Life insurance

[ILLMAS]

I need help, for the last 5 years I have had term insurance and I pay around $700 for $500K coverage, my agent called me yesterday to offer me a deal, I can convert $100K to whole life, and keep $400K term, however my payment for term doesn't change and whole life payment is $88 a month totaling to around $1,745.00 a year.  I was okay paying the $700 gambling on my own life, but now I don't know what to do, I was hoping someone that knows more can guide me to make the right decision.

 

Thanks

 

MAS

[Jack from Ohio]

I need help, for the last 5 years I have had term insurance and I pay around $700 for $500K coverage, my agent called me yesterday to offer me a deal, I can convert $100K to whole life, and keep $400K term, however my payment for term doesn't change and whole life payment is $88 a month totaling to around $1,745.00 a year.  I was okay paying the $700 gambling my own life, but now I don't know what to do, I was hoping someone that knows more can guide me to make the right decision.

 

Thanks

 

MAS

He is only looking for commissions.  Stay your course with term.

 

There are hundreds of better ways for investing your money than whole life insurance.

[JohnH]

_{Every time my agent suggests Whole Life, I tell him I'll consider whole life only if-and-when Consumer Reports changes their recommendations on the issue.  Same answer for annuities.}

[jasdlm]

100% agree with the two comments, above.

[michaelmars]

i like whole life in many cases.  What is your age, do you have children, how are you at savings, etc.

 

Many people can't save money but do pay bills when they get them.  In this case whole life is a forced savings.  When term runs out at age 65 or so, would you have enough savings at age 66 to support your wife, minor children etc?  $88 sounds cheap but what is the guaranteed rate of return? how fast will cash value build up?

 

Right after my second was born and spent a month in intensive care, I lost a whole tax season.  Now my wife needed a bigger car, I borrowed out $20k from the cash value and had free money to buy a car.  Also when applying for college aid, life insurance doesn't count.   My policy is old with a guaranteed rate of 6% so not only is it a good rate, after about 7-8 years of payments it became self paying and I no longer had to pay premiums.

 

I know all the arguments that you can make more with proper investing but one month you need new tires and skip the investment, the next month your pool needs a new liner and you miss the investment.   But getting an invoice in the mail gets paid.

[Jack from Ohio]

Cost benefit analysis will always favor term.

[MAMalody]

If you are considering whole life, the operative term above is guaranteed return.  May agents will show you what they have returned not what the policy guarantees. Personally I would lean toward term.  In fact, if you are okay with the extra expenditure you would pay for whole life, you can consider increasing the amount of term you are carrying or looking into a disabiltiy policy to go with your current policy.

[michaelmars]

Cost benefit analysis will always favor term.

I agree with this but again you need to consider other issues and whether or not you would need the insurance after the term expires.

[JohnH]

I've often asked insurance agents why insurance companies don't offer policies which build cash value for houses or cars. The principle is basically the same - you are insuring your house/car/boat, etc against its death. If policies which included elements masquerading as "investments" are a good idea for insuring our lives, why not for these other insurable entities? The answer (which the insurance industry will never admit) is that the reason for buying a homeowners policy or a vehicle policy is more-or-less a business decision. People weight the cost vs benefits and generally buy the best bargain. But insuring one's life becomes an emotional decision, so it's easier to sneak all these other elements into the decision.

As a practical matter, I agree with Michael that permanent insurance can function as a form of forced savings (although at very low rates of return). That's about the only positive thing I've ever been able to muster in its favor. But the tragedy is the fact that most young people wind up grossly uninsured because the premiums on the permanent policy are so exorbitant. Thus, they can't afford to buy the half-million or million dollars of coverage (or more) they actually need to protect their family financially during the critical years. So if an unexpected death occurs, especially if it is the primary breadwinner, the spouse and children often wind up impoverished.

The insurance companies compound the problem by paying miserly commissions on term insurance, but healthy commissions on the various forms of permanent insurance. Thus, it's very difficult for an agent to earn a decent income without rationalizing that permanent insurance is "better than nothing", or employing another one of a half-dozen excuses. This isn't illegal behavior by the insurance companies, but in my mind there's no doubt it is immoral.

[ADGFINANCIAL]

MAS, as a Life agent and planner I would need to know your age.  I usually do a 25,000 WL and $100,000 Term mix.  When the Term stops you have the WL for final expenses.  Also do you have a family or mortgage to pay off for them if you should die.  The Term amount could go up.  But as you get older the Term number will go down as your debts go down and the cost go way up.  But still you will need the WL.  I would think 25K would be enough unless your a very poor saver and believe me in my many years in business I've seen many.

[michaelmars]

in my case I will still have college age kids when my term runs out so I need a lot of whole life but I had the foresight to take it out at a very young age.

[Catherine]

Michael --

 

There are basically two reasons for life insurance (with reason number two possibly subdivided into parts A and B ).

 

1.  People depend on your earnings for their support.  This includes spouse (mortgage and car payments), and children (living expenses 'til self-supporting years, college/other educational costs).  Even after kids are out of college, if your spouse can't afford the mortgage payments alone, there is a need for insurance.  For this purpose, term is the best bang for your buck.  Even if the term you got years ago has run out, chances are you can replace that with a new term (and probably for a shorter term! - the kids will be done with school in way less than 20 years, yes?) for a fraction of the cost of whole life.

 

2.  Estate management.  Depending on the size of your estate and cash reserves, this could split to include final expenses.  Small estate, low cash --> small whole life for final medical and funeral/cemetery costs.  Bigger estate, especially if non-liquid (like a business or farm) --> enough to pay projected estate taxes.  In the middle --> some folks use whole life as a means of leaving an inheritance to their kids that they could not otherwise manage to scrape together.  (One agent I knew years ago sold lots of WL policies to folks who wanted to leave their kids a million dollars but knew they could never save that amount.)

 

So the first thing to think of is WHY you want/need the coverage.  That will tell you what kind you need.

 

Then you need to think amount.  

 

Assuming living costs -- how much to pay off that mortgage, and send the remaining kids to state (or private) schools?  That's what you want to get. Maybe round up a bit for final expenses.  

 

If estate planning or leaving an inheritance - that's a whole separate discussion, which should include an estate attorney, a financial planner, and an insurance agent. Don't forget to include consideration of long term care costs - those can kill an otherwise sound plan faster than you can say "Bob's your uncle."

 

Good luck!

[Randall]

I like the concept of insurance and having a term policy in a higher amount and a permanent policy in a lower amount. Your term policy premium is probably guaranteed for so many years. So how many more years is that premium guaranteed? Do you think you will need life insurance after that time? It also probably has a provision to convert some or all to a permanent policy without any underwriting. That provision has an expiration. So when is the expiration and how is your health if you had to go thru underwriting? These are things to consider. Permanent policies come in more than WL. There are ULs and VULs. You need to talk to your agent about the choices. With permanent policies in small amounts, I would not treat the policy cash value as something to tap into but rather merely a death benefit. Unless you have very large amounts of policy value, I would NOT borrow against it. It can and probably will come back to bite you with severe tax consequences.

The very wealthy utilize life insurance and annuities. But they can afford them and therefore and take much better advantage of the benefits. The rest of us have fewer choices and unfortunately, term is the way to go. And even then, too many have no insurance or too little even if it's term.

[easytax]

A lot of good answers here --- from both sides --- do not buy whole life, etc. etc. to have some for final expenses.

 

Real life case:  20 year term age 46 @ $745 yr.   covers all while kids, etc. till grown and on own, mortgage paid and so on.

 

    Year 5 - heart problems, etc.; year 10-11 supposed to have died several different time from "things" and put in nursing home to do so.

                            still have 5 years left on term.   --- by the way --- when you lose everything and become ward of state --- term does not count as asset as "no cash value", so you get to keep it.

 

Made it out of home, (God was good); digging out - but NO INSURANCE will touch me, so even with the "final events" coverage at $12-15 per unit will cost over $35 mo. for just a few units of coverage once my term runs out.      OR if I keep term - policy has guaranteed conversion clause --- it will only cost me $14,473 for the 21st year; $15,958 for the 22nd year; $17,572 for the 22nd year and so on.

 

I share this as even with a cost benefit analysis - you might want to consider that ---now, you can get something, whereas later you may not have options.

 

Using the "final benefit" costs the $88.00 monthly you mention for $100.000 coverage building some dollars; is just about 2 1/2 times the cost of my small few unit cost(units are typically 3-5 thousand - depending on final benefit company),  and --- you get a lot more.

 

 

Just a different perspective.