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Should I [Whole Life Insurance]?

SideAffectsSideAffects Registered User regular
edited August 2009 in Help / Advice Forum
Exactly what the title says. At the young impressionable tender age of 23, is Whole Life Insurance the bee's knees? The way I see it is this:

I can get a badass huge policy that covers me for the rest of my LIFE, and doesn't just terminate after whatever length of time.

Taxes on the seed, not the harvest

Gains value pretty awesomely because of people that purchase Term insurance and don't "use it" [die]

If I get a 40 year policy for $500k, it's about $5k spent per year. In 40 years that's 200k, but it's value will be $1.2 million by the time I'm in my mid 60s and want to start taking the big family on cruises and stuff.

I can draw on big amounts of money to buy cool stuff during my midlife crisis.

Ok, I definitely didn't list all the pros to it. I can't see any "costs" except that it's, well, expensive. My income is no more than 60k a year so it's a pretty significant amount of my moneys. Obviously I'll still contribute to a 401k up to my company's match.

What say you, financially-responsible Arcadians?

SideAffects on

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    HlubockyHlubocky Registered User regular
    edited August 2009
    I'm no expert on this, but I have been thinking about life insurance recently, and haven't really looked into whole life insurance. My wife and I are looking for a property to buy in Chicago and I figured I should get a few hundred thousand in term life insurance in case something happened to me so my wife would be able to pay for the house on her own. I don't know anything about whole life insurance, but it sounds like it is an investment... though is it a vehicle like a 401k or IRA where you choose the specific investment or is it some kind of shady annuity that the financial planners are always trying to push?

    I guess my point is that you should consider it like any other investment. If the tax benefits aren't as good as putting it in your retirement account or the return isn't as good as another type of investment, then maybe it isn't a good deal. Maybe there is an expert here that can speak to the benefits of this type of investment.

    Hlubocky on
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    DeebaserDeebaser on my way to work in a suit and a tie Ahhhh...come on fucking guyRegistered User regular
    edited August 2009
    It sounds like someone pitched life insurance to you as an 'investment vehicle'. That person is a piece of shit.

    At 23 you are much better off just starting up a Roth IRA. It also "Taxes on the seed, not the harvest" (btw, whoever used that phrase on you needs a good cock-punching)

    You arent going to die before your time leaving your future dependants in poverty.

    Deebaser on
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    DeebaserDeebaser on my way to work in a suit and a tie Ahhhh...come on fucking guyRegistered User regular
    edited August 2009
    Hlubocky wrote: »
    I'm no expert on this, but I have been thinking about life insurance recently, and haven't really looked into whole life insurance. My wife and I are looking for a property to buy in Chicago and I figured I should get a few hundred thousand in term life insurance in case something happened to me so my wife would be able to pay for the house on her own. I don't know anything about whole life insurance, but it sounds like it is an investment... though is it a vehicle like a 401k or IRA where you choose the specific investment or is it some kind of shady annuity that the financial planners are always trying to push?

    This is why you get life insurance.

    Deebaser on
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    ThundyrkatzThundyrkatz Registered User regular
    edited August 2009
    I second Deebaser

    Insurance as an investment vehicle is almost always a bad idea. Traditionally, the fees are much higher then a tradition tax advantaged account and there are typically more rules and penalties.

    I would strongly recommend that you max out all other avenues for tax advantaged growth before looking down this road. i.e. IRA, Roth, 401k. If you have done all that and still have cash to burn then maybe you could consider this alternative, however you should be very sure you understand the fees and risks involved.

    That being said, Life insurance is a great idea, what you should consider is Term life insurance. at your age, you could get a 500k 30 year policy on the cheap, like less then 100 bucks a month or so.

    That would protect any of your loved ones if you die. Use the cash you save on the difference and invest that on your own and you will be better off.

    Thundyrkatz on
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    SideAffectsSideAffects Registered User regular
    edited August 2009
    Deebaser wrote: »
    It sounds like someone pitched life insurance to you as an 'investment vehicle'. That person is a piece of shit.

    At 23 you are much better off just starting up a Roth IRA. It also "Taxes on the seed, not the harvest" (btw, whoever used that phrase on you needs a good cock-punching)

    You arent going to die before your time leaving your future dependants in poverty.

    Someone did pitch life insurance to me. That person is not a piece of shit. That person is my grandfather who is his own financial planner and has done amazingly. He was a firm believer in whole life and is doing far better than the rest of my family. You didn't know that, and that's okay. I just wanted to make it clear that this wasn't some sort of insurance pitch that I got with a free lunch at a sleazy mexican restaurant because i put my business card in a fishbowl.

    At 23 there's plenty of good reasons to have life insurance. It's a sad thruth that people die all the time before their life expectancy. My uncle died of a heart attack at 38. My friend's 20 year old sister had terminal cancer and passed away 2 months ago. Also, I'm not some "free bird" that can die and no one will miss me or stand to lose anything by my death. Having a policy with my parents as the benificiaries would be huge for the security of my large family. Paying off mortgages and college loans that are built up on an 8-person immediate family isn't something to scoff at.

    I've read TMM by Dave Ramsey, and while I appreciate his opinion there are plenty of arguments for the other side of the table. IIRC you cannot contribute more than 2k to a Roth IRA, and I have no interest in contributing more to my 401k than my company matches.

    SideAffects on
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    RUNN1NGMANRUNN1NGMAN Registered User regular
    edited August 2009
    You should do some research into whole life. Although it's not always a bad idea, it is incredibly complex and for most people is a really poor use of your money.

    Term life is a better option for most people, at least from the stuff I've read on it.

    For some unbiased advice you should check out The Motley Fool at fool.com. I'm pretty sure they have some information comparing term and whole life insurance.

    RUNN1NGMAN on
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    ThundyrkatzThundyrkatz Registered User regular
    edited August 2009
    It is great that you have a trusted family member to provide you with free financial advice. However, i stand by my statement that life insurance should not be used as an investment vehicle. The fees are high and there are too many rules like minimum investment IE premiums and penalties for withdrawal. however, it sounds like you may have already made up your mind.

    you can almost always do better by investing on your own. But talk your grandfather, discuss the fees you will be paying and how that will effect your returns. also, compare investments in say an index fund over a similar time period. Do what you want, just be informed.

    Lastly, not to start an argument, but 2009 contribution limits on an IRA or ROTH IRA (combined limits) are $5,000 per year.

    Thundyrkatz on
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    KathrisKathris __BANNED USERS regular
    edited August 2009
    Buying whole life insurance is a retarded use of money.

    Please go look up the word insurance in the dictionary.

    Kathris on
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    SaammielSaammiel Registered User regular
    edited August 2009
    Whole life may make sense as an estate planning tool, if you have maxed out other options, or to contractually obligate yourself to a savings plan with severe withdrawal penalties (and I personally think that the last reason is a disaster waiting to happen). You fall into neither of those categories. No one is arguing against life insurance itself, just against whole life.

    I mean, all a whole life policy is is a term life insurance policy combined with an investment vehicle. You can get both of those seperate and get a better deal. The investment vehicles attached to whole life policies are normally horrid. High fees and charges built into them are going to evisecrate your rate of return.

    I mean, look at your numbers. 200k to 1.2 million is pretty bad over the span of 40 years. The average rate of return in the DJIA is something like 8%. Lets say you invest poorly and only make 6%. You would still have 2.06 million at the end of that. Your listed rate of return on the whole life 'investment' is below 5%. Even taking into account the cost of a term policy, you are almost certainly going to do better in an index fund and some bonds alongside a term policy than that.

    A term policy is a far better deal and can be tailored more adequately to changing circumstances. In addition, unless you own a house in California 500k is far more, I'd imagine, than you need. Life insurance is a hedge against death, not some attempt at allowing your family to win the Grim Reaper Lottery. You should purchase enough to cover your obligations and no more. For some a person without children and with a spouse with a solid job, that might mean just covering the mortgage and maybe a smidge extra to defray funeral costs and the like. For someone with kids it may involve money to help with college, babysitting and the like as well as mortgage. But it should normally taper off as you reduce your future obligations via prudent investing and the paying down of the principle on outstanding debt. If you are 50 years old and you still need a f-off huge policy, something has gone wrong in your previous planning.

    Saammiel on
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    SideAffectsSideAffects Registered User regular
    edited August 2009
    It is great that you have a trusted family member to provide you with free financial advice. However, i stand by my statement that life insurance should not be used as an investment vehicle. The fees are high and there are too many rules like minimum investment IE premiums and penalties for withdrawal. however, it sounds like you may have already made up your mind.

    you can almost always do better by investing on your own. But talk your grandfather, discuss the fees you will be paying and how that will effect your returns. also, compare investments in say an index fund over a similar time period. Do what you want, just be informed.

    Lastly, not to start an argument, but 2009 contribution limits on an IRA or ROTH IRA (combined limits) are $5,000 per year.

    Thanks for the advice. Actually, my mind is not at all made up. I am simply doing the research. Some of these responses are unreasonably vehement and insulting, which I don't think are really deserved.

    For those interested, these are some of the sites of note I have found.

    http://www.smartmoney.com/comments/?entryID=8011
    (reading the comments specifically)

    http://www.forbes.com/2009/02/10/mutual-life-insurance-financial-adviser-network_0210_financial_planning.html?partner=whiteglove_google

    http://chattablogs.com/holtonian/archives/045036.html
    (comments)

    http://veracityfinancial.wordpress.com/2009/02/08/the-truth-about-life-insurance-by-dave-ramsey/

    SideAffects on
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    DeebaserDeebaser on my way to work in a suit and a tie Ahhhh...come on fucking guyRegistered User regular
    edited August 2009
    Whole life is still stupid in your situation. Regardless of whether your death would be a blessing to your family if you had insurance or not, they are not dependant on you.

    There is no need to fork over 10% of your after tax paycheck for a nebulous return and the needless feeling of security via the death benefit.

    You are MUCH better off maxing out your 401k contribution (pre-tax money) and starting up a roth (post tax) which has nowhere near the fees that life insurance has and has the added benefit of being unequivocally your money. You don't have to use your investment stockpile to pay off an insurance premium with investment accounts.

    Deebaser on
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    DogDog Registered User, Administrator, Vanilla Staff admin
    edited August 2009
    You should not be using life insurance as an investment vehicle. That is terrible advice regardless of who gave it to you.

    You should be putting that money into a retirement fund.

    Unknown User on
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    DogDog Registered User, Administrator, Vanilla Staff admin
    edited August 2009
    IIRC you cannot contribute more than 2k to a Roth IRA, and I have no interest in contributing more to my 401k than my company matches.

    This is also mostly incorrect information. In 2008 the limit for a single person was 5k.

    Unknown User on
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    DogDog Registered User, Administrator, Vanilla Staff admin
    edited August 2009
    Also, as others have said, this type of estate planning should only be used if you are maxxing out your other options. Are you maxxing your 401k up to where employer matching no longer benefits you? Are you maxxing your contributiosn to your other IRAs? Ensuring you have maximum equity in your home/car/whatever? Student loans?

    Saammiel covered pretty much everything else I would say, but the concepts behind this is an extremely poor use of potential investment money, and honestly I would take anything David Ramsey says with a grain of salt if I don't just ignore it completely.



    Sorry for the quick succession of posts, but poor investment decisions is one of the things that pushes my buttons.

    Unknown User on
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    HeirHeir Ausitn, TXRegistered User regular
    edited August 2009
    Term life is the best for your age. It's cheap, and you can usually get it through your employer for even cheaper.

    Rule of thumb that I always heard was to insure yourself for 10x your annual salary. So if you make $50,000 a year you'd insure yourself for $500,000.

    I had it at my last company and it literally cost me a few bucks a paycheck.

    Heir on
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    t_catt11t_catt11 Registered User regular
    edited August 2009
    Agreed with the above. Whole life insurance is a terrible investment. Put everything you can into other retirement savings options - pretty much all outperform life insurance. If you STILL have cash to invest, why not?

    Otherwise, get term life. So much more financially responsible.

    t_catt11 on
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    SaammielSaammiel Registered User regular
    edited August 2009
    Oh yeah, and I am not saying your grandpa is a fool or an idiot or a scoundrel or anything in my above post. It is likely he got his wealth through consistent savings, even though the underlying investment vehicle was poor. Constistently applying a portion of current money towards future financial needs is the most primitive and powerful way to build wealth IMO. Doing the above in a way that nets even semi-bad real rates of return will aid you immensely.

    Whole life certainly isn't the worst thing in the world. People do far far sillier things with their money than to invest in a insurance vehicle with a medoicre rate of return. Day trading and 'timing' markets comes to mind first and foremost. That said, I think you can do better.

    Saammiel on
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    SideAffectsSideAffects Registered User regular
    edited August 2009
    Saammiel wrote: »
    lots of good stuff

    Thanks

    SideAffects on
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    EggyToastEggyToast Jersey CityRegistered User regular
    edited August 2009
    The purpose of insurance is to cover you when you cannot pay for things on your own -- it significantly reduces risk. That's why people rarely have comprehensive insurance on their cars when the cars are old -- the cost of repairing the vehicle in a crash is less than the cost of insurance. Most people would rather put the extra couple hundred in savings into a savings account, rather than insure a beat up old car that would net them maybe a thousand bucks or so if it's totalled.

    It's the same with life insurance. If you're young and have no savings and no investments, if you were to die, your family would be on the hook for things that you had planned to be around for, such as mortgages, cars, and so on. They would also have to pay for your funeral. Your death could lead those closest to you towards financial trouble, simply because you're absent, and that's what life insurance should cover.

    When you get old, your family moves out and your house is paid for and you get Social Security. If you were to die, your family would receive your remaining investments but since you don't have any debts at that point in your life, you're "in the clear."

    In the case of whole life insurance, your premiums are usable as collateral for loans from the insurance company. These rates might be decent, or they might not be -- but because you bought into the plan, you're more likely to use them even if they're not very good because you're already invested in it. Furthermore, if you end up unemployed or unable to pay in for a length of time, the interest payments on a loan you've taken out could end up eradicating the premiums you've paid in and negating the plan.

    You should evaluate the plan in terms of life insurance -- not in terms of other benefits. If you have no dependents (people who depend on your income), then there's no need for you to get any form of health insurance. If you consider it a lottery, it's the worst lottery around (because you win if you die). As a long term investment vehicle, whole life is not that great -- it's still focused on the "life insurance" aspect, with some benefits that occasionally help people out.


    People compare it to term because you could pay term life insurance for 20 years, stop paying, and have nothing to show for it. But whole life insurance still requires you to pay premiums regularly.


    Remember, this is still ultimately life insurance. While I think your grandfather has his heart in the right place, a better question for him is "HOW has whole life insurance gotten you to where you are now, financially?" Otherwise it's like saying "this millionaire owns tons of properties, therefore if I own tons of properties I will also become a millionaire." Or "George Clooney eats at this restaurant, therefore if I eat at this restaurant I will become as popular as George Clooney." Just because your grandfather owns whole life insurance does not mean that it is the reason he is financially successful. This is assumption here, but if he's been his own financial planner that likely means he's earned enough money that he actually has to plan, and that his financial wellbeing is not due to whole life -- but rather, the fact that he has a whole life plan implies that he is financially successful otherwise.


    Now, if your grandfather has used it as an investment vehicle, taking loans out for, say, opening a business or investing in a company, and then has been successful and paid back those loans, then that's either business savvy or luck -- but has little to do with whole life insurance. Individuals with money and a strong credit rating can get business loans from a normal bank at similar (or much better) interest rates.

    edit: td;dr: correlation is not causation. just because your grandfather has WLI does not mean that WLI is the reason he is doing well financially.

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    SideAffectsSideAffects Registered User regular
    edited August 2009
    EggyToast wrote: »
    Just because your grandfather owns whole life insurance does not mean that it is the reason he is financially successful. This is assumption here, but if he's been his own financial planner that likely means he's earned enough money that he actually has to plan, and that his financial wellbeing is not due to whole life -- but rather, the fact that he has a whole life plan implies that he is financially successful otherwise.


    Now, if your grandfather has used it as an investment vehicle, taking loans out for, say, opening a business or investing in a company, and then has been successful and paid back those loans, then that's either business savvy or luck -- but has little to do with whole business insurance. Individuals with money and a strong credit rating can get business loans from a normal bank at similar (or much better) interest rates.

    edit: td;dr: correlation is not causation. just because your grandfather has WLI does not mean that WLI is the reason he is doing well financially.

    This is actually spot on, and something I hadn't really considered. Thanks.

    SideAffects on
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