Is Whole Life right in my situation?

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Is Whole Life right in my situation?

Postby BigMike » Sun Feb 10, 2013 1:29 pm

I have read a lot of negatives about whole life insurance, and have stayed away from it -- but I've also read that whole life makes sense in certain situations, and I'm wondering if mine is one of them.

My wife and I both have 20-year term policies that will cover us into our mid-60s, when our young child will have (presumably) graduated from College. We also max out our 401Ks and ROTHs every year (in Vanguard funds). Our agent (who knows I am anti-whole life) ran scenarios for us, at our request, to see if we might want to add even more term -- and surprisingly, he advised against it, as the calculations show that if either of us were to pass away now or in the near future, we'd be sufficiently covered and so would our child.

BUT...I am 7 years older than my wife, so chances are she will outlive me, perhaps by a significant number of years. When I brought this up, our agent suggested that I might want to supplement with a $250K whole life policy that would provide her with a death benefit if I were to pass away when, say, she's in her 70s, and our term insurance is gone. I don't have an illustration in hand yet, but he suggested that the premiums should be structured so that in 20 years the policy would be paid off, when I will be at retirement age and our term policies will lapse. After that, the policy wold continue to build cash value/death benefit without any additional payout on my part. This is a dividend paying policy with guaranteed annual growth of 4.5%, although the company currently is paying 5.6%

I'm torn. On the one hand, almost everything I've heard about whole life is negative. On the other hand, in my particular situation it seems like if might make sense. Thanks in advance for thoughts and advice!
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Re: Is Whole Life right in my situation?

Postby livesoft » Sun Feb 10, 2013 1:37 pm

I don't understand why your goal wouldn't be to be self-insured by age 50, so that if either of you died, then there would be no financial impact to your loved ones. To be self-insured means you put money into 401(k), Roths, taxable, etc.
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Re: Is Whole Life right in my situation?

Postby BigMike » Sun Feb 10, 2013 1:46 pm

livesoft wrote:I don't understand why your goal wouldn't be to be self-insured by age 50, so that if either of you died, then there would be no financial impact to your loved ones. To be self-insured means you put money into 401(k), Roths, taxable, etc.


Well, that would be a good goal and we do contribute the max to our 401K and ROTH. I guess what you are saying is take the premium I'd pay into the policy and invest that in a taxable account instead? My question then would be is there any benefit to the fact that the life insurance value grows tax-free? In other words, is a potentially lower rate of return in the insurance policy, tax free, better or worse than a taxable account that I'd probably invest in TSM? Thanks!
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Re: Is Whole Life right in my situation?

Postby bluemarlin08 » Sun Feb 10, 2013 1:47 pm

I hope your agent didn't tell you that you would receive a guaranteed 4.5% return on premiums paid, because that is not true for any Whole Life policy.
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Re: Is Whole Life right in my situation?

Postby nisiprius » Sun Feb 10, 2013 1:48 pm

BigMike wrote:BUT...I am 7 years older than my wife, so chances are she will outlive me, perhaps by a significant number of years. When I brought this up, our agent suggested that I might want to supplement with a $250K whole life policy that would provide her with a death benefit if I were to pass away when, say, she's in her 70s, and our term insurance is gone.
Set up an automatic savings account or an automatic transfer to an investment account, and choose the monthly amount so that when she's in her seventies she won't NEED a "death benefit." It's up to you whether to do this literally or just to do it by accounting in your general retirement account.

The purpose of life insurance is to provide for your family if you die prematurely before you have had time to accumulate an estate. You should be planning so that when you are in your "sixty-threes" (70s minus 7) you'll have accumulated that estate. Paying whole life premiums isn't going to help you do that, it's just going to make it harder to do. And it can't possibly be any better than investing the money yourself unless the insurance company has magic investments available to it that are unavailable to you and I, which they don't.

Investments are investments. Insurance is insurance. There is no good reason to mix them up other than to obfuscate the nature of the deal.

I think insurance is worthwhile and important, and you can only get it from an insurance company. But you don't have to go to an insurance company for investments, and you shouldn't.
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Re: Is Whole Life right in my situation?

Postby livesoft » Sun Feb 10, 2013 1:48 pm

Money invested in TSM grows virtually tax-free, too. All unrealized capital gains are tax-free. If you die, the heirs get all the gains tax-free.
One does pay a small amount of taxes on the qualifed dividends that TSM pays out every year. The taxes amount to something like 0.3% of the invested amount, so that is not something to worry about.
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Re: Is Whole Life right in my situation?

Postby BigMike » Sun Feb 10, 2013 1:51 pm

bluemarlin08 wrote:I hope your agent didn't tell you that you would receive a guaranteed 4.5% return on premiums paid, because that is not true for any Whole Life policy.


No, I could have misunderstood, but my understanding is that whatever portion of the premium goes to cash value is invested and grows at a minimum of 4.5%. Am I wrong, or is this how whole life policies work?
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Re: Is Whole Life right in my situation?

Postby BigMike » Sun Feb 10, 2013 1:54 pm

livesoft wrote:Money invested in TSM grows virtually tax-free, too. All unrealized capital gains are tax-free. If you die, the heirs get all the gains tax-free. One does pay a small amount of taxes on the qualifed dividends that TSM pays out every year. The taxes amount to something like 0.3% of the invested amount, so that is not something to worry about.


Thanks for this guidance!
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Re: Is Whole Life right in my situation?

Postby BigMike » Sun Feb 10, 2013 1:57 pm

nisiprius wrote:Set up an automatic savings account or an automatic transfer to an investment account, and choose the monthly amount so that when she's in her seventies she won't NEED a "death benefit." It's up to you whether to do this literally or just to do it by accounting in your general retirement account.


Nisiprius, thank you for responding. I appreciate your advice.
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Re: Is Whole Life right in my situation?

Postby nisiprius » Sun Feb 10, 2013 2:14 pm

BigMike wrote:No, I could have misunderstood, but my understanding is that whatever portion of the premium goes to cash value is invested and grows at a minimum of 4.5%. Am I wrong, or is this how whole life policies work?
If you decide to consider going the whole life route, try this experiment. I'm dead serious, I mean it literally. When you go to your agent, write down on a sheet of paper "In the [Exact name of policy being proposed] policy, whatever portion of the premium goes to cash value is invested and grows at a minimum of 4.5%," date it, and ask your agent to initial it.

Or, better yet, ask him to show you the part of the policy that says this and circle it, and you write next to it "This means that whatever portion of the premium goes to cash value is invested and grows at a minimum of 4.5%," date it and ask him to initial it.

This informal "get it in writing" procedure is really worthwhile, and my life experience is that you absolutely cannot tell what the reaction will be. Sometimes the person will say "Yes, that's right" and initial it. Sometimes the person picks up the phone and calls someone higher up for authorization. Sometimes the person realize they aren't sure and need to double- check, then initial it. (I remember this happened once with a $50,000 minicomputer system, when I wrote down "The quoted system includes all necessary cables.")

Be friendly, of course. Life insurance is complex product and that's why agents have to go to school and get letters after their names, so it is very reasonable for a prudent client to want patient answers to questions, and the agent is entitled to their commission by being willing to take the time to provide them. If some detail of a deal is important enough to you that it is influencing your decision, then it is important enough to get in writing.

You need to be prepared for the possibility of hostility and freaking out, however. It's only happened to me once, but it was memorable.

Of course, if the person gives you a sad look, "Why don't you trust people," that's a cue to leave, politely.

My prediction is that if you actually try this, what will actually happen is that the agent will say "Oh, my goodness, is that what you thought? I'm terribly sorry, gee, I've been in the business for fifty years and I guess I just tend to assume that people understand what's meant by language like that." And, if honest, actually explain it.
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Re: Is Whole Life right in my situation?

Postby mickeyd » Sun Feb 10, 2013 2:25 pm

Of course, if the person gives you a sad look, "Why don't you trust people," that's a cue to run.


Good point...also could substitute it with this~ "Have I ever lied to you before?"
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Re: Is Whole Life right in my situation?

Postby livesoft » Sun Feb 10, 2013 2:30 pm

A doctor once asked, "You don't trust doctors, do you?" I had to say, "No, I don't because of all the things I saw first hand from doctors when I worked in a hospital."

And conversely, I wouldn't want anyone to trust me either. They should get some verification from several other sources.
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Re: Is Whole Life right in my situation?

Postby LordB » Sun Feb 10, 2013 2:52 pm

All the debate about whole life aside why would your wife need more insurance if you die in your 70's?

As far as I can tell you should have been retired for years (and your wife should be by that point as well) so there would be no loss of income aside from social security which she should partially get as a survivors benefit which for most people at least on this forum isn't a huge part of their retirement money.

Anyways I would think you dying would reduce the expenses and leave her in the same or a better state at least financially.

What I would consider doing is make sure you have good long term care insurance. Decent chance that you go senile and need care etc. for many years which can wipe out finances.
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Re: Is Whole Life right in my situation?

Postby mephistophles » Sun Feb 10, 2013 3:42 pm

[quote="BigMike"]I have read a lot of negatives about whole life insurance, and have stayed away from it -- but I've also read that whole life makes sense in certain situations, and I'm wondering if mine is one of them.

My wife and I both have 20-year term policies that will cover us into our mid-60s, when our young child will have (presumably) graduated from College. We also max out our 401Ks and ROTHs every year (in Vanguard funds). Our agent (who knows I am anti-whole life) ran scenarios for us, at our request, to see if we might want to add even more term -- and surprisingly, he advised against it, as the calculations show that if either of us were to pass away now or in the near future, we'd be sufficiently covered and so would our child.

quote]

Your situation "does not" warrant the purchase of whole life insurance. If you need additional life insurance (by your own calculations) buy additional term. If you still need life insurance in your 60's and are not in good health you can convert some or all of your term to permanent. If you succeed with your investment program, that should not be necessary.
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Re: Is Whole Life right in my situation?

Postby texasdiver » Sun Feb 10, 2013 9:19 pm

If you die after you are both retired that should leave your wife better off rather than worse off.

With the same portfolio and income you had as a couple she now has one less mouth to feed, one less car to pay for, 1/2 the health costs to deal with, one less plane ticket to buy every time you travel and so on. Insurance is to replace lost income when you are working not to provide a retirement windfall.
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Re: Is Whole Life right in my situation?

Postby tphp99 » Sun Feb 10, 2013 10:13 pm

texasdiver wrote:If you die after you are both retired that should leave your wife better off rather than worse off.

With the same portfolio and income you had as a couple she now has one less mouth to feed, one less car to pay for, 1/2 the health costs to deal with, one less plane ticket to buy every time you travel and so on.


Sad but mostly true.
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Re: Is Whole Life right in my situation?

Postby letsgobobby » Mon Feb 11, 2013 2:25 am

If you die in the next twenty years you have term. If you die after that you're retired and have no income to insure. I don't see that your situation is any different from the great masses, who also do not need whole life insurance.
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