Whole Life Insurance

[disneysteve]

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]

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.

[disneysteve]

I don't know of any site where I can get an insurance quote without entering all my personal info. Does anyone know a site like that? I'm really curious now what the price difference is between term and whole life policies with similar death benefits.

[Runaway Finances]

I'll get you a quote from my insurance agent if you would like. I don't need personal information. Just pick an amount and give me an age. I'll assume you are as healthy as they come. I'll even do the spreadsheet for you and email it to you or post it on this forum if there is an avenue for that. Just give me the amount and age. It'll be fun! Not to mention educating for all of us. My agent sells for several companies and I'll just tell him to get me the cheapest term quote he can get and the best whole life policy he has available to him. Oh, I need a rate of return to assume. What do you want to use? In fact, this spreadsheet could be used by anyone to compare insurance coverages from any company. Someone tell me how to upload it to the forum if they know how. I've never looked to see how to do that.

[disneysteve]

I'm 45 and want $1 million in coverage. Make the term policy for 20 years. Non-smoker, no health problems, qualify for the best rates. Assume an 8% annual return on investments.

[Runaway Finances]

The challenge is on! I've emailed my agent. He just got back from a mission trip to Mexico so not sure how quick I'll get this back. It may take me a few days but hopefully this week I'll post the results.

[Runaway Finances]

I got the proposal for Term and a Variable Universal Life Policy. I had to use a variable policy because Steve wanted to assume an 8% rate of return. I built a spreadsheet in Excel so anyone can use it for future analysis. There are several assumptions I had to make. One is the rate of return to assume in the "invest the difference account" and in the cash value policy. I also had to assume a tax rate for both accounts. Gain on the cash surrender value is taxed at ordinary tax rates. If your invest the difference account is invested in stocks then that gain would be considered capital gain. However, you would have to hold the investment more than 1 year to get long term capital gain rates. I assumed that account was taxed at 15%. I also assumed that the ordinary tax rate was 28%. The Term premium was $1855/yr. and the Variable WL policy preimum was $14,160/yr. The term premium was guaranteed for 20 years, so I assumed the other policy was paid for 20 years too. The spreadsheet takes a picture at the end of each year and assumes both policies are terminated and taxes are paid. IF you can earn 8% in both accounts then you are better off buying Term and investing the difference. The scenario changes away from Term the lower the rate of return you assume and the lower the tax bracket you are in. By the way, the term premium in year 21 jumps to $42,335 from $1855. So you better be sure you won't need the coverage.

If I drop the rate of return to 6% then the breakeven was at 12 years. BUT, that was still using the 8% Whole Life return. So, that is not a fair comparison, but I thought it was interesting to see how much difference only 2% makes.

Assumed tax rates make a difference too but not near as much as investment rates of returns. So, there are a lot of variables that must be plugged in to determine which is better for you. I'll be glad to share the spreadsheet if there is a way to upload it to this site. Then you can plug in your own numbers.

[momula]

Thanks, helpful indeed