is too expensive. Generally speaking, those cases which there is estate planning need for cash value life. For example, the funding of irrevocable living trust (in which case universal life might be more suitable), pension optimization, and/or coverage of expected estate tax. Most folks do not have these issues. It's been my experience, among the things the wealthy have in common, is older age, the possession of real estate (which happens to compromise most of their net worth), and permanent life insurance. |
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Permanent life insurance is usually appropriate for the modestly-wealthy. The really wealthy don't depend on life insurance for estate liquidity. They generally leave or gift most, if not everything in their estates to a foundation over which they or their relatives have control. An irrevocable inter vivos trust isn't the same type of trust as the popular "living trust", which has no bearing on estate planning and generally only bypasses probate costs. |
| It seems like I read somewhere that it is illegal in some states for a "financial planner" to call whole life insurance and investment. I also read a report of a General in the US Army that sent a memo to soldiers going to Iraq explaining the difference between whole life and term because they were getting bombarded by these worthless salespeople trying to sell whole life. In the memo he stated that whole life is in no way, shape or form an investment but rather it is life insurance with a very low interest savings account attached to it. Most of the time people call themselves financial planners when really they are salesmen for insurance and other products. My advice to you is to find someone you can pay hourly for financial information and stay the f#$k away from whole life. |
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Stick with term if you are covering your family/heirs. Our "salesman" tried his hardest to sell us whole life and even brought in a "no-saler" because he couldn't close the deal. He kept telling my wife that she would "need" $3,000,000 for the kids, college and to keep her lifestyle. My wife is VERY frugal and told the guys to pound sound, but in a nice way. She explained to them that the money we put into the policy doesn't compare to a bond we could have purchased or even just using IRA/401's. He then tried to say that if I (me) die, she would have to maintain her lifestyle. She then explained that we do very well with 3 practices and she would just hire 2 new doc's to cover the other offices (my brother works in one of my offices). He then tried the "college fund" approach. That's when we both started laughing our asses off.. literally. The two salesmen looked at each other and then got serious and asked how our kids would pay for college. WE BOTH told them they can do it just like we did... student loans. I told them that I borrowed $115K and paid it all back in full and there is nothing wrong with borrowing for education. The "no-saler" tried to pick it back up from the beginning with the same approach but my wife thanked them both for their time and asked them to leave. The best part was when they went outside in the parking lot they started a conversation. The office window was open and we could hear their conversation. The no-saler was saying things like "fuck, that bitch is good", "if she hadn't been there, we could have got him", "talk to Ron and see if she is interested in possibly selling policies". If you take a 20 year term policy and you should pass away, get what you think what they will need to make it through. Don't think of your death a Lotto prize for your family. If that's what you want fine, but I would rather spend my money while I am here on the earth and NOT working my ass off to pay a note on a policy so my family can become millionaires if I die. I took a 20 year term policy for $1 million. My wife could hire several doc's to run the office (and spend time finding good doc's and not just hiring some jokers because she is strapped). That money would pay off the house, keep the kids at Catholic school and pay salaries of employees/doc's until things are back on track. thanks, Ron ETA: Bold red type |
This may be your experience. I am 0 for 3, though. Unless you call 51 old.  Many people do say that I am a statistical anomaly, so it doesn't bother me. Perhaps 5% of my net worth is in real estate. And, aside fromt the $10k policy my employer provides, I have no life insurance. I agree fully with earlier comments on the unsuitability of insurance as an investment. Insurance is a funny thing. There is a generational divide concerning insurance. I believe the younger baby boomers, and those younger than them, are realizing the inappropriateness of whole life as an investment. Those older still see it as a good idea. A girl once refused to date me, (after she asked me out, BTW!), because I had no life insurance. She said this made me irresponsible. I have no dependents, so my feeling is that I do not have to be responsible for any one else. I can focus my investments on performance, not as a protection against an early death. I believe that this is being responsible. |
Wow - sounds like you saved yourself from a poisoning down the road. |
Ever heard of LEVEL TERM and Garenteed Renewable Term? Find a company that offers a 35 year LEVEL term product. (Only one out there)... that same company has the lowest rates around geared towards the baby boomers... 4 Funny Banking Rules (Whole Life) 1. Your cash value (savings account) doesn't start building for the first 3 years. 2. 2-4 percent rate of return when you factor in the first 3 years of no return 3. When you die you don't get the cash value/savings (It's a "living benefit") 4. If you want to borrow out of your cash value/savings, you have to pay interest on your own money. 5. Doesn't qualify as a retirement account |
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I admit I didn't read all of the replies but I do work in finance and am licensed to give financial advice. Life insurance is insurance. Do you need insurance? On the same token, it IS NOT an investment. It sounds like you are speaking with on of the typical wirehouses who pitch a whole life plan to EVERY customer who meets with them. They pay good commission and are the "happy meal" plan that every customer is supposed to get. I can't legally name names, but a lot of the 'investment' firms do this and I have first hand experience with that. I am biased since I work at a bank, but try to talk to an advisor at your bank first and see what they have to say. Yes we still get paid commission and yes it is still a sales job, but the funds/insurance products I sell is not the same company who writes my paycheck. I am not paid to sell one family of funds or one insurance product. I am paid to find one or more off my list of over 150 different products that fits YOUR NEEDS. If your need is life insurance we have good plans to fill that niche. If your need is not life insurance I will not be recommending it to you. Give it a shot, two opinions are usually better than one. |
No, we offer both term and whole. We don't do much life insurance at the bank to begin with, but they both have their place so my company made both available to us. I'm not actually allowed to sell either of them myself, I have to have my investment officer (basically a regional manager of the investment team) to do a joint appointment if I think any type of life insurance might fit. We've had it available for a few months now and I think we've sold enough policies to count on one hand. My district has 10 branches in it and we get quite a lot of traffic, if that's any indication of our life insurance sales ratio. |
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Just pointing out the obvious, but I think any businessman's opinion regarding life insurance would be just as creditable as taking a banker's advice on life insurance, particularly a banker whose branch has only sold a handgul of policies. I wouldn't think that a banker would be too well trained in the various life insurance options, appropriate applications of policies for business needs and estate planning, etc. There's so much information available on the internet these days that most folks can shop for the best term insurance application for their situations, without having to rub elbows with a live person. For most young folks, plain ol' 20-30 year level term would probably fit their needs. |
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Another benefit of whole life policies is that it protects your future insurability. A 35-year old friend of mine was in an accident in June. He looks OK from the outside, but he suffered a brain injury. Now it is impossible for him to get life insurance to benefit his two daughters, he is unable to resume his career, and he really could have used the cash value that would have built up over ten or more years now that he can't work. Plus, he didn't have adequate disability insurance. When he is finally well enough to work a job WAAAAAAAAY beneath his educational level, the creditors will be crawling all over him. His mother is 60 years old, has exhausted her limited assets in caring for him, and now can't rely on her son to care for her in her old age. He and his family are financially ruined. Here's my advice, and I'd never make a cent of commission from you: get WHOLE LIFE -- as much as you can afford, with a disability waiver of premium; get disability insurance for your OWN OCCUPATION (unless you imagine yourself cheerfully saying, "Welcome to Walmart!"); get a long term care policy WHILE YOU ARE YOUNG, including 10% above the average daily nursing home cost for your zip code, with UNLIMITED LIFETIME benefits, at least 70% home health benefits, and some sort of rider to protect against inflation. And make sure your parents have LTC insurance so you won't have to mortgage your assets after theirs have been devoured by the costs of their care. Plus, meet at least annually with your financial advisor to review your total portfolio -- be sure you're staying on course to be financially prepared for retirement, and for protecting your family from the tragedies that no one ever expects will happen to them. I learned this the hard way, but you don't have to. The people who have been sucked into buying term insurance are short-sighted. Rates increase, insurability changes, and NO cash value accumulates. The reason term policies are so cheap is that insurance companies can count on less than 1% of them ever paying benefits. You get what you pay for, but with term life, less. Think of term insurance as paying rent. You can be thrown out at any time, and yet you've been paying someone else's mortgage for someone else to build-up equity. Unless there's an immediate short-term need for coverage with extremely limited financial resources, buying a term policy is flushing your $$$$$ down the toilet. |
I have no problem with constructive criticism, but I'm curious as to what credentials you hold to cut down on my advice? I didn't tell this guy what to do, we need more information here. I don't think you can form your opinion of my advice based off of the information available. The same holds true for anyone here recommending the original poster either way. There are a lot of other variables out there. Just because I sit at a desk at a bank doesn't mean I'm a "banker." Please don't make assumptions like that. I hope this stays civil, I'd like to hear your thoughts. |
Wow, let me say a few things about "Cash Value" again... 4 Funny Banking Rules (Whole Life) 1. Your cash value (savings account) doesn't start building for the first 3 years. 2. 2-4 percent rate of return when you factor in the first 3 years of no return 3. When you die you don't get the cash value/savings (It's a "living benefit") 4. If you want to borrow out of your cash value/savings, you have to pay interest on your own money. 5. Doesn't qualify as a retirement account Go find term from the #1 company... you'll get LEVEL term... GARENTEED RENEWABLE TERM, and a free Terminal Illness Rider... The cost per 1000 will be MUCH cheaper as well... |
You know what he could have used even more. The money he earned had he bought term and invested the difference. If he is unable to work, then life insurance isnt to protect his daughters, it would be to pay off in the event of his death. He barely has an income from what you say, so what income would whole life be protecting? The real problem for him it appears is that he didnt have enough savings, and he didnt have disability insurance. As far as long term care insurance, only insurance salesmen recommend buying that at your friend's age. |
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Anybody who uses defined benefit plans as an example of anything probably doesn't know much about pension plans in general, but certainly not much, if anything, about defined benefit plans. Do a search for the history and emasculation of the defined benefit plans and all will be revealed to you. Chances of having an employer who's funding a defined benefit plan are somewhere between infinitesimal and zero. The POINT of using, say, 30-yr-term is that, for folks (and we're talking about 99% of the American population) who won't need to be funding trusts for estate liquidity, 30-yr-term is a long-enough term to take care of those folks' (the 99%) obligations. |
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I hope everybody's getting 10-12%. Time will tell if "everybody" does that consistently. I'm a firm believer in Roths! It's a lot easier to plug theoretical rates of return into a calculator than to actually make the returns, year-in-and-year-out. Just don't put unmatched money into a qualified pension plan, and you'll be o.k.! 
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So, Einstein was right! Writing in red doesn't require much of an I.Q., huh?
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