Author Topic: Whole Life?  (Read 3635 times)

Cincy Stache

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Whole Life?
« on: January 09, 2014, 07:15:52 AM »
To Insurance Mustachians,

I don't believe I've made a mistake, but since there is so much negativity surrounding Whole Life I thought I'd bring the question and my situation to those I trust most.

I'm 28 years old. (extremely frugal in comparison to friends my age)
1 year old son w/ live-in girlfriend (no plans to marry)
I just bought a house in a nice neighborhood (94k mortgage)
Scattered investments here and there.

So that will give you a general sense of the state of life as it stands now...  I pay $45/month for the 100k whole life policy.  My rationale is that I like to "stache" money away in a variety of places, why can't this just be one more at a small sum of $45/month.  If I get hit by a bus tomorrow or in the foreseeable future of my son's youth, it will be worth it.  If I live for many many years my investments will surely outweigh the payout and interest this gains, but it might be a nice "icing on the cake" for my son and/or grand kids.

I'm almost 1 year into the policy, and I can take face punches, but I can also take atta boy's if I'm not completely wrong.

Thanks in advance.

arebelspy

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Re: Whole Life?
« Reply #1 on: January 09, 2014, 07:23:09 AM »
I pay $45/month for the 100k whole life policy.  My rationale is that I like to "stache" money away in a variety of places, why can't this just be one more at a small sum of $45/month.  If I get hit by a bus tomorrow or in the foreseeable future of my son's youth, it will be worth it.  If I live for many many years my investments will surely outweigh the payout and interest this gains, but it might be a nice "icing on the cake" for my son and/or grand kids.

Rather than critique whole life itself (easy enough to do), let's cut directly to why your rationale is wrong (sorry).

Your rationale, above, boils down to: if I die, my son gets 100k, if I don't, it's an extra 100k anyway on death (as "icing" on top of other investments) and it grows as an investment.

Here's why it's wrong: you aren't comparing the alternative, which is term life + investing the difference.

If you instead had term life for 100k, you'd still have the death benefit of 100k (whether you die soon or later), and investing the extra money that you save from term being so much cheaper means you'll end up with more money (aka even more "icing").

Whole life, with its higher fees, is just going to leave you and/or your son or other beneficiaries with less money.  That extra money goes to the insurance company, instead of them.

Life insurance may make sense for you.  But term gets the same death benefits, while giving you more money to invest at lower fees, ending up with much more money in the end.

Thus the error in your reasoning.  If there wasn't such a thing as term insurance, maybe it would be worth it to have whole life and the more expensive fees in order to get that death benefit.  Since term insurance IS available, whole life is not worth it.
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Cincy Stache

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Re: Whole Life?
« Reply #2 on: January 09, 2014, 07:36:03 AM »
arebelspy: Thanks for the logical assessment!

So, from that standpoint, would it be prudent to cancel the whole life now and look into the Term?  I'd hate to have made a $550 mistake, but would hate even more to lose out on future cash soldiers.

Obviously, I was sold the policy when my son was born by a family friend whom I still trust has good sense, but likely has better sense for his wallet!

Thanks again.

Another Reader

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Re: Whole Life?
« Reply #3 on: January 09, 2014, 08:00:28 AM »
Before you cancel the whole life policy, shop for a term policy.  Make sure the term is long enough to get you to the point where you no longer need life insurance.  The difference in price should be substantial, but you will have to be underwritten for the new policy.  Once you select the new policy and have been accepted, then cancel the whole life.  Occasionally conditions arise where you won't qualify for a new policy and you want to have insurance in place if that happens.

With regard to life insurance, the saying is "buy term, invest the difference,"  Between the fees and the investment performance, term wins out almost every time.  Make sure you invest the difference, though.

arebelspy

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Re: Whole Life?
« Reply #4 on: January 09, 2014, 08:05:53 AM »
So, from that standpoint, would it be prudent to cancel the whole life now and look into the Term?  I'd hate to have made a $550 mistake, but would hate even more to lose out on future cash soldiers.

Since you're already "in" sometimes whole life makes sense to keep (as you can "cash out" after a period of time - usually a decade or so), so you should run the numbers, but I'd strongly bet on it favoring cancelling the policy now.

In other words, over the next 9 years you should come out with more money with term than you would paying another 9 years of whole life and then cashing it out.  This would be different, of course, if you had already paid in for 8 or 9 years.

The 550 is a sunk cost you can think of as a learning experience and 1 year worth of insurance.

And definitely listen to AR and shop for the term policy first, make sure you can get it (and indeed, actually get it issued before cancelling the other one), and run the numbers on what it will save you.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

lackofstache

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Re: Whole Life?
« Reply #5 on: January 09, 2014, 08:09:36 AM »
If you'll invest the difference, I'd make the switch, probably to a higher death benefit term policy. Whether you get a 10/20/30 year term should depend on what timeframe you'll need the policy to help your family. Permanent policies aren't great for mustachians because they're not the BEST way to get death benefit & have savings/investments/cash value. They do serve people who can find a way to pay bills, but not save/invest because they offer a forced savings of sorts. Permanent policies also serve these people because they will ALWAYS need life insurance. Again, not a necessity for early retiring, financially independent folks with no debt & money in the bank.

Insurance folks aren't always trying to deceive people; these policies serve some well. In your situation, though, I'd cancel it, as the actuaries assumed you would, and get a term policy and put compound interest to work on the difference.

Weedy Acres

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Re: Whole Life?
« Reply #6 on: January 09, 2014, 08:11:25 AM »
Get term first, then cancel your whole life.  Just in case you get an incurable disease while you're going through the application process. :-)

Also, whole life loses the cash value when you die.  Your beneficiaries wouldn't get the "investment," they'd just get the 100K.

You can get 100K of term life for around $9/month.  If you invest the remaining $45 and get an 8% return, you'll have $8K in 10 years.  What will the cash value of the whole life be then?  In 20 years you'll have $26K.  And that won't go away when/if you die or quit paying premiums like it will with WL.

arebelspy

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Re: Whole Life?
« Reply #7 on: January 09, 2014, 08:19:45 AM »
Also, whole life loses the cash value when you die.  Your beneficiaries wouldn't get the "investment," they'd just get the 100K.

It depends.  Some whole life increase the death benefit with the amount of the cash value (so the current death benefit may be something like 100,053 or whatever).  That's why I hesitate to offer more specific details, because it depends on the contract. 

Either way, run the numbers and I'd bet it'll come out in favor of term.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Cincy Stache

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Re: Whole Life?
« Reply #8 on: January 09, 2014, 08:51:18 AM »
Thank you all.  I'll be running the #'s and proceeding from there. 

Much appreciated for helping me keep the stache growing.