Whole life insurance policy

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moneyhoney
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Whole life insurance policy

Postby moneyhoney » Wed Jun 20, 2007 10:42 pm

I hear and read a lot about how term life insurance policies are much better than whole life--way more coverage for much lower premiums. Makes sense, if I were an adult looking to buy life insurance.

Well, my parents (this was a pretty big financial sacrifice for them at the time) purchased a whole life policy for me when I was about two years old. They were thinking this was a good move, since the premiums would never increase, the policy builds cash value, and would benefit my kids, if I decided to have any. Plus there is an option to purchase additional insurance ("OPAI"). I'm now in my early 30's.

So, here is what I have--a basic $50,000 policy, about $330 per year premium. Two additional policies, "OPAI"'s, $15000 each, about $175 annual premium for each. I borrowed a few thousand out of basic one, against the cash value, to buy a car. It has a 6% interest rate on that loan, and you only have to pay the interest each year. However, I pay $100-$200 per month toward the principal.

My question--considering this is a policy my parents paid the premium on till I was 18, and I now pay the premiums, is it a good idea to hang onto my whole life policies? Does the "whole life insurance is bad" argument apply only if an adult were considering it vs. term life?

Thanks for reading, this is a great forum, I should have gone to bed two hours ago but keep reading posts here...

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plonkee
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Postby plonkee » Thu Jun 21, 2007 1:09 am

Since I don't know too much about these I'll just ask some questions.

Do you actually need life insurance? i.e. do you have any dependents?

How much would regular term life insurance be?

If you invested the difference would it make more money for you?

What is the surrender value? (don't know if you call it the same thing over there)

I would ignore the premiums that have already been paid and concentrate on whether the deal that you've got is better or worse than getting term life insurance (if necessary) and investing the difference. At this point the premiums that have been paid are gone whether you like it or not just look at comparing cashing in the policy now and spending the premium money on replacement coverage/investments or alternatively continuing with the policy.
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Dylan
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Postby Dylan » Thu Jun 21, 2007 5:24 am

Life insurance should, IMO, be thought of first and foremost as insurance for death and less so as an investment. The first question to be asking is what periods of your life do you need to have that protection. For most people it is either to replace lost income if you die while in your earning years or to offset expenses like funeral costs or several years of child care that would arise at death. Most of the high dollar items like replacing wages and paying for child care are not permanent risks making term an affordable solution.

If you already own a permanent life insurance policy and are considering the OPAI, think of it like you are shopping for a new policy. A non-smoker, early 30s, in good health could probably get 10-20 times the coverage you mention for a 20 year term for the premium you were offered. How much insurance would you need if you died today, next year, or in five years? How much do you need if you die in your 70s, 80s, or 90s?

Consider this also, if you live to a reasonably old age, inflation will make your $50,000 death benefit about the equivalent to the cost of purchasing a 10 year-old, used Honda Civic today.

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Postby lostmind » Fri Jun 22, 2007 9:45 am

I don't know if I understand this right but...

You are paying $330 per year for a $50,000 life insurance policy?

I am paying $70/month($840/year, in cad $) for $500,000 x 2 (covers both my wife and myself).

50,000/330 = 151.51

500,000/840 = 595.23 (x2?)

I don't know if your policy delivers enough benefit.... jmho

moneyhoney
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Thanks for the replies!

Postby moneyhoney » Fri Jun 22, 2007 6:41 pm

The reply that got me most was that $50,000 won't be much, factoring in inflation, when I kick the bucket, which we all will someday.

I don't have any dependents right now, if my boyfriend and I have kids we'd like to adopt.

My parents, whom I think the world of, had the best intentions for me (and my future dependents), when they signed me up for this whole life when I was two.

Of course there's the issue of covering my burial/cremation & funeral costs. I'd at least, for now, like to cover that, in case... I don't want to burden anyone else with that, and I'd want guests to celebrate my life. Kind of a weird subject to think about, but hey, it's inevitable!

I'll talk to my rep for the whole life and see how I can get out of that, and into a term life policy.

Me--own my own home w/o parents' help, regular contributor to my Roth IRA, 1.5 years left on my student loans, piddly income as an architect :)

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Postby squished18 » Mon Jun 25, 2007 6:30 am

moneyhoney,

I bet that if you looked into a term policy for the amount of coverage you currently have ($80000), it would be a whole lot cheaper than the $680/year you're currently paying. It sounds like you have an appropriate amount of coverage. However, I have yet to hear any convincing reasons for anybody to have a whole life policy.

If you want to get the exact same coverage and investment as you're currently getting but with better results, buy equivalent term life coverage (which will be cheaper) and invest the difference in a good (i.e. very low fee) mutual fund.

squished

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Postby MossySF » Mon Jun 25, 2007 10:49 am

There are some very limited reasons for whole life. Say you have hard-to-liquidate business/property and leaving them to your heirs would cause some nasty tax problems. Or you are completely set for retirement already and want to pay for life insurance using pre-tax money, you could buy whole life via a solo-401k.

squished18
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Postby squished18 » Mon Jun 25, 2007 2:00 pm

MossySF,

Would you mind explaining a bit more detail these special circumstances? I'd like to know just for pure interest's sake. How does whole life policies address these special circumstances?

thanks,
squished

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Postby MossySF » Mon Jun 25, 2007 4:19 pm

squished18 wrote:MossySF,

Would you mind explaining a bit more detail these special circumstances? I'd like to know just for pure interest's sake. How does whole life policies address these special circumstances?

thanks,
squished


Say you run a business valued at about 10M or so. You have a 30 year term life policy that expires before you pass away. Now your heirs have to pay estate tax on the 10M business. If they don't have the cash themselves, they'd have to find a buyer for their business in order to pay the tax bill. Finding the buyer under those circumstances may mean accepting a below market value -- or it means your heirs who thought they would follow in your footsteps now have a career change to contemplate. So if you own a business (or own rare/unique properties), you may need whole life so your heirs get a cash payout big enough to pay the tax bill.

The other scenario I mentioned is using pre-tax money to pay for insurance. If your 401K plan has the option to invest in whole life/universal life/so on, you can put up to 25% of your 401k contributions into an insurance policy. Term life does not have an investment component and hence cannot be held inside a 401k. What this means is you get a discount equal to your marginal tax rate for life insurance and this discount probably is large enough to overcome the extra fees of whole life. The only caveat is that if you no longer are covered by this plan (say the company terminates the 401k plan and forces everybody to move to something else), your whole life policy is cashed out, rolled over as cash to your new 401k/ira and your life insurance coverage is terminated. So if you take this route, it's best to have something that's totally under your control like a Solo-401K for the self-employed. Using up valuable room in your 401K for life insurance also means it's only a good idea for somebody who has retirement mostly funded already and can take dropping their contributions by up to 25%.

consultantjournal
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Postby consultantjournal » Mon Jun 25, 2007 5:05 pm

I don't know what sort of funeral arrangements you'd want, but you could just put aside $330 a year until you have a bank account with $5k or $10k in it. Then invest in term deposits. However, if you have some retirement savings or an emergency fund, that could be used instead. (Me, I'm being donated to science and requesting that a park bench be named after me. A memorial service would be find. This is much cheaper and more sustainable for the environment than a burial)

If you plan to buy a home or to possibly have children, consider term insurance.
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MossySF
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Postby MossySF » Mon Jun 25, 2007 5:31 pm

consultantjournal wrote:I don't know what sort of funeral arrangements you'd want, but you could just put aside $330 a year until you have a bank account with $5k or $10k in it.


They can just toss my body into the ocean for the fishes to feed off of.

squished18
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Postby squished18 » Tue Jun 26, 2007 7:05 am

Thanks for the explanation MossySF.


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