Reader Question: How Much Life Insurance Do You Need?
Published on - February 26th, 2010 (Modified on - February 9th, 2012) (by J.D. Roth) This is a guest post from Sanford Ellowitz, a New York State licensed insurance agent. He has over 25 years experience in the insurance and financial services industries. He’s also a Certified Financial Planner and a Certified Employee Benefit Specialist.
Penny recently wrote with the following question:
I’m interested to find out how one sets out a financial plan for life and how much insurance does a person really need because there are so many insurance plans, some are regular savings, some are a combination of investment linked insurance. How much does a person really need and what type of insurance does a person on a budget need the most?
J.D. asked me to write about this since he isn’t an insurance expert himself, so I’ll give you some ideas about how much and what type of life insurance you need, but first let’s start off by helping Penny set out a basic financial plan for life. Once you get some planning done, you’ll have a better idea of your life insurance needs.
Starting down the winding road
Think of a financial plan as a roadmap for a life-long journey. Your starting point is where you are financially right now. Begin by listing all your assets, such as the equity in your home and your savings accounts, and then subtracting what you owe, like the balance of your mortgage and credit card debt. This will give you a good idea of where you stand.
Once you’ve figured that out, think about your future obligations, such as getting your kids through college, saving for a comfortable retirement, achieving your goals, and making dreams a reality. You can find online savings calculators to help you estimate how much you’ll need to save for each of these, from a trip around the world to a little place on the beach to spend retirement.
Where does it all go?
Next, it’s time to gather all of your bills for the last few months so you can see where your money goes. This should include everything that you’ve spent money on — period. Be honest about any seemingly small expenses, and make reasonable estimates. You may be surprised to find out how much you’re spending on things you may not need, like eating out or your daily espresso habit.
Make a budget that includes enough savings to meet your obligations and goals, and — this is the really important part — stick to it.
Insurance is your contingency plan
When it comes to insurance, first you need enough to at least cover your obligations in case something happened to you tomorrow — that’s your base line. From there, it’s time to look into the future and prepare for what’s coming down the pike. Don’t underestimate how much you need. If your kids will be starting college ten years from now, you need to cover what it will cost then. (And it’ll probably cost a lot more than it does now!)
After that, you can decide what type of life insurance is best. Term life insurance is the cheapest, but it’s exactly what it says it is. If you get a term policy for 20 years and find that you need coverage after that, you’re out of luck. You’ll have to apply again, when you’re older and maybe not as healthy. Also, if you outlive the term of your policy, you don’t get anything back. Betting against your own longevity to save money may seem like a good idea now, but you might end up kicking yourself — or worse — down the line.
Permanent life insurance, which comes in different flavors (such as universal, variable, or whole life insurance) provides coverage for as long as you live, so you know there’ll always be a payout. Each has different savings features and can build up cash, which you may take or borrow against. The same coverage will cost a lot more than term life insurance, but you can count on it always being there.
Your bottom line for life insurance
Since Penny is on a budget, term life insurance sounds like the way to go — right now, anyway. She should make sure she has enough coverage for as long as you need it. Later, when her situation changes and she can loosen her belt a little, she may want to get some permanent insurance. At that point she’ll be able to take full advantage of its savings features, as well.
Remember, insurance is there for when things go wrong. It might mean the difference between putting your kids through college and putting them up to their eyes in debt, if something were to happen to you. It’ll be important for you to keep remaking your budget and comparing insurance plans as things change in your life, as they always do. Don’t worry, though; it gets easier every time. Just remember that insurance is your way of playing it safe, no matter the odds.
J.D.’s note: I’ve done more reading on life insurance since I first asked Sanford to answer Penny’s question. I actually think term life is the best choice for most people (but not everyone). There’s certainly no shame in taking out a term policy. If you think you might want permanent insurance down the road, look for a convertible term policy, which will let you switch over.
This article is about Ask the Readers, Insurance
SEARCH FOR RECENT ARTICLES
Good read. Thanks.
loading....
Wow. Lots of folks here bashing insurance companies and agents. Anybody here received a big tax free check from one as a beneficiary? Perhaps you don’t want life insurance, but did you consider that all the cash you save in a stock investment or so-called high-interest savings account (i.e. saving the difference) is going to be taxed and taxed upon your death? How much will really be left? Life insurance you buy is never for YOU. You aren’t the beneficiary. I’m investing in a tax free gift for my beneficiaries. It’s not money for me. A life insurance policy provides leverage – where else can you pay such a small amount to provide a big tax-free payout down the road? I consider insurance companies a necessary evil in order to obtain this leverage for my kids. I wish I could convince my MIL to consider a single premium whole life policy with cash she doesn’t need. As it is – much of what she has amassed over the years will go to the government in taxes. It’s just a big number on a bank statement now, but upon her death it will turn into a much smaller number distributed to her kids. With insurance it could stay a big number.
loading....
what a crock…where is the beneficial “savings feature” of a whole life or hybrid policy that you couldn’t do on your own and probably with better results if you put the money you would have contributed into whole life or hybrid policies into your own investments? There are very narrow cases where whole life or hybrid could be a better option; however, for the masses, you are better off getting term level and investing what you would have paid into your own investments.
insurance isn’t your contingency plan, it is “a” contingency plan out of several you should have, between emergency funds, retirement funds, college savings, etc.
I also find it amusing how people define “need” when it comes to insurance, especially life insurance. things like the cost of college, spa weekends, or 10,000 bubble gum balls per year are not needs they are wants. I can understand that people would want to include all sorts of things; however, the basic premise when you are trying to optimize your budget is to not overspend on over coverage for your insurance “needs”. This means, you should be covered for enough money to cover the income that will be lost by you being dead to maintain expenses (not necessarily lifestyle), and/or training/retraining your surviving spouse to make up for the lost income and pay the bills during that time. Notice I didn’t say anything about paying off the mortgage, other debts, or kids tuition (yes, college tuition isn’t a need, it’s a want), because that would suggest you are going to pay more insurance than you actually “need”.
Now if you “want” to buy more coverage than you “need” to cover paying for other things, then by all means increase the amount of insurance coverage. Just don’t be under the delusion between “need” and “want” when it comes to life insurance.
loading....
I agree that this post is close to worthless in terms of useful information. An ad for insurance salespeople in the guise of a post. Not up to your usual standard, JD.
Most particularly, I am annoyed that once again a so-called “expert” in this field has failed to point out that most families with minor children will qualify for social security survivor benefits, which can go a long way toward replacing the lost income of a deceased spouse. In my family’s case, the estimated SSI survivor benefit (which is included in your annual SSI summary statement) for either me or my spouse and our kids is actually more than our respective take-home pay (since we max out our retirement accounts). Granted, these payments only last until the children reach age 18, but they can be a significant amount, and certainly mitigate the need for expensive insurance policies.
I have posted a similar comment before either here or on TSD — wish someone would pay more attention to this issue. I can’t remember seeing it come up in most discussions of life insurance issues, and if you ask me that is a serious gap in the discussion. If you want a guest post on this topic, I would be happy to draft one. The SSI survivor benefits I got starting at age 15 (when my dad died) went a long way toward paying my college expenses (my mom and I mostly lived off of her benefit), so I have direct experience with this issue.
loading....
First of all, you should never confuse life insurance of any type with an investment. Life insurance should only be bought if someone depends on you financially and they will be drastically impacted by your death.
When determining the type of insurance, you have to weigh out your budget, how long you need the coverage, and the purpose of the insurance. Term is cheaper because it’s insuring against the chance of your death. Whole life insures against the certainty of your death. That is why it is expensive. Not because insurance agents make a lot of money. It is because the insurance company knows that it will be paying out at some point…Is car insurance expensive because salesmen get paid? How about any product where salesmen earn a commission???? No… They are expensive because of what they are insuring against and the likelihood of a payout. Any insurance product could be made cheaper by removing commissions but that is not likely to happen for most products we as consumers purchase. Do not base your decision on how much you think your agent is making. Buy what is best for you.
Moving on… As for the amount, you have to determine the amount your dependents would need to continue their life normally. For all you people that think life insurance is waste of money, you probably don’t know of anyone that has had a family and died at a young age. It is devastating on every level…How many benefits/fundraisers have you been asked to contribute to for someones untimely death? It’s horrible to think that someones spouse has to try and get by with the little amount they can raise at an event. Don’t be so selfish and get some insurance to protect your family.
loading....
I generally find this website to have very useful information, which only makes this article more dangerous. Someone might actually believe it!!!!
Term life insurance is the only financially-sensible option. If you would like to invest, you should independently research the investment, not buy whole life insurance.
Also, as others have mentioned, it is irresponsible to discuss the amount of life insurance that is necessary without mentioning that the answer is always none if you don’t have dependents.
loading....
This is a great article. A smart and wealthy person always finds protection for himself. To me, you should be clear about the purpose of having an insurance – to get protection. If you’re into savings/investment/earning, use other products. There should be relatively clear line between these financial instruments.
Personally I have term life insurance from my company, which offers protection for my family (parents specifically). If I had no dependent though, I wouldn’t get an insurance now (although it caused very little). It all boils down to your individual needs and risk tolerance, so stay true to yourself!
On a side note, I believe people should know exactly what different types of insurance mean (universal/variable/whole life), before you can make an informed decision. Don’t rely solely on your insurance agent’s words since there’s conflict of interests. After all, you’d be paying thousands of premiums over the long run. It’s just like buying a car, you wouldn’t just listen to the car dealers, would you?
loading....
#52 Dave: There is no estate tax this year. Last year there was only an estate tax on estates at least worth 3.5 million. Next year it may be set at 1 million, but congress will probably push it to a higher number again. The tax advantage is only something to think about when dealing with large estates.
loading....
I had always heard that 5 times your annual salary was a good number to have.
Of course, if you’re single, then I wouldn’t have it at all. Except for maybe enough to cover your funeral.
loading....
Dave- you would be better off getting your MIL to a good estate attorney than having her pay out for life insurance.
loading....
Wow! Pretty strong opinions about how wasteful it is to buy permanent life insurance. This could be a great post if you really wanted to learn something about life insurance. I once heard that less than 1% of all term policies ever pay out a benefit. Term insurance only pays out if you die and most people (99%) actually outlive their coverage. Term insurance is a great product to protect against dying too early but not living too long! For many people, especially those who are young and in good health, it is a great product. In fact, its greatest value is realized if you die the day after you place the insurance inforce. But what happens if you do live too long?
Do you have car insurance for auto accidents or homeowners insurance if your house burns down? If your house doesn’t burn down, if you don’t get in an accident, how come the insurance company never gives you any of the money back? Where is the value in that? Term insurance works the same way. It is protection against the most unfortunate of events. You just have to die in order for your loved ones to collect. In most basic situations, for protection against an early death, term insurance will fill the need.
I guess, if I bought term, I could invest the difference and get a tax deduction by making a greater contribution into my 401(k) or maybe I could fund a Roth IRA. If I’m married, my wife and I can put $10,000 into a Roth (until 2010, only possible as long as our income is below a certain level) and get a benefit that is income tax free. But what if I had an extra $50,000 or $100,000 a year to invest? Is there a way I could get that much money into a savings vehicle that would go to my heirs income and estate tax free? Could I get that much money into a investment that provides tax-deferred growth AND will pay out a stream of income that is tax-free? What type of policy is purchased by business owners, high-income professionals, professional athletes and anyone else who is wealthy?
Have you ever borrowed money and paid interest to a bank? Did you know that with a properly structured life insurance policy you could borrow from yourself, pay yourself back at interest and have the death benefit and cash value of your contact increase while you were doing so?
The normal reaction of most people who will read this response will be to try and tear it apart piece by piece because permanent life insurance is a lousy investment. You will miss the point. Permanent life insurance isn’t an investment. It is a tool. A very useful and powerful tool that has been used for years by people who understand its value. If you really take the time to learn about it you will see what I mean. Of course, you could always visit numerous finance blogs and say “Buy term and invest the difference”.
For the record, I am not an insurance agent, I don’t have a blog, book or website. I’m not trying to sell anything and I have no financial interest whatsoever in anything you do or don’t do. I just know an awful lot about the real value of permanent life insurance. It is complicated but not impossible to learn. A lot easier than puts and calls, margin accounts, options, CDO’s etc. Don’t bash what you don’t understand.
loading....
One point that hasn’t been mentioned. If you’re looking for term life insurance, you can talk to sales folks that directly represent the insurance companies, or you can talk to an independent broker that will get you quotes from many companies. Working with a broker can be worthwhile, particularly if you’re not young and healthy (and thus probably not going to get the “preferred” rate.)
For example, I’m 46 and a type 2 diabetic. This generally makes it much harder to get life insurance. As it happens, my diabetes is very well controlled, and some insurers are willing to take this into consideration while others aren’t.
I had $300K in group life through my employer, but I was maxed out, at an amount that was less than the typical recommendation of 6-10 times your annual income. The only advantage of this policy is that it didn’t require a physical. I wanted to up my insurance to $500K. So I found an insurance broker who helped me to get a 20 year term policy at a fixed rate that was only slightly higher than what I was paying for $300K of group life (and the group life rate would have gone up each year as I got older!)
There were several companies that didn’t want the business (because of my medical condition) and several others that gave widely varying price quotes. Shopping around was definitely worth while.
loading....
Steve@31 – great post, much better perspective that the actual article.
It always amazes me at how many people have some type of life insurance that don’t actually need it. If you are truly on a GRS path and have killed your debt, built your savings you probably have little or NO need for life insurance. I haven’t had life insurance since I was 35. Instead we lived completely debt free and had savings for the ongoing expenses. Use Steve’s formula and get an accurate number and as one poster said – stop putting in wants, cover the basic needs – anything more is a waste of money!!
Finally, as another said, life insurance is a TERRIBLE investment. Never, ever, never, buy a form of life insurance as an invesment. Buy a TERM life insurance policy from a reputable company and wisely invest the balance you would have put in one of those riduculous “permanent” policies that only a sales person would recommend. You’ll have much, much more at the end of the same time period!! MUCH MORE!
loading....
Unfortunately Bear, you miss the point. Life insurance isn’t an investment. It was never meant to be one. Life insurance is a tool, a financial instrument. Used properly, it can arguably be the most efficient financial instrument available to a person. First and foremost, life insurance provides protection against the risk of dying too soon. What happens to the remaining survivors in a family if one of the primary breadwinners dies before the family has accumulated enough financial capital? The family can suffer a severe financial hardship. Life insurance provides protection and term is usually the most affordable option for people starting out. People buy term because it is the most affordable coverage to protect against dying too soon. In fact, the best time to put a life insurance policy in force is the day before you die. Unfortunately, that is easier said than done.
From an insurance company’s perspective, term life is one of the biggest cash cows around. It has been said that approximately 1% of all term policies actually pay a benefit. That would mean that around 99% of all term policies purchased never pay a benefit to the beneficiaries named in the contract. Sounds like a good deal for the insurer, not the insured. If you think about it, there are numerous reasons why term policies lapse before paying a benefit.
Regarding permanent insurance, learn about what it can do if you really understand it. What is the reason a person would willingly pay $10,000, $50,000, even $100,000 a year to purchase a permanent life insurance policy? Try to resist the urge to simply dismiss something you don’t really understand. Instead of saying never, ever buy permanent life insurance; ask yourself why it had value. Most people dismiss it before ever learning what it can do. Long term, a GOOD dividend paying permanent life insurance policy is a powerful tool that provides tremendous financial leverage for the policyholder.
Most people think a Roth IRA is a good investment? How much money can someone put into a Roth IRA on an annual basis? $5000 a year under age 50 and $6,000 if you are over age 50. With permanent insurance you can put in 10, 20 or even 100 times that amount if the contract is structured properly. All the money grows tax deferred and can be paid out to your heirs income and estate tax free if you want it to. You can also pull out a stream income and never pay a dime in income taxes if you use permanent life insurance properly. Life insurance is flexible, highly liquid and even stock market proof if you buy the right kind.
For the record, I am not an insurance agent. I don’t have a link, blog or website. I don’t care what people do or don’t buy. I just happen to know a little more about life insurance than the average consumer. Everyone knows that insurance companies are huge lobbyists. Why is that? Is it possible they created something that savvy business people and knowledgeable professionals have been using for years? Educate yourself!
loading....
Has anyone asked *why* life insurance proceeds are generally non-taxable? A famous Supreme Court found that the proceeds represent the “return of a deliberate overcharge” and thus was, in the aggregate, a return of policyholders’ money.
Someone mentioned a neighbor, an insurance agent, who uses universal life as an “investment”. Obviously, if you are not paying the extremely large sales commissions, the returns are much better…
The fact remains that a buy term and invest the difference strategy will yield a higher payout at any age, if implemented properly.
loading....
While I do agree that in some very limited instances, a whole life policy can be of some benefit to certain consumers, the vast number of people who would be getting their advice from a personal finance blog titled Get Rich Slowly would not find a benefit. Term life insurance is the better, more financially wise choice for probably 99% of all people who need life insurance at all. As other posters have already stated, there are many people who don’t need any life insurance. If you are single, married with no children, or if your children are no longer dependent upon your income…then you may not need to purchase any life insurance.
For all those saying that the naysayers of whole life insurance just don’t understand whole life insurance, I respectfully say – bullc***. Lots of us do understand how whole life policies work and we also understand that if you have enough money for a whole life insurance policy to perhaps make any sense – there are also numerous others ways to protect and pass down your assets (tax-advantaged) that don’t necessitate buying products from someone who doesn’t even have a true fidicuary responsibility to you and makes their money by commissions paid for selling whole life.
If anyone reading this thread thinks that they have enough assets to make whole life insurance worthwhile..then let me suggest that the person/people you should be talking to about these issues isn’t a insurance *salesperson*, but rather a reputable estates& trust attorney, as well as a tax attorney and/or accountant. You will pay those people for the intellectual services they provide and in return they can help you make sure that your estate is protected from as many taxes as possible, and that it is preserved for the beneficiaries of your will. If a reputable trust and estate attorney tells you whole life might be an advantage, then it might be worth investigating. But a salesperson telling you that – well, they are trying to sell you something, whether you need it or not. And if you are not willing to pay a trust and estate attorney an hourly rate to go over your financials to craft a way to make sure your money goes where you want it after you pass – then I have to ask whether you have enough money to really worry about these issues. The several hundred to a few thousand of dollars that you would probably pay could potentially save you tens of thousands of dollars in premiums paid into whole life and much more than that to be paid in estate taxes.
JD, I really would recommend that you see if you can find a Trust & Estate lawyer willing to comment on these issues, a Tax Accountant or someone else with those type of credentials for further discussion on this topic. Or barring that – perhaps provide some links from legal publications regarding these issues and the academic articles that are produced fairly regularly for difference legal and tax publications. I think a salesperson (even with the lofty title of “Certified Financial Planner) isn’t the best person to provide up to date, unbiased information regarding estate planning. They have two methods to discuss with most people – selling term life and selling whole life. There is more out there than just that, and more ways to skin this cat.
loading....
Some people are not a fan of life insurance, especially whole life or universal life, but I am.
Number one, it is a good tool for diversification. Granted it may not be the best, but you are getting cash value and you have life insurance. After usually 10 years, it will pay for itself and still build a cash value, so you do not even need to keep paying if you do not want to.
As for how much you need, it depends on your lifestyle and age. If you are 55 and have $2 million in the bank, it may not matter as much. But if you are 25 with a wife and 2 kids, you probably need enough so they will be situated for awhile.
loading....
It’s unfortunate to see the attitude, “Buy term and invest the difference” being applied with such broad brush strokes. For less affluent investors, this may be true. But read any trade magazine published for doctors, lawyers, CEO’s, and other industries of affluence and do you know what you will invariably find? Permanent, Universal, and Whole policies are by far the best tools. Not so much for the person struggling to even max out their IRA’s each year, but there is a definite audience for whom the “buy term and invest the difference” adage is poor, poor advice.
In response to #27, the reason you find so much pro-term and anti-permanent/whole “propaganda” on financial blogs is because the writers and audience, in general, don’t have the kind of discretionary investment capital that people of higher wealth do. This is by no means a knock on anyone who isn’t “wildly rich.” It’s just a statement of fact.
The high costs of permanent policies, when you’re dealing with a financial advisor who’s worth more than the stock his business card is printed on, far, far outweigh the capital gains and other taxes you’d spend on cashing out any other taxable investments. As has been brilliantly stated by Paul in comments #61 and #64, permanent and whole policies are tools.
Many of you are throwing statements out there like:
#50 “insurance agents want you to think that universal life is a good investment. However, in reality they’re a very poor investment choice. The fees are high and the returns are low. If the insurance is not the point, then invest in a low-cost index fund. You’ll come out ahead in the end.”
(Not only is this statement very narrow in its applicable scope, but it’s usually very wrong.)
#53 “what a crock…where is the beneficial “savings feature” of a whole life or hybrid policy that you couldn’t do on your own and probably with better results if you put the money you would have contributed into whole life or hybrid policies into your own investments?”
(Again, a statement that either doesn’t understand or fails to recognize the highly taxable nature of most traditional investments. For the short term, those taxable investment vehicles are great. But they can be of the highest cost as a long term, retirement vehicle.)
#56 “Term life insurance is the only financially-sensible option. If you would like to invest, you should independently research the investment, not buy whole life insurance.”
(Laughably false. Probably true for a lot of people, but to make a blanket statement like this is irresponsible and damaging.)
#65 “The fact remains that a buy term and invest the difference strategy will yield a higher payout at any age, if implemented properly.”
(While this can be true sometimes, again, it’s not a “fact” at all and irresponsible to pass as one.)
Finally, it’s been said (by #2) that “Asking an insurance agent to advise you on insurance needs is a bit like asking the fox to lay out the security plan for the hen house. Only the fox might have a conscience.” Should we then stop seeking counsel from our local butchers, florists, gardeners, contractors, etc.? While the analogy (like all analogies) breaks down at a certain point, there’s no reason to believe all insurance agents never have any interest in the general wellness of their fellow human. Many are wonderful, compassionate, honest people, who make a living by helping their clients make smart, savvy choices. With that said, I wouldn’t advise buying many forms of insurance from an insurance agent – I’d go the route of a trusted, highly-proven financial advisor. They usually understand the investment (and investment tool) side of the vehicle a bit more. But enough of this general distrust and loathing of insurance agents, real estate agents, or other service providers because of an invented conflict of interest.
For the record, I am not an agent. I am someone who has used permanent policies as a tool for over 3 decades. I’m now close to 60 and about to retire with over ten million in tax-free investment payouts from IRA’s, SEP’s, and permanent insurance policies. The absolute only reason I disclose that information (while, thankfully, remaining anonymous) is to illustrate that many of the misunderstandings regarding the value of permanent and whole life insurance as a tool in a diverse, long-term portfolio are false and prohibitive. Talk to a financial advisor you trust. Ask him about his clients, his achievements, his track record – make him justify his very professional existence.
He’ll/she’ll be ecstatic to if they are worth the relationship, or will refuse or struggle to if they are not.
(And a big thank you to Paul at comments #61 and 64 for the useful posts. And thank you JD for a continuing diverse look at this, and other topics. Don’t get ruffled by naysayers – stay diverse in your info and open-minded in your education and educating. Thank you for a great blog that continues to teach me about building wealth!)
loading....
“..but read any trade magazine published for doctors, lawyers, CEO’s, and other industries of affluence and do you know what you will invariably find? Permanent, Universal, and Whole policies are by far the best tools.”
Uhh, IMO, that is starting to invalidate your argument. If you are rich you can get richer by these vehicles, but if you are average… and you are in the bottom 98.5% of the population they might not be as useful.
“As has been brilliantly stated by Paul in comments #61 and #64, permanent and whole policies are tools”
If you are rich and financially savvy in the first place. A porche is a great tool to get to one place to another in style..if you can afford it.
“If the insurance is not the point, then invest in a low-cost index fund. You’ll come out ahead in the end.” (Not only is this statement very narrow in its applicable scope, but it’s usually very wrong.)”
Really? Define “wrong”. I would like to see hard data on this one saying that a perm life insurance beats an index fund the length of an insurance term at a reasonable cost for some NOT making over $72k a year (for an average income in the US) way more often than not to take the risk.
““Term life insurance is the only financially-sensible option. If you would like to invest, you should independently research the investment, not buy whole life insurance.”
(Laughably false. Probably true for a lot of people, but to make a blanket statement like this is irresponsible and damaging.)”
Soo..you just invalidate your own blanket statement saying that it’s laughably false then saying it’s probably true for a lot of people. Which is it?
“With that said, I wouldn’t advise buying many forms of insurance from an insurance agent – I’d go the route of a trusted, highly-proven financial advisor.”
I completely agree. A trusted third-party can help navigate those kinds of issues.
“But enough of this general distrust and loathing of insurance agents, real estate agents, or other service providers because of an invented conflict of interest.”
I disagree on this one though (well, not the loathing part). There is a reason why “caveat emptor” has survived as a phrase for millennia. I rather be wrong a few times with people because of my distrust (and still have my funds) then be always trustful and lose my shirt. It is a balance though.
“Don’t get ruffled by naysayers – stay diverse in your info and open-minded in your education and educating. Thank you for a great blog that continues to teach me about building wealth!)”
I agree about diversity but I don’t get the naysayers part. I can say the same for your opinions naysaying the naysayers
Even though I am nitpicking it’s great to hear from someone who’s had success with term life.
loading....
I can appreciate your strongly worded, if not elitist, sentiments Wesley (Poster #68). However, this post did not give enough information to enable the GRS readership to make an informed decision; direct them to other informational resources; or challenge the deeply entrenched belief that term life insurance is the best route in virtually all cases. Deciding on what type of life policy to buy and how much is a nuanced decision. No disrespect meant to the author, but this post is overly simplistic. A great place to start would have been to discuss all of the life insurance products on the market and their pros and cons. Give a general rule of thumb in terms of calculating how much life insurance is appropriate. Discuss a variety of perspectives and theories, like self-insured, no dependents-no coverage, estate planning and tax-avoidance strategies. How large must your estate be or how much discretionary income should you have before you seriously consider whole life policies? You can gift $12K tax free. Also, it is critical not to link wealth with high prestige occupations, like lawyers and doctors, all too often those household are over-leveraged to the hilt with education loans. The days of giving deference to financial professional because of their title, certifications are over. I believe Ramsey said in TMM or was it Kiyosaki in RDPD-I can’t recall, whoever it was said enlist financial advisors who have the heart of a teacher – I wholeheartedly agree with statement. Madoff is the most egregious example, but no one should be given deference when they are handling some else’s money. Plain and simple – this post is kinda of just saying do permanent life insurance- it’s the best thing to do, the critical question is WHY!!!!??????? Show me, don’t tell me. Congrats on your success Poster #68, and I’m not being facetious-I would hazard to guess that you got there from being a critical thinker and having a spirit of discernment. That’s the place where all of us are aspiring to get to. I’m looking forward to GRS revisiting this topic in a more substantive way, there is enough information for a series, two or three posts. Last point in a rambling maybe even convoluted post – I’ve worked for two insurance companies, including State Farm and their cookie-cutter whole life policies were a joke. The policy holder gets fleeced and the agent merely parrots a carefully rehearsed sales pitch. Of course, the commission is richer and that was one of the motivating factors why the policies were pushed.
loading....
I must say that this was my least favorite post in following this blog daily for – how many years now? Three sounds right.
The post is far too short to cover such a complicated topic at any level which is useful; the article doesn’t clearly answer the question in the title; and the advice given doesn’t seem targeted to the *expected* blog audience here.
We just received a letter from our life insurance agent this week advising us that they think we are ‘greatly underinsured.’ They tried to talk us into much more insurance when we opened a policy two years ago, but quit trying to sell me when I explained how I came upon the dollar figure for us. We had just taken out a large business loan to expand my husband’s business. We purchased enough term life insurance on my husband to cover the loan obligation in full plus pay off our mortgage. We have no other debt. I work full time and make enough to support myself, especially if the mortgage was paid. We don’t have children. We don’t NEED more insurance. I think life insurance is a product that needs to be considered individually, and the ‘rules of thumb’ always seem to be skewed to benefit the insurance salespeople. I’ll be interested to read J.D.’s take on it in his book.
loading....
Great comments by both JLA (#69) and DreamChaser57 (#70). It wasn’t my intention to contradict myself, but thus is the nature of online commenting – proof reading is often at a premium
JLA, your first couple points (counterpoints) are right on. My whole point, which I must have failed to make very clear, is that for anyone making 6 figures annually (or close to) permanent and whole life insurance is a great option, often better in the long term than anything else (as long as you diversify). So you’re exactly right, JLA – and my intentions were to point out that that someone in that category of higher earners looking to do some research on their own could get a very wrong impression from many of the blanket statements that permanent life insurance is a fool’s choice.
I meant that term life insurance being “the only financially-sensible option” is laughably false in that as a blanket statement, it cannot be said. It’s the only financially-sensibly option for many people, but that’s not what was said. for 10% of the nation (at least) permanent and whole is a better choice.
#70′s statement, “I’ve worked for two insurance companies, including State Farm and their cookie-cutter whole life policies were a joke” interests me a great deal, mainly because I can see how that can be absolutely true. My financial advisor, way back in the day, was meticulous in setting up my policies, and he worked monthly on making sure they adapted to the economy. I would definitely not advise getting a permanent or whole life insurance policy from an insurance company, not because the employees are bad or deceitful, but because their hands are tied with the kinds of policies they can offer and maintain.
I find that a lot of the investment advice and counsel I read from Ramsey, Orman, and most financial blogs doesn’t apply as well to those that make a significant income. The average US household makes something like $45k annually and has $13k in consumer debt alone. So the popular advice out there (after you get out of all that high interest debt) is geared towards that kind of audience. But what happens when you’re making $100k a year and have no debt? Your game plan changes a lot at that point, including the investment vehicles that best suit your financial situation.
loading....
#Poster 72 (Wesley) – thanks for your feedback, your post really clarified your views. if your schedule permits and you are so inclined, maybe you can author a guest post to GRS about why whole life options are better for high income earners with little or no consumer debt. by the way the other major insurance company i worked for was AIG – but I did not even feel like going there, LOL
loading....
For Paul@64 – trust me I have researched this topic exhaustively and stand whole heartedly by my statements. As far as it not being an investment – really, if semantics are your defense for foolish uses of your money feel free to keep spending it away any way you’d like on the “tool”.
For Wesley@68 – please don’t insult us, having made more than most doctors, lawyers, CEO’s (even having been one) I know what real wealth is and am very happy to enjoy an extremely pleasant financial lifestyle. As someone who has far more money I am confident in saying that I have accumlated so much more by making decisions just like this one. I actually do the research and fortunately have made decisions that are based on detailed analysis, not the foolishness that an insurance salesmen throws in front of me. In addition, I have reviewed that decision repeatedly over several decades and everytime have come to the same conclusion that the wolf in different sheep clothes is still the same skulking wolf looking for his next financial victim. There are far more advantageous ways for someone like me that makes multiple six figures, owns several businesses, etc., etc., to save money on taxes than these foolish investment/”tools.”
I’m disappointed that JD chose a salesperson to have this discussion and have to agree with several posters that this would be much better handled by a Trust/Tax Attorney.
loading....
“So you’re exactly right, JLA – and my intentions were to point out that that someone in that category of higher earners looking to do some research on their own could get a very wrong impression from many of the blanket statements that permanent life insurance is a fool’s choice.”
Ahh, good clarification. Hopefully when I get to the point of significant annual wealth in the future I’ll revisit these other options with a trusted financial advisor and see if it makes sense for myself and the family.
loading....
@68, you should put what I wrote into context. Even with the tax treatment, you could more than make up by investing what you would have contributed in a whole life policy to a real investment or investments. There are plenty of ways to shelter the money in various ways to beneficiaries. Life insurance isn’t an investment. Folks who believe so are trying to sell you those policies. I have never seen any insurance provider omit the term “investment” when referring to hybrid or whole life policies. It’s a very costly non-”investment” that could be invested far cheaper elsewhere.
as i mentioned before, there are very narrow reasons for whole life and hybrid over term life, especially when you are cost prohibited out of a whole life policy.
loading....
Most of the problem with the vast majority of whole life products out there is not the basic idea, but in the application. See, when life insurance companies were first founded, there was only whole life. Also, the companies were mutually owned, that is, the policy holders were the owners of the company. The intent was to have people pool their money together and essentially, have new premiums plus the investment of old premiums pay the death benefits. The more money a company had, the more leverage they had with the money for investments, which means more profits for the owners – or policy holders – and therefore a well-performing whole life policy.
Whole life policies started to tank when companies began to demutualize, with a major push coming in the ’80′s and ’90′s. By doing so, companies now separated the owner from the customer. Now you have to divide the dividend between a person who wants immediate returns (stock holders) and a person who is mainly focused on a death benefit (customer). Additionally, that drives the company board to make riskier choices for quicker gains, since stock holders tend to look at quarterly earnings over everything. The mutuals don’t have this problem, because the policy holder’s priority is still the long term death benefit.
Check this website out: http://infinitebanking.org/. It is an independent organization detailing the rest of the possibilities of what you can do with a whole life policy but only when dealing with the mutuals. Not too many people understand this. But wealthy people do. Also, read this article from Forbes: http://www.forbes.com/2009/02/10/mutual-life-insurance-financial-adviser-network_0210_financial_planning.html written right smack in the middle of the financial chaos during Q4 ’08 and Q1 ’09. Again, no mention of stock company whole life products.
I will confess that I do work for a mutual life insurance company. We do sell boat loads of term, but when we show people currently that our whole life policies *outperformed* the stock market for the last ten years, well, the proof was in the pudding. More control, more power, more money for the clients over their 401(k)’s, IRA’s, Roth’s, SEP’s, pensions, etc. A quality whole life with a mutual company is not a matter of cost, it’s a matter of cash flow. And even with this great product in our arsenal, we still recommend the value of investing in the stock market. Diversification is essential.
I agree with everyone that just about every whole life policy the encounter out there sucks. People have no reason to believe me, at all. I suggest you find someone who has a whole life policy with any of the following mutuals: Northwestern, New York Life, MassMutual, or Guardian, and ask them if they’ll request an in-force illustration from their agent. Be fair – if they’ve abused their policy with tons of loans and surrenders, it’s hard to get a clear comparison to the same investment in the market. You can’t touch your retirement accounts (IRA, 401 (k), etc,) so look for one that has been left alone like an retirement account would. Also, go to http://www.thestreet.com/insurers/index.html There, you will find an independent rating for each of the above companies. Also, go to Moody’s, AM Best, Fitch, and S&P. Check out the same four companies’ financial ratings. You’ll be impressed.
Best of luck to all, and please buy what makes sense to you. Not bogus magical numbers like ’10-12% average’ returns in the stock market or non-performing whole life policies. And please DO THE MATH! You can talk averages all you want, but if you don’t look at what that means by testing the actual history, you’ll still be guessing. Period.
loading....
@Ivan The factor you neglect to mention is the large sales load even the mutuals pay to put new policies on their books. Sales commissions and administrative overhead are large, so any “investment” starts out in a hole. *Any* insurance product should be scrutinized carefully, whether from a mutual or a stock company.
Those who claim a whole life product is superior for the very wealthy are, unfortunately, largely buying into a shell game. In many cases, seeking to minimize taxes at all costs is, indeed, far too costly. There are tax advantaged investments available that still outperform any cash build-up in a whole life plan. The return on a whole life policy in the case of a beneficiary’s death, too, is fairly miserable–since, with a policy held for many years, most if not all the face value is simply the return of premium overcharge or “cash value.”
Let’s say, for example, you buy term insurance for current protection and begin an investment in a municipal mutual–a mutual fund that exclusively buys tax-exempt municipal bonds. Proceeds from that are also tax exempt, and you are not having to overcome the huge sales commissions paid to insurance agents for the costly whole life plans. Later, as the investment program becomes sufficiently large and the actual insurance needs diminish, the insurance coverage can be discontinued entirely.
loading....
I read this first 40 or so comments (which means no one will probably make it down to read this one, but so be it). A couple of notes:
1. One size doesn’t fit all. Term is a great product, but it is only effective for a term. When the term renews, the cost may be prohibitive if you still need it.
2. Life insurance, generally speaking, shouldn’t be seen as an investment. It’s protection for the family. “Term and invest the difference” has valid points, if you actually invest the difference (which many people, most of whom probably don’t read financial blogs, won’t do). There are tax differences as pointed out, but I digress.
3. Life insurance should be part of a broader financial plan. When discussing life insurance or flexible-premium annuities, products that are many time seen as “inferior” because there are other things that have the potential of higher growth, you can do both. Put “safe” money one place and put money you’re willing to lose other places. What’s your safe place? That depends on your risk-tolerance and your situation.
No one can post a comment on a blog saying any place where everyone should be putting money without knowing more.
4. You can’t always foresee future needs. Buying a 20-year term when you’re 25 is great. If you have a child at 40 and God forbid, you die at 46, what’s going to happen? Could you afford or qualify for another term policy? Will your assets be high enough to pay for a funeral, maintain a somewhat similar lifestyle for your family, give your spouse a little time to grieve and not add new constraints to your surviving spouse’s plan for retirement, etc.
Social security is great, but from having to live on it as a kid, your standard of living may have to drastically decrease.
5. According to Fool.com in a March 2002 article, the average funeral was just shy of $6,000, excluding cemetery fees. There are plenty of ways to go with cremation or quite a few cost-saving measures, but unless you’ve pre-planned a funeral or die after a long, terminal illness, many times your funeral will be planned by family who may be in shock, grieving, and not thinking at 100%.
6. Look at the life insurance company! Any company worth anything is rated by a number of rating organizations. There are “ethical practices” associations that certify insurance companies–on both their selling tactics and their claim settlement process. Price is important, but throwing away $X-25 to a life insurance company who, frankly, sucks is worse than $X to a solid, stable company. There are many different types of companies – stock, mutual, fraternals- each with various pros/cons. Before you buy, know the differences and what you’re working with.
7. Look at the product. Everything breaks down to term or permanent, but within both categories, there’s a lot of digest. Is it a par(ticipating) policy where you could be issued dividends? What’s guaranteed for how long? What happens if I die tomorrow, 10 years, 20 years?
8. A policy offered through your employer isn’t a sure bet. Take it into account when you determine your needs, but if you get fired tomorrow, you’re without coverage.
9. Not all insurance agents are the devil. A great agent who is worth his/her commission is one who will talk over with a family their needs, look at their situation and say “I’m impressed. You have your bases covered. You have these options with me, and talk them over after I leave, but good for you.”
loading....
@David, I agree with you on what @Ivan and other other insurance sellers forget to highlight. If you are going to pay $100 per month for a whole life policy as an “investment” it means something like $90 goes towards the life insurance and $10 goes towards the “investment” regardless of mutual funds or stock. That is an expensive investment if you ask me. You could spend $10 on level term life and $90 on your investments without loads and make far more that the “investment” feature of a whole life policy. Even if you take the “investment” feature, the internal rate of return for mutual life was around 4%, before fees/commissions/taxes/whatever. So tell me how something barely beating inflation is a stellar investment and reason to buy into what @Ivan is saying?
loading....
The real comparison for whole life cash value build up is to risk-free investments, CDs, money markets, high-quality munis, treasuries and AAA high-quality corporates on an after-tax basis (not stock mutual funds).
The other thing you have to look at is the value of a disability waiver of premium.
If someone buys a term policy, then plans to fund a Roth IRA using mutual funds, and then gets disabled a month later, will his broker come up with the money? Will his CPA? Will anyone on this board make up the difference for him by writing a check to his IRA every week? Anyone? (crickets).
Any financial “plan” needs to work under three circumstances: Whether the insured lives, dies, or becomes disabled. Any plan that doesn’t work under all three circumstances, funding all the family’s objectives, is not a plan but a gamble.
No family should go underinsured because they can’t afford everything in whole life. But permanent life insurance may well be the only component of an individual’s portfolio that self-completes in the event of a disability. Particularly where DI insurance is unavailable, or where college funding is an issue.
You also have to take into account the potential for liability… individuals in fequently-sued occupations, OBGYNS, for example, should NOT have non-retirement assets in mutual funds, because mutual funds in most jurisdictions are fair game for creditors. The protections afforded permanent life insurance and annuities are frequently far more generous.
Tim doesn’t know what he’s talking about. If he’s reading an IRR for mutual life insurance before taxes, that’s meaningless, because of the tax-free build-up in life insurance. He should be taking the tax-equivalent yield, which, depending on individual tax brackets and state/muni tax levels, is closer to 5.3 to 5.5 percent. Which is competitive with high-quality bond fund returns and superior to bank CDs.
loading....
I am single and have no debt except my mortgage, and I have ample cash and retirement funds to cover the contingencies in the event of my death. I also have life insurance coverage at work of 1 year’s salary. Is there a reason I might need more life insurance? I can’t think of one.
loading....
@Drew – A little food of thought – your insurance with work will eventually go away. Typically, when you resign, retire or are fired, you lose it. It may have worth it to have a small policy that would be available to you in such a case.
That being said, I’m not suggesting anything without having seen a more detailed needs analysis. You may be fully covered, but still things to keep in mind.
loading....
@Drew,
You might be right, for the time being. But things change as I am sure we all know.
loading....