Whole Life Insurance

[Spencer Brown]

This is Spencer.

I've recently heard about a whole life insurance policy. I've been reading up on it and it seems to have some defiant benefits. It talks about using the savings for retirement, to finance purchases, etc.
Is this something smart to invest into? All of my neighbors have already bought into it.

Thanks

[jeffrey]

Don't do it. Your post brings up a couple of key points:

1. Insurance should not be an investment. Insurance is to protect yourself in the case of an unanticipated event. If you need life insurance, get a term policy and invest the savings elsewhere.

2. Do your homework and don't do what 'everyone else' is doing. Just because others are doing it (like your neighbors) should never be a reason to do it yourself. You should make decisions after doing the proper research and only after doing the proper research.

[nmboone]

Jeffrey's right!! Stay far far away from Whole and Universal Life Insurance policies. Stick to term. You'll be the smartest neighbor in your block!

[InsuranceGuy]

Term, Whole, and Universal life - in that order.

Whole life can have a lot of benefits to the insured including cash value, loan provision, and safe growth. Compare the return on a whole life policy to the market over the last decade and the life policy looks like a real smart place to stash money.

[tmvijai]

I am motivated to ditto Jeff's comments since I follow the same rule. Term is the best option if you never have a life policty to start with. But after reading my 2 course for CFP cert(currently working on), whole has lot of advantages which many people are taking advantage. It shouldn't used as a sole investment vehicle. Here are few things about whole life,

For 5-7 years, all your premium payment of whole insurance goes to agent commission. If you terminate the policy during this period, you don't get back anything. You need to have a commitement to do whole life for 25-30 years to make it real worth it. Also there are different riders which complicates the whole life policy. So it is true whole life is not a good choice for both life insurance and investment but it is a good choice if you run out of other choices. There is also variable life insurance which combines whole life and self portfolio management to make another insurance cum investment vehicle. It was popular 2 years ago when stock where at high not anymore..

So if you don't have insurance at all, first risk management step is to get Term life to cover your bases next think about other options.

[arthurb999]

Originally Posted by InsuranceGuy

Term, Whole, and Universal life - in that order.

Whole life can have a lot of benefits to the insured including cash value, loan provision, and safe growth. Compare the return on a whole life policy to the market over the last decade and the life policy looks like a real smart place to stash money.

Couldn't you just invest in the same things the whole life invests and come out better becasue of lower expenses?

[disneysteve]

Originally Posted by arthurb999

Couldn't you just invest in the same things the whole life invests and come out better becasue of lower expenses?

Of course you could, but no insurance salesmen will ever tell you that because they make a huge amount of money on the commissions on these policies.

The other point that is important to keep in mind is that amount of insurance you get for your money is way, way higher with term than with whole life dollar for dollar.

[feh]

Sounds very similar to a variable annuity, which are largely considered a ripoff (except for the person selling them).

[tmvijai]

All the whole, universal, variable are loaded with agent commissions as your premium and atleast for 7 years your investment go nowhere. I agree you can guy more insurance for your money in term than whole. I am with TERM as a sole insurance for anybody who don't have any insurance. but if you are done with all 401k, IRA's and investments, WHole or variable is considered as tax shelter with investment and insurance option embedded. It has loan option which can be used if you have a good surrender value.

I am not a sales man but I have done quite amount research and current working on my insurance course CFP. It gives lot of insight about insurances. I was a total opponent of whole but after reading, I found it not all that bad but it shouldn't be considered investment vehicle.

[disneysteve]

tmvijai - I think you are probably right but what you say applies to a very small percentage of Americans. Really, how many people are maxing out both their 401ks and their Roths, have adequate term life insurance, a 6-8 month liquid emergency fund, other short term savings for things like vacations and such, college funds for the kids, no consumer debt besides a mortgage and still have money they are looking to invest? Maybe 10% of the population and probably less than that. But to hear the insurance salesmen talk, you'd think everyone should have whole life insurance.

[snafu]

Your neighbors purchased whole life insurance because they just don't know any better! They've likely made other poor financial decisions.

[Bimmer]

Originally Posted by Spencer Brown

This is Spencer.

I've recently heard about a whole life insurance policy. I've been reading up on it and it seems to have some defiant benefits. It talks about using the savings for retirement, to finance purchases, etc.
Is this something smart to invest into? All of my neighbors have already bought into it.

Thanks

Do these same neighbors have hefty car loans and pay minimums on credit card balances? Term is better anyway, but certainly do not get a whole life policy because its the "cool" thing to do in the neighborhood!

[Runaway Finances]

In my 30 years being in the financial services business (including 17 years in the insurance business, left the business in 1996) I have never met a single person who bought Term and truly invested the difference. I've never met someone who said "and here is my investment account that I have built up from the savings between the Term and whole life premiums". On the other hand, I have met MANY people who reach retirement and the only savings they have are their retirement plans and the cash value of life insurance. The books may say "term and invest the difference" is better, but that is not reality. Come on guys, how many of you truly set up a separate account and invested the difference. Most people buy life insurance because the don't have enough savings to provide for their families the way they want. This is usually when they have kids and have a terrible time saving money.

Most people buy Term because that is all they can afford. And, if that is all you can afford, then by all means, by Term. When buying insurance, you should make 3 decisions: 1) How much insurance do you need, 2) how long do you need the insurance, and 3) how much is your budget for life insurance. Those were the questions I would ask before I would come up with a recommendation for what type of insurance to place a client in. Many times, their budget dictated that Term was all they could afford to buy, even though it wasn't always the best product to buy.

Never buy life insurance as a "retirement funding vehicle". Buy it because you need life insurance. The cash value can be used like an emergency fund, but its main purpose should be for life insurance.

I've done the numbers on buy Term invest the difference vs. Whole Life and there is a cross over point. The rate of return in each determines that. If you invested the difference in the stock market over the last 10 years, then someone with a non-variable whole life policy most likely smoked you.

I've said this in another thread, but if you need to keep your term policy after the initial guarantee period, then you better get ready to pucker as the premium skyrockets unless you are healthy and can reapply. It doesn't take much to make you uninsurable, by the way.

[disneysteve]

Originally Posted by Runaway Finances

In my 30 years being in the financial services business (including 17 years in the insurance business, left the business in 1996) I have never met a single person who bought Term and truly invested the difference.

I certainly have. In fact, we started investing first even before we bought insurance (because we didn't need insurance yet at that point). We set up an automatic monthly transfer into a mutual fund, gradually increased the monthly amount and later added additional investments, all the while keeping our cheap term coverage. In fact, I've replaced our term policies twice over the years as our personal savings grew and our debt diminished, reducing the amount of coverage we needed and because term rates came down so much.

And that touches on another point. I don't need whole life insurance because there will come a point when I don't need insurance at all. Once the house is paid off, my daughter is out on her own and our investments are sufficient to support my wife were I to die, the insurance can go. I've already cut our coverage twice and I expect to cut it again in the near future. The need for life insurance should gradually fade as you get older. Why buy "whole life" coverage if you won't need it for your whole life?

[tmvijai]

I can also proudly say, I have also invested the difference and continuing to do so. It all depends on each individual practice who don't want to throw the money into drain.

[creditcardfree]

Technically, no I haven't invested the difference. In fact, I don't know what the difference is because I haven't priced a whole life insurance. However, we save over 15% of our gross income. I can imagine that is more than the difference between whole life insurance and term insurance.

[disneysteve]

Originally Posted by creditcardfree

Technically, no I haven't invested the difference. In fact, I don't know what the difference is because I haven't priced a whole life insurance. However, we save over 15% of our gross income. I can imagine that is more than the difference between whole life insurance and term insurance.

Yes, that's techincally true for us as well. I did not compare a term policy and a whole life policy, pick the term and invest the cost difference. I picked the term and invested above and beyond that. We currently invest 21% of my gross and 50% of my wife's gross. I'm sure that is way more than what whole life would cost us.

[Runaway Finances]

Well, you guys are in the vast minority from what I have encountered. Americans had a negative savings rate in 2007, so on average how could most people "invest the difference" when they were spending more than they were earning? Most of the people making posts on this forum are asking about how to pay off all their debts, and they aren't saving very much. When we give advice, sometimes that advice is good for us because we are good with our money, but not everyone is good with their money or there would not be forums like this one.

Steve, you are doing it exactly right...reduce your coverage as you no longer need it. And, Term insurance is absolutely the right type of insurance for short term needs. You seem to like to do numbers....get your insurance agent to give you a quote for Term insurance at the age you bought insurance and then a whole life quote for the same age. Do a comparison of buy Term invest the difference vs Whole life and determine where the cross over point is. Be sure to take into account taxation on the "invest the difference" part. You assume you surrender the policy and the "invest the difference account at the end of each year. Assume whatever return you want, but if you are going to assume equity type returns on the invest the difference part, you should assume the same returns on the whole life part as that could be invested in equities too. I think you are going to be surprised at how soon the cross over occurs. It is probably going to be in the 12 year range. It was about 10 years back when I was doing it.

One of the reasons I got out of the life insurance business is because I got tired of fighting with this age old argument. There is no one policy that fits everyone's situation. Whole life insurance was not designed solely so an agent and the insurance company can make a lot of money. Sure they are in the business to make money, just like every one of us who have a business or job. Many people think doctors make too much money, but that doesn't mean every doctor is bad, does it, Steve? Sure there are bad insurance guys, but the good ones are trying to determine what is the best policy for the client. I used to know a ton of them.

[cameraeye]

Originally Posted by Runaway Finances

Well, you guys are in the vast minority from what I have encountered. Americans had a negative savings rate in 2007, so on average how could most people "invest the difference" when they were spending more than they were earning? Most of the people making posts on this forum are asking about how to pay off all their debts, and they aren't saving very much. When we give advice, sometimes that advice is good for us because we are good with our money, but not everyone is good with their money or there would not be forums like this one..

So you are saying that if you are good with money term life insurance is better, but if you are bad with money whole life insurance is better? That doesn't make sense - It seems to me that we should teach those that aren't so good with money how to be better with money, not cop out because we don't think they are good with money.

[Runaway Finances]

Not saying that at all. They were saying they invested the difference which I said was unusual. But, I contend that cash value insurance (structured right) is less expensive than term (even if you invest the difference) if you need coverage for more than 10-12 years. If you need insurance coverage for less than that time, buy Term without a doubt. I also agree with Steve that you should cancel coverage when you no longer need it (that includes Cash Value type insurance), especially Term insurance. Term insurance is just like auto insurance. Only buy what you need for as long as you need it as it has no value. As you build up savings, then you are self insuring yourself for that part. In other words, when you determine how much life insurance you need, you start with answering the question "How much money do you want to have in the bank for your family when you die?" Let's say the answer is $1 million. If you have $100,000 in savings, then you need to insure the $900,000 shortfall. Next year, if your savings is now $200,000, and you still need to have $1 million, you only need to insure $800,000. So, if you are on a regular plan of savings, then some part of your insurance program should be Term insurance and that is the portion you would reduce as your savings grows. I'm making this process way more simple than it really is. A good insurance agent will walk you down this path.

One problem with these forums is that we are addressing one or two issues in their lives. We can't possibly do the proper planning that needs to be done to solve all the problems, BUT at least it is a start and for the most part, people get great advice and opinions. Hopefully it is enough to get people on track. Unfortunately, some people will never do what it takes to get their finances in shape.

In the end, everyone needs to do what they think is right for them. I just wanted to put a different view on life insurance out there that is obviously a minority view. I obtained my Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC) designations early in my career. That doesn't make me a genius and always right, but I do have a lot more experience in the insurance industry than most of the people posting comments. So, it makesme have at least a credible opinion I hope.