Life insurance, is it a good deal?

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gougou
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Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 2:09 pm

So my father's friend (female, 55yo) is looking to invest some money to leave to her child. The deal she got is that she pays $100K per year for the next 5 years, and the total death benefit is $2.5M up until she is 104 yo, and grows at about 3% per year after that, until she's 120 yo then the death benefit will be paid to beneficiary regardless of whether she is alive.

She wants to know if it is a good deal. I'd like some opinions from here. Thanks :)

Edit: The $500K she's looking to invest is an inheritance she recently received that she wishes to pass down. She probably doesn't need it for her retirement. She is not a US resident but she prefers to invest the money in the US.
Last edited by gougou on Mon Aug 12, 2019 4:26 pm, edited 3 times in total.

02nz
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Re: Life insurance, is it a good deal?

Post by 02nz » Mon Aug 12, 2019 2:12 pm

Insurance is not an investment. Mixing the two is one sure-fire way of overpaying. Insurance companies have very opaque and high-cost investment products. Avoid them.

Gill
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Re: Life insurance, is it a good deal?

Post by Gill » Mon Aug 12, 2019 2:22 pm

Like any life insurance, it is a good deal if she dies prematurely such as if she dies in the first year there is a gain of $2.4 million. If she lives well beyond her life expectancy it is not such a good deal. For example, if she lives to be in her mid 90's the $500,000 premium could have grown to at least $4M at a 6% growth rate. As previously mentioned, it is not an investment but rather insurance against the risk of an early death.

Why not just invest the $500K in her personal account and devise it to her child in her will, either in trust or outright.
Gill
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Re: Life insurance, is it a good deal?

Post by 123 » Mon Aug 12, 2019 2:34 pm

gougou wrote:
Mon Aug 12, 2019 2:09 pm
...She wants to know if it is a good deal...
It is a very good deal for at least one person - the insurance salesperson who closes the deal. In life insurance sales it is not unusual for the commission paid to the salesperson to be 50% or more of the first year premium. That varies depending on the company and the particular product and how it is packaged, but agents generally try to sell the product that brings them the most commission rather than the greatest benefit to the consumer, their yachts are expensive to maintain!
The closest helping hand is at the end of your own arm.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 3:14 pm

She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.

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RickBoglehead
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Re: Life insurance, is it a good deal?

Post by RickBoglehead » Mon Aug 12, 2019 3:18 pm

She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 3:23 pm

gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Those are not nearly good enough reasons to buy a whole or universal life insurance policy. Just putting everything into a bond fund would be far better. Or she could buy TIPS of a 5, 10 year. or 30 year maturity, which are guaranteed by the U.S. Treasury to have a specific inflation-adjusted return. Or she buy CDs from a bank that is FDIC insured.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Life insurance, is it a good deal?

Post by DarkHelmetII » Mon Aug 12, 2019 3:27 pm

gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Sounds like a disaster brewing. A fairly "vanilla" alternative I may suggest considering is Vanguard's tax-managed balanced fund. But the problem in this situation is that ultimately you will probably be blamed for an inevitable drop in the markets etc... So the bigger question is what really is your duty to intervene here?

Also adding ... IF she really wants to do life insurance, go with low-cost VUL through TIAA or Ameritas. At TIAA for example she could do 80% fixed account and 20% equities. But again the irony here is that if English is limited why is the more complex option (life insurance) coming out as the preferred option over a simpler mix of stocks and bonds?

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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 3:38 pm

Another option is a lifetime single-premium immediate annuity (SPIA), which is a low-cost, low-commission product that's been around for centuries. At today's rates, $2.5 million for a 55 year old female would pay out $10,500 per month for the rest of her life and includes a cash refund provision as follows: "If you die before receiving an amount equal to the premium, your beneficiaries will receive a lump sum equal to the remainder of the premium which has not yet been paid to you."

However, I would never recommend that anyone put 100% of their funds into a SPIA because it would potentially leave her with no liquid funds on hand.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Life insurance, is it a good deal?

Post by Wiggums » Mon Aug 12, 2019 3:44 pm

As stated above, Life insurance is not an investment.

She needs to go to plan B.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 4:22 pm

DarkHelmetII wrote:
Mon Aug 12, 2019 3:27 pm
gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Also adding ... IF she really wants to do life insurance, go with low-cost VUL through TIAA or Ameritas.
That's interesting and I'll look into it.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 4:30 pm

RickBoglehead wrote:
Mon Aug 12, 2019 3:18 pm
She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
US Treasuries return is probably too low so it's difficult to recommend it.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 4:35 pm

123 wrote:
Mon Aug 12, 2019 2:34 pm
gougou wrote:
Mon Aug 12, 2019 2:09 pm
...She wants to know if it is a good deal...
It is a very good deal for at least one person - the insurance salesperson who closes the deal. In life insurance sales it is not unusual for the commission paid to the salesperson to be 50% or more of the first year premium. That varies depending on the company and the particular product and how it is packaged, but agents generally try to sell the product that brings them the most commission rather than the greatest benefit to the consumer, their yachts are expensive to maintain!
Lol, I heard the salesperson is flying here to meet her to get the deal done.

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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 4:36 pm

gougou wrote:
Mon Aug 12, 2019 4:35 pm
123 wrote:
Mon Aug 12, 2019 2:34 pm
gougou wrote:
Mon Aug 12, 2019 2:09 pm
...She wants to know if it is a good deal...
It is a very good deal for at least one person - the insurance salesperson who closes the deal. In life insurance sales it is not unusual for the commission paid to the salesperson to be 50% or more of the first year premium. That varies depending on the company and the particular product and how it is packaged, but agents generally try to sell the product that brings them the most commission rather than the greatest benefit to the consumer, their yachts are expensive to maintain!
Lol, I heard the salesperson is flying here to meet her to get the deal done.
Think about why they would do that. Ask her to do the same.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Life insurance, is it a good deal?

Post by Wiggums » Mon Aug 12, 2019 4:49 pm

gougou wrote:
Mon Aug 12, 2019 4:35 pm
123 wrote:
Mon Aug 12, 2019 2:34 pm
gougou wrote:
Mon Aug 12, 2019 2:09 pm
...She wants to know if it is a good deal...
It is a very good deal for at least one person - the insurance salesperson who closes the deal. In life insurance sales it is not unusual for the commission paid to the salesperson to be 50% or more of the first year premium. That varies depending on the company and the particular product and how it is packaged, but agents generally try to sell the product that brings them the most commission rather than the greatest benefit to the consumer, their yachts are expensive to maintain!
Lol, I heard the salesperson is flying here to meet her to get the deal done.
Flying here to meet her. Do you know he is making a big commission.

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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 4:51 pm

Wiggums wrote:
Mon Aug 12, 2019 4:49 pm
gougou wrote:
Mon Aug 12, 2019 4:35 pm
123 wrote:
Mon Aug 12, 2019 2:34 pm
gougou wrote:
Mon Aug 12, 2019 2:09 pm
...She wants to know if it is a good deal...
It is a very good deal for at least one person - the insurance salesperson who closes the deal. In life insurance sales it is not unusual for the commission paid to the salesperson to be 50% or more of the first year premium. That varies depending on the company and the particular product and how it is packaged, but agents generally try to sell the product that brings them the most commission rather than the greatest benefit to the consumer, their yachts are expensive to maintain!
Lol, I heard the salesperson is flying here to meet her to get the deal done.
Flying here to meet her. Do you know he is making a big commission.
If they're agreeing to pay her $100k for the first year, based on what I know of these commission rates, that's probably about the salesperson's commission on this sale. You'd better believe that I'd fly across the country for that kind of dough. Sadly, it seems like this is almost a done deal. :(
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Life insurance, is it a good deal?

Post by Stinky » Mon Aug 12, 2019 4:53 pm

gougou wrote:
Mon Aug 12, 2019 4:30 pm
RickBoglehead wrote:
Mon Aug 12, 2019 3:18 pm
She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
US Treasuries return is probably too low so it's difficult to recommend it.
Don’t do life insurance! It’s not an “investment” - it’s insurance.

If treasuries yield too little, consider a bond fund. Or, if she wants more potential return with relatively low risk, mix in 20-40% in Total Stock Market, with the rest in bonds.
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NotWhoYouThink
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Re: Life insurance, is it a good deal?

Post by NotWhoYouThink » Mon Aug 12, 2019 4:58 pm

gougou wrote:
Mon Aug 12, 2019 4:22 pm
DarkHelmetII wrote:
Mon Aug 12, 2019 3:27 pm
gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Also adding ... IF she really wants to do life insurance, go with low-cost VUL through TIAA or Ameritas.
That's interesting and I'll look into it.
What about it looks interesting and why would you look into it? It is still life insurance, not an investment. It will never benefit her at all, and will only benefit her heirs if she dies young.

Why is she talking to an insurance salesman? Where is her money now, and what about that situation does she want to change? Does she need this money to live on?

Life insurance of any kind sounds like a terrible idea for her. But since a salesman has a target on her back, you may not be able to stop it. People are allowed to do stupid things with their money.

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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 5:00 pm

Stinky wrote:
Mon Aug 12, 2019 4:53 pm
gougou wrote:
Mon Aug 12, 2019 4:30 pm
RickBoglehead wrote:
Mon Aug 12, 2019 3:18 pm
She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
US Treasuries return is probably too low so it's difficult to recommend it.
Don’t do life insurance! It’s not an “investment” - it’s insurance.

If treasuries yield too little, consider a bond fund. Or, if she wants more potential return with relatively low risk, mix in 20-40% in Total Stock Market, with the rest in bonds.
If she just doesn't like the idea of stocks, she could get 3% to 3.5% on CDs that are FDIC insured.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Hyperborea
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Re: Life insurance, is it a good deal?

Post by Hyperborea » Mon Aug 12, 2019 5:14 pm

gougou wrote:
Mon Aug 12, 2019 2:09 pm
Edit: The $500K she's looking to invest is an inheritance she recently received that she wishes to pass down. She probably doesn't need it for her retirement. She is not a US resident but she prefers to invest the money in the US.
Some of the alternate suggestions given to invest in US domiciled funds/ETFs might not be a good idea. Given that the person is a non-resident alien there may be large (very large) US estate taxes owed on those funds when she dies. Whether this is so will depend on the country of her residence and whether there is an estate tax treaty with the US - not many countries do. If she was to invest in ETFs instead then using Irish domiciled ETFs (even if they invest in the same underlying stocks - e.g. S&P500) would avoid that issue and probable double taxation on the dividends.


Edited to downgrade S&P5000 to S&P500.
Last edited by Hyperborea on Mon Aug 12, 2019 5:44 pm, edited 1 time in total.
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SuperSaver1975
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Re: Life insurance, is it a good deal?

Post by SuperSaver1975 » Mon Aug 12, 2019 5:18 pm

This sounds like a "whole life insurance" scam. The broker is going to pocket 6 figures and rip her off.

She won't get the "investment" part AND the death benefit.

Scenario 1, as life insurance: Pay $500,000 for a $2.5M life insurance policy. If she dies, the "investment" principal and interest disappears, and the life insurance turns out to have been over-priced by 2,000% or more compared to a standard, basic, legit term life insurance.

Scenario 2, as an "investment": Pay $500,000 for an "investment" earning 3% interest. First, the 3% is probably a rosy prediction that is not guaranteed. Usually they guarantee only a negative rate of return. People who wait years and years for these "investments" end up finding out that the rosy prediction never materialized. Second, if she withdraws money at some point, it's not so simple. She will have to take the money out as loans with a high interest rate, just to get her own money!! Third, taking the money out in withdrawals (loans) makes the death benefit disappear.

When you realize they are offering you one OR the other, and not both, it's a total scam.

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Re: Life insurance, is it a good deal?

Post by RickBoglehead » Mon Aug 12, 2019 5:28 pm

gougou wrote:
Mon Aug 12, 2019 4:30 pm
RickBoglehead wrote:
Mon Aug 12, 2019 3:18 pm
She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
US Treasuries return is probably too low so it's difficult to recommend it.
She's a whale. Ripe for the kill. You should advise her to RUN. And not be greedy.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 5:40 pm

SuperSaver1975 wrote:
Mon Aug 12, 2019 5:18 pm
This sounds like a "whole life insurance" scam. The broker is going to pocket 6 figures and rip her off.

She won't get the "investment" part AND the death benefit.

Scenario 1, as life insurance: Pay $500,000 for a $2.5M life insurance policy. If she dies, the "investment" principal and interest disappears, and the life insurance turns out to have been over-priced by 2,000% or more compared to a standard, basic, legit term life insurance.

Scenario 2, as an "investment": Pay $500,000 for an "investment" earning 3% interest. First, the 3% is probably a rosy prediction that is not guaranteed. Usually they guarantee only a negative rate of return. People who wait years and years for these "investments" end up finding out that the rosy prediction never materialized. Second, if she withdraws money at some point, it's not so simple. She will have to take the money out as loans with a high interest rate, just to get her own money!! Third, taking the money out in withdrawals (loans) makes the death benefit disappear.

When you realize they are offering you one OR the other, and not both, it's a total scam.
OK I'll definitely ask her to give us a detailed inforce illustration of the proposed policy and double check. But I am pretty sure the total death payout is $2.5M up until she's 104 yo.

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gougou
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Re: Life insurance, is it a good deal?

Post by gougou » Mon Aug 12, 2019 5:42 pm

NotWhoYouThink wrote:
Mon Aug 12, 2019 4:58 pm
gougou wrote:
Mon Aug 12, 2019 4:22 pm
DarkHelmetII wrote:
Mon Aug 12, 2019 3:27 pm
gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Also adding ... IF she really wants to do life insurance, go with low-cost VUL through TIAA or Ameritas.
That's interesting and I'll look into it.
What about it looks interesting and why would you look into it? It is still life insurance, not an investment. It will never benefit her at all, and will only benefit her heirs if she dies young.

Why is she talking to an insurance salesman? Where is her money now, and what about that situation does she want to change? Does she need this money to live on?

Life insurance of any kind sounds like a terrible idea for her. But since a salesman has a target on her back, you may not be able to stop it. People are allowed to do stupid things with their money.
It's interesting because it is an insurance policy which avoids a lot of tax issues.

I don't know how much money she has but this $500K was an inheritance she recently received that she wishes to pass down. I'm pretty sure she doesn't need that money for retirement.

Just telling her to run or that she's stupid is not going to help though.

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Re: Life insurance, is it a good deal?

Post by willthrill81 » Mon Aug 12, 2019 5:47 pm

gougou wrote:
Mon Aug 12, 2019 5:42 pm
NotWhoYouThink wrote:
Mon Aug 12, 2019 4:58 pm
gougou wrote:
Mon Aug 12, 2019 4:22 pm
DarkHelmetII wrote:
Mon Aug 12, 2019 3:27 pm
gougou wrote:
Mon Aug 12, 2019 3:14 pm
She does not want to lose money so stocks are too risky for her. She doesn't know much English and she has no desire to manage her investments.
Also adding ... IF she really wants to do life insurance, go with low-cost VUL through TIAA or Ameritas.
That's interesting and I'll look into it.
What about it looks interesting and why would you look into it? It is still life insurance, not an investment. It will never benefit her at all, and will only benefit her heirs if she dies young.

Why is she talking to an insurance salesman? Where is her money now, and what about that situation does she want to change? Does she need this money to live on?

Life insurance of any kind sounds like a terrible idea for her. But since a salesman has a target on her back, you may not be able to stop it. People are allowed to do stupid things with their money.
It's interesting because it is an insurance policy which avoids a lot of tax issues.

I don't know how much money she has but this $500K was an inheritance she recently received that she wishes to pass down. I'm pretty sure she doesn't need that money for retirement.

Just telling her to run or that she's stupid is not going to help though.
I'm sure that she's not stupid at all. But buying life insurance as an investment is not a good move. Listen to the wisdom of those who know, sometimes from personal experience, just how these things work. Everyone here is telling you that this is really, really bad.

There are much better ways to address taxes than with life insurance 99.99% of the time. Only an insurance salesperson will say otherwise.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Life insurance, is it a good deal?

Post by Trader Joe » Mon Aug 12, 2019 5:59 pm

gougou wrote:
Mon Aug 12, 2019 2:09 pm
So my father's friend (female, 55yo) is looking to invest some money to leave to her child. The deal she got is that she pays $100K per year for the next 5 years, and the total death benefit is $2.5M up until she is 104 yo, and grows at about 3% per year after that, until she's 120 yo then the death benefit will be paid to beneficiary regardless of whether she is alive.

She wants to know if it is a good deal. I'd like some opinions from here. Thanks :)

Edit: The $500K she's looking to invest is an inheritance she recently received that she wishes to pass down. She probably doesn't need it for her retirement. She is not a US resident but she prefers to invest the money in the US.
I would not recommend this course of action. She should consider investing in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), designate her beneficiary(s) and have a valid will in place.

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Re: Life insurance, is it a good deal?

Post by Hyperborea » Mon Aug 12, 2019 6:05 pm

Trader Joe wrote:
Mon Aug 12, 2019 5:59 pm
gougou wrote:
Mon Aug 12, 2019 2:09 pm
So my father's friend (female, 55yo) is looking to invest some money to leave to her child. The deal she got is that she pays $100K per year for the next 5 years, and the total death benefit is $2.5M up until she is 104 yo, and grows at about 3% per year after that, until she's 120 yo then the death benefit will be paid to beneficiary regardless of whether she is alive.

She wants to know if it is a good deal. I'd like some opinions from here. Thanks :)

Edit: The $500K she's looking to invest is an inheritance she recently received that she wishes to pass down. She probably doesn't need it for her retirement. She is not a US resident but she prefers to invest the money in the US.
I would not recommend this course of action. She should consider investing in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), designate her beneficiary(s) and have a valid will in place.
Not a US resident so they can't buy US mutual funds and US ETFs may have punishing estate taxes - an exemption of only $60K where the tax rate rises quickly to 40%. Whether this is true will depend on the country of the person's residence and whether they have an estate tax treaty with the US (not many do). So, this is potentially very expensive advice.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Nate79
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Re: Life insurance, is it a good deal?

Post by Nate79 » Mon Aug 12, 2019 8:36 pm

I'm really sorry to hear she was scammed by a life insurance salesman into dumping her money into this horrible product. If she hasn't already paid any money she should stop immediately. You said she doesnt want to lose money but in fact whole life you lose a significant amount of money for the first 5-10 years as you dig out of the hole due to the commission. Oh, and if you die they keep your money and just pay you the death benefit which could have been bought for much cheaper using term. Overall it is a horrible money losing product scammed on unsuspecting and ignorant consumers. Buyer beware.

SuperSaver1975
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Re: Life insurance, is it a good deal?

Post by SuperSaver1975 » Tue Aug 13, 2019 10:25 am

gougou wrote:
Mon Aug 12, 2019 5:40 pm
SuperSaver1975 wrote:
Mon Aug 12, 2019 5:18 pm
This sounds like a "whole life insurance" scam. The broker is going to pocket 6 figures and rip her off.

She won't get the "investment" part AND the death benefit.

Scenario 1, as life insurance: Pay $500,000 for a $2.5M life insurance policy. If she dies, the "investment" principal and interest disappears, and the life insurance turns out to have been over-priced by 2,000% or more compared to a standard, basic, legit term life insurance.

Scenario 2, as an "investment": Pay $500,000 for an "investment" earning 3% interest. First, the 3% is probably a rosy prediction that is not guaranteed. Usually they guarantee only a negative rate of return. People who wait years and years for these "investments" end up finding out that the rosy prediction never materialized. Second, if she withdraws money at some point, it's not so simple. She will have to take the money out as loans with a high interest rate, just to get her own money!! Third, taking the money out in withdrawals (loans) makes the death benefit disappear.

When you realize they are offering you one OR the other, and not both, it's a total scam.
OK I'll definitely ask her to give us a detailed inforce illustration of the proposed policy and double check. But I am pretty sure the total death payout is $2.5M up until she's 104 yo.
This past year I did a complete overhaul of my finances, and nearly got suckered into this kind of insurance/investment product by a Northwestern Mutual financial advisor, who was really just an insurance salesman. If it is called "whole life" or "variable life" or "universal life" insurance, it is a scam. Maybe not quite as bad as the Nigerian Prince scam, but right up there. Term life insurance is really cheap and simple. My wife has a policy worth $750,000 and our premium is around $300 dollars per year. If we scaled her death benefit up to $2.5 million, it would cost us about $1,000 per year. This is the rate for a healthy mid-30's female, so your father's friend would pay a higher rate due to her age, but paying $500,000 is an egregious markup.

Listen to the others who say that investments and insurance should not be mixed. The reason that insurance salesmen come up with these products is to confuse and trick the mark, er, customer. If she wants life insurance, she should buy that as a stand-alone term life insurance product. If she wants an investment, that should be kept completely separate from life insurance.

In my case, the NW Mututal guy gave us a thick binder full of financial analysis of our situation. When I really took a look at this tome, and looked at the charts prepared for the whole life insurance policy, it predicted a rate of 5.0% growth, and showed how that would grow. But in another column, the amount of money that was guaranteed was LESS than the principal we would be depositing, for a period of about 30 YEARS!. Imagine that, they would only guarantee less than what we could get by literally hiding it under a mattress.

Your father's friend isn't dumb. Lots of people fall for this scam. To the best of my knowledge, the best time to start a whole life insurance policy is never. And the best time to get out of one, once gotten into, is right now, no matter how painful the loss. If she were to get involved, and then change her mind after a year or 5, she'd probably lose $75,000, plus the opportunity cost of a real investment.

MI_bogle
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Re: Life insurance, is it a good deal?

Post by MI_bogle » Tue Aug 13, 2019 10:43 am

gougou wrote:
Mon Aug 12, 2019 4:30 pm
RickBoglehead wrote:
Mon Aug 12, 2019 3:18 pm
She is a sitting duck. Warn her off. Bank CDs or US Treasuries.
US Treasuries return is probably too low so it's difficult to recommend it.
There is no free lunch. If stocks are too risky and she "does not want to lose money" she also cannot be against the low returns of CDs/Treasuries.

You cannot have low risk and high return.

Do NOT do this life insurance. It's a terrible deal for her, and for her heir(s). She will be given the hard sell, because it will make a ton of money for the insurance salesman

Admiral
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Re: Life insurance, is it a good deal?

Post by Admiral » Tue Aug 13, 2019 11:14 am

I actually think that, if she doesn't need the money, or care about money or maximizing the inheritance, this seems like a good deal for the heirs (and the insurance company, of course, but let's put that aside.)

She pays $500k. The heirs get $2.5m tax free in 50 years. (When they may or may not still be alive. Doh!)

If the 500k were invested for 50 years @ 3%, that's $2,191,953.01, but that's a taxable figure, and before inflation.

Of course, for 50 years the return rate is likely to be higher. If it's 5%, that's $5,733,699.89, before taxes and inflation. So the insurance deal is not looking so great there.

If she drops dead tomorrow or even in a few years, it's a great deal for them!!

dbr
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Re: Life insurance, is it a good deal?

Post by dbr » Tue Aug 13, 2019 11:49 am

Admiral wrote:
Tue Aug 13, 2019 11:14 am
I actually think that, if she doesn't need the money, or care about money or maximizing the inheritance, this seems like a good deal for the heirs (and the insurance company, of course, but let's put that aside.)

She pays $500k. The heirs get $2.5m tax free in 50 years. (When they may or may not still be alive. Doh!)

If the 500k were invested for 50 years @ 3%, that's $2,191,953.01, but that's a taxable figure, and before inflation.

Of course, for 50 years the return rate is likely to be higher. If it's 5%, that's $5,733,699.89, before taxes and inflation. So the insurance deal is not looking so great there.

If she drops dead tomorrow or even in a few years, it's a great deal for them!!

I agree this needs to be considered carefully regarding the objectives and the alternatives.

It may be the best plan is to give the money to the heir now neither invest it as a legacy nor buy insurance. More later. As an aside I think rants about much money they insurance company is going to make are irrelevant except that there may be better policy alternatives out there. I don't think it is possible to buy term insurance that does not terminate at a fairly early age, such as 75 or something. For a legacy the insurance must be permanent.The objective is to hand down an inheritance.

The alternatives are:

1. Pay $500,000 now and the heir gets $2.5M whenever the "grantor" dies.

2. Invest the $500,000 now and the heir gets whatever the investment has grown to at death of the grantor.

An assumption is that the grantor has already decided that she has no interest whatsoever in the original $500,000. This leads to a third alternative:

3. Give the $500,000 to the heir now and let the heir spend or invest the money at will.

Insurance and investment cannot be compared in a commensurate manner because insurance is not an investment and balances a completely different set of risks and benefits than does investing. Some of these include:

1. The outcome of insurance is certain in amount and highly uncertain in timing. An investment left as a legacy is highly uncertain in both amount and timing but an investment given over now is highly uncertain in outcome but has no uncertainty in timing as the heir can use the money at will.

2. The insurance has a benefit that the payment could appear at early demise of the grantor while an investment could have attained almost no growth so soon. Insurance has a risk that the grantor will live so long the heir will hardly benefit from the legacy.

3. Investing has a risk that investment returns could be poor. Insurance has a benefit that the payout is certain. Investment returns that are as certain as the insurance payout are going to be very poor. For example at 2% it will take 82 years to grow $500,000 to $2.5M.

4. Investing has an opportunity that investment returns could be good. In FireCalc an initial portfolio of $500K invested in the stock market could grow in 30 years to $2M at the worst and $20M at the best. However, if the grantor would die 15 years out the investment potential is about $500,000 to $6M and abour 3/4 of the outcomes do not reach $2.5M. Therefore the real decision is about certainties rather than about maximizing wealth.

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willthrill81
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Re: Life insurance, is it a good deal?

Post by willthrill81 » Tue Aug 13, 2019 11:53 am

I suspect that we won't hear from the OP about this again. The OP seems to think that this life insurance would be good.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Nate79
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Re: Life insurance, is it a good deal?

Post by Nate79 » Tue Aug 13, 2019 11:54 am

Admiral wrote:
Tue Aug 13, 2019 11:14 am
I actually think that, if she doesn't need the money, or care about money or maximizing the inheritance, this seems like a good deal for the heirs (and the insurance company, of course, but let's put that aside.)

She pays $500k. The heirs get $2.5m tax free in 50 years. (When they may or may not still be alive. Doh!)

If the 500k were invested for 50 years @ 3%, that's $2,191,953.01, but that's a taxable figure, and before inflation.

Of course, for 50 years the return rate is likely to be higher. If it's 5%, that's $5,733,699.89, before taxes and inflation. So the insurance deal is not looking so great there.

If she drops dead tomorrow or even in a few years, it's a great deal for them!!
If she drops dead tomorrow this was an absolute horrendous deal because she could have put $499,9xx in a money market account and bought a term policy for the same face amount and come out FAR ahead. Whole life scam is still a life insurance product, normally the underlying insurance portion itself is more expensive than a term policy you can buy at any of the third party brokers.

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Nate79
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Re: Life insurance, is it a good deal?

Post by Nate79 » Tue Aug 13, 2019 11:55 am

dbr wrote:
Tue Aug 13, 2019 11:49 am
Admiral wrote:
Tue Aug 13, 2019 11:14 am
I actually think that, if she doesn't need the money, or care about money or maximizing the inheritance, this seems like a good deal for the heirs (and the insurance company, of course, but let's put that aside.)

She pays $500k. The heirs get $2.5m tax free in 50 years. (When they may or may not still be alive. Doh!)

If the 500k were invested for 50 years @ 3%, that's $2,191,953.01, but that's a taxable figure, and before inflation.

Of course, for 50 years the return rate is likely to be higher. If it's 5%, that's $5,733,699.89, before taxes and inflation. So the insurance deal is not looking so great there.

If she drops dead tomorrow or even in a few years, it's a great deal for them!!

I agree this needs to be considered carefully regarding the objectives and the alternatives.

It may be the best plan is to give the money to the heir now neither invest it as a legacy nor buy insurance. More later. As an aside I think rants about much money they insurance company is going to make are irrelevant except that there may be better policy alternatives out there. I don't think it is possible to buy term insurance that does not terminate at a fairly early age, such as 75 or something. For a legacy the insurance must be permanent.The objective is to hand down an inheritance.

The alternatives are:

1. Pay $500,000 now and the heir gets $2.5M whenever the "grantor" dies.

2. Invest the $500,000 now and the heir gets whatever the investment has grown to at death of the grantor.

An assumption is that the grantor has already decided that she has no interest whatsoever in the original $500,000. This leads to a third alternative:

3. Give the $500,000 to the heir now and let the heir spend or invest the money at will.

Insurance and investment cannot be compared in a commensurate manner because insurance is not an investment and balances a completely different set of risks and benefits than does investing. Some of these include:

1. The outcome of insurance is certain in amount and highly uncertain in timing. An investment left as a legacy is highly uncertain in both amount and timing but an investment given over now is highly uncertain in outcome but has no uncertainty in timing as the heir can use the money at will.

2. The insurance has a benefit that the payment could appear at early demise of the grantor while an investment could have attained almost no growth so soon. Insurance has a risk that the grantor will live so long the heir will hardly benefit from the legacy.

3. Investing has a risk that investment returns could be poor. Insurance has a benefit that the payout is certain. Investment returns that are as certain as the insurance payout are going to be very poor. For example at 2% it will take 82 years to grow $500,000 to $2.5M.

4. Investing has an opportunity that investment returns could be good. In FireCalc an initial portfolio of $500K invested in the stock market could grow in 30 years to $2M at the worst and $20M at the best. However, if the grantor would die 15 years out the investment potential is about $500,000 to $6M and abour 3/4 of the outcomes do not reach $2.5M. Therefore the real decision is about certainties rather than about maximizing wealth.
Or you just get a term policy and negate all of the whole life scam issues.

dbr
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Re: Life insurance, is it a good deal?

Post by dbr » Tue Aug 13, 2019 12:29 pm

Nate79 wrote:
Tue Aug 13, 2019 11:55 am


Or you just get a term policy and negate all of the whole life scam issues.
I don't think you can get term life to indefinite age. If the policy terminates before the insured dies it does nothing to provide a legacy.

I don't disagree at all that the OP should shop carefully and avoid a bad deal if they decide insurance serves the purpose they have in mind. GUL, for example, guarantees for life but does not intend to build up cash value. But I am not an insurance expert and would advise consulting one if a person has the kind of objectives that life insurance might meet. Ensuring/insuring legacy desires can be a legitimate objective.

Another option when there are very incommensurate tools is to split the difference. Some of the money could be used for insurance and some invested thus diversifying the risks and opportunities.

And I still think giving the heir the money now is an option.

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