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Indexed Life Insurance - Worth it?
Old 04-10-2012, 09:35 PM   #1
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Indexed Life Insurance - Worth it?

A financial adviser referred to by a close family member offered me an "indexed Universal Life Insurance" policy today, sold by Ameriprise / RiverSource Finnacial. You can read more about it here. I do not want to bore you folks with the usual details, but, basically, the policy offers:

- $500,000K Net Death Benefit
- Disability benefits. $13K per month, for 33 months in the event of physical disability.
- Tracks the S&P500, but with an 11% gain cap.
- Floor of 0% (if markets go down, floor is 0%).
- Average return in the last 25 years: 6.65%

I would have to contribute $400 a month for this, which seems abnormally high. Plus, the fine print on the paperwork is a little confusing. More than the norm, and I am usually good at this sort of deciphering. Fees and the like are not abundantly clear. Would need to consult back with the agent again, since our first meeting was a little on the "informal / last-minute" side.

You can read more about me here, but please note that the numbers are a little outdated. As a rule of thumb, I never liked the idea of a financial agent and always preferred doing things my own way. My South American background taught me to never trust anything nor anybody that is trying to sell me something. I've been through hyper-inflation, national defaults, extreme currency devaluation and military coups, so I certainly do not believe in fairy tales nor perfect, "risk-free" investment vehicles.

Where I stand now:

- 34 years.
- Married. No kids.
- No debt whatsoever.
- House is paid for. Value of about $250K.
- Cars paid for.
- Mostly an "all cash" guy, who is slowly getting into the market. The "low-cost index fund" way.
- $130K in cash, liquid. Savings account with an 0.8% rate. (I know, I know...)
- $5K worth of silver bullion (physical)
- $2K in precious metals ETF's
- $2K in SPY ETF (will be funding this more and more in the coming months).
- We currently enjoy the $0 per transaction (up to 30 trades per month) at Merrill Lynch.

My wife and I are very much the LBYM type (well, I am... she grudgingly obliges), and are fortunate enough to live on one salary and save the other one, with an average monthly savings rate of $3K. BUT, who knows how long this will last? Jobs are not safe at all.

In other words, in THEORY, we could easily afford the $400/month payment. But my gut feeling tells me I would be better off investing that into index funds and my own trades. I do like the other benefits that come with the policy, though, such as the disability income, etc., but I wonder if there are other, cheaper, better vehicles when it comes to basic life insurance and disability protection (a subject I know pretty much nothing of).

Your opinions and feedback are, of course, most welcomed and appreciated.
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Old 04-10-2012, 09:43 PM   #2
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But my gut feeling tells me I would be better off investing that into index funds and my own trades.
I tend to agree with you.

This may sound basic, but you didn't say whether you actually need any life insurance. If you do, a term policy will buy you the most protection for the least money. I'd bet you could also find inexpensive disability coverage.

Of this $400 per month, how much is buying insurance and how much is accumulating cash value? In other words, what is the insurance cost? Once you know that you can shop this against other "pure" insurance products. I think you'll find there are better deals out there in insurance.
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Old 04-10-2012, 09:43 PM   #3
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Run like hell.

If you are smitten with the idea of an investment with some equity upside and none of the downside, it is very easy to replicate the same investment as detailed here: Life, Investments & Everything: Rolling Your Own
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Old 04-10-2012, 09:48 PM   #4
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Be sure to ask if he'll throw in a perpetual motion machine to seal the deal...

You can avoid many of the fees, expenses and commissions buried in the fine print by investing on your own and purchasing separate disability and term life policies. The fine print is confusing for a reason, and your doubts about this product are well founded.

Walk away. Better yet, run...
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Old 04-10-2012, 09:50 PM   #5
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Be sure to ask if he'll throw in a perpetual motion machine to seal the deal...

You can avoid many of the fees, expenses and commissions buried in the fine print by investing on your own and purchasing separate disability and term life policies. The fine print is confusing for a reason, and your doubts about this product are well founded.

Walk away. Better yet, run...
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Old 04-10-2012, 10:16 PM   #6
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Old 04-10-2012, 10:20 PM   #7
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Buy a big ass chunk of 25 year term, and pocket the difference........ $400 a month is insane for $500,000 worth of coverage for your age.......
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Old 04-10-2012, 10:44 PM   #8
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Buy term. Period. The end.
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Old 04-10-2012, 10:47 PM   #9
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Despite my comments on a different thread, I second the rest of the group. Run like hell, both from indexed life insurance and Ameriprise.
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Old 04-10-2012, 11:25 PM   #10
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Quote:
Originally Posted by Karloff View Post
A financial adviser referred to by a close family member offered me an "indexed Universal Life Insurance" policy today, sold by Ameriprise / RiverSource Finnacial.
Sounds like you need some new "close family members"...
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Old 04-11-2012, 07:18 AM   #11
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I agree with the other poster.

IMHO, you should buy insurance just as insurance, not with any investment function in mind. So work out how much insurance you need and buy a term policy.

Take the money you save and invest it yourself, you'll pay lower fees and probably get a better return.
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Old 04-11-2012, 07:29 AM   #12
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If you are smitten with the idea of an investment with some equity upside and none of the downside, it is very easy to replicate the same investment as detailed here: Life, Investments & Everything: Rolling Your Own
Brewer, thanks for the link. As you point out, that info is a invaluable vaccine for those considering an insurance product that would do the same thing but with greater risk and higher costs. I don't think it would be best for me, but I can sure see the value for some people (especially if it keeps them out of the clutches of a salesman).
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Old 04-11-2012, 08:42 AM   #13
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Brewer, thanks for the link. As you point out, that info is a invaluable vaccine for those considering an insurance product that would do the same thing but with greater risk and higher costs. I don't think it would be best for me, but I can sure see the value for some people (especially if it keeps them out of the clutches of a salesman).
While I use options from time to time to take a flier or reduce risk, I am not enamored with the EIA strategy. Too wonky for me. But I know it has a big following among very risk averse. Since it is easy to replicate, I don't understand why people feel compelled to buy it at high cost from an insurer or bank.
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Old 04-11-2012, 09:12 AM   #14
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One thing no one else has mentioned--

You don't appear to need life insurance. You have no children and no debt, and it sounds like either of you could support themselves in the event that the other died.

I would look for disability insurance (which is a must have in my mind) and not worry about life insurance until you have a reason to purchase it.
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Old 04-11-2012, 09:49 AM   #15
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I would buy disability insurance term and keep it until you are in sight of having enough to retire. The odds are higher that you will become disabled over death. The insurance should pay indefinitely or until ss starts.

I would wait until having kids to buy term life.
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Old 04-11-2012, 10:28 AM   #16
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But my gut feeling tells me I would be better off investing that into index funds and my own trades. I do like the other benefits that come with the policy, though, such as the disability income, etc., but I wonder if there are other, cheaper, better vehicles when it comes to basic life insurance and disability protection (a subject I know pretty much nothing of).
I'll add to the chorus. Your gut is right.

There is no value in bundling Life, DI, and investments. IF you need life insurance, term is cheap. IF you need DI (in excess of Social Security and a possible group plan at work), shop for it. The universe of possible investments is huge, find the mix you like best.
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Old 04-11-2012, 10:32 AM   #17
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Take a look at how much a 20-25 year term life policy will cost for $500K coverage for a 34-year-old. If you're pretty healthy I'll bet it's around $50 a month. Then invest that other $350ish each month for yourself. Chances are extremely high that you will come out much farther ahead. (My previous experience with pricing term life is that it starts getting a lot more expensive as soon as part of the term takes you over age 60, and if that's still the case then a 25 year term might be a sweet spot as it would only take you up to 59.)

Also, the amount of coverage depends on your current and expected future situation. Can your wife get a good enough job to support herself if you were gone? If so, how much do you really need? If she doesn't have the earning potential to make it on her own (in that case you may want to invest in education/job training for her, sounds like you can clearly afford it), you might need some -- but it sounds like she can based on what you wrote.

So the main need for life insurance would be for any kidlets that may be in the future. Until then, your main concern (IMO) is disability insurance, not life. Having said that, if you're very healthy and kids are in your future, locking in low life insurance rates while you are a very low risk wouldn't be a terrible thing.

What they are offering is purportedly an "equity indexed" insurance whole life product with a disability income and life insurance component. When you hear the phrase "equity indexed", RUN. Beyond that, life insurance and disability coverage can be purchased for a LOT less, unbundled, and leave you a lot left over per month to invest on your own.
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Old 04-11-2012, 11:18 AM   #18
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I got a 30 year term policy 10 years ago when I was 45. I had a couple of pre-existing conditions but nothing bad. Didn't smoke. My premium is $117/month. You should be able to beat that significantly if you're just 34. Of course, as others have said, look and see if you even need a life insurance policy. In your life situation (as you've stated it) disability is much more important.
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Old 04-11-2012, 02:51 PM   #19
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What they are offering is purportedly an "equity indexed" insurance whole life product with a disability income and life insurance component. When you hear the phrase "equity indexed", RUN. Beyond that, life insurance and disability coverage can be purchased for a LOT less, unbundled, and leave you a lot left over per month to invest on your own.
You also do not want everythinng bundled into one contract. If you want to get rid of, say, disability coverage but keep the rest it is usually easier to do so if they are separate policies rather than all being wrapped up in one.
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Old 04-11-2012, 02:58 PM   #20
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Thank you all for the honest feedback and advise. Lots of valuable and sensible comments. I suppose you know what conclusion I came to... Thanks again, and please feel free to share any more insights if needed.
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