Insurance Policies

[savemoney]

Hi. I am new to this forum, but have been reading around and the posts here are very helpful. The question I have is are insurance policies a good place to invest money in?

Thanks for any help.

[jIM_Ohio]

Insurance policies are not investments.
Insurance policies are needed as part of a sound financial picture.

In my case, we have two working spouses. We bank 1/2 of my wife's salary each month. The other half is part of the budget.

Meaning we need 1 1/2 incomes for out budget. We have 300k of term life insurance to make sure the debt (mortgage) gets paid off so other spouse could work and still be comfortable on death of spouse. Basically enough life insurance to free up the $2500 mortgage payement within budget helps either of us if something goes wrong. This is covered with a simple term policy because our mortgage should go away in 20-30 years.

We also have a permanent insurance policy to cover funeral costs. 25k each. This policy has a sub account indexed to S&P 500, so this account has a cash value which might/probably exceed the 25k policy value later in life. Provided we pay the premiums, this policy will be in force our whole life. We will die, so this policy is needed.

It was cheaper for us to get both policies when we were young. The cost of the whole life insurance at age 50 looked steep, so it made sense to us to lock in insurance rates while we were younger.

It's possible some people would argue we overspent on insurance... but we have "peace of mind" which is difficult to put a price on.

This is 650k of insurance, covering two people, for under $130/mo.

Insurance is not meant to be an investment. We could borrow the cash value in event of an emergency... but their would be much cheaper ways of doing things if we wanted an emergency fund that large (cash value should be ~100k in our late 50's).

[disneysteve]

Originally Posted by jIM_Ohio

Insurance policies are not investments.

Repeat this over and over and over!

You buy insurance to protect your assets. You buy investments to grow your money. They are two separate things.

For the vast majority of people, what is needed is term life insurance. It is cheap and allows you to get maximum coverage for the minimum price.

[jIM_Ohio]

Originally Posted by disneysteve

Repeat this over and over and over!

You buy insurance to protect your assets. You buy investments to grow your money. They are two separate things.

For the vast majority of people, what is needed is term life insurance. It is cheap and allows you to get maximum coverage for the minimum price.

Add to this term insurance is cheap, and covers you for a given term (amount of time). If you die the day after the term (contract) expires, your beneficiaries collect nothing.

Life insurance is a contract, depending on various rules, the contract can (and will in case of term, will) expire.

You need to decide what you need going in, or a salesperson might tell you what you need without knowing it. If you don't know what you need, ask questions on forums like this...

[disneysteve]

Originally Posted by jIM_Ohio

We also have a permanent insurance policy to cover funeral costs. We will die, so this policy is needed.

I would disagree with this. Not the fact that you will die. Obviously, that part is true. However, that doesn't mean you will always need insurance in place to cover funeral costs. Hopefully, you are saving money in other ways. As we get older and our financial assets increase, our need for insurance gradually decreases.

I've reduced my life insurance twice in the past 10 years and I expect to reduce it farther next time I meet with my agent. Eventually, I expect to reach a point where I don't need it at all as our savings and investments grow to be sufficient to support the surviving spouse and cover funeral costs.

[jIM_Ohio]

Originally Posted by disneysteve

I would disagree with this. Not the fact that you will die. Obviously, that part is true. However, that doesn't mean you will always need insurance in place to cover funeral costs. Hopefully, you are saving money in other ways. As we get older and our financial assets increase, our need for insurance gradually decreases.

I've reduced my life insurance twice in the past 10 years and I expect to reduce it farther next time I meet with my agent. Eventually, I expect to reach a point where I don't need it at all as our savings and investments grow to be sufficient to support the surviving spouse and cover funeral costs.

There is merit to your point and each person's situation is different. The penalties for IRA withdraws, when transferred to a spouse is what? I do not think Roth or 401k assets could be withdrawn for funeral expenses without being taxed witha 10% additional penalty? So the issue becomes that middle ground between ages 50 (when mortgage is paid off) and 62.5 (when a 401k can be liquidated). 62.5 is not even something I am sure of...

Buying a new insurance policy at 50 when the term expired appeared expensive (relative to costs of similar insurance at age 28). Meaning if cost at age 50 for term was same as cost for permanent at age 28, it made sense to lock that cost/rate in now. There is risk with new policies (health could change, rates could change).

401k and Roth are for retirement... if something were to happen to me my wife would depend on these accounts for retirement income (most of our retirement savings are currently in my name).

What little my wife has in her retirement accounts I could liquidate to pay for her funeral... but I still think the penalties outweigh this technique while young.

There is a chance the permanent insurance would have enough cash value for kids (which don't exist yet) to go to college. It might make sense to surrender it then.

[disneysteve]

Originally Posted by jIM_Ohio

each person's situation is different.

Not only that, but your situation can and will change over time.

When I first took out life insurance, I had a newborn daughter, over 100K in student loan debt and a pretty small amount in savings. My insurance needs then were pretty high.

Now, we've got no debt except our mortgage, which is a lot smaller than it was then, and our savings have grown considerably, so my insurance needs are significantly less.

Give us another 10 years or so and our daughter will be grown and self-sufficient (hopefully), our mortgage will be even smaller and our savings will have grown even more. At that point, the amount of insurance I'll need will be relatively minimal.

So it is an ever-changing situation. That's why it is important to pull out those policies every couple of years and make sure they still fit your needs.

[Ima saver]

Insurance is not an investment, I agree. I also agree with disneysteve. I had a 10 year term policy on my husband for $250,000 for about $360 a year.When the policy went up to $1200 a year after the 10 years were up, I dropped the policy. I have no mortgage or other debts other than my car(which I could pay off easily) I have a lot in assets. I do still have a small policy (term) for $25,000 for $44 a month, but I really think I should just drop that. What do you think??

[disneysteve]

Originally Posted by Ima saver

I do still have a small policy (term) for $25,000 for $44 a month, but I really think I should just drop that. What do you think??

What is it that you are insuring with that policy? Insurance is intended to meet a particular need. If your spouse would have no particular needs upon your death that he couldn't cover out of savings, than you don't need the policy.

[Scanner]

I am entertaining the idea of using a whole life policy as a vehicle for investing for my kids college as per JimOhio's suggestion (my agent is still looking into polices).

I like the fact there is some flexibility that a traditional 529 or Coverdell won't offer.

We kind of joke - we have a college fund set up for the 9 year old and a "bail fund" set up for the 4 year old (he's kinda ornery and bad).

But, you can only figure on about a 4% return on the investment part of the cash part of the policy, which isn't the best, I'll admit (which is why I'm still mulling it over - go for return or flexibility).

So. . .that being said, it pays to aggressively invest elsewhere where the return would be high to balance the risk and reward if you are going to go with life insurance.

Let's say at the end of the college investing career, we have $40,000 in 529 money and $50,000 in life insurance - the life insurance becomes flexible money to spend IMO.

I think for retirement, since it is such a long haul that it only deserves a small place in the portfolio.

[jIM_Ohio]

Originally Posted by Scanner

I am entertaining the idea of using a whole life policy as a vehicle for investing for my kids college as per JimOhio's suggestion (my agent is still looking into polices).

I like the fact there is some flexibility that a traditional 529 or Coverdell won't offer.

We kind of joke - we have a college fund set up for the 9 year old and a "bail fund" set up for the 4 year old (he's kinda ornery and bad).

But, you can only figure on about a 4% return on the investment part of the cash part of the policy, which isn't the best, I'll admit (which is why I'm still mulling it over - go for return or flexibility).

So. . .that being said, it pays to aggressively invest elsewhere where the return would be high to balance the risk and reward if you are going to go with life insurance.

Let's say at the end of the college investing career, we have $40,000 in 529 money and $50,000 in life insurance - the life insurance becomes flexible money to spend IMO.

I think for retirement, since it is such a long haul that it only deserves a small place in the portfolio.

On the 4%- check the sub account type. There are types which can give a higher possible return (we chose indexed to S&P 500/or 1% whichever is greater)... other types use only cash type sub accounts which are the 4% guarantee you suggest.

[creditcardfree]

If something were to happen to my spouse or to me, I expect that our life insurance proceeds or emergency fund could be used for funeral expenses. I wouldn't take out insurance just for this purpose, regardless of age.

[jIM_Ohio]

You actually keep 20k-30k in cash for funeral expenses?

[disneysteve]

Originally Posted by jIM_Ohio

You actually keep 20k-30k in cash for funeral expenses?

Not me. I would never even consider spending that much on a funeral. No offense to anyone, but I think the money some people choose to spend on funerals is ridiculous. I think the current figure for an average funeral is around $6,500. Throw in a few thousand more for the plot, cemetery fees and a headstone and you are easily in the $10,000-$12,000 range, and even that can be done more cheaply. But when I see people spending 2 or 3 times that or more, I've got to wonder what they're thinking. Here is just a casket that is $19,000: http://www.casketsite.com/batesville...heanbronze.htm. Who needs that? I will be quite happy if my family buries me in one of these for $505: http://www.directcasket.com/woodcaskets/abraham.htm. In fact, in the Jewish religion, a casket is supposed to be a simple wooden box with no metal and no fancy adornments.

[jIM_Ohio]

Originally Posted by disneysteve

Not me. I would never even consider spending that much on a funeral. No offense to anyone, but I think the money some people choose to spend on funerals is ridiculous. I think the current figure for an average funeral is around $6,500. Throw in a few thousand more for the plot, cemetery fees and a headstone and you are easily in the $10,000-$12,000 range, and even that can be done more cheaply. But when I see people spending 2 or 3 times that or more, I've got to wonder what they're thinking. Here is just a casket that is $19,000: http://www.casketsite.com/batesville...heanbronze.htm. Who needs that? I will be quite happy if my family buries me in one of these for $505: http://www.directcasket.com/woodcaskets/abraham.htm. In fact, in the Jewish religion, a casket is supposed to be a simple wooden box with no metal and no fancy adornments.

Our policy for 25k to cover was a round number... I think that by the time we die the 6500 funeral now would be ~10-15k.

I could see 6500 being amount of cash being kept in EF... and if that's route one chooses to go... who am I to criticize?

The important thing is to know the possible expense and hedge against it in some way.

[savemoney]

I see some of you say this is not an investment when you get whole life insurance and some of you say it is(like a college fund for a child)? Now I'm really confused. I guess what you'll are saying is that you can make money elsewhere with your money.

Thanks for the help.

[jIM_Ohio]

Originally Posted by savemoney

I see some of you say this is not an investment when you get whole life insurance and some of you say it is(like a college fund for a child)? Now I'm really confused. I guess what you'll are saying is that you can make money elsewhere with your money.

Thanks for the help.

You need to read each post and realize there are answers to smaller questions inside them.

The whole life insurance is "clever" way to do some different things. It is NOT an investment. It has a cash value, but it is NOT an investment. If all you wanted to do was save money, there are much cheaper and profitable ways to do it.

But if you have specific needs, it might work to your benefit.

If I died tommorrow, I do not have enough cash saved for funeral expenses. So we decided to buy enough insurance to cover that.

If I died tommorrow, my wife's paycheck is not enough to pay the bills. We bought insurance to cover this gap in cash flow as well.

Will I die? Yes. Some people might suggest that time won't come soon enough, but I guarantee I will die. Therefore the funeral expense will definitely come, and we need this insurance our WHOLE LIFE.

Will my wife always need to supplement my income if I die? NO. As time goes on the mortgage is paid down (paid off), so the need for a high amount of insurance ends at age 48 or 49 (20 yr term policy expires)... the mortgage should be paid off at age 50.

Whole life insurance has many features and many types.
http://www.smartmoney.com/insurance/...story=lifeterm
http://www.mostchoice.com/life_insurance_vul.html

Whole life takes on many types
Universal (this is usually a fixed increase in cash value each year- and the insurance contract is written as though given ages have a given benefit). This would be considered "conservative", IMO.

Variable (This means the insurance contract will NOT guarantee any specific amount above what policy is for). There are two types of Variable Whole Life

"One demands a fixed premium payment. The other, variable-universal life, has a flexible premium like universal life. Remember, though, that variable returns can fluctuate with the financial markets. If the stock market takes a hefty dive, you may find the cash-value portion of your policy in the tank. Variable life is not appropriate for people who are on a tight budget or are likely to need to tap their savings on short notice. Many variable buyers would be better off buying term and making a separate investment in a mutual fund."

I have a variable universal life policy. The goal is a cash value greater than the 25k we insured for. This benefit comes tax free to my wife on death. If I need to transfer more wealth to my son, I could add more to this account, and pass that benefit to him on my death tax free.

I saw that I would be debt free and have significant savings around age 45-50. If I want to pass money to kids tax free, I believe I have that shelter now set up. It's expensive to do this and not for everyone. Not sure what I pay in fees on this policy (that was not important to me).

Funeral costs are covered for us, which was the goal. The side benefits of avoiding estate taxes did factor into the thought process.

In the situation of paying for a child's education, it is possible that one could buy a variable whole life policy for 60k (amount of eduication). If parent dies, this insurance policy pays for the education. If parent lives, the account has a cash value which can be used to fund the education.

One "savings" vehicle and the 60k would not be seen by financial aid process, either. The cost to do this might be $100/mo for 10 years. GUESSING at the payment.

If one were to buy term for 10 years (60k), maybe the cost is $10/mo. The question is can $90/mo for 10 years get you the 60k for kid if you live? My calculations suggest it comes way short (17k assuming 10% return). BIG question. The insurance might cost more... but not sure.

[disneysteve]

Originally Posted by savemoney

I see some of you say this is not an investment when you get whole life insurance and some of you say it is(like a college fund for a child)? Now I'm really confused.

Okay. Whole life insurance IS a type of investment. It just isn't a very good one. The fees and commission are typically much higher and the returns lower than you could get in a more traditional investment vehicle like a low cost mutual fund. So while you could choose to use insurance as an investment, the general consensus is that you would do better to put your money elsewhere.

[sweeps]

Steve's right. Insurance companies get you coming and going (and staying) with both whole life policies and variable annuities. A few families out there may benefit with these investments. But the majority don't.

[disneysteve]

Jim touches on one very valid use of whole life insurance and that is estate planning. I'm no expert on this, but there are situations where passing on assets to your heirs via whole life insurance can save gobs of money in estate taxes. This isn't something that concerns the average American, but if it might apply to you, definitely speak with an estate planning attorney and see if this might make sense for you.