Whole Life vs Universal Life Insurance

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cmauss
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Whole Life vs Universal Life Insurance

Post by cmauss » Mon Sep 17, 2018 3:39 pm

I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.

gclancer
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Re: Whole Life vs Universal Life Insurance

Post by gclancer » Mon Sep 17, 2018 3:48 pm

Are you married? Do you have children? Why do you think you need life insurance?

A good place to start for comparison shopping would be www.term4sale.com. How much in term life insurance could you get on a 30 year fixed annual premium policy for the same number of premium dollars you’re contemplating spending on whole or universal life?

cmauss
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Re: Whole Life vs Universal Life Insurance

Post by cmauss » Mon Sep 17, 2018 4:25 pm

Just for more information, I am married and we have a 2.5 year old child. I like the idea of whole or universal, because from my understanding it acts as an investement you can leverage loans and other things against as well as life insurance. Where as with term all I get is the pay out to my family in the event that I die.

david
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Re: Whole Life vs Universal Life Insurance

Post by david » Mon Sep 17, 2018 4:38 pm

You pay for that privilege, though. So having assets instead can also be used to borrow against and pay for things.

Separating insurance from investment is also likely to be cheaper. Agents typically make a bundle on these policies. Also you never get both the cash value and the death benefit. So talking about them as a "both" can be problematic.

These policies are typically sold to people. It is very rare that they are beneficial. But a good salesperson could make them seem like valuable investments, though. Beware.

CRTR
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Re: Whole Life vs Universal Life Insurance

Post by CRTR » Mon Sep 17, 2018 4:40 pm

I'm with "gclancer" on this one. Let's start with the basics:
1. Why do you need life insurance?
2. How much life insurance do you need? How did you arrive at that number?

It sounds like the appeal of permanent policies is the "investment returns" you can earn. The way I think of permanent policies is that there are two parts: the savings portion and the insurance portion. The insurance portion is called the "face value" (amount your beneficiaries will receive when you die) and the savings portion is called the "cash value". Usually the agent selling the policy will provide some sort of simulation showing how much the cash value will grow over time. In essence, you're buying a package deal: a life insurance policy and a savings/investment account managed by an insurance company.

To help decide if this is the most cost effective choice for you, compare the premium of a 30 year term policy (www.term4sale.com is a good option ) with a death benefit equal to the face value of the permanent policy. Next, take the difference in monthly premiums between the two choices and plug that extra $$ into an investment returns calculator get an estimate what you would have after 30 years of investing. Compare your expected investment returns to the cash value projections from the agent . . . Let me know if you still think it's a good deal?

Tal-
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Re: Whole Life vs Universal Life Insurance

Post by Tal- » Mon Sep 17, 2018 4:41 pm

For 99% of the population that needs life insurance, a simple term policy is the best bet.

You're right that whole and universal policies act as both an investment and as life insurance, but they aren't very good at either. By way of example, if a whole life policy was 2000/year for 150k payout, you'd be better off spending $300 for the exact same 150k coverage, investing $1500 in a stock/bond allocation, and going out on a nice date night with the remaining $200.
Debt is to personal finance as a knife is to cooking.

mortfree
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Re: Whole Life vs Universal Life Insurance

Post by mortfree » Mon Sep 17, 2018 4:43 pm

You want term life insurance.

Forget about the others.

You will lose money.

Not sure where you have been reading but on this forum people are told to run away from the whole life and universal life Insurances

Then there are threads where people realize they made a huge mistake and want out.

I didn’t read all the way through but by the third reply it should be obvious.
viewtopic.php?t=219782
Last edited by mortfree on Mon Sep 17, 2018 4:54 pm, edited 1 time in total.

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White Coat Investor
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Re: Whole Life vs Universal Life Insurance

Post by White Coat Investor » Mon Sep 17, 2018 4:50 pm

cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.
Treat this process as you would treat getting married, because in both cases it's either "Until death do you part" or it's going to cost you a lot of money. You should become an expert in cash value life insurance before buying a policy. Note that most who follow this advice don't end up buying a policy. I know of some good posts on whole life insurance that might help you in increasing your expertise on the topic. Perhaps somebody can post a link to them.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

History_Prof
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Re: Whole Life vs Universal Life Insurance

Post by History_Prof » Mon Sep 17, 2018 4:56 pm

And because White Coat Investor will not self-promote, I would recommend checking out: https://www.whitecoatinvestor.com/what- ... insurance/ and the longer series: https://www.whitecoatinvestor.com/debun ... insurance/

When I first met with a financial planner ([sic!] insurance salesperson) the site was very useful in allowing me to acquire the knowledge necessary to make a sound life choice.
Last edited by History_Prof on Mon Sep 17, 2018 4:59 pm, edited 1 time in total.

MittensMoney
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Re: Whole Life vs Universal Life Insurance

Post by MittensMoney » Mon Sep 17, 2018 4:58 pm

Every financial advisor I've spoken with about this topic (they used to work at Northwestern Mutual, or USAA, etc., but now work at RIA's) say that mixing life insurance & investments doesn't work out for the consumer. Your best course of action is to buy Term Life Insurance, and then invest separately.

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HomerJ
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Re: Whole Life vs Universal Life Insurance

Post by HomerJ » Mon Sep 17, 2018 4:59 pm

White Coat Investor wrote:
Mon Sep 17, 2018 4:50 pm
cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.
Treat this process as you would treat getting married, because in both cases it's either "Until death do you part" or it's going to cost you a lot of money. You should become an expert in cash value life insurance before buying a policy. Note that most who follow this advice don't end up buying a policy. I know of some good posts on whole life insurance that might help you in increasing your expertise on the topic. Perhaps somebody can post a link to them.
I heard of this one guy who has some good posts on life insurance

https://www.whitecoatinvestor.com/what- ... insurance/
The J stands for Jay

NotWhoYouThink
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Re: Whole Life vs Universal Life Insurance

Post by NotWhoYouThink » Mon Sep 17, 2018 5:01 pm

Congratulations! You are successful enough to attract the attention of life insurance salesmen. That really is a positive accomplishment, You'll be even better off once you educate yourself about insurance and investments enough to know that you should keep the two separate.

As several people have mentioned, term life insurance is cheap. Both you and your wife should get plenty.

Investing is important too, and this site has a great wiki on getting started. But nobody who isn't trying to sell you life insurance will tell you that insurance is a good investment. Or even that it is an investment at all. It isn't.

If you pour a bunch of money into a whole or universal life policy, the first thing that happens is that the agent who sold it gets a big commission. Now everybody has to make money, and sales is a valid career path, but you have to keep in mind that the sales agent is very motivated to sell to you because of the big commission, and that will motivate him to, say, leave a few things out that you need to know about the policy you are being sold.

On the other hand, you can invest in low cost index mutual funds with no sales commission at all, and very low annual costs. So what is better - a high up front commission and high annual costs, or no up front commission and low annual cost? Your answer will depend on whether you are the one buying or selling the insurance policy.

Also, the "investment" in the policy isn't very accessible, so you can't easily get to it when you need it. If you are saving for a house down payment or college or even retirement, you want to be able to withdraw the money when you need it. You don't want to have to borrow from the policy and then pay yourself interest, and risk a big tax bill if you borrow too much. Speaking of taxes - if you keep the policy long enough (think decades, not years) for it to actually have gains, those gains will be taxed at ordinary income rates if you decide to withdraw the money. With your investment, you may be taxed a capital gains rates, which generally are lower.

Congratulations on your current financial success, and good luck with your investments.

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HomerJ
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Re: Whole Life vs Universal Life Insurance

Post by HomerJ » Mon Sep 17, 2018 5:04 pm

cmauss...

Life insurance is not a good investment. The fees are large and hidden.

Buy life insurance like you buy car insurance, and hope you never have to use it.

If you were planning on spending $500 a month on whole life, instead spend $50 a month on 20-year or 30-year term-life and invest the other $450 a month.

You'll probably have MORE insurance, and in 20-30 years, you'll definitely have MORE money than if you "invested" $500 a month into whole life or universal life.
The J stands for Jay

cmauss
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Re: Whole Life vs Universal Life Insurance

Post by cmauss » Mon Sep 17, 2018 5:11 pm

All, thank you for the feedback and glad that I asked here first before doing anything! you are right in that a 250k whole life policy is about $160 a month vs $30 a month for term. going with term and investing that extra $130 a month does seem like a better payout and plan moving forward.

EnjoyIt
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Re: Whole Life vs Universal Life Insurance

Post by EnjoyIt » Mon Sep 17, 2018 5:15 pm

cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.
When I ran the numbers for myself many years ago the policy being sold to me was having me pay $50k every year and then after 8 years I would have $400k based on their projections. This is a horrid investment. I instead bought term life and invested the rest. Believe me, I have way more than $400k. Plus, the money is mine. I do not have to borrow from a life insurance policy and pay interest on it.

BTW, thanks WCI for educating me on permanent life insurance back then. You have saved me a fortune.

inbox788
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Re: Whole Life vs Universal Life Insurance

Post by inbox788 » Mon Sep 17, 2018 5:26 pm

cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans...
Did you seek out life insurance yourself, or have you been talking to insurance sales people (or financial "advisors" who are secretly insurance sales people -- ask them how they get paid)?

These aren't the life insurance policies you're looking for.
You can buy inexpensive Term Life when you need it, now go about your business.
Move along... move along.

https://www.youtube.com/watch?v=XvxAMCJe7ak

Nate79
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Re: Whole Life vs Universal Life Insurance

Post by Nate79 » Mon Sep 17, 2018 5:37 pm

cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.
These are absolutely horrendous products. They are horrendous for 3 reasons. One, the fees are super high. Two, they are very complicated (I can guarantee you don't understand these products). Three, they have horrible returns.

Within this is the overall problem that they mix insurance with investing. I can guarantee you will be better off by separating the two products and buying term insurance and investing in traditional ways such as ALL tax advantage accounts and then taxable accounts with very tax efficient index funds.

Hopefully this is clear enough to you.

Edit: just saw you responded that you changed your mind. Term insurance - good choice.

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Taylor Larimore
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Re: Whole Life vs Universal Life Insurance

Post by Taylor Larimore » Mon Sep 17, 2018 5:43 pm

cmauss wrote:
Mon Sep 17, 2018 5:11 pm
All, thank you for the feedback and glad that I asked here first before doing anything! you are right in that a 250k whole life policy is about $160 a month vs $30 a month for term. going with term and investing that extra $130 a month does seem like a better payout and plan moving forward.
cmauss:

You've made a good decision.

Best wishes
Taylor (a former life insurance salesman)
"Simplicity is the master key to financial success." -- Jack Bogle

Grt2bOutdoors
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Re: Whole Life vs Universal Life Insurance

Post by Grt2bOutdoors » Mon Sep 17, 2018 6:04 pm

cmauss wrote:
Mon Sep 17, 2018 4:25 pm
Just for more information, I am married and we have a 2.5 year old child. I like the idea of whole or universal, because from my understanding it acts as an investement you can leverage loans and other things against as well as life insurance. Where as with term all I get is the pay out to my family in the event that I die.
I did not read the other posts, so bear with me.

Let’s do a simplistic comparison that is still representative of Whole/Universal vs. Term Life.
You purchase a $200k whole life policy that provides you with dividends of 3 percent. The dividends remain tax deferred in the policy. The annual cost of said policy is $2,000 per year. Still with me?

Cost - $2,000
Death benefit - $200,000
Dividends - $600 (2000 * 3%)
Loan rate - 4%

Term Life insurance- 20 year term
Death benefit- $200,000
Cost - $200

Difference in cost between whole life insurance and term life insurance - $1,800. If you took the 1,800 and invested it in a mix of equities and bonds, you could earn on average about 5% per year. That is exactly what the insurance company does, only they keep 40% of the returns while retaining full use of your money after accounting for mortality expenses. At your age, they know and expect the risk of you dying a premature death is very low. Now, it gets worse...in addition to keeping the 40%, they also will charge you for you to “borrow” your own money. Still with me?

Why would you willingly give up use of your money to an insurance company when they will charge you to borrow from it? If you are happy to pay interest when taking your own money, then simply pay the interest to yourself by depositing 4% into your own investment account each month.

Benefits of Term Life Insurance- you spend less upfront for pure term life insurance, if you die during the term, the life insurance company will pay your beneficiaries, you keep full control of your money, you withdraw when you like, you pay yourself interest, you pay less in tax and administrative expense charges, you keep the sales commission that USAA or any other whole/universal insurance provider would pay to sales agent. You make your wife very happy - who doesn’t like to save money?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

trueblueky
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Re: Whole Life vs Universal Life Insurance

Post by trueblueky » Mon Sep 17, 2018 6:17 pm

+1 to all the above advice.

Let me add that no one on this forum will make a penny advising you. Their motives are pure.

Dottie57
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Re: Whole Life vs Universal Life Insurance

Post by Dottie57 » Mon Sep 17, 2018 6:42 pm

Find out the following:

1 . Total cost for whole life policy for x amount.
2. Total cost for term life for 30 years at x amount.
3. Calc difference : Whole life cost - term life cost
4. Invest the difference into 3 fund strategy. Buy the term life insurance.

In 30years you will have more than the whole life. You will have paid a lit less in fees.

NotWhoYouThink
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Re: Whole Life vs Universal Life Insurance

Post by NotWhoYouThink » Mon Sep 17, 2018 7:03 pm

Good decision to stick with term. When you are ready, you can start asking questions about how to invest the money you are not spending on insurance.

JBTX
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Re: Whole Life vs Universal Life Insurance

Post by JBTX » Mon Sep 17, 2018 7:45 pm

Kudos for deciding not too. I recently looked at some whole and universal life products quoted to a friend and the real returns were awful. Something like 2.5-3.5%. And your cash value takes years before it starts to accumulate - primary because that accumulation is going towards payment of sales commission.

Nissanzx1
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Re: Whole Life vs Universal Life Insurance

Post by Nissanzx1 » Mon Sep 17, 2018 7:49 pm

Whole life insurance is not the most value for your family. Listen to the advice here and leave this garbage for someone less educated.

You are to be commended for taking care of your family with life insurance. It's a simple thing that so many painfully overlook.

Grt2bOutdoors
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Re: Whole Life vs Universal Life Insurance

Post by Grt2bOutdoors » Mon Sep 17, 2018 8:19 pm

One more point about whole life insurance, your death benefit. Going back to earlier example, your policy of $200,000. Let’s say you’ve owned it for exactly 10 years, you’ve paid in $20,000. You accumulate a cash value of $10,000. Something happens, your beneficiary goes to collect, how much does wife get?

Policy - $200,000
Cash value - $10,000
Policy loan - you didn’t borrow, so $0.
Death benefit is $200,000.

That cash value life insurance agents crow about you accumulating? Well, the insurance company keeps it, all of it. In essence, you paid $20,000 for $200,000 of coverage. ($1000 in annual pure term premiums buys you a yacht full of coverage at your age for 20 years). The life insurance kept 100% of the returns, you never saw the 60% they illustrate as being “cash value”. Even if you did borrow from it, you have to pay it back when alive with interest or at death, it is deducted from death benefit. I’ll bet it slipped their mind to inform you of all the benefits of “cash value”.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

CRTR
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Re: Whole Life vs Universal Life Insurance

Post by CRTR » Thu Sep 20, 2018 6:26 pm

cmauss wrote:
Mon Sep 17, 2018 3:39 pm
I am 29, and want to start a life insurance policy. I am attracted to the permanent plans, as they can actually pay back. I am trying to decided if I should go with whole life or Universal. From reading it seems like whole life usually offers some good dividens that can be reinvested, but universal also offers some good investment oportunities. I am currently looking at the USAA options, but an open to other companies. Which plan offers the best options and which companies offer competitive packages? I was also looking in the 150-250k area, any input what a good policy amount is would be appreciated.
here is your answer . . . hot off the press. Great discussion about permanent life insurance and the issues and risks that the selling agent somehow always forgets to tell you about! https://www.wsj.com/articles/universal- ... ending_now

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Lemonaid56
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Re: Whole Life vs Universal Life Insurance

Post by Lemonaid56 » Thu Sep 20, 2018 6:54 pm

From personal experience I can say DO NOT use life insurance as any kind of investment vehicle .
We were sold policies from NYL by FIL as" investment" when we were back in our 20's freshly married. FIL sold DW policy "guaranteed" to be worth a million when we wanted to retire; Universal Variable BLAH BLAH BLAH. Fortunately due to high risk factors in my career I was not able to get the same policy.

Fast forward 30 years! (Wow, we are old now!) Her policy, due to downturns in the market, not "investing" enough cash and other unforeseen circumstances (her policy we're still paying on) has death benefit of 500K and CASH value of still only 185K. We stopped putting in the extra cash "investment " quite a few years ago when I became enlightened to mutual fund investing. If we had only been investing that $300 extra a month in mutual funds.

Fortunately my whole life policy we found out after 20 years that it will pay for itself out of the dividends to stay afloat. Death benefit of that is 250K but cash value? 85K!!!
If only we had known back then what we know now. All that "excess" cash NYL was telling us to "invest" could have been really making money if we had stayed with mutual funds or even better if the Boglehead way had been shown to us.
Go term life and seriously invest your college, retirement, house down payment money in the 3 fund portfolio.
Last year FIL still touting the NYL way was cheering on the life insurance for making "guaranteed" 6% gains until I told him through the Bogle plan we did about 27% gains the same year. We never saw that supposed 6% gain either, don't know where that info came from.

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Re: Whole Life vs Universal Life Insurance

Post by wolf359 » Thu Sep 20, 2018 7:45 pm

My guess is that the insurance salesman looked at how much you could afford in payments, then pegged the amount he offered you based on that.

Now you're comparing the cost of term insurance against the whole life/universal policies to achieve the same thing.

You should analyze what your insurance requirements actually are, then see how much it costs to buy that.

If you die, and you leave your wife and child on their own, how much do they need to support themselves in your absence? Do you want to pay for your child's college education? Do you want enough to allow your wife to support herself for life, or just long enough to raise your child? Do your assets already support your family because you're financially independent, or are you short of that? Do you want to pay off your mortgage, student loans, and other debts?

Does the $150,000 policy you were originally pricing achieve all your goals?

You may find that a $1-2 million term policy for someone who is young, healthy, and married with a child, and owns a home is pretty reasonably priced. Try pricing out a level term policy for multiple years, so that the policy will cover you in case some health condition comes up that might disqualify you later. If you're projecting becoming financially independent over the next 20 years, then select that period (or maybe even a little more for a buffer).

The reason the salesman didn't do this analysis for you is that if he already knows you can't afford $1-2 million of universal or whole life coverage every year for the rest of your life. He may have pitched it as "owning versus renting" and said term policy premiums are wasted if the term expires unused. This money for the premiums AREN'T wasted if you don't die during the term. It's not a bet with the insurance company. What you're paying for is the peace of mind that if something happened to you, that your love ones are financially secure. That's worth a lot.

If you want to invest, invest. If you want insurance, get insurance. Don't buy one and call it the other.

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Re: Whole Life vs Universal Life Insurance

Post by TheHouse7 » Thu Sep 20, 2018 7:59 pm

Taylor Larimore wrote:
Mon Sep 17, 2018 5:43 pm
cmauss wrote:
Mon Sep 17, 2018 5:11 pm
All, thank you for the feedback and glad that I asked here first before doing anything! you are right in that a 250k whole life policy is about $160 a month vs $30 a month for term. going with term and investing that extra $130 a month does seem like a better payout and plan moving forward.
cmauss:

You've made a good decision.

Best wishes
Taylor (a former life insurance salesman)
cmauss:

You've made the right decision.

Keep asking good questions,
TheHouse7 (a former insurance salesman)
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

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Re: Whole Life vs Universal Life Insurance

Post by InvestorWannabe18 » Fri Sep 21, 2018 1:11 pm

First, let me answer your original question: whole life vs. universal life. A recent Wall Street Journal article points out the disaster experienced by those who have taken out universal life insurance. https://www.wsj.com/articles/universal- ... _lead_pos4
When my wife and I started having children we decided to look into life insurance and the agent recommended Universal Life. Having been previously in the insurance industry for a number of years, I passed. Instead we took out a combination of whole life and term. Instead of two policies and two policy fees we combined our needs into one policy – whole life basic policy and a term rider – if I remember, about 4 times the term as the whole life. The term rider by the way gives you a chance to convert to more permanent insurance should your circumstances change. For example, you become uninsurable.
A number of years later, we took out a loan using the cash value of the whole life policy. Mortgage interest rates were nearly 5x higher than the guaranteed interest rates of the policy. The market at that time was in a downturn – not that we had much money invested.
I will skip to my current situation. I have two term insurance policies from my employers – military vet and recently (early) retired teacher. The premiums on these policies at my age make both of these no longer affordable. Converting to whole life at this stage is even more out of the question. We thought our insurance needs would disappear at a certain age but that didn't turn out to be true.
As for buying term and investing the difference, I understand the argument. But I'm like you, I want something solid for my family. I've lived long enough not to be caught up in the optimism of up markets.
It's been awhile since I was thoroughly knowledgeable in life insurance so If you decide to buy whole life here are a couple of things to talk to your agent about: first, some companies are "mutual" and some are "stock". The dividends from a mutual company are a return of your unused premium and not taxable. The dividends from a stock company are return of your investment and are taxable. Second, you can use your dividends to either purchase paid up additions (which helps the face value of your policy keep up with inflation) or be applied to reduce your premiums. I have one policy where the (non-taxable) dividends almost completely pay for the premium.

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Re: Whole Life vs Universal Life Insurance

Post by LadyGeek » Fri Sep 21, 2018 3:46 pm

This thread is now in the Personal Finance (Not Investing) forum (insurance).
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