Is this insurance policy a good deal?

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psy1
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Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 9:04 am

I have tried to talk myself into thinking this insurance policy, which we have had for several years, is a bad deal but I can't see it. Tell me if I am wrong!

My wife and I, both 57, have a second to die life insurance policy for $1,000,000 with an adult child as beneficiary. The cash value is ~$40,000. the annual payment is $3300. Most of the annual premium pays the insurance and a little bumps up the cash value. The cash value is invested in a stock fund-of-funds, the return on which is at best average.

The annual premium is fixed. The cash value will continue to increase slightly to a maximum. Should we live long enough, the cash value will go down (because the cost of insurance will go up) until it reaches zero but our insurance will continue at $1 mil.

From my standpoint, cashing out $40K and investing the $3300 annual premium for 30 yrs in a taxable account with a 6% return would be just $330K. At 8%, just $452K. The $1 mil seems like a good deal. Of course, we have had the policy for 19 years so we could have done better investing from the start but we did want some insurance at the time. So the question is if this is a good deal now, not 19 years ago.

dbr
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Re: Is this insurance policy a good deal?

Post by dbr » Tue Aug 13, 2019 10:30 am

If your objective is to pass on a maximum amount of money to your beneficiary when you are both gone, I think the chances of doing that by cancelling the policy and investing the money are very poor. To do that you have to both invest at a high and uncertain return and you would surrender the benefit of your beneficiary getting the full $1M at an earlier age if you don't live as long as expected. A risk is that you live so long your beneficiary does not see the money for a long time. It is not straightforward to compare the terms of an insurance proposition to an investment proposition in terms of whether or not it is a "good deal."

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 10:32 am

Yes, I understand what you are saying. The goal is to leave a baseline inheritance that we feel is sufficient to not feel guilty should we spend down our assets. She deserves something for surviving us!

dbr
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Re: Is this insurance policy a good deal?

Post by dbr » Tue Aug 13, 2019 10:52 am

psy1 wrote:
Tue Aug 13, 2019 10:32 am
Yes, I understand what you are saying. The goal is to leave a baseline inheritance that we feel is sufficient to not feel guilty should we spend down our assets. She deserves something for surviving us!
To be more specific, if you want to ensure she gets no less than $1M when you are gone plus whatever else is left, then this policy would seem to be an ideal way to do that.

SuperSaver1975
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Re: Is this insurance policy a good deal?

Post by SuperSaver1975 » Tue Aug 13, 2019 11:17 am

Keep in mind that if the death benefit is paid out, the cash value that accrued will magically disappear. At least, that's how these products usually work.

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 11:20 am

SuperSaver1975 wrote:
Tue Aug 13, 2019 11:17 am
Keep in mind that if the death benefit is paid out, the cash value that accrued will magically disappear. At least, that's how these products usually work.
Yes, understood. Although not quite true, in my mind I consider this term life insurance given the fixed premium and the minimal cash value. The biggest long term risk is inflation eroding the value of the benefit but inflation has been low so far.

123
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Re: Is this insurance policy a good deal?

Post by 123 » Tue Aug 13, 2019 11:28 am

If the adult child beneficiary has a disability I can see a potential need for the policy. If the adult child is working, lives on their own, and is capable of accumulating their own retirement savings then the policy would seem to serve little financial purpose.
The closest helping hand is at the end of your own arm.

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 11:34 am

123 wrote:
Tue Aug 13, 2019 11:28 am
If the adult child beneficiary has a disability I can see a potential need for the policy. If the adult child is working, lives on their own, and is capable of accumulating their own retirement savings then the policy would seem to serve little financial purpose.
I understand your point about disability, but it seems to me that a million dollars serves more than a little financial purpose.

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Nate79
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Re: Is this insurance policy a good deal?

Post by Nate79 » Tue Aug 13, 2019 11:57 am

No, it's a horrible product. You would be FAR better to have (or now buy) term insurance.

megabad
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Re: Is this insurance policy a good deal?

Post by megabad » Tue Aug 13, 2019 12:02 pm

123 wrote:
Tue Aug 13, 2019 11:28 am
If the adult child beneficiary has a disability I can see a potential need for the policy. If the adult child is working, lives on their own, and is capable of accumulating their own retirement savings then the policy would seem to serve little financial purpose.
Basically I agree with this. It seems there are at least 3 questions here:

1) Was this life insurance policy a good deal original? >> No
2) Is this life insurance policy a good deal now compared to other life insurance policies? >> If are healthy and you are spending (net) less than $2000 per year for it than yes. If you are spending more than no in my opinion. It is not clear to me how much you are spending net.
3) Is any life insurance a good deal in this situation? >> Only if you have dependents with limited means of support. I can't think of many folks at 60 with adult children that I would recommend life insurance to, but there are exceptions.

In other words, I think there is a high likelihood that keeping this policy is not a "good deal" for you in the all encompassing sense unless you have extenuating circumstances necessitating coverage. The only exceptions I can think of to this are if the policy is very old and cost is negative (can happen).

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 12:08 pm

megabad wrote:
Tue Aug 13, 2019 12:02 pm

Basically I agree with this. It seems there are at least 3 questions here:

1) Was this life insurance policy a good deal original? >> No
2) Is this life insurance policy a good deal now compared to other life insurance policies? >> If are healthy and you are spending (net) less than $2000 per year for it than yes. If you are spending more than no in my opinion. It is not clear to me how much you are spending net.
3) Is any life insurance a good deal in this situation? >> Only if you have dependents with limited means of support. I can't think of many folks at 60 with adult children that I would recommend life insurance to, but there are exceptions.

In other words, I think there is a high likelihood that keeping this policy is not a "good deal" for you in the all encompassing sense unless you have extenuating circumstances necessitating coverage. The only exceptions I can think of to this are if the policy is very old and cost is negative (can happen).
For clarification, the policy was arguably not a good investment 19 years ago when we purchased it but it seems to me that it served the purpose at the time because our assets were much lower and we assured an inheritance.

The cost now is $3300 per year total, so $1650 per person for the couple.

Our child is in college so not self-sufficient yet and likely to pursue a profession that is not the most lucrative.

megabad
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Re: Is this insurance policy a good deal?

Post by megabad » Tue Aug 13, 2019 12:23 pm

psy1 wrote:
Tue Aug 13, 2019 12:08 pm
For clarification, the policy was arguably not a good investment 19 years ago when we purchased it but it seems to me that it served the purpose at the time because our assets were much lower and we assured an inheritance.
The purpose it served was costing you far more than term insurance would have.

The cost now is $3300 per year total, so $1650 per person for the couple.
A reasonably healthy male at your age should be able to get a $1 mill 10 year term policy for less than $2500 per year. In my opinion, you are overpaying by $800 per year. But this assumes that you need insurance.

Our child is in college so not self-sufficient yet and likely to pursue a profession that is not the most lucrative.
But I assume you have other assets correct? If she will be inheriting $3 million in assets, does she really need an extra $1 million in life insurance? Obviously everyone's situation is different but I would think you have a much larger nest egg than when you bought the policy so maybe you have enough assets without it now?

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 12:31 pm

Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?

dbr
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Re: Is this insurance policy a good deal?

Post by dbr » Tue Aug 13, 2019 12:35 pm

megabad wrote:
Tue Aug 13, 2019 12:23 pm
psy1 wrote:
Tue Aug 13, 2019 12:08 pm
For clarification, the policy was arguably not a good investment 19 years ago when we purchased it but it seems to me that it served the purpose at the time because our assets were much lower and we assured an inheritance.
The purpose it served was costing you far more than term insurance would have.

The cost now is $3300 per year total, so $1650 per person for the couple.
A reasonably healthy male at your age should be able to get a $1 mill 10 year term policy for less than $2500 per year. In my opinion, you are overpaying by $800 per year. But this assumes that you need insurance.

Our child is in college so not self-sufficient yet and likely to pursue a profession that is not the most lucrative.
But I assume you have other assets correct? If she will be inheriting $3 million in assets, does she really need an extra $1 million in life insurance? Obviously everyone's situation is different but I would think you have a much larger nest egg than when you bought the policy so maybe you have enough assets without it now?
The problem is a ten year term insurance policy does nothing to secure a legacy for a person 57 years old who will no longer be insured at age 67. It is a good solution for someone who has dependents in the critical early sixties life range. I think it could be term insurance could be bought to age 75, but have no idea on cost.

I agree with your point about the big picture. It makes a huge difference what other assets there are.

dbr
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Re: Is this insurance policy a good deal?

Post by dbr » Tue Aug 13, 2019 12:42 pm

psy1 wrote:
Tue Aug 13, 2019 12:31 pm
Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?
Can you buy 30 year term at age 57? or even 20 year term? Term insurance does not provide a legacy if you outlive, so there is a risk you spend your money and your heir doesn't get less but gets nothing.

Aside from that I can't relate to the concept of a "good deal" for mixing up insurance and investment. I would say that for what you want to do keeping the policy seems like a better answer for you than cancelling the policy and investing. You decide these things on what is the best tool to meet your objectives and not on what is the "best deal."

Whether cancelling the policy and getting some other kind of insurance makes sense, I don't know. Keep in mind the premium on this policy is low because you bought it when you were young for insurance reasons. But you are absolutely right that any consideration that you coulda-shoulda-woulda bought term and invested the savings is completely irrelevant.

megabad
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Re: Is this insurance policy a good deal?

Post by megabad » Tue Aug 13, 2019 12:57 pm

psy1 wrote:
Tue Aug 13, 2019 12:31 pm
Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?
Yes I suppose the difference between us is I don't consider insurance an "investment". I equate it to gambling. I suppose I agree with you that is a reasonable gamble (now), but my point was why bother? Basically you are gambling that your portfolio returns will be less than historical averages and that you won't live significantly past life expectancy. These probably aren't terrible bets but who knows. I am also assuming that your policy has a very high age limit (99 usually?) and that you don't go over it. Is it a "good deal" for Jeff Bezos to go the MGM grand and bet $1m even if his odds are 75%? I say no because why would he bother--he doesn't need to.
dbr wrote:
Tue Aug 13, 2019 12:35 pm
The problem is a ten year term insurance policy does nothing to secure a legacy for a person 57 years old who will no longer be insured at age 67. It is a good solution for someone who has dependents in the critical early sixties life range. I think it could be term insurance could be bought to age 75, but have no idea on cost.

I agree with your point about the big picture. It makes a huge difference what other assets there are.
Well, as another poster said, I wasn't sure you could go any longer than 10 years at 57 so I just used that and at 67 I anticipated that OP would be ready for retirement and might have significant assets. The big picture was definitely my point.

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 1:52 pm

My wife and I are semi-retired. We anticipate working just enough each year for at least 3 more years to meet our expenses and such time as our daughter has finished her education. Assets not including house are ~$4.8 million, 60% tax deferred and 40% taxable.

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Stinky
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Re: Is this insurance policy a good deal?

Post by Stinky » Tue Aug 13, 2019 2:39 pm

psy1 wrote:
Tue Aug 13, 2019 12:31 pm
Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?
Is the current policy guaranteed to stay in force for the remainder of your lives if you pay the $3,300 annual premium? (This is an absolutely critical question.) If so, I agree that the policy is worth keeping today from a purely investment point of view.

Effectively, looking forward only, you're investing $40,000 today, and $3,300 every year in the future, to get $1 million at the second death. And the $1 million is tax-free to the beneficiary. This is a better tax result than you would get investing money in a taxable account.

I definitely wouldn't have bought the policy 19 years ago. But that is now water under the bridge.

The vast majority of my posts on life insurance are "buy term", and "drop any other kind of life insurance". This situation is different because of all the money that you've "lost" over the last 19 years.

Looking forward only, this is a money-good deal for you.
It's a GREAT day to be alive - Travis Tritt

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 2:58 pm

Stinky wrote:
Tue Aug 13, 2019 2:39 pm
psy1 wrote:
Tue Aug 13, 2019 12:31 pm
Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?
Is the current policy guaranteed to stay in force for the remainder of your lives if you pay the $3,300 annual premium? (This is an absolutely critical question.) If so, I agree that the policy is worth keeping today from a purely investment point of view.

Effectively, looking forward only, you're investing $40,000 today, and $3,300 every year in the future, to get $1 million at the second death. And the $1 million is tax-free to the beneficiary. This is a better tax result than you would get investing money in a taxable account.

I definitely wouldn't have bought the policy 19 years ago. But that is now water under the bridge.

The vast majority of my posts on life insurance are "buy term", and "drop any other kind of life insurance". This situation is different because of all the money that you've "lost" over the last 19 years.

Looking forward only, this is a money-good deal for you.
Yes, you are correct on the above. The policy is in effect until the second of us dies and the premiums are fixed.

And yes, often I wait long enough my decisions are eventually correct! When we bought the policy 19 years ago, we had plenty of 20-year term life that is about to be finished and not replaced. We bought the second-to-die policy as sort of a gift to our daughter so that it would be money segregated from our investments that she would receive when she is older and assure that she receives an inheritance regardless of our subsequent financial decisions. We considered that as she gets older, she might take over the premiums herself. In reality, we would not want the payments to lapse, so we would continue to make the payments but likely moderate other gifts to her in consideration of the insurance.

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Stinky
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Re: Is this insurance policy a good deal?

Post by Stinky » Tue Aug 13, 2019 4:13 pm

psy1 wrote:
Tue Aug 13, 2019 2:58 pm

The policy is in effect until the second of us dies and the premiums are fixed.
One final comment about the policy. It sounds like a “secondary guarantee universal life” policy.

On a “normal” universal life policy, the policy lapses when the account value goes to zero. On your policy, there is likely an additional “secondary guarantee” that the policy will stay in force if premiums are paid when due, even if the account value is zero.

On this type of policy, it is absolutely imperative that someone pays every premium when due.. Even being late with one premium can cause the secondary guarantee to expire, and then the policy will lapse when the account value reaches zero.

I worked in life insurance, and I know that many policyholders were very unhappy when they let the secondary guarantee lapse. Don’t be one of them - or your current money-good deal will no longer be money-good.
It's a GREAT day to be alive - Travis Tritt

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psy1
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Re: Is this insurance policy a good deal?

Post by psy1 » Tue Aug 13, 2019 4:53 pm

Stinky wrote:
Tue Aug 13, 2019 4:13 pm
psy1 wrote:
Tue Aug 13, 2019 2:58 pm

The policy is in effect until the second of us dies and the premiums are fixed.
One final comment about the policy. It sounds like a “secondary guarantee universal life” policy.

On a “normal” universal life policy, the policy lapses when the account value goes to zero. On your policy, there is likely an additional “secondary guarantee” that the policy will stay in force if premiums are paid when due, even if the account value is zero.

On this type of policy, it is absolutely imperative that someone pays every premium when due.. Even being late with one premium can cause the secondary guarantee to expire, and then the policy will lapse when the account value reaches zero.

I worked in life insurance, and I know that many policyholders were very unhappy when they let the secondary guarantee lapse. Don’t be one of them - or your current money-good deal will no longer be money-good.
Good advice, thank you! The need to be timely with payments is why we won't eventually have our daughter make the payments but instead do it ourselves to make sure it is done in a timely manner. Yes, the policy will continue even when the cash value is zero.

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Re: Is this insurance policy a good deal?

Post by Wiggums » Tue Aug 13, 2019 5:01 pm

Stinky wrote:
Tue Aug 13, 2019 2:39 pm
psy1 wrote:
Tue Aug 13, 2019 12:31 pm
Perhaps I should rephrase the question rather than re-litigating my original thought process when buying the policy and my personal goals for the money.

If we cash out the policy, we get $40K. We are likely to live another 30 years or so on average so if we invest the $40K plus the $3300 annual premium in a taxable account we are likely to have less than $500K at the time the last of us dies. It seems to me that, as of now, the existing policy is worth keeping on that basis.

We are in reasonably good, but not perfect, health. If we were to get 20-30 year term life policies the premiums would be higher than what we are paying now ($1650 each per year).

From my standpoint, the policy as it stands now, seems like a good deal as insurance and as an investment. To rephrase my original post: am I correct in thinking that the existing policy is a good deal as both an investment and as insurance?
Is the current policy guaranteed to stay in force for the remainder of your lives if you pay the $3,300 annual premium? (This is an absolutely critical question.) If so, I agree that the policy is worth keeping today from a purely investment point of view.

Effectively, looking forward only, you're investing $40,000 today, and $3,300 every year in the future, to get $1 million at the second death. And the $1 million is tax-free to the beneficiary. This is a better tax result than you would get investing money in a taxable account.

I definitely wouldn't have bought the policy 19 years ago. But that is now water under the bridge.

The vast majority of my posts on life insurance are "buy term", and "drop any other kind of life insurance". This situation is different because of all the money that you've "lost" over the last 19 years.

Looking forward only, this is a money-good deal for you.
+1

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