Author Topic: Whole Life Insurance Question  (Read 5274 times)

Fenfen

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Whole Life Insurance Question
« on: October 06, 2015, 10:30:42 AM »
I've been on the MMM kick for a few years now and generally interested in my personal finances. I've been working to get my wife interested/involved/onboard.

She mentioned this to a mentor of hers and her mentor suggested working with a financial advisor. I  made sure that it was a fiduciary to make sure they had our best interests in mind. They were impressed with the outlook I conveyed for "accelerated financial independence." One of the items they suggested was a whole life insurance plan.

I was previously weary of life insurance plans but I read Tony Robbins' Money: Master the Game and he described life insurance that isn't retail and can be borrowed against, or reduced by a certain amount if you withdraw money. He describes it basically as an investment asset wrapped in insurance for tax purposes. This is the type of plan I am considering.

I am looking at it to create some extra stability for my wife if something happens to me, but also allows for some cushion while I am living. I feel comfortable with the option, but...am I missing anything? I've asked the advisor a ton of question, reviewed documents, etc. Is anyone else familiar with this type of insurance? It's a Northwestern Mutual policy.

Thanks for any feedback.

honeybbq

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Re: Whole Life Insurance Question
« Reply #1 on: October 06, 2015, 10:42:37 AM »
For 99% of the population, whole life insurance is a complete waste of money.  In general, the best idea would be a short(er) term life insurance. Do you have children or just the wife?

Here's a few links that might be of interest from BH:

https://www.bogleheads.org/forum/viewtopic.php?t=139318
https://www.bogleheads.org/forum/viewtopic.php?t=76621

and

http://r0k.us/insurance/vp/

and finally WCI:

http://whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
« Last Edit: October 06, 2015, 10:44:14 AM by honeybbq »

Tremeroy

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Re: Whole Life Insurance Question
« Reply #2 on: October 06, 2015, 11:01:05 AM »
First, let me verify that I understand what you're talking about:
Essentially, you would be using the policyowner dividends (from the mutual-insurance company) to make additional whole-life purchases throughout your life. You could then borrow against the policies or cash-out in case of emergency with negligible income-tax consequences. This specific concept is common among almost every mutual-insurance company's whole-life policies; without any more information, I doubt that there any meaningful differentiating aspects to a Northwestern Mutual vs. its competitors.

I would caution you, many of the whole-life policy projections that I've seen incorporate some aggressive assumption on policyowner dividends / distributions to make the policies look comparable to actual investment assets. What does the fine print in the advisor's presentations say? Is (s)he trying to sell you an indexed policy or a traditional policy?

Remember, there are really only three ingredients to a mutual-insurance company's dividend—1) the company's investment return (usually heavily invested in fixed income!), 2) the company's expense control (without a shareholder's board of directors to exercise some oversight!), & 3) the operating results relating to new-policy sales, redemptions, & mortality. The dividend itself is not guaranteed, either—so a few years of poor company performance could hamstring your plan.

If you didn't have the death benefit, would you still be interested in investing in a life insurance company? What proportion of your assets would you so devote?

MidWestLove

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Re: Whole Life Insurance Question
« Reply #3 on: October 06, 2015, 11:41:02 AM »
Whole Life Insurance is one of those things that unless you know you need it - you probably don't.  Tax benefits are greatly overblown in vast majority of the cases (when you get to the distribution phase, taxes become significantly lower as your income is significantly lower as well as multiple income streams (qualified dividends, etc) are taxed favorable, see GoCurryCracker for example). Also, understand that it is you that pays for intermediate agents, funds those offices, pays those salaries, etc  if you sign up  as mutual owner. this money does not come from the sky.

unless you know you need it for very specific scenario, avoid.

Tremeroy

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Re: Whole Life Insurance Question
« Reply #4 on: October 06, 2015, 11:57:38 AM »
The best thing you can do is educate yourself on this matter.

That is the purpose of the OP, I believe.

To Fenfen, I think that the least costly option is probably to do term insurance & invest your cost savings. The whole-life policy is more expensive and marginally easier. In terms of effort, you would not have to manually purchase low-volatility assets & manage a standalone term-life policy if you went with the whole-life option. Personally, I do not think that the cost is worth the simplification.

TVRodriguez

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Re: Whole Life Insurance Question
« Reply #5 on: October 06, 2015, 12:29:37 PM »
Be careful, OP.  I've known many many many financial advisors, some of whom are "fiduciaries" and Registered Investment Advisors, some of whom are Certified Financial Planners, some of whom are bankers, some of whom are insurance agents, some of whom are brokers, and many others.  The fee-based CFPs are usually a bit more on the ball as a whole, but you are best served by being wary. 

With any advisor, check the math on any proposal they give you, especially with regard to insurance.  Many insurance products use very high expected returns to sell you on the product.  They say that it will "pay for itself" and that you will be able to stop making premium payments.  This is not always true.  Read the fine print.  Literally--read the fine print.  They sometimes package the insurance as a sort of panacea, which it's not.

Many people would do better to buy term life (if they need life insurance at all) and invest the difference in a retirement account or even in a taxable account. 

MoonShadow

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Re: Whole Life Insurance Question
« Reply #6 on: October 06, 2015, 12:44:07 PM »

I am looking at it to create some extra stability for my wife if something happens to me, but also allows for some cushion while I am living. I feel comfortable with the option, but...am I missing anything? I've asked the advisor a ton of question, reviewed documents, etc. Is anyone else familiar with this type of insurance? It's a Northwestern Mutual policy.


I have done much research in this area myself, because I have a genetic disorder that has killed every male member of my family before 60.  I have even looked into a Northwestern Mutual policy set.  The short answer is, unless you make more than $180K per year as a family or can't get term insurance due to medical reasons (I cannot) then the answer is almost certainly no.  It wasn't even ideal for myself, because I can replicate the living advantages of a whole life policy using a combo of an annually maxed out Roth IRA and Traditional 401K with borrowing privileges.  And no matter what they tell you, the commission is huge.  It is the life insurance industry that wanted the income caps & relatively low annual contribution limit when Roth IRA's were being proposed in congress; because they knew they would be a cheaper option for most people than whole life (or any form of permanent life policy, really).

Noahjoe

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Re: Whole Life Insurance Question
« Reply #7 on: October 06, 2015, 01:11:53 PM »
I used to sell insurance, though not for Northwestern Mutual. I can tell you that whole life is the best commission of anything I could sell. By a great margin - the first year commission was about 40% and renewals were huge. So, let me ask you this: do you mind paying a 40% front load on your investment? One with a return that could underperform inflation (I went through the NWM song and dance and seem to recall that the average return was 2.5% per year)?

Life insurance is an interesting thing. You need to paint the whole picture (kids, outstanding debts, wife's ability to provide a similar standard of living if you're gone, etc) to understand if it's really a good choice for you, but if you're only looking to insulate your wife from the loss of your income, then you do not need whole life insurance. Buy term. And only for as long as you'll need it. Once you're retired/rich, it's irrelevant. Which is to say, calculate your FIRE date and buy a term that's reasonable to that date (or even a little before, if your wife is capable of working).

NWM also tries to sell overfunded life insurance, which I have no qualms about saying avoid like the fuckin' plague. 5 minutes with Google and you'll know why.

Fenfen

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Re: Whole Life Insurance Question
« Reply #8 on: October 06, 2015, 05:41:03 PM »
Thanks for everyone's input. I decided to not move forward. A creeping doubt had found its way to me and the feedback today solidified it. And even if it makes sense for me, it's not a good decision if I am not comfortable with it.

I'm glad I solicted feedback before it was finalized. I've not been on the forums for a while so I am happy to be back and get great feedback!

Noahjoe

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Re: Whole Life Insurance Question
« Reply #9 on: October 07, 2015, 06:49:01 AM »
Fenfen,

I'm genuinely glad to hear this. I am always happy when someone makes a good decision when it comes to insurance scams like this - because let's be serious, that's what it is. Well done. Now if you're young, healthy, and still want to bridge the gap during your earning years, get some quotes on term life insurance. You can often tack it on with the same insurer you user for car insurance/homeowner's/etc. I added a small policy and the discount generated by it was actually greater than the cost of the insurance (it was only about $10,000). Now that's a Mustachian decision.

Also, most people selling insurance are of the mindset that you need to replace your income to the tune of 80% of the rest of your life, and often discount things like investments/your wife working/the fact that you could invest the insurance payout/the likelihood that she'd remarry if she's still young. You probably don't need a 2+million dollar policy. More likely, 500,000 to 1,000,000 would be enough. Do the math so you know what you need before you talk to another insurance agent so you don't get sucked into an emotional decision.

MoonShadow

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Re: Whole Life Insurance Question
« Reply #10 on: October 07, 2015, 01:30:54 PM »
Also, most people selling insurance are of the mindset that you need to replace your income to the tune of 80% of the rest of your life, and often discount things like investments/your wife working/the fact that you could invest the insurance payout/the likelihood that she'd remarry if she's still young. You probably don't need a 2+million dollar policy. More likely, 500,000 to 1,000,000 would be enough. Do the math so you know what you need before you talk to another insurance agent so you don't get sucked into an emotional decision.

Another way to look at term life is as a multiple of your annual income or expenses.  So that, should you die, your wife has so many years of current lifestyle to make adjustments.  This method won't make your wife & kids rich, but three or four years of your income should be plenty of time for Momma to make some lifestyle changes.  Sell the McMansion and move into a paid for condo.  Go back to college to finish her degree.  Get the teens through high school, then sell the house and move into an even smaller condo.  Find a new sugar daddy.  You get the picture.