Author Topic: Life insurance question  (Read 8308 times)

cyclocross

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Life insurance question
« on: June 10, 2012, 05:15:52 PM »
Almost two years ago a Northwestern Mutual salesman got me excited about saving for retirement which resulted in me buying a Whole Life Policy with Adjustable Term Protection which is costing me $317/month.  At the time it was sold to me as a way for saving for retirement, but now it just doesn't make sense to me.  After looking over the papers, if I wait until July (a full two years for the policy) it will have a cash value of about $1500.  I am 31, single with no kids.  I'd like to cancel this policy and hopefully get the cash value.  Does this sound like a good idea?  Or should I keep it?  After reading the entire MMM blog I think there are definitely better places for this money to go. 

gooki

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Re: Life insurance question
« Reply #1 on: June 10, 2012, 05:53:03 PM »
Sounds like a good idea to me.

Gerard

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Re: Life insurance question
« Reply #2 on: June 11, 2012, 06:36:07 AM »
Sounds like a good idea to me.
+1

Cash it out and buy a bike!

tooqk4u22

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Re: Life insurance question
« Reply #3 on: June 11, 2012, 08:56:07 AM »
cash it out and switch to a term policy

ShavinItForLater

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Re: Life insurance question
« Reply #4 on: June 11, 2012, 08:57:14 AM »
If I were in your shoes I'd dump it.  If you want a more professional opinion you could get one for $90 here: evaluatelifeinsurance.org

For the amount you have invested though, I'd probably just go ahead and cash it out, and chalk up the loss to your financial education.  Whole life is a ripoff, anyone who says different is most likely selling it.

stashette

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Re: Life insurance question
« Reply #5 on: June 11, 2012, 11:21:17 AM »
If you are single with no kids, I don't really think that you need life insurance at all.  Even if you want some life insurance, most employers offer life insurance around 1x annual salary.

Whole life and similar policies have such high fees that they are rarely worth it as investments.  To cash out a policy my parents bought when I was a kid, I had to pay high tax rates, too, but it was better than paying the high premiums. 

When I was fresh out of college, I had a financial adviser sucker me into buying a $1 million VUL policy as an investment vehicle.  She said it was the secret investment vehicle that all the rich people use.  Fortunately, I figured out very quickly that it was a waste of money and that there wasn't a need for me to have that much in life insurance.

cyclocross

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Re: Life insurance question
« Reply #6 on: June 11, 2012, 07:11:12 PM »
Sounds like a good idea to me.
+1

Cash it out and buy a bike!

I like the way you think!  There are already too many bikes in my apartment...

Thanks everyone for your feedback.  I'll wait another month to cash it out and chalk it up to a learning experience. 

andrew

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Re: Life insurance question
« Reply #7 on: June 11, 2012, 10:18:39 PM »
You don't buy life insurance for yourself, you buy it for your survivors. Since you have no wife of kids you have no need for a life insurance policy. Cancel the policy and start putting that $317/mo in a diversified index fund such as VASGX.

cyclocross

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Re: Life insurance question
« Reply #8 on: June 12, 2012, 10:27:12 AM »
Andrew, that's exactly what I was thinking about doing with the money and am researching those types of funds now.

follicular

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Re: Life insurance question
« Reply #9 on: June 12, 2012, 11:17:45 AM »
Cyclo
Another possibility if you have no survivors to bequeath the insurance proceeds to is to consider a charitable remainder trust (if this is applicable to your age--I am not sure). You contribute to specially set up trust funds maintain by a charity organization that you would like to support and at some point in the future (post retirement I believe) you can actually take out money from the trust with the balance for the trust to keep. A bit like insurance but you are helping a good cause and I believe getting a tax break along the way. You should ask someone who really knows about this stuff.
good luck

rusty

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Re: Life insurance question
« Reply #10 on: June 14, 2012, 03:53:32 PM »
There is a place for every life insurance product.  Problem is many agents often put the wrong plan in place because they are thinking of themselves and not their clients.  I have sold life insurance in the past and have seen it first hand.  However, I hate to see people say a particular plan is a rip off.  It all depends on the situation.

WHole life has a place as well as term.  Term is for most people.  Whole life is great for very specific places (estate planning, certain retirement situations - ie having exhausted all other retirement vehicles or your income is so high you can not contribute to other retirement vehicles).   Here is an example: I had a client who is over 65 and has an over funded UL policy, which pays him a guaranteed 4%.  He has no need for the money and would like to leave it for the kids (benefit would go to kids tax free at more than double what he put in).  He does not trust the market due to his age and his past experience.  He can get his money out at any time also.   His situation was very unique and not something I would have recommended to many people, but this is an example of where whole/UL policies work for the client.

Again, for most people term is the best answer.

arebelspy

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Re: Life insurance question
« Reply #11 on: June 14, 2012, 06:56:18 PM »
Fully agree rusty.  Thanks for posting.

(I was shocked there was no spam link in a post about life insurance when it is their first post on the forums! :D )
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rusty

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Re: Life insurance question
« Reply #12 on: June 15, 2012, 06:17:36 AM »
Thanks Arebelspy.  I worked with a company that would push that junk down my throat for quite some time.  I finally told them to stick it.  I am an insurance agent still.  Started my own agency earlier this year.  I believe in doing what's right for the client and it will pay off in future referrals.  My previous company often had a different view.  There is only so much pushing back you can do.  You know there is nothing you will be able to do to change that view from corporate.  I will say I sleep a lot better now.  ; )

I have been reading MMM and prior to that ERE for some time.  I am trying to get myself in a better long term financial position, but I am starting a little late (40's).  I am having more of a challenge with my spouse, but I think we are making progress.  Many of the changes I have made while going on my own were from a MMM standpoint.  Once I get my income back up to a good level, I can start saving again and look at investments or rentals (currently have two). 

Thanks again
Rusty

Arbor33

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Re: Life insurance question
« Reply #13 on: June 15, 2012, 10:38:03 AM »
My father has always told me not to look at life insurance as an investment and thusly, it hasn't even been a blip on my radar.

Could one of you more informed mustachians provide a short little breakdown of what term vs whole actually is and why or why not my dad was right?

grantmeaname

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Re: Life insurance question
« Reply #14 on: June 15, 2012, 01:36:39 PM »
There are some complexities with the benefit amounts and the premium amounts and some portion of the amount, which I know nothing about. That disclaimer aside, here's the 10,000 foot view:
Term insurance is used to replace your income and provide for your survivors if you die during the term that it exists. For example, you could buy 20 years of term insurance at the birth of your child, and thus even if your spouse didn't work, they would be protected and able to raise your child or send them to college even if you died at the most inopportune time. If you and your spouse are both working, and your family could get along okay without you on one income, it's probably a better use of your money to invest than get the insurance. You only need whole life if your income needs replaced when you pass.

Whole life insurance is best for the elderly as an estate planning tool. You buy a whole life policy, and then when you die, no matter when it is, the policy pays off and settles your debts, then the remainder can pass on to your next-of-kin. It's sold in other circumstances but that seems ethically dubious and seems pretty looked down upon by the MMM community.

rusty

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Re: Life insurance question
« Reply #15 on: June 16, 2012, 07:25:59 AM »
Would agree with whole and term life explaination used above.  It's generally not used as an investment for most people. 

Side note: I recommend people purchase life insurance (term) at least enough to replace income even in a situation where both spouses work.  From experience, a widow will not be able to continue their life as normal after the passing of a spouse, especially if it's sudden.  I have had clients lose children/spouses due to accidents and they could not say the child's name in my office 1 year after the loss with out breaking down.  They are typically an emotional mess for quite some time.  I have seen people lose the desire to live.  Life insurance is part of the FI planning process.  Get enough to make the emotional transition for your spouse/children as easy as possible.  More if you like.  I know my wife would have a hard time trying to manage rental property, take care of the kids, and return to work; so I carry about 10 years of income replacement while my kids are young.

We typically don't think about the consequences of the loss until we see someone else go through that.  The life insurance is there to give people time to grieve and replace income.  Most don't consider the grieving part.  They wrongly assume the living spouse can go back to work the next Monday (next week, or month) as if nothing has changed.  Having personally seen it, people take a long time to return to their "new normal" life.

As far as whole life, I have seen it used more as a tax shelter for those who have exhausted all other tax shelters (SEP, 401k, etc).  Example being a high income business owner who does not qualify for a ROTH or has no access to 401k, or may have fully funded the SEP.  Once you get over $200,000; your saving options are reduced (not a bad problem to have). 

For most people here, it's not a good use.  Term is a better fit.  People here are trying to be FI, so the need for life insurance in the far future may not be necessary unless there is an estate tax issue.  Most here will not have that problem, because they don't need a tremedous amount of assests to reach FI.

Bakari

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Re: Life insurance question
« Reply #16 on: June 16, 2012, 09:51:12 AM »
I'm not totally sure life insurance has any value even if you do have kids.

I mean, really, which will have the more positive impact on their quality of life should you and their other parent both die at once: growing up in foster care, with a insurance payout, or growing up with a trusted friend or relative, but with no insurance payout?
The real insurance is having a back-up plan in place, not giving some company cash every month.

And of course, as was said, if you have no dependents it literally serves no purpose at all
(other than, I suppose, sparing your family the cost of a coffin. plot, and fancy funeral?  Avoid that burden by specifying in your will that you prefer a simple wake and cremation)

Arbor33

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Re: Life insurance question
« Reply #17 on: June 18, 2012, 04:30:32 AM »
Thank you guys, that was a fine break down.

I fall under the "no dependents" category and have an employer paid policy but it's still nice to have a basic understanding of it all.