Author Topic: Help me out here--Life insurance question  (Read 2818 times)

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Help me out here--Life insurance question
« on: June 23, 2015, 10:20:06 AM »
Future FIL is telling me we (fiance and I) need to get life insurance for her. He is saying that "we can convert to a permanent whole life plan" and she would be rated up if she tried to buy insurance. I don't know what plan she is on now, I wasn't aware she was on any--if she is, FFIL has been paying for it, or else it is through her old employer--I know she wasn't paying for that one, I think it was just a benefit (that is now gone)

Her new employer doesn't have one, since she is just temporary for now. She'll probably be permanent by December.

The plan that FFIL is talking about is $144,400 payout, for $1,850 a year. I don't know the fees or any of the terms.

Now, why would we do this? I'm 25, she's 26. I have no debt, she has student loans that will be paid off in between 6 and 24 months depending on how we decide to allocate our 401k/IRA/outside investments. No kids, but are planning on them in 2-4 years. She has a 401k valued at 1/4 of the student loans; I have about 1/3-1/2 in liquid savings of the student loans, and my retirement accounts are worth about 1.5x the student loans.

Does anyone think this could possibly be a good idea? I don't see where it makes sense for us, but I know nothing about life insurance.

tj

  • Handlebar Stache
  • *****
  • Posts: 1238
  • Age: 34
  • Location: Maui
    • Arcadia Power
Re: Help me out here--Life insurance question
« Reply #1 on: June 23, 2015, 10:37:05 AM »
Thats a terrible rate. I pay $800/yaer for 1 million of coverage for 30 years. Why would you need more than 30 years of life insurance coverage? It'll cover me until age 59 and i plan to retire before then, thus no need for insurance after that.

Mirwen

  • Stubble
  • **
  • Posts: 160
  • Location: Las Vegas
Re: Help me out here--Life insurance question
« Reply #2 on: June 23, 2015, 10:37:56 AM »
Whole life is designed for people with tons of assets that want to protect some of them passing on to their heirs without estate taxes.  I don't think this applies to you.  You may want an inexpensive term life policy to help with final expenses, taking time off from work (perhaps months), counseling, possibly moving and replacing some of her income for a time.  You could set up a similar policy for yourself to protect your fiance if something happens to you.

I cannot fathom how two 20 somethings without kids would need whole life.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3310
  • Age: 36
Re: Help me out here--Life insurance question
« Reply #3 on: June 23, 2015, 10:42:45 AM »
Is she not healthy?  Involved in a dangerous job?  "Rated up" means they would charge her at a higher premium because she is a higher than normal risk.

Generally speaking, whole life insurance is a pretty shitty deal.  There are some specific cases where it makes sense, but it is sold to way, way more people than should actually be using it. 

As an example of how much cheaper term insurance is, we currently have a 30 year term policy on my wife that we bought when she was 31, and it only costs $43 / month for $500K of coverage.  And frankly, I'm thinking that's too much for us to be spending - we don't need a 30 year term, that rate is on the high end even for a 30 year term policy.  So $1850 is over 3 times that, for less coverage.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
Re: Help me out here--Life insurance question
« Reply #4 on: June 23, 2015, 10:46:49 AM »
Future FIL is telling me we (fiance and I) need to get life insurance for her.  [snip]

The plan that FFIL is talking about is $144,400 payout, for $1,850 a year. I don't know the fees or any of the terms.

Now, why would we do this? I'm 25, she's 26. I have no debt, she has student loans that will be paid off in between 6 and 24 months depending on how we decide to allocate our 401k/IRA/outside investments. No kids, but are planning on them in 2-4 years.
...
Does anyone think this could possibly be a good idea? I don't see where it makes sense for us, but I know nothing about life insurance.

I think FFIL's plan is a very bad idea.  First of all, if you are here you are presumably committed to saving at least more than you spend, and reaching FI at some point early in your life.  Once you are FI life-insurance serves no purpose.  People get suckered into these plans by seeing how much they can 'save' when they are in their 50s & 60s if they 'invest' in it now when they are young.  That's probably how he is viewing it - "if only i'd done this while younger it would be so much cheaper for me now'...

Second, that level of payout is absurd for healthy people in their 20s (I am assuming you are both healthy with no pre-existing life-threatening conditions).  For comparison, I am several years older than you, have a 10yr term life insurance that's $21/month ($252/year) and has a $500k payout.  You'd be paying ~7x that amount for less than 1/3 the payout.

Here's my advice.  You have no dependents and very little debt.  Put everything you can into savings and you should be fine.  IF you decide to have children in a few years consider buying term life insurance that will cover just enough to make up for the lost income should one of you die until the kids are age 18. In most cases $500k should be plenty, but it will certainly cost you much less than $1800/year (more like $200-400/year).  Continue to save, since FI is ultimately your greatest insurance policy against the unexpected.
« Last Edit: June 23, 2015, 10:49:19 AM by nereo »

TrMama

  • Magnum Stache
  • ******
  • Posts: 2830
Re: Help me out here--Life insurance question
« Reply #5 on: June 23, 2015, 11:01:26 AM »
Your FFIL's idea is a terrible plan. The rate of return on whole life is horrible. If he has a policy on her that he's been paying for he should cash it out and use the proceeds for himself.

For young, healthy people term life is the only insurance you need. However, since you are planning on kids before FIRE, I'd counsel you to go ahead and get cheap policies fairly soon. Definitely get them before she gets pregnant. There are 2 reasons I say sooner is better:

1. The rates are cheaper for younger people.

2. As you get older, doctors start looking for more problems. Surprise! When you look for problems, you find them. Some of these problems can increase your life insurance rate (if you don't already have a policy) or can make you uninsurable. Pregnancy comes with all kinds of extra screenings, plus at the end you have an expensive little dependent.

When you reach FI, cancel the term policies.

r3dt4rget

  • Stubble
  • **
  • Posts: 182
Re: Help me out here--Life insurance question
« Reply #6 on: June 23, 2015, 11:02:58 AM »
Does anyone think this could possibly be a good idea? I don't see where it makes sense for us, but I know nothing about life insurance.
You're right, it doesn't make any sense to buy life insurance. In case you haven't seen this: http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

klystomane

  • Stubble
  • **
  • Posts: 180
Re: Help me out here--Life insurance question
« Reply #7 on: June 23, 2015, 11:09:01 AM »
Future FIL is telling me we (fiance and I) need to get life insurance for her. He is saying that "we can convert to a permanent whole life plan" and she would be rated up if she tried to buy insurance. I don't know what plan she is on now, I wasn't aware she was on any--if she is, FFIL has been paying for it, or else it is through her old employer--I know she wasn't paying for that one, I think it was just a benefit (that is now gone)

Her new employer doesn't have one, since she is just temporary for now. She'll probably be permanent by December.

The plan that FFIL is talking about is $144,400 payout, for $1,850 a year. I don't know the fees or any of the terms.

Now, why would we do this? I'm 25, she's 26. I have no debt, she has student loans that will be paid off in between 6 and 24 months depending on how we decide to allocate our 401k/IRA/outside investments. No kids, but are planning on them in 2-4 years. She has a 401k valued at 1/4 of the student loans; I have about 1/3-1/2 in liquid savings of the student loans, and my retirement accounts are worth about 1.5x the student loans.

Does anyone think this could possibly be a good idea? I don't see where it makes sense for us, but I know nothing about life insurance.

Is the payment every year for the rest of your life?

Or does it stop after X years?

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--Life insurance question
« Reply #8 on: June 23, 2015, 12:27:26 PM »
No idea if the payments stop at a certain point or what. But yeah, I couldn't figure it out. I still can't figure out why he can't see it.

klystomane

  • Stubble
  • **
  • Posts: 180
Re: Help me out here--Life insurance question
« Reply #9 on: June 23, 2015, 12:51:35 PM »
No idea if the payments stop at a certain point or what. But yeah, I couldn't figure it out. I still can't figure out why he can't see it.

This is a pretty important point to look into. There are plans where you pay x amount for x number of years (15-20), and then coverage remains in effect until you die.

If you have to pay until the moment right before you're in the grave, then it seems like an exorbitant amount for your age and for the payout amount.

For plans where you only pay x number of years, if you work out the math, based on investing the money vs buying into that plan, if you assume normal returns 5-7% per year, investing will net you more, but how much more? This is also assuming you live to a certain age, etc.

GoldenStache

  • Stubble
  • **
  • Posts: 239
  • Location: Washington, DC
Re: Help me out here--Life insurance question
« Reply #10 on: June 23, 2015, 01:42:12 PM »
Self-insure and tell FIL you got it covered.

Take that $1,850 and buy VTSAX.

In 30 years, compounding at:
7% - $186k
9% - $275K