New guy in need of opinion

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Mbmd
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Joined: Tue Jul 09, 2019 10:11 pm

New guy in need of opinion

Post by Mbmd » Tue Jul 09, 2019 10:43 pm

Hi.
New to this site. Thanks to everyone for dedicating their time and knowledge to this site.

I’m pretty sure I know the answer to this question but I will ask regardless to see what your opinion is.

Does it make more sense for a high income earner to buy whole life insurance??

(I AM NOT TRYING TO SELL/ENCOURAGE ANYONE TO BUY INTO PERM LIFE INS AS IT HAS BEEN ADDRESSED IN OTHER POSTS. PURELY ASKING FOR AN EDUCATED OPINION)

With an income of 500-600K/yr I have been able to max out a 401K, max out 457, maxed out IRA, HSA also maxed out. Funding two 529 for my kids. 6mo emergency fund. No debt except the house. Investment account in moderate risk portfolio about 40K/yr. I have 20 yr Term life insurance for 2M.
Living well below my means.
For the last 6 months I have been “investing” in a WLI. It was sold to me as a way to diversify and save for retirement. Tax free growth, guaranteed benefit and safe from any personal lawsuit.

Does it make sense to have a WLI in my situation?
Should I consider it an expensive lesson and close that account? (I have been contributing more than the required premium).

Thank you for your opinion

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sergeant
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Re: New guy in need of opinion

Post by sergeant » Tue Jul 09, 2019 11:11 pm

IMHO you made a mistake. Dump it and invest in taxable or pay down mortgage debt. You won't find many pro WLI here.
Lincoln 3 EOW!

mcraepat9
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Re: New guy in need of opinion

Post by mcraepat9 » Tue Jul 09, 2019 11:28 pm

Compared to tax efficient investing in a normal taxable account, WLI makes virtually no sense. Every “benefit” can be obtained or dealt with cheaper, more efficiently etc. You’ve been sold snake oil. Get out now.
Amateur investors are not cool-headed logicians.

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Watty
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Re: New guy in need of opinion

Post by Watty » Tue Jul 09, 2019 11:47 pm

Mbmd wrote:
Tue Jul 09, 2019 10:43 pm
Does it make sense to have a WLI in my situation?
Should I consider it an expensive lesson and close that account? (I have been contributing more than the required premium).
mcraepat9 wrote:
Tue Jul 09, 2019 11:28 pm
Compared to tax efficient investing in a normal taxable account, WLI makes virtually no sense. Every “benefit” can be obtained or dealt with cheaper, more efficiently etc. You’ve been sold snake oil. Get out now.
There is a saying, "Even a broken clock is right twice a day."

It is highly probable that it was a mistake but once in a blue moon whole life insurance can make sense for estate tax planning, dealing with a owned business after you die, or a very few other special situations.

If the whole life insurance was suggested by the estate planning lawyer when you were setting up a complex estate plan then it might make sense so it would be worth researching more.

If you bought it after going to something like a "free" steak dinner then you can bet that it is not a good deal for you.

How did you met the person who sold you this?

123
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Re: New guy in need of opinion

Post by 123 » Wed Jul 10, 2019 12:00 am

If you need life insurance buy term insurance. Generally people get policies that are 20 or 30 year level (premium) term to match risk while they are raising their family. Sometimes people with substantial assets do not need any life insurance. Their assets will provide for their dependents if they are no longer around.

Whole life policies, as well as universal life policies, add additional expenses in a couple of ways. Generally there are higher expense ratios for any investment selections available within the products. But the biggest problem is often that you lose the benefit of long term capital gains tax treatment. For pure investment a taxable account is much cheaper and more tax efficient.

Many times 50% or more (sometimes 100%) of the first year premium on a life insurance policy is paid to the salesperson as a commission. The policy has to be in force for awhile before the insurance company makes any profit from it.
The closest helping hand is at the end of your own arm.

mhalley
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Re: New guy in need of opinion

Post by mhalley » Wed Jul 10, 2019 12:40 am

A very small percent of the population should buy whole life. Wci has a list of those, and It goes like this:
. The ideal purchaser of whole life insurance should:

Need or desire a guaranteed, but possibly slowly increasing, life-long death benefit,
Understand that the guarantee/contract essentially relies on the insurance company staying in business for as long as he lives for any policy of reasonable size,
Live in a state that protects 100% of the cash value from creditors,
Have some estate planning liquidity issues,
Be in excellent health,
Pursue no dangerous hobbies,
Not mind having low returns on his investment despite holding it for decades,
Have serious philosophical aversion to using traditional financing resources such as banks and credit unions (or simply just saving up for what you want to buy),
Have already maxed out all available retirement accounts including backdoor Roth IRAs and HSAs, and
Be willing to hold on to the policy until death no matter what changes in his financial life in the future.
The fact is that only a tiny percentage of the population, far smaller than the number of people who have been sold these policies historically, meets all or even most of these criteria. Whole life insurance remains a product designed to be sold, not bought.
Check out his series on the myths of wl:
https://www.whitecoatinvestor.com/debun ... insurance/

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StormShadow
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Re: New guy in need of opinion

Post by StormShadow » Wed Jul 10, 2019 12:51 am

123 wrote:
Wed Jul 10, 2019 12:00 am
If you need life insurance buy term insurance.
OP has a 20 year term insurance policy for $2 million.

Anyhow, I also recommend investing in taxable instead of whole life insurance.

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Raybo
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Re: New guy in need of opinion

Post by Raybo » Wed Jul 10, 2019 9:06 am

While I never made the kind of money you do, I did find myself in a similar situation. I had made all my tax deferred contributions and still had extra money left over and wanted to lower my taxes. Pretty much the only thing left was whole life.

I bought a policy on the idea that I could use it to defer income until I retired and then "borrow" it out tax free. I viewed the fees as "pre-paid income taxes."

When I got the policy and read (several times), I understood exactly how the policy worked and how much in fees they were taking. Each fund inside the policy had very high fees and the insurance company took a 5% load on every dollar I paid into the policy. With that kind of fee structure, it is hard to make much money.

Also, the borrowing feature was a kind of shell game. I was allowed to borrow money from the policy at a set rate (4%, I think) as long as I had excess money in to policy. The company moved money out of an investment and into the fixed rate fund that was used to pay the "interest" on the loan. That is, I was paying interest to borrow my own money!

I also realized that the money in the investment accounts would be used to the pay the policy's premium if I didn't send in any money. I stopped paying the premium and cancelled the policy when there wasn't anything left in it.

As everyone has said above, bite the bullet, pay the taxes, and invest in a taxable account. It will make you more money in the long run then playing the insurance game.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

GCD
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Re: New guy in need of opinion

Post by GCD » Wed Jul 10, 2019 9:24 am

My wife and I each have $1M term life policies and neither one of us ever broke $150K salary. At your salary I would consider $2M term life to be a little light. Could you just bump that up a little instead?

Look at the worksheet here. https://www.bogleheads.org/wiki/Life_insurance

megabad
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Re: New guy in need of opinion

Post by megabad » Wed Jul 10, 2019 9:52 am

Mbmd wrote:
Tue Jul 09, 2019 10:43 pm
Does it make sense to have a WLI in my situation?
Should I consider it an expensive lesson and close that account? (I have been contributing more than the required premium).
I would have gone low cost annuity first (assuming you plan on having your 500-600k income stop at some point in your life). Much cheaper way of deferring taxes. So my answer is basically no, it doesn't make sense. However, once you have gone into these plans, you need to review all the costs (charges, fees, taxes, etc) very very carefully before deciding to exit them. In some cases, once you have made the mistake, the best option is to stay in. In some cases, the best option is to leave. The complexity is one of the many reasons I despise whole, universal, permanent, etc life policies.

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ruralavalon
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Re: New guy in need of opinion

Post by ruralavalon » Wed Jul 10, 2019 10:07 am

Welcome to the forum :) .

It is good to see that you are making maximum contributions to your tax-advantaged accounts, and are debt free other than the mortgage note.

Mbmd wrote:
Tue Jul 09, 2019 10:43 pm
Hi.
New to this site. Thanks to everyone for dedicating their time and knowledge to this site.

I’m pretty sure I know the answer to this question but I will ask regardless to see what your opinion is.

Does it make more sense for a high income earner to buy whole life insurance??

(I AM NOT TRYING TO SELL/ENCOURAGE ANYONE TO BUY INTO PERM LIFE INS AS IT HAS BEEN ADDRESSED IN OTHER POSTS. PURELY ASKING FOR AN EDUCATED OPINION)

With an income of 500-600K/yr I have been able to max out a 401K, max out 457, maxed out IRA, HSA also maxed out. Funding two 529 for my kids. 6mo emergency fund. No debt except the house. Investment account in moderate risk portfolio about 40K/yr. I have 20 yr Term life insurance for 2M.
Living well below my means.
For the last 6 months I have been “investing” in a WLI. It was sold to me as a way to diversify and save for retirement. Tax free growth, guaranteed benefit and safe from any personal lawsuit.

Does it make sense to have a WLI in my situation?
Should I consider it an expensive lesson and close that account? (I have been contributing more than the required premium).

Thank you for your opinion
No. Whole life insurance does not make sense in your situation.

Whole life insurance is rarely a good idea. It can be useful (1) to fund the care of a special needs child after your passing, or (2) to enable transfer of ownership of a small business after your passing. But that is not your case.

I suggest instead contributions to a regular taxable brokerage account, and investing in very tax-efficient stock index funds. Examples would include Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX), Vanguard Total Stock Market Index Fund (VTSAX), and Vanguard Total International Index Fund (VTIAX).

Wiki article, "Tax-efficient fund placement". See "Table 1. Hypothetical tax costs (when taxable funds are held) ", the tax cost can be fairly low even in the highest tax bracket.
Last edited by ruralavalon on Wed Jul 10, 2019 10:38 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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TomatoTomahto
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Re: New guy in need of opinion

Post by TomatoTomahto » Wed Jul 10, 2019 10:27 am

OP, you said it yourself
It was sold to me
WLI is sold, not bought.

I wouldn’t touch it with a barge pole. I doubt that it’s a wise choice for you.

What’s the matter with taxable? It isn’t painful to pay taxes on the roughly 2% Total Stock throws off. If that bothers you, buy Berkshire Hathaway.
Okay, I get it; I won't be political or controversial. The Earth is flat.

Topic Author
Mbmd
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Joined: Tue Jul 09, 2019 10:11 pm

Re: New guy in need of opinion

Post by Mbmd » Thu Jul 11, 2019 8:02 am

I want to thank everyone that has taken their time to answer my post. Your comments and advise is greatly appreciated.

I have already called the financial advisor and asked him to cancel this policy. He tried to schedule a face-to-face meeting immediately to keep me from closing it which probably means he gets more out of it than I do. I obviously declined.

I am Trying to managing my own portfolio and bogleheads has been extremely useful.

Thank you very much.

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ruralavalon
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Re: New guy in need of opinion

Post by ruralavalon » Thu Jul 11, 2019 8:26 am

Mbmd wrote:
Thu Jul 11, 2019 8:02 am
I want to thank everyone that has taken their time to answer my post. Your comments and advise is greatly appreciated.

I have already called the financial advisor and asked him to cancel this policy. He tried to schedule a face-to-face meeting immediately to keep me from closing it which probably means he gets more out of it than I do. I obviously declined.

I am Trying to managing my own portfolio and bogleheads has been extremely useful.

Thank you very much.
Good choice, congratulations.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Stinky
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Re: New guy in need of opinion

Post by Stinky » Thu Jul 11, 2019 4:01 pm

Mbmd wrote:
Thu Jul 11, 2019 8:02 am
I want to thank everyone that has taken their time to answer my post. Your comments and advise is greatly appreciated.

I have already called the financial advisor and asked him to cancel this policy. He tried to schedule a face-to-face meeting immediately to keep me from closing it which probably means he gets more out of it than I do. I obviously declined.

I am Trying to managing my own portfolio and bogleheads has been extremely useful.

Thank you very much.
Welcome to the Forum!

You've made the right decision. Stick with it.

Don't accept the meeting with the "advisor". Yes, he gets a lot more out the sale (future commissions) than you do.

Except in very limited situations as described above, whole life should not be purchase. Buy level premium term insurance if you need life insurance. Invest elsewhere - not in whole life.
It's a GREAT day to be alive - Travis Tritt

MittensMoney
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Re: New guy in need of opinion

Post by MittensMoney » Thu Jul 11, 2019 4:05 pm

You just took a 4-figure paycheck out of his hands that he thought was a 'sure thing'. Kudos!

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