Comments on: Reader Question: Since whole life insurance has a cash value, wouldn’t that be better than a term policy?

By: taketheredpill

taketheredpill — Sun, 31 May 2009 20:11:30 +0000

Mark,
Whole Life insurance is NOT an investment. Investing by definition involves risk of loss. You invest in something with hopes of a positive return. Whole Life insurance is a guaranteed permanent death benefit that has a savings (not investment) component. There is no risk. Universal and Variable Universal policies are different, and in most cases crap. That’s why insurance companies keep changing them, because they can never get them to work the way they are sold. That being said, there are Whole Life policies out there that are crap. I would stick to one of the 4 major mutuals (Mass, Northwestern, New York Life, Guardian) when it comes to WL policies. I personally hate term, and will convert as much as I can each year. I want to own my life insurance policy, not rent. I am paying into my life insurance policy (structured to completely paid off by age 65, unless I choose to use the dividends to pay the premiums), much like I am paying a mortgage so one day I will be 100% owner of my home.

LI Girl,
I don’t know where you get your information, or what policies you have seen, but that’s absurd. Most policies have a period of 2 years where the company can contest the claim if the applicant committed fraud or suicide. However, once your policy is delivered, you could die the next minute and that benefit is payable period. There might be some crap companies out there that will make it difficult for you to receive your claim, but they will have no case as long as there is no fraud or suicide. After that 2 year period, you can jump off a bridge and the company has to pay the claim.

By: life insurance girl

life insurance girl — Sun, 31 May 2009 17:29:58 +0000

I have noticed lately that there are alot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect.

By: Mark

Mark — Tue, 17 Feb 2009 05:19:40 +0000

If a whole life insurance is an investment, why is it regulated by the insurance commission and not by the securities and exchange like any other investment? If whole life has an investment, why is it that agents do not need an investment license to sell them?

By: taketheredpill

taketheredpill — Fri, 10 Oct 2008 04:14:05 +0000

JRay,
Your mentality is unfortunately why so many retirees, widows, etc are contemplating suicide right now. To assume a 10% rate of return is completely foolish. You are talking about an average first of all, which is debatable, but historically I think 8% is more accurate. But what happens if one year the rates go way down? As soon as you start making withdrawals, you are solidifying those losses. For example, if you are living off of a “10%” interest per year on $650,000, you have $65,000. Did you factors taxes, INFLATION, or market fluctuations into that equation??? Let’s say one year, the market goes down (today they DJIU dropped below 9000), and you end up up with a negative return. Your wife needs some money, so she has to dip into the $650,000. Now let’s say there is $600,000 left. Oh thank goodness, the next year we got 10%. But now it’s only $60,000, and the liberal administration just raised taxes across the board. Inflation went up a modest 3%. Uh oh. But the next year is better and an amazing 15% return gives your wife a whopping $90,000. Problem is now she is in a higher tax bracket, so she decides she is just going to take $65,000, and now you have 625,000 in the mutual fund. Score! Next year, major problems, a terrorist attack, political turmoil, market crisis, and you got a negative return of -5%. Your wife has to dip in again, but she has some more expenses because she started her own business and the kid is looking at colleges. Plus, inflation is now roughly 10% higher than what is was the first year you died, so that $60,000 just doesn’t cut it, so when all is said and done, she decides she needs $100,000 to meet her needs.

Basically, every morning, your wife will walk down the driveway and pick up the newspaper and go straight to the Business section to gauge how much money she can expect to spend.

I’m not putting my family through that nonsense.

If you know anyone retiring or retired, ask them how they are doing? Some might be okay, but youre bound to come across some real hard core suffering. Do you spend more money during a work week or during a week of vacation? Retirees are supposed to be on vacation, but many having to go back to work, and many are not able to. Like I said, there are some retirees that are enjoying retirement right now. I’d be willing to bet that some of those can thank their whole life insurance policy and a good solid foundation of protection for that.

I’m not saying that one should not invest in the market or real estate or other potentially higher yielding investments. However, if you don’t have a solid foundation of protection and contingencies, you effectively have no plan.

Just look around you right now. It’s happening all over, and it is extremely sad, because someone with your mentality convinced these people to buy term and invest the difference, or put their money in stocks and real estate, whatever. They were not shown the truth. Failure should NOT be an option when it comes to a financial plan, but you are essentially basing your financial strategy on ideal and unrealistic predictions, assumptions, and opinions about the future. Your plan should be able to work under any circumstances, and be based on facts and economic principles. Then, if you have money in there to play with, by all means, throw into the ring and see what happens.

By: Jeff

Jeff — Tue, 26 Aug 2008 20:01:46 +0000

a couple of things. First, another rehashing of the old Term vs. Perm debate. Usually the comparisons I see do not take into account trading costs to invest the difference between term insurance and permanent insurance. Second, while it is all well and good to say that a person will invest the difference, I have seen that most people don’t have the internal discipline to actually follow through with that strategy. Ipods are introduced, let’s go to the bahamas this year on vacation instead of the lake, let;s go out to eat instead of stay at home and cook. Third, needs change over time, so the reason that you took out a policy when you were thirty may not be the reasons that you want Life Insurance when you are 45 or 50. You don’t have to be a millionaire to recognize that Life Insurance is the most efficient way of transferring money to someone else at your death. Fourth, LIfe insurance is not an investment. there are alot of things that LI can do for you or your beneficiaries, but it is a protection product. finally, a good advisor will advise you on the type of LI that meets your needs, this is as opposed to a ’salesman’. You could easily make the same comparison about physicians? are they health advisors or just drug salesmen?

By: Jake

Jake — Wed, 20 Aug 2008 21:55:35 +0000

Whole life can actually be an incredible investment if done right. It should focus on death benefit but on cash value. If you emphasize cash value you can create a self sustaining policy, and it will out grow any other investment you can imagine. By using it as a financing solution it will grow even more.

Jake
http://www.becomingyourownbank.com

By: jray

jray — Thu, 22 May 2008 01:09:44 +0000

I can purchase 1.1 million 20yr level term for my wife and myself for $44/mn. This amount is equal to our annual salaries with a return of 10%. For example: I make 65,000/yr and my wife makes 45,000/yr. If I were to die with a $650,000 policy and my wife invested that into Mutual Funds with a 10% rate of return, she could live off of the 65,000 (my annual salary). The cost for both of us to get $250,000 in whole life was $350/mn. If I were to invest the difference of the 2 policies ($306/mn) into Mutual funds at a rate of return of 10% for 30yrs, I would have $554,556. Hope this makes sense. One more thing, ask the person who sells you whole life what happens to the cash value you buildup in a whole life policy if you die! You don’t get it. They’ll try to tell you something like it takes care of their fees.

By: Chris

Chris — Sun, 18 May 2008 17:06:02 +0000

Jeremy,
Great post and I agree with your assessment entirely, well almost. While for younger working families I too believe that term life insurance is definitely the best choice to keep premiums low and affordable.

Now the case for a permanent policy while younger, in our experience the key to making life insurance work as a cash accumulation vehicle is to over fund the policy. We like variable universal or index products that you have the opportunity to get a higher rate of return in the policy, this also helps offset the cost’s and fees in the policy.

Typically we use this concept with someone who is high income earner with discretionary income and they are fully funding their 401k, IRA etc. Now we can look at over funding a VUL contract for a number of years the longer the better (compound interest) and look to use the cash build up as a supplemental retirement income.

The most powerful aspect of life insurance is the awesome tax leverage you obtain which is tax deferred growth inside of the policy and tax free withdrawals of your cash value via withdrawals and loans from the policy.

If someone can commit to this type of plan it works very very well as a tool for retirement planning. Plus no penalties for early withdrawals of your cash value unlike a qualified plan. The key is to commit to the plan!

By: Sharon

Sharon — Sat, 08 Sep 2007 22:02:28 +0000

Do any of you have any comments on the pros and cons of cashing in a life insurance policy vs. borrowning against it to pay of high interest debts? Thanks.

By: Jeremy

Jeremy — Fri, 31 Aug 2007 15:48:27 +0000

Evan,

Right, if you or I can’t afford whole life insurance, how many in this demographic can? If someone could scrape up enough money to pay the premiums, hey that’s fine, but it is a lot of money to pay for a minimal benefit.

And I was a financial planner and also an insurance salesman in the past. We used that same 5% payout statistic to scare people all the time. I sold insurance for three years and during that time I had 3 clients actually have to file a claim. Each of these were term policies and were paid out in full.

That statistic is thrown around just like I was taught about the FDIC claim. Maybe you’ve heard it, where FDIC has 99 years to repay you so it is worthless, etc just to get people into non-bank investments. It is just a scare tactic that uses a tiny piece of truth that is exaggerated as a sales technique.

But you are right, it is always easier to insure yourself when you are younger and have less health issues, but if you can’t even afford whole life anyway that 20 years of compounding is moot. Plus, what good is a vehicle that barely compounds at the rate of inflation?