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 Post subject: Life Insurance Policy On My Parents
PostPosted: Thu May 03, 2007 12:45 pm 

Joined: Wed May 02, 2007 8:28 pm
Posts: 11
My mom keeps trying to get me to purchase a life insurance policy on my father. She keeps telling me what a good safe investment it is. I dont know anything about it and dont ever hear anything about it. My question is if it is such a good investment why dont more people do it. My dad is fifty three years old a non smoker and in very good shape. 5-11 195. Any information on this topic would be greatly appreciated. Thanks.

Luke


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PostPosted: Thu May 03, 2007 6:13 pm 
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Joined: Thu Apr 05, 2007 4:19 am
Posts: 395
Location: New Jersey
I'm assuming she is referring to the cash value of the policy (as opposed to thinking your dad will die soon). Although I'm not quite sure why she would recommend your dad be the insured rather than you because the insurance cost would likely be higher for him. Anyway, cash value policies were much more desirable when other tax deferred investment vehicles were not available. Now, with IRAs and 401(k) plans providing tax advantages at a lower cost, life insurance as an investment has become less popular. Are you already making the maximum contributions to your IRA and employer plan if you have one?


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PostPosted: Thu May 03, 2007 6:42 pm 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
If you don't need the insurance payout part (ie, no kids, kids all grown up, spouse makes plenty of money, etc), then it's a poor deal because you are paying a lot of money for the cost of insurance part -- especially for an older person.

For somebody who needs life insurance, a cash value policy could be an ok deal if you find a policy with low commissions/expenses -- after you've completely maxed out your 401k/roth ira/ira/hsa options. If this is the case, older can be better because that increases the IRA max contribution limit allowing you to overwhelm the non-cost of insurance fees.


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 Post subject: So how does it work
PostPosted: Fri May 04, 2007 8:53 am 

Joined: Wed May 02, 2007 8:28 pm
Posts: 11
Like I said I am almost completely ignorant on the subject. This is my general understanding of it. I purchase a policy on my dad naming me as the beneficiary. Lets say we get a 500K dollar policy and the premium is 300 dollars a month. So I pay the premium and when he dies, as morbid as that sounds, I would be the one who gets the 500K. Lets say I buy a 40 year policy at 300 per month thats an investment of $144000 with a payout of 500K. So essentially I profit 356K. Now I see the point that 333 per month will get you to your 4k max out on a roth IRA but if I had extra money after I max the IRA and Employee 401k is this a good option for my money or would i be better off just dumping left over money in a solid 12% historical return mutual fund. The idea of life insurance seems sound especially if my parents have debt when they die which could be passed on to me. What do you all think? My parents are not financially fit, have no money for retirement and no existing life insurance on their own. I just cant help but think that I am missing something. It seems like a good deal but if it is than why dont more people do it?

Luke


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PostPosted: Fri May 04, 2007 9:25 am 

Joined: Thu Apr 05, 2007 6:27 am
Posts: 106
Location: USA
Did you cosign on any of their loans? Because otherwise their debt will NOT be passed on to you.

If you want to keep their house rather than selling it to pay off the mortgage, then maybe some insurance might help. But frankly, it sounds like that's a rationale for them buying policies on each other, not for you getting one.

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 Post subject: Re: So how does it work
PostPosted: Fri May 04, 2007 10:43 am 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
luke52985 wrote:
Lets say we get a 500K dollar policy and the premium is 300 dollars a month. So I pay the premium and when he dies, as morbid as that sounds, I would be the one who gets the 500K. Lets say I buy a 40 year policy at 300 per month thats an investment of $144000 with a payout of 500K. So essentially I profit 356K.


If you contributed $300 a month to a taxable account for 40 years, 10% annual return would give you roughly 1.3M after taxes. (assuming 2.5% dividend yields, 22.5% state+fed tax for qualified dividends, etc, etc, etc)

356K sounds like a huge number -- until you actually put the numbers into a spreadsheet. This is where insurance companies get people -- the general population do not understand the power of compounding returns and hence don't realize that the insurance company pays out 30% of the profits from the monthly contributions.

Most people don't do it because they spend more than they make and don't have money for neither investments nor insurance. :)


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PostPosted: Fri May 04, 2007 11:34 am 

Joined: Mon Apr 23, 2007 7:03 am
Posts: 62
Location: Tampa, FL, USA
One other problem you face is insurable interest. The owner of a policy has to have an insurable interest in the insured. You have to demonstrate a reason why their death has a financial impact on you, and that you would be negatively impacted by their death.

Otherwise, everyone over 70 would make a fortune letting investors buy insurance policies on them for a fee of say, $10,000. The investor pays the premiums and then when they die, gets the payout.

Also, underwriting would look at your dad's income and investments, an total insurance he has before deciding if they would write a 500,000 policy. Again, to prevent fraud.

So, wise investment or not, you might not be able to do it.


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 Post subject: Thank You
PostPosted: Fri May 04, 2007 3:31 pm 

Joined: Wed May 02, 2007 8:28 pm
Posts: 11
I really appreciate all of the information. I knew there had to be something that was missing. I guess if it sounds to good to be true it usually is. Thanks for your help all.


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