Whole life insurance as an investment.

[YoungInvestor]

I'm 26. I have a whole life insurance policy I pay 400$ a month with the intention on cashing it out before I die.

My situation is this

26/single
Make 90k a year
Have 85k in 401k(max what employer matches 7%)
Have 15k in savings.
Owe 140k on my house for 16 more years
No other debt.
About 1700-2000 monthly expenses.


I live a semi conservative lifestyle but like being able to do whatever I want when I want, but most of my friends are fresh out of college so we do everything on the cheap.

I don't like risking a lot of money in investing. I think if I can have a gurantee that makes me feel better then maybe losing to gain more. I plan on cashing out the whole life insurance to retire early or just have money to travel or whatever, I haven't decided that part yet. Do you guys think that's a good plan? I hope to have enough money when I die to pay all the debts that comes with. And I also have life insurance at work that pays 6x my salary now. And my parents have life insurance on me that pays my mortgage.

Do you think its a safe sound investment idea?

I do dabble with stocks with about 9k.

[disneysteve]

I have a whole life insurance policy

Do you think its a safe sound investment idea?

Here we go again .

NO. This is a HORRENDOUS plan! Whole life insurance is NOT an investment vehicle. It is a complete and total rip off and will cost you tens of thousands of dollars over your lifetime. Do yourself a huge favor and cancel it now. Then buy term insurance for 8-10 times your income if you actually have a current need for life insurance. Forget about the coverage from work because if you leave the job for any reason, you lose that coverage. You can't depend on that. Then invest in a Roth IRA and your employer retirement plan if there is one.

I'll post a link to a previous thread detailing the reasons why nobody should ever own whole life insurance.

[disneysteve]

http://www.savingadvice.com/forums/investing-banking/75703-iul-vs-roth-401k-401k-vs-roth-ira-ira.html

Here's one recent thread. There are several others if you search though.

[feh]

Do you think its a safe sound investment idea?

Definitely not.

It's great that you're concentrating on your finances at a young age. If you need to learn about personal finances, click on the link in my signature. If you want to learn about investing, start here: http://www.bogleheads.org/wiki/Bogle...g_start-up_kit

[Petunia 100]

I'm 26. I have a whole life insurance policy I pay 400$ a month with the intention on cashing it out before I die.

My situation is this

26/single
Make 90k a year
Have 85k in 401k(max what employer matches 7%)
Have 15k in savings.
Owe 140k on my house for 16 more years
No other debt.
About 1700-2000 monthly expenses.


I live a semi conservative lifestyle but like being able to do whatever I want when I want, but most of my friends are fresh out of college so we do everything on the cheap.

I don't like risking a lot of money in investing. I think if I can have a gurantee that makes me feel better then maybe losing to gain more. I plan on cashing out the whole life insurance to retire early or just have money to travel or whatever, I haven't decided that part yet. Do you guys think that's a good plan? I hope to have enough money when I die to pay all the debts that comes with. And I also have life insurance at work that pays 6x my salary now. And my parents have life insurance on me that pays my mortgage.

Do you think its a safe sound investment idea?

I do dabble with stocks with about 9k.

You're young. You're earning a good salary. You've made some smart decisions so far. (Manageable mortgage, no other debts, saving for retirement, controlling expenses). Thumbs up.

You're also making some not-so-smart decisions. (Not learning the basics of investing, choosing a whole life insurance policy as a savings vehicle, "playing" with stocks).

Take the time to learn. Your older self will thank you.

[snafu]

I too hope you'll reconsider your insurance purchase and switch to term insurance if you determine you really need insurance. Of course your insurance agent sells you the product that gives the best commission year by year as long as you have the policy.

I wonder if you've heard of the book The Millionaire Next Door? You are already well on track to be The Automatic Millionaire [Bach]. While I acknowledge there is s a level of risk in investment, it can be reduced over 35 years of steady contributions and the sums in the early years benefit most from the magic of compounding.

[dczech09]

Kudos to you my friend! You're doing great! We gotta get more people in our generation to be doing as well

I echo the rest, and I really hope you read the thread that disneysteve mentioned. You will see me a lot in there, so I will not regurgitate my thoughts since they are in there.

You're young. I'm guessing single with no kids? That being the case, you really have no reason for life insurance unless you have a co-signer on your mortgage (which I am assuming not).

What scares me is that you have taken out this policy with the intent of cashing out before retirement. Did the agent mention the cash surrender charge? Did they mention the commissions they are making off of you over the next few years? Did you know that these policies NEVER perform as projected? Did the agent ever tell you that you really do not own the cash value and that your beneficiaries will only get the death benefit (not the cash value) if you die? These questions are my way of passive-aggressively telling you these things

Your 401k is looking great! I mean wow! Age 26 and you have such a large proportion of one year's salary already. You will easily hit one year's salary by age 30, which is a great mark to hit!

If I were you, I would open a term life insurance policy with a death benefit of about 10 times your income (only if you need it though, no use in getting it while you don't need it). Cancel the crap whole life policy and invest $458.33 per month into some good mutual funds within a Roth IRA. The reason I say such an odd amount is because the maximum contribution is $5,500 per year, which equates to about $458.33 per month. Set up your contributions into the Roth IRA to be automatic on the same day every month (like the 15th for example). Leave it alone! Let it grow!

[amarowsky]

I recently started an internship at northwestern mutual. And I don't necessarily agree with what everyone says. Interest rates are rising, and so will dividends paid on certain policies. Northwestern mutual dividends is 5.6%. It's not a good short term plan, but in the long run they can be a safe place to park money so it can provide defense against market volatility. Also it will grow and outpace inflation. You have do do your research on whole life though. It's deferred gratification, and you must be careful which company to buy from. It took me a lot of convincing and illustrations to understand the benefits that can come from whole life.

[disneysteve]

I recently started an internship at northwestern mutual. And I don't necessarily agree with what everyone says. Interest rates are rising, and so will dividends paid on certain policies. Northwestern mutual dividends is 5.6%. It's not a good short term plan, but in the long run they can be a safe place to park money so it can provide defense against market volatility. Also it will grow and outpace inflation. You have do do your research on whole life though. It's deferred gratification, and you must be careful which company to buy from. It took me a lot of convincing and illustrations to understand the benefits that can come from whole life.

It's funny and rather telling that the ONLY people who think whole life is a good idea are the people who SELL whole life policies. Ignore the illustrations and projections. They simply aren't true. The policies will never, under any circumstances, actually perform as well as those illustrations suggest.

To be fair, I have absolutely nothing against Northwestern Mutual. I happen to have my disability insurance and my wife's life insurance (term coverage of course) through them. I used to have my own life insurance there as well but found something much cheaper elsewhere.

[amarowsky]

I have been very guarded in considering it, I've been trying to poke wholes in all of the weaknesses of buying whole life. I can see that many of you are virulently against it.

[disneysteve]

I have been very guarded in considering it, I've been trying to poke wholes in all of the weaknesses of buying whole life. I can see that many of you are virulently against it.

We aren't against it to be mean or nasty. We're against it because it is a horrendously bad deal for your money. Despite the industry losing a huge class action law suit years ago for misrepresenting whole life as an investment product, nothing at all has changed in the way that these policies are marketed. Salespeople continue to show rosy projections of how great an investment this is, how much money you will make, how you can take the money out tax-free to pay for college or retirement, etc. They fail to reveal the 90% commission they will make for selling the policy or what they'll make every year you keep it. They fail to talk about how much of your payment gets sucked off the top before a penny goes into the account. They fail to show a fair comparison of how phenomenally better you would be if you bought cheap term and invested the difference.

[amarowsky]

I was fortunate to have a pretty good experience with a universal life policy that my grandparents had established for me at a young age. They later gave me the policy and I took over payments. I believe they started it when I was about 5 years old. It was through Thrivent, and had a really good floor interest rate of 4%. The contributions were low too, only $25 quarterly. Long story short when I was about 20, they told me about the policy, but we decided to draw 5k out of it to help my older brother pay for his school. Now the policy only has about $1500 in it, but we absolutely received a return (beyond the 2500$ of total premium that had been put in). My grandparents may have just been lucky, because it sounds like everyone who has mentioned their insurance experiences here have had much lower yielding policies. Definitely not a preferred growth product. But I had pretty comfortable experience with mine as a safe way to hedge just over inflation (and also provide a death benefit should something happen to me).

[JoeP]

Life insurance is supposed to replace your income so that beneficiaries can enjoy the same standard of living without you here punching a clock. For example, if you have kids and a wife, and your wife's income alone won't provide enough to pay current (mortgage) and future (college) bills, you may want TERM insurance to help out in that area.

Get ready for hard resistance from the insurance company when you call to cancel.

[disneysteve]

I was fortunate to have a pretty good experience with a universal life policy that my grandparents had established for me at a young age.

Life insurance is supposed to replace your income so that beneficiaries can enjoy the same standard of living without you here punching a clock.

amarowsky, what JoeP just posted is really the bottom line.

Insurance is for one purpose - to provide money for those who are financially dependent on you in the event of your premature death. That's it.

There is absolutely no reason to insure a 5-year-old unless that person is a movie star and the family needs the income. If your grandparents wanted to be helpful, they should have put that money in a good investment account, not an insurance policy.

For those who actually do need life insurance, buy term. Period. That's it. Whole life is a rip off, plain and simple. There are very rare exceptions where it makes sense for estate planning purposes but for 99.9% of the population, it's a scam.

[dczech09]

Interest rates are rising, and so will dividends paid on certain policies. Northwestern mutual dividends is 5.6%.

Yes, interest rates are rising as they have nowhere to go but up. As interest rate rise, bond values (which are a popular investment for insurance companies) go down. So insurance companies may take advantage of new bonds issued at higher interest rates, however they suffer from lower values on their bonds if they turnover (and lot of them do). So actually the rise in interest rates creates a lot of volatility for insurance companies, their funds, and their policy returns/dividends.

Also, dividends are really just smoke-in-mirrors, or a shell-game if you prefer. You get dividends for owning shares in participating insurance policies, so the more money the insurance company makes, the higher your dividend. And how does the insurance company make money? By charging premiums, which are then used to fund the dividend. So imagine that you take $100 out of your right pocket, then put $10 in your left pocket... that is how dividends work for life insurance policies. You are just being given back excess premiums that you were charged by the very company that you supposedly own shares in (which is a misnomer because mutual life insurance companies are supposed to be non-profit). Bottom line: these dividends are gimmicks; they aren't a good deal!

At least with stock dividends, the business funds dividends through operational profits, not a deliberate over-charging of premiums.

It's not a good short term plan, but in the long run they can be a safe place to park money so it can provide defense against market volatility. Also it will grow and outpace inflation.

Again, higher interest rates increase volatility in many respects. You can never really escape market volatility whether you are in a life insurance policy or some REAL investment. After all, life insurance companies invest in the financial markets with YOUR money, so market volatility does indirectly affect you.

You have do do your research on whole life though.

Yes you do. And research does not favor whole life insurance. Find me one academic study that actually shows permanent life insurance outperforming a "buy-term and invest the difference through a Roth IRA or 401k" strategy.

I have nothing against Northwestern Mutual myself. However, I will vociferously point out the reality when it comes to permanent life insurance products. And it is not to be nasty or mean; it is to make sure that lay-people get the facts and do not get taken advantage of by some shark in a penguin-suit.