Term vs. whole life insurance... which is better?
Posted in Life Insurance Questions 11 months ago, 59 replies
submitted by ed walters in athens georgia
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You have likely made a decision by now but in truth, Whole Life is a far better choice than term - all other things being equal. Most Life Insurance Agents don't understand what they sell. Companies make much more money on Term Insurance as less than 2% ever pay off. Banks and Corporations buy tons of Whole Life but Banks sell term and want you to invest in their lousy investment products that pay minus 40%. They have done such a good job of selling this product that even most agents don't understand the products they sell. If you want to disucss and understand what the deal is I can be reached through my wed site johndelaneyinsurance.com - Best of Luck!
submitted by John DeLaney CLU in Louisville KY
@ May 24, 2009 - 09:40 PM
Ron's chart is very useful. One thing to ask yourself is, "How much can I afford per year?" If your budget only allows a few hundred dollars then term life insurance is probably best for you. Why? Because no form of life insurance is good if you let the policy lapse because it becomes unaffordable. Permanent policies are 3x's more expensive then term life insurance.
Thats also very good and prudent advice that Byron has added about budget and ensuring you can afford the policy for the life of the policy.
submitted by Ronald Belham in Philly
@ July 22, 2008 - 06:20 PM
Term Term Term. Whole life and Universal life are designed to make the Insurance companies $$ not you. The Purpose of Life Insurance is only to provide $$ to your family to take care of your financial obligations. If no one is relying on your income you don't likely need much. Focus on keeping your investments and your insurance seperate. If you take the savings from Term plans over Whole or Universal for the same dollar amount and then invest the difference, you will be further ahead financially. I know this because I used to work for these companies. Who ever sells you a Whole or Universal policy makes a boatload of money compared to Term. This is because they make the companies much more money.
Ryan,
How much money did investors lose by buying term and investing the rest in the stock market? 20%, 30%. How much did a person lose in their whole life policy? 0%.
My point is, only future performance of investments hold the answer to what is right, term or whole. With the volitility of the market today, Whole Life is becoming more attractive as an asset class.
How much money did investors lose by buying term and investing the rest in the stock market? 20%, 30%. How much did a person lose in their whole life policy? 0%.
My point is, only future performance of investments hold the answer to what is right, term or whole. With the volitility of the market today, Whole Life is becoming more attractive as an asset class.
submitted by Matt in Kansas City
@ February 04, 2009 - 01:08 AM
not to get into the entire debate of whole life vs. term but actually insurance companies pay out on 1% of term policies...ie, they make their $ on selling term. they, unlike most of us, realize that we will live longer then the policies we buy
submitted by Edwin in Providence, RI
@ February 16, 2009 - 08:03 PM
I WANT TO CANCEL MY TERM INSURANCE WITH MY AGENT $635000.00 BECAUSE MY CHILDREN HAVE GOOTEN OUT OF COLLEGE AND MY TERM WAS FOR MY WIFE AND COLLEGE BILLS / COLLEGE IS PAID OFF. MY AGENT IS TRYING TO TURN MY POLICY INTO A WHOLE LIFE TRYING TO SHOW ME THAT IT WILL MAKE ME MONEY. I AM 53 YEARS OLD HAVE ENOUGH MONEY INVESTED IN OTHER THINGS . MY QUESTION IS IS THIS AGENT JUST LOOKING OUT FOR HIMSELVE TO MAKE MONEY.
submitted by RICHARD HAGGERTY in STAMFORD CT.
@ March 14, 2009 - 09:57 AM
The bottom line is this...Buy Term and invest the difference. Any financially savy person will tell you that you should always keep the two separate. For one thing, your rate of return within the savings acct isn't as good as when you invest in other options, also...what most agents of whole life dont tell you is that the first three years of your savings goes right into the agents pocket for their commission, also...if you die before the cash out date then you don't get both. If you die, the savings goes to them and you get the death benefit. Also, they make it to where your savings will usually never be grow higher than the death benefit. So you decide. Insurance is just that..in case you die. If you are interested in saving then do that separate! Make sense?
submitted by Audrey Collins in Boise, ID
@ May 06, 2009 - 06:18 PM
Buy Term and invest the difference is the most over used over stated financial anecdote in today's world. First of all, who does invest the difference? What a whole life, or permanent insurance policy does is force people to put themselves first. Although you are correct that most cash values do not grow as fast as some other investments, however where is the risk? Not in whole life! Also, even if you did invest the difference are you taking into consideration tax consequences? A whole life policy can and will continue to grow even if you borrow or take from it...will any other investment do that?
submitted by Brian T. in San Ramon, CA
@ May 28, 2009 - 01:38 PM
Your response is a very common one Ryan...but unfortunately very far from the truth. Just imagine if you owned a life insurance company. Which would you rather your customers buy.....A policy that has a 99% chance oof NOT resulting in a claim and you get to keep all the spent premiums (and all you were on the hook for was the risk)...or a policy in which you are contractually obligated to return every dime of a customer's premium if they so choose to take that option at some point in the future? If you chose option A, then I think you need to re-think your postion on term vs. permanant.....
submitted by Josh in Macon, GA
@ July 01, 2009 - 04:10 PM
I'm really ignorant when it comes to life insurance. I've gotten some good information here. My question becomes - what are the tax advantages? I am 45 years old and have a life insurance policy through my work. But I want more, something to leave my son and his family. I want the most for the least amount of monthly payments. Help!!
That's the same here. I knew I wanted more insurance and that's what I did. Now I'm wondering if I made the proper decision. I already had term life through my job. I recently updated my insurance and added whole life, did I do the right thing? From reading the comments and reading Suze Orman book, term life is better. I probably won't get that much money from whole life over the years worth paying for. I should just save this amount every week. I'm 40, married, and have 2 boys 10 and 13. Please advise.
It all depends on what you want. You get term insurance strictly for the protection / death benefit that you would want your beneficiaries to receive should something happen to you.
Suze Orman suggests an old school train of thought where you buy term & invest the difference. There's nothing wrong with that as long as you are confident you can make 5% after-tax doing investments. Keep in mind, the last 10 years, stock market has averaged returns of 4%. Take out taxes and that return isn't enough to even keep up with inflation. Unless you can really say to yourself that you're investment savvy, "term and invest the difference" probably isn't the best option for you.
Now with whole life, you get it if you think you're going to live a long life and want the "living" benefits that a whole life policy can give you. I'm not talking UL/VUL policies. I'm talking strictly permanent WHOLE life insurance. The cash value accumulation will be affected by which company you buy the policy from since not all WHOLE life policies are the same and also how much you plan on saving per month for your policy.
Now you could save the amount in a savings account, yes. But you will be paying taxes on any interest gains compared to tax-deferred growth you can receive in a whole life policy. In addition, in today's market, interest rates on CD's and money market accounts are laughable.
If you get a whole life policy from a company such as Northwestern Mutual, TIAA-CREF, or New York Life, you can expect after-tax returns on average of 5%. These 3 companies have the highest possible credit ratings an insurance company can receive out of the 1200+ companies that are out there and because of our financial strength, NYL (the largest, oldest, & strongest mutual/private company) for example has paid a dividend to our policy-holders for the last 160 years. What does that mean to you as a consumer? It means the likelihood and peace of mind knowing you can get an average after-tax interest return of 5%.
NYL
Financial Advisor
Series 7 & 66 Registered Investment Advisor
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
Suze Orman suggests an old school train of thought where you buy term & invest the difference. There's nothing wrong with that as long as you are confident you can make 5% after-tax doing investments. Keep in mind, the last 10 years, stock market has averaged returns of 4%. Take out taxes and that return isn't enough to even keep up with inflation. Unless you can really say to yourself that you're investment savvy, "term and invest the difference" probably isn't the best option for you.
Now with whole life, you get it if you think you're going to live a long life and want the "living" benefits that a whole life policy can give you. I'm not talking UL/VUL policies. I'm talking strictly permanent WHOLE life insurance. The cash value accumulation will be affected by which company you buy the policy from since not all WHOLE life policies are the same and also how much you plan on saving per month for your policy.
Now you could save the amount in a savings account, yes. But you will be paying taxes on any interest gains compared to tax-deferred growth you can receive in a whole life policy. In addition, in today's market, interest rates on CD's and money market accounts are laughable.
If you get a whole life policy from a company such as Northwestern Mutual, TIAA-CREF, or New York Life, you can expect after-tax returns on average of 5%. These 3 companies have the highest possible credit ratings an insurance company can receive out of the 1200+ companies that are out there and because of our financial strength, NYL (the largest, oldest, & strongest mutual/private company) for example has paid a dividend to our policy-holders for the last 160 years. What does that mean to you as a consumer? It means the likelihood and peace of mind knowing you can get an average after-tax interest return of 5%.
NYL
Financial Advisor
Series 7 & 66 Registered Investment Advisor
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
submitted by New York Life Financial Advisor in CA
@ September 16, 2008 - 11:56 AM
A couple of facts: 1) Only 1% of term policies pay a death claim. 2) 90% of Term policies are cancelled, replaced or converted within 5 years after purchased. Insurance companies make so much money because everyone buys term and they hardly pay claims!!!!!!!
Now I would rather have someone buy the correct face amount rather than less amount beacuse of the product. My point is to buy majority of term, but why not buy an additional whole life with it? $1,000,000 =Total need, so buy 750,000 term and 250,000 whole? or 900,000 term and 100,000 whole.
The best policy is to buy is the one that is in force when you die, so will you die within the next 10, 15, 20 or 30 years? So if you know when you will die, thats the one you should go with. Or for a little more money, we can gurantee that regardless when you die, we will pay a claim. Even better, if you dont want the death benefit, then we can give you your money back plus something in addition to that. Just my two cents.
Now I would rather have someone buy the correct face amount rather than less amount beacuse of the product. My point is to buy majority of term, but why not buy an additional whole life with it? $1,000,000 =Total need, so buy 750,000 term and 250,000 whole? or 900,000 term and 100,000 whole.
The best policy is to buy is the one that is in force when you die, so will you die within the next 10, 15, 20 or 30 years? So if you know when you will die, thats the one you should go with. Or for a little more money, we can gurantee that regardless when you die, we will pay a claim. Even better, if you dont want the death benefit, then we can give you your money back plus something in addition to that. Just my two cents.
submitted by Michael in San Francisco, CA
@ April 22, 2009 - 06:41 PM
That is horrible advice!! Do your research! Ughhh
submitted by Audrey Collins in Boise, ID
@ May 06, 2009 - 06:20 PM
It is my belief that if your primary goal in purchasing variable life policy is cash accumulation then I believe there are better ways to accomplish this. Variable life has many fees and administrative charges. You can purchase a tax deferred investment that invests into equities without all the fees that take away from earnings. With the rate of return in the stock market being so nominal over the years I don't see the additional risk in purchasing this type of policy justifiable. The death benefit is not guaranteed. The cash value is also not guaranteed. There is a possibility that you may have to increase your premiums over the years due to the poor performance of the policy. Buy term insurance and invest the difference!
What everyone overlooks about life insurance is this - how long do you want it to last? Term is cheap because 99% of the time you will outlive the term of the policy, and the insurance company will keep your premiums and never have to pay out a death claim. It serves its purpose when you have large needs and limited budget, but term gets more expensive as you get older, and at some point you won't be able to get any more because you're too old and in poor health. Whole life has higher level premiums up front because it builds a cash value, which yields dividends, which have the potential to pay your premiums for you until you die. ("Whole life" lasts for your whole life, hence its name.) If you want a guaranteed death benefit and a very efficient tax-free wealth transfer vehicle, whole life (Permanent insurance) is the only way. Some people also use whole life as a savings vehicle to create tax-free cash flows for retirement, college, etc. Consult a knowledgeable insurance professional (CLU, ChFC) before making a commitment, and be sure to go with a solid company. Cheaper is not always better!
Here's another hint: so-called "independent" insurance brokers are often paid higher percentage commissions on term from weaker companies, to motivate them to sell these products, sometimes more than 100% of the first-year premium. Yes, we make more commission on whole life because the premium is higher, but it's better for the client in the long run. When I represent a certain AAA-rated carrier it's because I know their products and underwriting standards, and I believe it's in the client's best interest to go with the best company, not the cheapest, and not the one that pays me a higher commission. And I won't be coming back in two years to replace your policy with a new one (thereby earning another commission).
Here's another hint: so-called "independent" insurance brokers are often paid higher percentage commissions on term from weaker companies, to motivate them to sell these products, sometimes more than 100% of the first-year premium. Yes, we make more commission on whole life because the premium is higher, but it's better for the client in the long run. When I represent a certain AAA-rated carrier it's because I know their products and underwriting standards, and I believe it's in the client's best interest to go with the best company, not the cheapest, and not the one that pays me a higher commission. And I won't be coming back in two years to replace your policy with a new one (thereby earning another commission).
I am confused with the current down turn in the economy My husband and I are 58 &59 yrs old with IRA's but no life insurance at all Is it too late to get term or is whole life way to expensive for us at this age (we are in very good health)
Linda,
I think life insurance makes good sense for you and your husband.
At your age, the first thing you should do is find a high quality variable annunity that works in some guareentees and stick yoru money in there. Some VAs can actually give you the better of 7% or whatever the stock market does in a given year. You get the better of the two.
What's more, is it can guareentee you an income for life.
DO you also have 401ks at work?
Secondly, I would probably buy some whole life insurance on your husband. To be completely respectful in discussing this, he will probably pass first, and you could outlive him by 8 years.
Put the VA only in his name to get the highest payout, and that money will be replaced by the life insurance upon his passing. If he outlives you, well, he is still getting an income from the VA.
All that being said, I would never give ironclad suggestions on the internet....you need to talk to a financial advisor....
Be careful though, because some of them will dismiss the life insurance, even though you may end up wanting it for legacy reasons.
I think life insurance makes good sense for you and your husband.
At your age, the first thing you should do is find a high quality variable annunity that works in some guareentees and stick yoru money in there. Some VAs can actually give you the better of 7% or whatever the stock market does in a given year. You get the better of the two.
What's more, is it can guareentee you an income for life.
DO you also have 401ks at work?
Secondly, I would probably buy some whole life insurance on your husband. To be completely respectful in discussing this, he will probably pass first, and you could outlive him by 8 years.
Put the VA only in his name to get the highest payout, and that money will be replaced by the life insurance upon his passing. If he outlives you, well, he is still getting an income from the VA.
All that being said, I would never give ironclad suggestions on the internet....you need to talk to a financial advisor....
Be careful though, because some of them will dismiss the life insurance, even though you may end up wanting it for legacy reasons.
submitted by Andrew in Greenwood, IN
@ November 24, 2008 - 11:45 AM
I also want to make it simple …
First of all, I agree with some of you, that everyone situation is different, and I also believe that if you want to help someone, sit down with him/her/them and see what their situation is and decide how to do help.
I think, we should said that life insurance is not investment vehicle. Life insurance is only income replacement … remember it is only income replacement in the event something happen to you and you won't leave something behind.
When you buy whole life insurance, indirectly, you're also buying TERM insurance.
Depends on what kind whole life insurance you bought (straight, universal, variable) you are buying: Decreasing Term or Annual Renewable Term. What that means?
Decreasing Term means company is paying for your insurance less and less b/c your cash value is accumulating, so their responsibility is less and less from year to year, but you still paying the same amount. People can say "yes, but I am paying also into my investing" …. First never use word investing …. why? someone wrote down, that the second nice benefit is cash value … disagree …. When you are buying Whole Life Insurance (doesn't matter which one) you think you are buying Insurance+Investment …. my question is why you never received both of them: when you die you received Death Benefit (if any) and company keeps your investment or if you will live until age 100 you received your cash value (if any). Never both.
ART means that company renew your policy from year to year, so it goes up and up; when the policy amount is higher than your premium company start taking money from your cash value account and keep open account until you have money there, then your policy lapse.
I believe in term b/c in my opinion Is should have (or my family) maximum protection for less dollars for some period of time until I accumulate enough money to spend on my retirement. Of course, it's not make sense if you only buy only term insurance (although it's better than nothing) . I am Financial Advisor, and I saw many disclosures from insurance companies (whole life) … people believe me it was terrible.
Moreover, usually your investments in whole life insurance are between 2-4%. If you want to take money from you policy, you must borrow against it (usually 6-8%) !!!! It's like: you go to the bank to put money into CD for 3%; after 1 year you go to the bank … to take it but bank tells you "sorry mr/mrs but the value is ZERO"; so, you wait, go to the bank after 5 years; bank tells you "yes we can give you money (remember your money) but as a loan with 8% interest rate". From some of my Clients I heard that Agents told them that they do not have to pay any interest on it …. Of course not b/c interest is adding every year to the loan, so if you take a loan for $10,000 with 8%, then after the year you loan is $10,800, after 2 years $11664, and so on … of course you do not have to pay interest. Then when loan exceeds the value of the cash value, the policy lapse (you have a chance to pay it back in 30 days).
Guys, there is more and more, and more …. It's not a simply case.
If anyone needs help, let me know: info@ezconsultingcorp.com
Investment: it's another case …
"buy term and invest the difference" … means invest for your retirement, so long run.
In long run investment is always good. Always remember, keep eye on it. This is your money, nobody else … always check statements at least each 3 month and at least know what's going on the market. If you are not sure, call your advisor and ask him/her. Most people lose big bucks b/c they portfolio was design not appropriately at current situation … that's all.
If you do investment remember that you should have: long term bucket, medium bucket and emergency bucket … Start from long (retirement); then medium (3-5 years for some purpose); emergency (in the event something happen and you need money right now). I can write, and write … if someone needs help, let me know.
One more word to the person that wrote:
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
Everything is based on your ethics … for me it doesn't matter what license someone have, b/c if you are not a good person nothing will help you. Of course, it's not a NON-PROFIT Organization, but for me always is: First - Client, Second-Commission. That's my opinion.
First of all, I agree with some of you, that everyone situation is different, and I also believe that if you want to help someone, sit down with him/her/them and see what their situation is and decide how to do help.
I think, we should said that life insurance is not investment vehicle. Life insurance is only income replacement … remember it is only income replacement in the event something happen to you and you won't leave something behind.
When you buy whole life insurance, indirectly, you're also buying TERM insurance.
Depends on what kind whole life insurance you bought (straight, universal, variable) you are buying: Decreasing Term or Annual Renewable Term. What that means?
Decreasing Term means company is paying for your insurance less and less b/c your cash value is accumulating, so their responsibility is less and less from year to year, but you still paying the same amount. People can say "yes, but I am paying also into my investing" …. First never use word investing …. why? someone wrote down, that the second nice benefit is cash value … disagree …. When you are buying Whole Life Insurance (doesn't matter which one) you think you are buying Insurance+Investment …. my question is why you never received both of them: when you die you received Death Benefit (if any) and company keeps your investment or if you will live until age 100 you received your cash value (if any). Never both.
ART means that company renew your policy from year to year, so it goes up and up; when the policy amount is higher than your premium company start taking money from your cash value account and keep open account until you have money there, then your policy lapse.
I believe in term b/c in my opinion Is should have (or my family) maximum protection for less dollars for some period of time until I accumulate enough money to spend on my retirement. Of course, it's not make sense if you only buy only term insurance (although it's better than nothing) . I am Financial Advisor, and I saw many disclosures from insurance companies (whole life) … people believe me it was terrible.
Moreover, usually your investments in whole life insurance are between 2-4%. If you want to take money from you policy, you must borrow against it (usually 6-8%) !!!! It's like: you go to the bank to put money into CD for 3%; after 1 year you go to the bank … to take it but bank tells you "sorry mr/mrs but the value is ZERO"; so, you wait, go to the bank after 5 years; bank tells you "yes we can give you money (remember your money) but as a loan with 8% interest rate". From some of my Clients I heard that Agents told them that they do not have to pay any interest on it …. Of course not b/c interest is adding every year to the loan, so if you take a loan for $10,000 with 8%, then after the year you loan is $10,800, after 2 years $11664, and so on … of course you do not have to pay interest. Then when loan exceeds the value of the cash value, the policy lapse (you have a chance to pay it back in 30 days).
Guys, there is more and more, and more …. It's not a simply case.
If anyone needs help, let me know: info@ezconsultingcorp.com
Investment: it's another case …
"buy term and invest the difference" … means invest for your retirement, so long run.
In long run investment is always good. Always remember, keep eye on it. This is your money, nobody else … always check statements at least each 3 month and at least know what's going on the market. If you are not sure, call your advisor and ask him/her. Most people lose big bucks b/c they portfolio was design not appropriately at current situation … that's all.
If you do investment remember that you should have: long term bucket, medium bucket and emergency bucket … Start from long (retirement); then medium (3-5 years for some purpose); emergency (in the event something happen and you need money right now). I can write, and write … if someone needs help, let me know.
One more word to the person that wrote:
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
Everything is based on your ethics … for me it doesn't matter what license someone have, b/c if you are not a good person nothing will help you. Of course, it's not a NON-PROFIT Organization, but for me always is: First - Client, Second-Commission. That's my opinion.
submitted by Daniel in New York
@ February 24, 2009 - 12:25 AM
Would you please go into detail about death benefit, cash value guaranteed and tax advantage? I saw that whole life provided all those(from the chart)but I have no idea what they mean??
Whole Life Insurance has a guaranteed death benefit. The death benefit would not be effected by interest rates, mortality or any other factor. The cash value that accumulates inside the policy is tax deferred until withdraw. At that time any profit (premiums minus cash value) would be taxed at the policyholders tax rate. Whole Life Insurance is designed to provide permanent protection and a long term means of accumulating cash.
well, still somewhat(lots) confused. In whole life, no or less interest earned on premiums for frst two yrs, have to pay interest on my own money if borrowed and less cash value if i die. Also so much of term insurance i've heard and read on the internet that its cheap and invest the difference. Would i be better off by investing my self if i have term or should i be letting the whole life insurance company do that if i buy whole life at higher premiums? please suggest if i've written clear enough, appreciate it. i'm 43 yrs, married and have two daughters 11 and 9.
The main purpose of whole life insurance is to provide permanent life insurance protection for your entire life. Term insurance cannot accomplish this. The cash value of whole life insurance is can be very beneficial if measured it in the long run. You may then accumulate significant values that are tax deferred.
Bottom line, you need to determine what insurance company you buy insurance from, because it does make a different. Saying that there's no difference between insurance companies is like saying all car companies are the same. Whole life insurance yields pretty high returns over the course of 10 - 30 years depending on what company you go with. Northwestern Mutual, New York Life, Mass Mutual, and Guardian are 4 companies that will probably yield between 5 - 9% returns depending on the company you choose. The cash grows tax deferred and can be taken out tax free if done properly. For the older folks, it can be used not just as life insurance but as a tax shelter for your money. Imagine, by paying high premiums, you're building up your cash values quickly. If something unfortunate happens, the family gets a much higher return than what you put in. If you live strong and live long, the cash builds up significantly and you've successfully protected a large amount of your assets. But out of 1200 companies, if you go with any of them aside from the 4 mentioned above, you might as well buy term and invest the rest.
When purchasing Whole Life or Universal Life insurance the company you pick is extremely important to your long term cash accumulation. I would also consider Prudential and John Hancock in the group of companies to consider. When withdrawing cash from a life insurance policy be careful of the interest rate charged by the insurance company. If your policy lapses your withdraw may be considered taxable. Always consult with an accountant.
The idea that "buy term and invest the difference" is the right choice for everyone, no matter what their situation is, is ridiculous. There is no "right or wrong" kind of life insurance. Like many others have said, it depends on your situation.
A good example for those who may be somewhat confused is that whole life is like owning, where as term is like renting. Both serve a purpose. Buy term and invest the difference became popular when stock brokers became able to sell insurance due to deregulation.
Imagine if your stockbroker could suddenly sell (and rent) real estate and explained to you that you should sell your home, rent a similar apartment (from him of course, so he would get paid for it) and take the difference between your mortgage and your rent and invest it in the stock market. Naturally the stock market should give a higher rate of return over the long run than your primary residence, so why pay a mortgage when you can get a higher rate of return on your money elsewhere?
You would never do this because rate of return does not dictate every decision in your life, even when it comes to financial planning. You buy a house because you want to own it, pay it off, and have an asset to call your own. The rate of return is a nice aspect of home ownership but not the primary concern.
Whole life is very similar. People buy it because they want the death benefit to be permanent and guaranteed to pay off at death. The cash value is a nice secondary benefit (although you do want the highest possible, hence the importance of a good company as others have mentioned).
People who say term is always right (Orman et. al) have a very simplistic view to the financial planning process and probably are much more focused on making money for themselves than they are the well being of their "clients" or the people they "serve".
A good example for those who may be somewhat confused is that whole life is like owning, where as term is like renting. Both serve a purpose. Buy term and invest the difference became popular when stock brokers became able to sell insurance due to deregulation.
Imagine if your stockbroker could suddenly sell (and rent) real estate and explained to you that you should sell your home, rent a similar apartment (from him of course, so he would get paid for it) and take the difference between your mortgage and your rent and invest it in the stock market. Naturally the stock market should give a higher rate of return over the long run than your primary residence, so why pay a mortgage when you can get a higher rate of return on your money elsewhere?
You would never do this because rate of return does not dictate every decision in your life, even when it comes to financial planning. You buy a house because you want to own it, pay it off, and have an asset to call your own. The rate of return is a nice aspect of home ownership but not the primary concern.
Whole life is very similar. People buy it because they want the death benefit to be permanent and guaranteed to pay off at death. The cash value is a nice secondary benefit (although you do want the highest possible, hence the importance of a good company as others have mentioned).
People who say term is always right (Orman et. al) have a very simplistic view to the financial planning process and probably are much more focused on making money for themselves than they are the well being of their "clients" or the people they "serve".
I agree with Ed. Everyone is different. Whether you purchase term insurance, whole life, variable life or index life insurance, I believe the most important aspect is getting the proper amount of coverage for your family. Do not sacrifice cash values for life insurance benefits. Sometimes individuals will purchase a whole life policy for 100,000 when they should have purchased 250,000 of term insurance.
Make this simple.
Term life insurance gives you a death benefit for a specified amount of time, and you should cover specific needs with specific insurance. For example, you purchase a house and take $100,000 loan for 30 years. A 30 year term for $100,000 would cover that need, so why overpay on a whole life to cover a specific need? If you have a 4 year old and want to cover college expenses you will not have that need in 20 years so term works well.
On the other hand, the need to replace income never goes away, funeral expense never goes away. These are the types of events that should be covered with whole.
The best way to set up your life insurance is a blend of term to cover specific needs and whole life to cover needs that never go away. In all reality, you should really look at your life insurance probably about every 4-5 years as your needs change over time.
I am not a believer in equity (cash value) building life insurance, you can get whole life that is guaranteed insurance for your entire life with no equity growth, which is lower premiums and accomplishes your goal of a lifetime of insurance.
One thing you must understand about cash value in whole life policy....unless you have a policy that adds the cash value to the death benefit (which is much more expensive), you do not get the cash value when you pass away. You have a $200,000 policy with $50,000 of cash value at death, the insurance company pays out the $200,000 and the $50,000 goes away, so why do you want that money associated with the life insurance?
The word "investment" should never be used with life insurance. If you want to accumulate money, do it in an investment product. If you want to guarantee no market downturns, look into equity indexed annuities.
My advice...don't pick term or whole, if you do a solid analysis of your own personal situation, the analysis will tell you how to set up your life insurance. To be properly set up, most of the time a blend of the products is the way to go.
Email me if you have questions...dhorsey@myclearview.com
David J Horsey Jr, CLTC
Clearview Insurance & Finanacial Services
Term life insurance gives you a death benefit for a specified amount of time, and you should cover specific needs with specific insurance. For example, you purchase a house and take $100,000 loan for 30 years. A 30 year term for $100,000 would cover that need, so why overpay on a whole life to cover a specific need? If you have a 4 year old and want to cover college expenses you will not have that need in 20 years so term works well.
On the other hand, the need to replace income never goes away, funeral expense never goes away. These are the types of events that should be covered with whole.
The best way to set up your life insurance is a blend of term to cover specific needs and whole life to cover needs that never go away. In all reality, you should really look at your life insurance probably about every 4-5 years as your needs change over time.
I am not a believer in equity (cash value) building life insurance, you can get whole life that is guaranteed insurance for your entire life with no equity growth, which is lower premiums and accomplishes your goal of a lifetime of insurance.
One thing you must understand about cash value in whole life policy....unless you have a policy that adds the cash value to the death benefit (which is much more expensive), you do not get the cash value when you pass away. You have a $200,000 policy with $50,000 of cash value at death, the insurance company pays out the $200,000 and the $50,000 goes away, so why do you want that money associated with the life insurance?
The word "investment" should never be used with life insurance. If you want to accumulate money, do it in an investment product. If you want to guarantee no market downturns, look into equity indexed annuities.
My advice...don't pick term or whole, if you do a solid analysis of your own personal situation, the analysis will tell you how to set up your life insurance. To be properly set up, most of the time a blend of the products is the way to go.
Email me if you have questions...dhorsey@myclearview.com
David J Horsey Jr, CLTC
Clearview Insurance & Finanacial Services
Term insurance, return of premium term insurance, whole life insurance, variable life insurance, indexed life insurance.....there are so many different types. Everyone is different. Everyone has different needs. There is no wrong or right. The type of insurance you purchase depends on your individual situation. I would never say that whole life is bad for everyone nor would I say that term insurance is bad for everyone. The only bad decision is the decision not to purchase life insurance.
The type of life insurance policy a individual purchases should not be based on what type of insurance is most or least profitable to the insurance company. Your purchase which is based on your needs should be the primary focus. Term insurance is popular for a reason. Cost and coverage are the primary reasons why.
In reply to Tim's question, The death benefit that is paid to your family is the 13,618.00 This policy has accumulated dividends over the years which are paid at death.
I also want to make it simple …
First of all, I agree with some of you, that everyone situation is different, and I also believe that if you want to help someone, sit down with him/her/them and see what their situation is and decide how to do help.
I think, we should said that life insurance is not investment vehicle. Life insurance is only income replacement … remember it is only income replacement in the event something happen to you and you won't leave something behind.
When you buy whole life insurance, indirectly, you're also buying TERM insurance.
Depends on what kind whole life insurance you bought (straight, universal, variable) you are buying: Decreasing Term or Annual Renewable Term. What that means?
Decreasing Term means company is paying for your insurance less and less b/c your cash value is accumulating, so their responsibility is less and less from year to year, but you still paying the same amount. People can say "yes, but I am paying also into my investing" …. First never use word investing …. why? someone wrote down, that the second nice benefit is cash value … disagree …. When you are buying Whole Life Insurance (doesn't matter which one) you think you are buying Insurance+Investment …. my question is why you never received both of them: when you die you received Death Benefit (if any) and company keeps your investment or if you will live until age 100 you received your cash value (if any). Never both.
ART means that company renew your policy from year to year, so it goes up and up; when the policy amount is higher than your premium company start taking money from your cash value account and keep open account until you have money there, then your policy lapse.
I believe in term b/c in my opinion Is should have (or my family) maximum protection for less dollars for some period of time until I accumulate enough money to spend on my retirement. Of course, it's not make sense if you only buy only term insurance (although it's better than nothing) . I am Financial Advisor, and I saw many disclosures from insurance companies (whole life) … people believe me it was terrible.
Moreover, usually your investments in whole life insurance are between 2-4%. If you want to take money from you policy, you must borrow against it (usually 6-8%) !!!! It's like: you go to the bank to put money into CD for 3%; after 1 year you go to the bank … to take it but bank tells you "sorry mr/mrs but the value is ZERO"; so, you wait, go to the bank after 5 years; bank tells you "yes we can give you money (remember your money) but as a loan with 8% interest rate". From some of my Clients I heard that Agents told them that they do not have to pay any interest on it …. Of course not b/c interest is adding every year to the loan, so if you take a loan for $10,000 with 8%, then after the year you loan is $10,800, after 2 years $11664, and so on … of course you do not have to pay interest. Then when loan exceeds the value of the cash value, the policy lapse (you have a chance to pay it back in 30 days).
Guys, there is more and more, and more …. It's not a simply case.
If anyone needs help, let me know: info@ezconsultingcorp.com
Investment: it's another case …
"buy term and invest the difference" … means invest for your retirement, so long run.
In long run investment is always good. Always remember, keep eye on it. This is your money, nobody else … always check statements at least each 3 month and at least know what's going on the market. If you are not sure, call your advisor and ask him/her. Most people lose big bucks b/c they portfolio was design not appropriately at current situation … that's all.
If you do investment remember that you should have: long term bucket, medium bucket and emergency bucket … Start from long (retirement); then medium (3-5 years for some purpose); emergency (in the event something happen and you need money right now). I can write, and write … if someone needs help, let me know.
One more word to the person that wrote:
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
Everything is based on your ethics … for me it doesn't matter what license someone have, b/c if you are not a good person nothing will help you. Of course, it's not a NON-PROFIT Organization, but for me always is: First - Client, Second-Commission. That's my opinion.
First of all, I agree with some of you, that everyone situation is different, and I also believe that if you want to help someone, sit down with him/her/them and see what their situation is and decide how to do help.
I think, we should said that life insurance is not investment vehicle. Life insurance is only income replacement … remember it is only income replacement in the event something happen to you and you won't leave something behind.
When you buy whole life insurance, indirectly, you're also buying TERM insurance.
Depends on what kind whole life insurance you bought (straight, universal, variable) you are buying: Decreasing Term or Annual Renewable Term. What that means?
Decreasing Term means company is paying for your insurance less and less b/c your cash value is accumulating, so their responsibility is less and less from year to year, but you still paying the same amount. People can say "yes, but I am paying also into my investing" …. First never use word investing …. why? someone wrote down, that the second nice benefit is cash value … disagree …. When you are buying Whole Life Insurance (doesn't matter which one) you think you are buying Insurance+Investment …. my question is why you never received both of them: when you die you received Death Benefit (if any) and company keeps your investment or if you will live until age 100 you received your cash value (if any). Never both.
ART means that company renew your policy from year to year, so it goes up and up; when the policy amount is higher than your premium company start taking money from your cash value account and keep open account until you have money there, then your policy lapse.
I believe in term b/c in my opinion Is should have (or my family) maximum protection for less dollars for some period of time until I accumulate enough money to spend on my retirement. Of course, it's not make sense if you only buy only term insurance (although it's better than nothing) . I am Financial Advisor, and I saw many disclosures from insurance companies (whole life) … people believe me it was terrible.
Moreover, usually your investments in whole life insurance are between 2-4%. If you want to take money from you policy, you must borrow against it (usually 6-8%) !!!! It's like: you go to the bank to put money into CD for 3%; after 1 year you go to the bank … to take it but bank tells you "sorry mr/mrs but the value is ZERO"; so, you wait, go to the bank after 5 years; bank tells you "yes we can give you money (remember your money) but as a loan with 8% interest rate". From some of my Clients I heard that Agents told them that they do not have to pay any interest on it …. Of course not b/c interest is adding every year to the loan, so if you take a loan for $10,000 with 8%, then after the year you loan is $10,800, after 2 years $11664, and so on … of course you do not have to pay interest. Then when loan exceeds the value of the cash value, the policy lapse (you have a chance to pay it back in 30 days).
Guys, there is more and more, and more …. It's not a simply case.
If anyone needs help, let me know: info@ezconsultingcorp.com
Investment: it's another case …
"buy term and invest the difference" … means invest for your retirement, so long run.
In long run investment is always good. Always remember, keep eye on it. This is your money, nobody else … always check statements at least each 3 month and at least know what's going on the market. If you are not sure, call your advisor and ask him/her. Most people lose big bucks b/c they portfolio was design not appropriately at current situation … that's all.
If you do investment remember that you should have: long term bucket, medium bucket and emergency bucket … Start from long (retirement); then medium (3-5 years for some purpose); emergency (in the event something happen and you need money right now). I can write, and write … if someone needs help, let me know.
One more word to the person that wrote:
Final Note: Beware of "advisors" that have a 63 series license compared to a 66. 63 licensed agents have no fiduciary duty to their clients and do not have to look out for your best interests.
Everything is based on your ethics … for me it doesn't matter what license someone have, b/c if you are not a good person nothing will help you. Of course, it's not a NON-PROFIT Organization, but for me always is: First - Client, Second-Commission. That's my opinion.
Of course WL shouldn't be looked at as an investment, however, when it comes to estate planning needs, a permanent life insurance product is the best tool to use. Perhaps in your financial planning you haven't done a lot of estate planning so you haven't come across the need for this. Just a comment from someone who's family has been screwed by uncle sam.
submitted by Brian in Middleton, WI
@ February 25, 2009 - 01:52 PM
I am a financial advisor with a major wealth management firm. I recently completed an analysis of a NYL Whole life illustration, that I would be happy to share. If you look just at the guaranteed portion of the illustration, it came out to earn 1.17% in the first 10 years and 2.9% in years 10 to 36. Compare that to a 10 year T-Bill rate of 2.78% and a 30 year rate of 3.49%.
I would be wary of any non-guaranteed portion of a Whole Life Illustration. Especially in light of the current economic environment, when so many financial companies are having to cut their dividends because of market losses. Even if your agent says "We've always paid around 5%" You may want to see if that's the guaranteed dividend.
I would be wary of any non-guaranteed portion of a Whole Life Illustration. Especially in light of the current economic environment, when so many financial companies are having to cut their dividends because of market losses. Even if your agent says "We've always paid around 5%" You may want to see if that's the guaranteed dividend.
Comparing Whole Life to other investments must be done apples to apples.
Firstly, INTENTION is important in the illustration. If I am using WL as an investment tool, whereas I plan on retiring on my Cash Value and Dividends, then yes, putting the money in the stock market makes more sense.
I would never recommend a client do that.
If my objective is RETIREMENT planning for myself and my spouse and my hiers and my charities, etc., then DEATH BENEFIT needs to be my calculus, NOT cash value (though they are tied together, DB is always higher, unless you have a MEC).
Also, it is not just that my investments equal my death benefit, but also that they beat it. Investment monies are taxed (outside of the Roth), while WL death benefits are exempt from Income tax.
So, when it comes to making sure my wife and I can live it up on our savings (investments), that she is taken care of after I die, and that our children, grandchildren, and other charitable organizations are taken care of after she passes, we buy WL.
Also, dividends in long standing mutual companies are historically sound. I will not speak to other's dividend history, but my company has paid dividends since 1865. Policy owners during the Great Depression recieved not only their gaurentee interest, they also recieved yearly dividends.
As a pure, money making investment, WL is like buying a bond. As a financial planning tool, it is the bedrock foundation.
Firstly, INTENTION is important in the illustration. If I am using WL as an investment tool, whereas I plan on retiring on my Cash Value and Dividends, then yes, putting the money in the stock market makes more sense.
I would never recommend a client do that.
If my objective is RETIREMENT planning for myself and my spouse and my hiers and my charities, etc., then DEATH BENEFIT needs to be my calculus, NOT cash value (though they are tied together, DB is always higher, unless you have a MEC).
Also, it is not just that my investments equal my death benefit, but also that they beat it. Investment monies are taxed (outside of the Roth), while WL death benefits are exempt from Income tax.
So, when it comes to making sure my wife and I can live it up on our savings (investments), that she is taken care of after I die, and that our children, grandchildren, and other charitable organizations are taken care of after she passes, we buy WL.
Also, dividends in long standing mutual companies are historically sound. I will not speak to other's dividend history, but my company has paid dividends since 1865. Policy owners during the Great Depression recieved not only their gaurentee interest, they also recieved yearly dividends.
As a pure, money making investment, WL is like buying a bond. As a financial planning tool, it is the bedrock foundation.
submitted by Andrew Burks in Salem, IN
@ March 30, 2009 - 01:24 PM
By converting your term policy to a universal life policy you will guaranteed life insurance protection for the rest of your life. Do you need life insurance forever? Is your estate large enough where you will be subject to estate taxes. If so, life insurance would be a wise purchase. If your term insurance purchase was based on sole purpose of providing protection while your kids were in college than maybe you should cancel the policy.
All the questions I've had for years have just been answered! Thanks for a very good web site.
I enjoy this site because the questions are real life situational questions that are asked every day. The answers are direct, varied and give the consumers objective advice. I believe this type of site is more informative than most.
Why is term so cheap? Think about it. If you're paying $300 a year for a $1 million term policy, do you think there's a bat's chance that the insurance company expects to pay out on your policy? Definitely not. Of course, we still buy it because it's cheap and you never do know whether your time is going to be up tomorrow or 50 years from now.
Why would I buy a term policy during my working years when the likelihood of death is basically 0%, then drop it during retirement when the likelihood of death during retirement is 100%? If I'm going to buy insurance, I might as well make sure it's going to be in force when I actually need it, right? Otherwise it's been a waste of money.
Here's something interesting to chew on. Assuming you're 35 years old now and you want to have $1 million of life insurance in force until the day you die (assume age 85):
-Buying 10-year term policies, then renewing every 10 years until age 85, will cost about $375,000.
-Buying 20-year term policies will cost about $380,000.
-Buying a combination of term ($700,000) and whole life ($300,000) that totals $1 million, then decreasing the term insurance benefit as the whole life increases in value (so you maintain a steady $1 million of benefit up to age 85), will cost around $370,000.
Which is the most expensive? Hard to say. Insurance costs - when measured over a lifetime - are generally the same across all policy types. The difference here, though, is the flexibility you'd have if you bought the whole life. Dividends, guaranteed death benefits, guaranteed premiums, guaranteed cash values, flexibility to use cash values to pay premiums when I need to, availability of using dividends to offset premiums in the future, etc. There are a lot of reasons.
I spend a lot on whole life insurance every year, and I grin every time I write out a premium check because I know it's safe and secure, and I'm already making more in dividends and cash value increases than the amounts I write in premiums. Guaranteed returns. No risk. Can we say the same for our mutual fund accounts these days? No way.
Why would I buy a term policy during my working years when the likelihood of death is basically 0%, then drop it during retirement when the likelihood of death during retirement is 100%? If I'm going to buy insurance, I might as well make sure it's going to be in force when I actually need it, right? Otherwise it's been a waste of money.
Here's something interesting to chew on. Assuming you're 35 years old now and you want to have $1 million of life insurance in force until the day you die (assume age 85):
-Buying 10-year term policies, then renewing every 10 years until age 85, will cost about $375,000.
-Buying 20-year term policies will cost about $380,000.
-Buying a combination of term ($700,000) and whole life ($300,000) that totals $1 million, then decreasing the term insurance benefit as the whole life increases in value (so you maintain a steady $1 million of benefit up to age 85), will cost around $370,000.
Which is the most expensive? Hard to say. Insurance costs - when measured over a lifetime - are generally the same across all policy types. The difference here, though, is the flexibility you'd have if you bought the whole life. Dividends, guaranteed death benefits, guaranteed premiums, guaranteed cash values, flexibility to use cash values to pay premiums when I need to, availability of using dividends to offset premiums in the future, etc. There are a lot of reasons.
I spend a lot on whole life insurance every year, and I grin every time I write out a premium check because I know it's safe and secure, and I'm already making more in dividends and cash value increases than the amounts I write in premiums. Guaranteed returns. No risk. Can we say the same for our mutual fund accounts these days? No way.
Term is so cheap because they do not pay alot of death claims. The likelihood is STILL there that a death could occur, the chances being more than 1%. Why not purchase a large term life insurance policy during the families growing years and then later in life convert your term insurance to whole life or buy a new policy. You may not even need life insurance when you retire, Why make that decision now. Term insurance is not a waste of money. The protection and low cost are invaluable!
Term is an expense, thats money paid to an insurer and is not returned to you. Loss 100%!
Ofcourse in some situations it does make sense.
Whole life is an investment, the money you pay in comes back with dividends.
Whole life doesnt care why you bought it, when you retire and dont have the need for insurance then you can use it for anything else that you want...eg. leverage your other assets, take the pressure off other assets to perform. Putting other assets at lower risk mean your chance of success is greater.
The presence of whole life in your portfolio provides you with options. If you had to live through retirement just on your other assets, theres pretty much one choice and one choice only...live off the interest.
Life insurance should be permanent and forever. Cash values can only go in one direction...UP!
Ofcourse in some situations it does make sense.
Whole life is an investment, the money you pay in comes back with dividends.
Whole life doesnt care why you bought it, when you retire and dont have the need for insurance then you can use it for anything else that you want...eg. leverage your other assets, take the pressure off other assets to perform. Putting other assets at lower risk mean your chance of success is greater.
The presence of whole life in your portfolio provides you with options. If you had to live through retirement just on your other assets, theres pretty much one choice and one choice only...live off the interest.
Life insurance should be permanent and forever. Cash values can only go in one direction...UP!
Term is for you if you are of modest means and expect your income to remain relatively stable. You simply need economic replacement of your life in case of a catastrophic loss; this is the essence of all insurance. An insurance company is willing to be on the hook for hundreds of thousands in death benefit for a very small premium because they know there is a miniscule chance a claim will be paid. Permanent insurance, specifically whole life, has an actuarial cost with the assumption of a much greater chance of claim; hence its higher cost. It has multiple benefits no other financial instrument possesses: Creditor protection, liquidity and tax advantages. I would argue that its rate of return is competitive. If you have a linear 5% rate of return tax-free and your tax bracket is 35%, you'd be hard-pressed to find an investment that could return the equivalent taxable return on a linear basis (between 7&8%) that shares the above mentioned benefits.
I dispute the idea that term insurance is only for people with modest means. I personally know alot of people with incomes over 250,00 that purchase term insurance. You do not always need economic replacement of your income for your entire life. Situations are different. I firmly believe that any reference to a whole life policy as an investment product is wrong.
Term is excellent coverage for working families with children. Yes, there is only a 1% chance that it will pay out over..say 20-30 years. But the amount you are willing to give up is very small compared to whole life over those years. The point of life insurance is to provide for those who need it in the small chance that you die. If I die at 75...well I do not think my family needs an infusion of hundreds of thousands of dollars. I already saved for retirement(money that would have gone to a whole life policy) and that money is there for them.
If I die at 60(worst case scenario)..before retirement and a few years after Term as been cancelled.. then there is no death benefit for me(unless I have group through a job). However, the need for a large death benefit is gone. Children are grown...house should be paid off..should be very few bills, and the retirement saved up to that point should be sufficient.
Of course it would make sense to look at your situation every few years and perhaps decide to decrease term coverage instead of cancelling. Decrease it to your needs at the time. If you get cancer and will probably die sooner, then obviously you wouldn't want to cancel since your need has just increased with medical bills.
But remember...all of the money you would have paid for whole life...could be in savings account ready to go when needed any time.
If I die at 60(worst case scenario)..before retirement and a few years after Term as been cancelled.. then there is no death benefit for me(unless I have group through a job). However, the need for a large death benefit is gone. Children are grown...house should be paid off..should be very few bills, and the retirement saved up to that point should be sufficient.
Of course it would make sense to look at your situation every few years and perhaps decide to decrease term coverage instead of cancelling. Decrease it to your needs at the time. If you get cancer and will probably die sooner, then obviously you wouldn't want to cancel since your need has just increased with medical bills.
But remember...all of the money you would have paid for whole life...could be in savings account ready to go when needed any time.
There are many choices when deciding what is the proper type of life insurance for a person to buy. Is the correct answer: term insurance, whole life insurance, variable life insurance, indexed life insurance or universal life insurance. There are many different ways to approach the solution without any answer being wrong. The most important decision, is the decision to purchase a policy. The second most important decision is to buy the correct amount of coverage. Everything else depends on your own finances, and what you want out of the program.
The financial advisor (also an independent agent) who is working with us wants us to only contribute up to the match in our 401K and use the rest for whole life insurance. We are both in our 50's and have been maxing out on our 401k's for a few years now. I feel very uncomfortable with not maximizing the 401k first before investing in life insurance. I don't understand the logic....Also he thinks my husband should take out the single annuity pension when he retires because we'll have the whole life for me...Does this make sense?
Regarding the decision to maximize 401K contributions, our advisor gave us the same advice. The rational was the lack of flexibility for use of the funds inside the 401k (i.e. penalties for withdraw, etc) plus the potential higher tax rate at retirement. When he crunched the numbers, considering the future tax liabilities, the return did not look that great for funds invested over the company match.
submitted by REA in York, PA
@ June 04, 2009 - 10:55 AM
In regards to your decision to either maximize your 401k contributions or paying premiums on a whole life policy I believe the better choice is to maximize your 401k contributions. We are not making a fair comparison. The 401k (pretax) contributions will out perform the whole life thereby giving you a larger nest egg! No comparison!
Ron,
I respectfully have to disagree, based on re-thinking what exactly we are comparing.
This is a multi-hour discussion I will try to boil down to this:
When ever we have the nest egg strategy, we are told to live off the interest of the principal. If my wife and I retire at age 65, there is a 50% chance one of us will make it to at least age 90 (probably her).
That's 25 years.
Has the market consistently gone up EVERY year over the last 25 years?
Has it ever done that in ANY 25 years stretch?
No, eventually, you have to touch principal, especially when a market like this or 1987 hits (those are within 25 years of each other) , which reduces the size of our nest egg.
Remember, we are scraping cream off that top (interest), and then it is getting taxed at what will be a much higher rate for EVERYONE in the future (so what's the point of pre-tax?), but that is another thought.
So, we have our bad year, and now the nest egg is less. The market rebounds next year, but our interest is based on a smaller principal. We may have to touch our diminished principal again in order to keep up our standard of retirement living.
Additionally, we may want to consider living on LESS than the full interest amount, as we will need to GROW our nest egg DURING retirement AS WELL.
If you retired in 1985, and your retirement income DID NOT increase for 25 years, you would have a terrible time living on 2010's prices.
Further, what is around today that was not around in 1985? No one had a cell phone in 85, but could anyone reading this imagine their lives without one now? Anybody keep the black and white 18'' TV from their childhood? Or did more people on here go out and buy a 42'' plasma?
The point is, things will continue to evolve, and new products will emerge. Should you limit your lifestyle (and let's face it, right now, you probably currently do not), just because you locked yourself into the "nest egg" situation?
So, our 401k's give us a tax break now, but the TRUE rate of return must be measured against increasing taxes, inflation, and lifestyle.
Now, let's see how a Whole Life policy gives us a pass to use our 401k account more freely.
WARNING------WHOLE LIFE ADVOCATING------WARNING!!!!!!!!!!!!!!!
Our 401k is less than in the first example, because we used part of our money on the premium dollars for a whole life policy.
(quick aside, Whole Life is funded after tax.....so, we are paying taxes on the money right now.....that money in a 401k enjoys tax deferred growth, but the money in a whole life policy is NEVER taxed as income.....which is better depends on your situation and tax bracket.....for most people, tax free in retirement is the way to go.....so, even if you hate my WL talk, at least STOP putting money in your 401k after the match is meet, and plug it into a ROTH)
Whole Life becomes the PERMISSION SLIP for you to go out and spend down that 401k account. No longer do you have to live on interest, BECAUSE WE BOUGHT WL ON BOTH SPOUSES.
We are free to spend down our retirement accounts, because when one person dies, the other has a large influx of cash they can use to live on the rest of their lives.
But what if we spend the assets before we die?
Simple answer. If you have a QUALITY WL policy, you should have accumulated a decent amount of Cash Value.
This Cash Value is available for you to borrow against the policy......this is money we never intend to repay, as we can safely allow the interest of that loan to compound inside the contract, at which upon death it will be paid back, with the balance going to the beneficary.
As a matter of fact, you could use one of the spouses policies for this very purpose IMMEDIATELY when you retire.
Why?
Now, instead of pulling $40,000 out of your 401k to live on, and having it taxed in the 22% bracket, you can pull 20k out of your WL and 20k out of your 401k.
You are now in the 15% tax bracket (only the qualified money is taxable), and the other 20k comes to you tax free, as it is in the form of a loan on the contract.
Moreover, your actually get to have more money with the second strategy, because you have a smaller amount that is taxable at a lower rate than in the first example.
EX.1---about $31,000 after taxes
EX.2---about $37,000 after taxes (the 20k from the WL policy is tax free)
It's a beautiful thing.
That was a lot of information, and I'm afraid it is just the tip of the iceberg on the Whole Life story.
Here is some recommended reading:
http://www.lifetax.com/webdocuments/The%20Whole%20Story%20of%20Whole%20Life%202005.pdf
Basically, this is the most diverse financial tool available, and it should be the "bonded" part of an individual's portfolio.
I appreciate anyone who took the pains to read this far.
Andrew Burks
I respectfully have to disagree, based on re-thinking what exactly we are comparing.
This is a multi-hour discussion I will try to boil down to this:
When ever we have the nest egg strategy, we are told to live off the interest of the principal. If my wife and I retire at age 65, there is a 50% chance one of us will make it to at least age 90 (probably her).
That's 25 years.
Has the market consistently gone up EVERY year over the last 25 years?
Has it ever done that in ANY 25 years stretch?
No, eventually, you have to touch principal, especially when a market like this or 1987 hits (those are within 25 years of each other) , which reduces the size of our nest egg.
Remember, we are scraping cream off that top (interest), and then it is getting taxed at what will be a much higher rate for EVERYONE in the future (so what's the point of pre-tax?), but that is another thought.
So, we have our bad year, and now the nest egg is less. The market rebounds next year, but our interest is based on a smaller principal. We may have to touch our diminished principal again in order to keep up our standard of retirement living.
Additionally, we may want to consider living on LESS than the full interest amount, as we will need to GROW our nest egg DURING retirement AS WELL.
If you retired in 1985, and your retirement income DID NOT increase for 25 years, you would have a terrible time living on 2010's prices.
Further, what is around today that was not around in 1985? No one had a cell phone in 85, but could anyone reading this imagine their lives without one now? Anybody keep the black and white 18'' TV from their childhood? Or did more people on here go out and buy a 42'' plasma?
The point is, things will continue to evolve, and new products will emerge. Should you limit your lifestyle (and let's face it, right now, you probably currently do not), just because you locked yourself into the "nest egg" situation?
So, our 401k's give us a tax break now, but the TRUE rate of return must be measured against increasing taxes, inflation, and lifestyle.
Now, let's see how a Whole Life policy gives us a pass to use our 401k account more freely.
WARNING------WHOLE LIFE ADVOCATING------WARNING!!!!!!!!!!!!!!!
Our 401k is less than in the first example, because we used part of our money on the premium dollars for a whole life policy.
(quick aside, Whole Life is funded after tax.....so, we are paying taxes on the money right now.....that money in a 401k enjoys tax deferred growth, but the money in a whole life policy is NEVER taxed as income.....which is better depends on your situation and tax bracket.....for most people, tax free in retirement is the way to go.....so, even if you hate my WL talk, at least STOP putting money in your 401k after the match is meet, and plug it into a ROTH)
Whole Life becomes the PERMISSION SLIP for you to go out and spend down that 401k account. No longer do you have to live on interest, BECAUSE WE BOUGHT WL ON BOTH SPOUSES.
We are free to spend down our retirement accounts, because when one person dies, the other has a large influx of cash they can use to live on the rest of their lives.
But what if we spend the assets before we die?
Simple answer. If you have a QUALITY WL policy, you should have accumulated a decent amount of Cash Value.
This Cash Value is available for you to borrow against the policy......this is money we never intend to repay, as we can safely allow the interest of that loan to compound inside the contract, at which upon death it will be paid back, with the balance going to the beneficary.
As a matter of fact, you could use one of the spouses policies for this very purpose IMMEDIATELY when you retire.
Why?
Now, instead of pulling $40,000 out of your 401k to live on, and having it taxed in the 22% bracket, you can pull 20k out of your WL and 20k out of your 401k.
You are now in the 15% tax bracket (only the qualified money is taxable), and the other 20k comes to you tax free, as it is in the form of a loan on the contract.
Moreover, your actually get to have more money with the second strategy, because you have a smaller amount that is taxable at a lower rate than in the first example.
EX.1---about $31,000 after taxes
EX.2---about $37,000 after taxes (the 20k from the WL policy is tax free)
It's a beautiful thing.
That was a lot of information, and I'm afraid it is just the tip of the iceberg on the Whole Life story.
Here is some recommended reading:
http://www.lifetax.com/webdocuments/The%20Whole%20Story%20of%20Whole%20Life%202005.pdf
Basically, this is the most diverse financial tool available, and it should be the "bonded" part of an individual's portfolio.
I appreciate anyone who took the pains to read this far.
Andrew Burks
Andrew,
I could not have said it any better myself!!! Like I said earlier, anyone who believes buy term invest the difference has not compared WL products vs investment, and/or does not fully understand the flexibility that a WL product has. One more thing, say you get that term insurance...say you are 45 now and you get that 20 year term...do you think you will be in the same or better health when you are 65? Also, are you guaranteed your investments will still be there...subtract $30,000 after a year like 2008 and that could equal more than what you originally planned for when needing money for your retirement.
Believe it or not just because you average 10% a year for a number of years...it matters greatly what the returns are each and every year! Suze Orman's of the world and the cookie cutter answers they give do a disgrace to the Financial Services profession.
I could not have said it any better myself!!! Like I said earlier, anyone who believes buy term invest the difference has not compared WL products vs investment, and/or does not fully understand the flexibility that a WL product has. One more thing, say you get that term insurance...say you are 45 now and you get that 20 year term...do you think you will be in the same or better health when you are 65? Also, are you guaranteed your investments will still be there...subtract $30,000 after a year like 2008 and that could equal more than what you originally planned for when needing money for your retirement.
Believe it or not just because you average 10% a year for a number of years...it matters greatly what the returns are each and every year! Suze Orman's of the world and the cookie cutter answers they give do a disgrace to the Financial Services profession.
submitted by Brian Todd in San Ramon, CA
@ June 07, 2009 - 12:31 AM
After reading a lot of the posts, I only have two comments that I want to make clear:
1.) When speaking about whole life, there are only about 4 companies that are even worth mentioning. Otherwise, term is the way to go. Can we clarify that? Because in that case, I wouldn't mind talking about WL as an investment. A 30 year yield of 7-10% sounds pretty good to me. Let's be honest....if I'm putting a piece of the pie in WL, I'm not looking for short term gains so who cares what it does in the beginning?
2.) Can we stop bringing up guaranteed values in WL and how low they may be? If you actually want to compare, I'd rather have guarantees in an "investment" than no guarantees at all! Putting the money in the market has 0 guarantees. I love how no one brings this up when they address guaranteed values in WL.
Bottom line...if you put all your money in the market, it's not that intelligent and that can be seen by the multiple baby boomers who have to work longer because the market tanked. If you put all your money in WL, it's also not that intelligent because you're denying yourself gains that could allow you to retire on time if not earlier. All in all, both products provide value in and of themselves. It's how you position each one to maximize your portfolio in order to retire on time and reach your financial goals.
1.) When speaking about whole life, there are only about 4 companies that are even worth mentioning. Otherwise, term is the way to go. Can we clarify that? Because in that case, I wouldn't mind talking about WL as an investment. A 30 year yield of 7-10% sounds pretty good to me. Let's be honest....if I'm putting a piece of the pie in WL, I'm not looking for short term gains so who cares what it does in the beginning?
2.) Can we stop bringing up guaranteed values in WL and how low they may be? If you actually want to compare, I'd rather have guarantees in an "investment" than no guarantees at all! Putting the money in the market has 0 guarantees. I love how no one brings this up when they address guaranteed values in WL.
Bottom line...if you put all your money in the market, it's not that intelligent and that can be seen by the multiple baby boomers who have to work longer because the market tanked. If you put all your money in WL, it's also not that intelligent because you're denying yourself gains that could allow you to retire on time if not earlier. All in all, both products provide value in and of themselves. It's how you position each one to maximize your portfolio in order to retire on time and reach your financial goals.
No one life insurance product is better than the other and you'd be best served to talk with a specialist who can help you to determine what is best for you based on a variety of factors.
Attached is a chart we put together describing the differences between term, whole, universal and variable. (Click here for the large version of the life insurance comparison chart.)
Feel free to contact me via the contact form if you want some help with your decision.