Author Topic: Whole Life Insurance Policy - Challenging Mustachian Wisdom  (Read 6344 times)

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Whole Life Insurance Policy - Challenging Mustachian Wisdom
« on: August 09, 2014, 12:48:07 AM »
Hello everyone,

I have a 250K whole life insurance policy for which I pay $1200 per year and this amount will not change. I am 28 years old. I've been researching whether it makes sense to keep this policy or get rid of it and replace it with term life insurance. I have noticed that many Mustachians recommend term over whole life insurance, however, the numbers seem to be in favor of whole life insurance in this case. I would appreciate your perspective.

If I opted to invest the premiums in index funds with an average annual return of 7%, the breakeven point would be 40 years from now, when I am 68. Assuming my life expectancy is 90, I will have lived 75% of my lifetime before reaching the break even point on whole life insurance before market returns would exceed the 250K limit on the policy.

That would mean that if I die at any point before 68, it would be better to have the whole life insurance policy. From my perspective, the additional expense of the premiums that are in excess of what I could have received from investing the funds does not compensate for the risk I am assuming by doing so for 75% of my lifetime.

What are your thoughts? Please feel free to provide your counterpoints. Thanks.
« Last Edit: August 09, 2014, 12:54:17 AM by The Mobile Mustachian »

MDM

  • Walrus Stache
  • *******
  • Posts: 9246
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #1 on: August 09, 2014, 01:13:47 AM »
Comparing insurance vs. investment is apples vs. oranges.  You should first decide if you need insurance at all.  If so, then decide the most economical way to obtain it.

Presumably your current costs for term insurance would be lower than for whole life: you could invest that difference and use the returns for a better life instead of life insurance.

So, not a counterpoint so much as some questions:
  - Why do you need life insurance?
  - What would it cost you to buy term life insurance? 
  - What is the expected result if you invest at 7% the difference between the premiums for whole and term insurance?


The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #2 on: August 09, 2014, 01:34:33 AM »
MDM, thanks for the great questions. Honestly, I'm not sure what to do now that I've given your questions some thought.

I am the primary income earner and we are still in the wealth accumulation phase. I would like a policy to:

1) Bridge the gap between now and FI - somewhere between 10 and 15 years from now. In reality, I think a $500K policy for 15 years would accomplish that. I already have a 750K policy that my current work provides me for $250 per year and another one that work pays for that's $190K. Both of these policies will cease when I stop working there upon achieving FI.

2) Pay off any principal balance left on our mortgage if/when we buy a single family home. We do not currently. Guesstimated principal would be about $225K at purchase and we are a couple years away from considering this purchase. A $250K policy for 30 years would cover this, though the principal remaining would go down steadily over time and, thus, the need for the policy.

3) Just thought about this one. I help my parents invest their retirement savings and perform lots of general maintenance for them. If I am not around, their investment portfolio's will likely not be as efficiently managed (perhaps by an outside adviser @ 1% fee of their $800K portfolio or 8K per year. Let's use 10K for round numbers to account for maintenance as well. They are in their 60's with a life expectancy (hopefully) of about 90. Let's assume 25 years remaining at present. 25 years x 10K = 250K risk exposure for a period of 25 years.

I've done 2 scenarios below: 1 for a 20 year policy and another for a 30 year policy.

The cost per month of a 250K term life insurance for a 20 year policy would be $15 / mo or $180 per year. That would leave $1,020 per year for investing. Invested over a 20 year period, this would amount to approximately $44,000.

The cost per month of a 250K term life insurance for a 30 year policy would be $25 / mo or $300 per year. That would leave $900 per year for investing. Invested over a 30 year period, this would amount to approximately $92,000.
« Last Edit: August 09, 2014, 02:11:30 AM by The Mobile Mustachian »

MrFrugalChicago

  • Bristles
  • ***
  • Posts: 340
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #3 on: August 09, 2014, 07:33:25 AM »
Honestly, I have looked at the math a lot of times. I have never seen whole life insurance make sense.

Very good odds you live past 68. In those cases, you were way better investing the money yourself.

Small risk you die in the next 15 years. If you want to counter that for your family, term life will do so.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #4 on: August 09, 2014, 11:00:11 AM »
Hello everyone,

I have a 250K whole life insurance policy for which I pay $1200 per year and this amount will not change. I am 28 years old. I've been researching whether it makes sense to keep this policy or get rid of it and replace it with term life insurance. I have noticed that many Mustachians recommend term over whole life insurance, however, the numbers seem to be in favor of whole life insurance in this case. I would appreciate your perspective.

If I opted to invest the premiums in index funds with an average annual return of 7%, the breakeven point would be 40 years from now, when I am 68. Assuming my life expectancy is 90, I will have lived 75% of my lifetime before reaching the break even point on whole life insurance before market returns would exceed the 250K limit on the policy.

That would mean that if I die at any point before 68, it would be better to have the whole life insurance policy. From my perspective, the additional expense of the premiums that are in excess of what I could have received from investing the funds does not compensate for the risk I am assuming by doing so for 75% of my lifetime.

What are your thoughts? Please feel free to provide your counterpoints. Thanks.

A few things:

1. Why use 7% a year, when accounting for a 40 year span?  Estimating 7% a year, a little more than half the long term average/CAGR of the market, can be a useful buffer when looking at shorter term timeframes, but it's not needed IMO for long timeframes.  There has never been a 30 year period in history that was less than 8.5%, so you are calculating for worse than the worst possible scenario ever seen.

Set that to 11.5%, and here are the numbers:

20 years: $82,488
30 years: $265,541
40 years: $809,199

Set it to the worst 30 years ever, 8.5% (worst 40 years is probably 9.5% or 10%, but can't find anything on it right now) and it's:

20 years: $58,563
30 years: $150,213
40 years: $357,432

Now what about setting it to the best 25 years ever, 17.24%?

15 years:  $69,771
20 years:  $163,002
25 years:  $369,512

2.  As someone stated already, comparing life insurance payouts if you die, to liquid money in an investment account, really doesn't make sense.  The investment money is available to improve your quality of life, through an earlier FI date...etc.  Furthermore, based on my 10 second google search, we have about a 25% chance of dying before 70.  A 25% chance of receiving the insurance's $250,000 payout.  So the expected return from now until you're 70 is:

250,000*0.25 = 62,500

Which leads us to...

3.  As MMM said, all insurance has an expected negative return (for you anyway).  The way you're talking, it seems like you're expecting the math to work out in your favor.  It won't.  The insurance company does the math, and sets the price high enough for covering the expected payouts, pay their bills, pay their employees, pay their stockholders...etc.  MMM said it best:

Quote
The first thing to understand about insurance companies is that they are making money off of you lots of it. They do this by employing a team of brilliant mathematicians called Actuaries who analyze detailed mountains of statistics about the average behavior of people like you, and thus how much money they expect to pay out to you in claims. They then strategically set your premiums to a level where on average, they can pay your claims, pay their employees, and still make a large profit for their shareholders. So they have, of course, rigged the odds against you. So when buying insurance, you will most likely pay in more than you get out of it.

http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

4.  From what I can see, you don't need insurance right now.  Despite that, your employer is already providing you with $940,000 of insurance.  From what you've stated, I see absolutely no reason to be paying $100 a month for even more insurance with this whole life policy.

Personally, I'd get rid of all additional (above the free 190k) insurance right now, since you don't need it.  Re-evaluate this when you leave your job, which might not happen until you're FI.  Then, when you're FI between 10-15 years from now, you won't need insurance then either...as you'll be FI.

iris lily

  • Magnum Stache
  • ******
  • Posts: 3140
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #5 on: August 09, 2014, 11:15:08 AM »
If I already posted this somewhere, sorry! I was thinking of it but don't know if I posted it.

Here is possibly the only useful purpose I've seen for life-insurance-as-savings:

My friend who is 59 was the beneficiary of his mother's life insurance policy. Because she spent the last few years of her life in a nursing home, a stroke victim, at the expense of the government, she had no assets. It was important to her to leave her children something. The state couldn't go after this asset, as it could any other asset she would have had.

I realize that many MMM followers aren't interested in leaving their progeny money or else they aren't going to invest in such a poor financial vehicle, and I agree with all of that; DH and I don't have life insurance. In the case of this woman, life insurance with a payout after death seemed to work for her goals. I'm interested if Mustsacheans can punch a hole in this logic.

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #6 on: August 13, 2014, 02:17:42 PM »
Hey everyone,

Thanks for the helpful feedback. You've convinced me =) Instead of cancelling the policy, however, I'm checking to see if I can get a paid-in-full policy for a lesser amount based on the premiums I've paid to-date. I'll let you all know how it turns out.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 2936
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #7 on: August 13, 2014, 02:22:02 PM »
There was a thread about this recently and it linked to an article written by the White Coat Investor.  It answered every issue about a Whole Life policy.  Hopefully someone can find and repost

dandarc

  • Magnum Stache
  • ******
  • Posts: 3315
  • Age: 36
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #8 on: August 13, 2014, 04:07:47 PM »
I'm curious - how long have had you had this policy?  What is the cash value?

The price looks pretty low for whole life - I wonder if what you've got here is actually a universal life policy with no (or a very small) savings component built in.  That would essentially be a level-term to age 100 policy.  These are much better priced than traditional whole-life.  Price looks in the ballpark for that, if you've bought it recently.

Another possibility is that it is whole life, but you've had it for a long time.  Maybe your parents bought it for you as a kid and eventually transferred it to you?

What others are saying about assessing your need is very important - insurance costs you money, like I said I'm just curious on how you got to this pricing level.

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #9 on: August 13, 2014, 08:30:26 PM »
I'm curious - how long have had you had this policy?  What is the cash value?

The price looks pretty low for whole life - I wonder if what you've got here is actually a universal life policy with no (or a very small) savings component built in.  That would essentially be a level-term to age 100 policy.  These are much better priced than traditional whole-life.  Price looks in the ballpark for that, if you've bought it recently.

Another possibility is that it is whole life, but you've had it for a long time.  Maybe your parents bought it for you as a kid and eventually transferred it to you?

What others are saying about assessing your need is very important - insurance costs you money, like I said I'm just curious on how you got to this pricing level.

Thanks for asking. It is a universal life policy that is level term to age 100. I have been paying into the policy for 4 years, so I bought it when I was 24.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3315
  • Age: 36
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #10 on: August 14, 2014, 07:20:02 AM »
Cool - just as a heads up, I'm shopping myself right now, and at 31, I could get a level term to 100 for under $1000 per year.  I'm actually looking at 10 - 15 year terms, but Geico's site (lifequotes.com) sure makes it easy to look at other products as well.  This assumes that I qualify for the top tier - only wildcard is going to be my cholesterol ratio.  So if you're healthy, and you do decide you need this level of coverage till you are 100 (looks like you came around on the "need" for this in other posts), then you might want to shop for a better rate.

PloddingInsight

  • Bristles
  • ***
  • Posts: 308
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #11 on: August 14, 2014, 07:37:31 AM »
A life insurance policy, like a debt, will generally penalize you if you fail to make a scheduled payment because you are forgetful, out of the country, or in a hospital.  Your retirement account is not going to start charging you fees or collapse in value because you don't stick to your agreed-upon investment schedule.  Even if the numbers work out "under the assumptions", you need to consider the risk.

greenmimama

  • Pencil Stache
  • ****
  • Posts: 718
Re: Whole Life Insurance Policy - Challenging Mustachian Wisdom
« Reply #12 on: August 14, 2014, 09:55:45 AM »
Well my 38yo DH has a million dollar policy for about $800/year so I would say $1200 is a big rip off.

Get a term and invest your own money.