Introduction and question about retirement/life insurance

[beancounter]

Hello everyone,

I've ben lurking here for a while mainly because I am not really on the pathway to ER. I am 25, married and paying for school out of pocket and have about $8K in a 401(k) from an old job. I make too little right now to think about retirement, but this board does serve as quite a bit of inspiration.

Last night I had a thought and was wondering if someone here would know the answer or be able to point me in the right direction in finding an answer. I will try to be clear

Now I keep receiving these notices of life insurance plans that cost a few dollars a month and pay over 6 figures to a dependant if I die. Where do life insurance companies stick this money? Why don't companies that manage retirement accounts stick their money in the same place?

TIA. Hope my question is clear.

 

[yakers]

Where do life insurance companies stick this money?

TIA. Hope my question is clear.

They stick it to you.
This insurance is not worth it.

As to where they invest your payments it could be a long term bond if that matched their liabilities but it is possible they have a range of investments which together pay more than their expected liabilities and collectively their portfolio reduces their risk. Where you should put your money is another question.

 

[ERD50]

life insurance plans that cost a few dollars a month and pay over 6 figures to a dependant if I die.

TIA. Hope my question is clear.

I think I understand your question. You are asking how they can take a 'few dollars a month', invest it, and hand your dependent over six figurers upon your death.

You just need to do the math. Take a spreadsheet, take those $XX each month times 12 for a year, and factor in some reasonable annual investment rate of return. Now, see how many years it takes for it to reach 6 figures.

You will find that they will make the 6 figures before your average life expectancy (for a healthy 25 year old). So, on average, they will be keeping the money, and earning on it, long after it reached the face policy of the value. They keep the rest.

Also, 6 figures seems like a big number now, but 60 years from now @ 3% inflation it will be ~ 1/6th as much in today's terms (didn't your grandad tell you about buying lunch for a dime?).

yakers was more succinct. You won't find many on these boards that advocate life insurance as an investment. Read up on investing here and on some of the recc books, and you will very likely make a much better return than the life insurance policy would give you.

If your wife (and/or future children) are dependent upon your income - term insurance is probably appropriate. Few life insurance salesmen will recc it, they do not make as large a commission from it.

Hope this helps - good luck - ERD50

 

[samclem]

beancounter,

Just to clarify,

--The ads you are seeing might be for term OR whole life insurance, it is hard to tell from the info you gave.

--if the ad talks about "permanent insurance", "cash value," Saving tax free" etc, then it is whole life (or Universal life, or variable universl life, etc) and you do not want to buy it.

-- if just a few buck buys you lots of insurance and the words/terms aboe aren't in the ad, then it is probably term insurance, which is exactly what folks who need insurance should almost always be buying.

The companies make money on term insurance because relatively few people collect on it (which is EXACTLY the way you want it to be for yourself ) They also invest the money you pay in and make a good %age that way.

The companies make money on whole life in the same way--some folks never collect on them (many policies lapse or start taking the large premiums out of the accumulated cash value when folks can't pay the high premiums or wise up and stop paying the premiums and cash them out). They make the rest of their money on these policies by the considerable difference between what they earn and what they pay you (in building up your cash value).

Well worn advice: Don't buy while life insurance--buy term insurance and invest the difference yourself. Oh, and shop around (online) for the best rate in term insurance--prices vary.

 

[larry]

And also remember this, ANYONE who is selling you life insurance (of ANY kind) is not your friend. This is strictly a business relationship. Too many times people buy unneeded insurance from a "friend" and unnecessarily get screwed.

Been there, done that and bought a t-shirt. I paid my insurance stoopid tax in my early 20's.

 

[PsyopRanger]

I make too little right now to think about retirement, but this board does serve as quite a bit of inspiration.

That's what most people say their whole lives. It's funny, when I was 20 and going to college, I had 10% automatically taken out of my paycheck and somehow I found a way to live on the remaining 90%.

Anyways...

I think you also need to look at why you might need insurance? You are married but how much debt to you have? If you died, what would your wife have to pay and how long would she be able to get by without your income?

With the little you posted, maybe look at some 10 Year Term that is renewable. This means after the 10 years, you can renew at the same price even though you are older.

Plus, I wouldn't trust the fliers in the mail. Look for reliable companies.

Check sites like Selectquote and others to shop around.

 

[kcowan]

80% of insurance salesmen fail. They sell insurance to their friends and family then move on to other jobs. It is a part of the strategy for these companies. We had a product that would screen applicants to determine successful sales people. The companies did not want it for the above stated reason.

Term insurance especially purchased through a group is the best way to protect your family (when you get one).

 

[beancounter]

I think I understand your question. You are asking how they can take a 'few dollars a month', invest it, and hand your dependent over six figurers upon your death.

You just need to do the math. Take a spreadsheet, take those $XX each month times 12 for a year, and factor in some reasonable annual investment rate of return. Now, see how many years it takes for it to reach 6 figures.

This explained a lot thanks.

Thanks for the responses everyone. I also checked wikipedia earlier today and I got a rough idea on how life insurance works.

Apologies to those that thought I wanted life insurance. I wasn't very clear in my OP. I don't intend to purchase it, I just was curious on how it worked and how bogus the claims on the brochures were.