question about whole life

[mathjak107]

i know the premiums stay the same but does the internal cost of insurance and fees increas over time eating away more and more of the inyterest and cash value?


when a policy is considered paid up does that mean the face value and cash value of the policy are equal.?


what about cost of insurance when its paid up .? do they still charge you cost of insurance even though for the most part your self insuring with the cash value.?

 

[73ss454]

As I had stated once before on the forum, I bought 3 whole life policies in my life. All 3 ended up in class actions. 2 of them I took the settlement and killed the policies. I still hold the last one. I was lied to when I purchased them and didn't do my DD.

I was told that I'd only have to pay for 10 years and it would be paid up. In reality the yearly premium of $6875 is due till the age of 99. What happens is the dividend of the policy is supposed to pay the premium at some point. I'm in year 25 with this policy and still have to take money out of my pocket each year although the dividend does pay a large part at this point. In answer to your question about being paid up. I think they mean when the dividend pays the premium in full each year. I'm not sure if and when that will ever happen.

The premium is set till the age of 99 in my case and they do not lower that as the cash value goes up.

I did receive $31500 in the settlement from the class action a few years ago. My cash value is $186K this year.

My advise is to stay away from these policies and buy term.

 

[73ss454]

One thing I forgot to mention.

When the sales person sells these policies they show you the policy earning something like 8% a year which shows this great accumulation of wealth. In reality they may pay 3% and you pay forever because the 3% doesn't cover the premium.

 

[martyb]

I cashed in my only whole life policy quite awhile ago (1992) when I wanted to buy a house in Bastrop, TX. It wasn't worth a whole lot, but enough to pay most of the closing costs associated with the home purchase. That policy was with Liberty Life Ins. Co. and the only reason I had it was because an uncle who was a salesman with that company talked me into it when I was around 16 yrs old or so. Since then, I've only purchased term insurance.

 

[mathjak107]

well i wasnt looking to buy one i was just curious about those few questions pertaining to them.

basically you send in a much larger premium than term ,maybe 5 to 20x as much.

they then take out fees , cost of insurance and commissions and start to save that extra cash left over for you.

if you die they will pay you the difference between your cash value and the policy value.

as an example if you saved 25k and died and had a 100k policy the insurance company pays out 75k from their pocket and 25k from your cash value . the more you save the less your on the insurance companies dime.

the idea is as you pay your premiums year after year you are becoming closer and closer to self insuring.

once you have 100k in cash value saved if its a 100k policy basically your self insured from that point on and off the insurance companies dime..

if you die its your money thats paid out and not the insurance company.

i was just wondering if as you age the internal cost of insurance goes up even though your running more on your dime.

 

[james7]

i know the premiums stay the same but does the internal cost of insurance and fees increas over time eating away more and more of the inyterest and cash value?


when a policy is considered paid up does that mean the face value and cash value of the policy are equal.?


what about cost of insurance when its paid up .? do they still charge you cost of insurance even though for the most part your self insuring with the cash value.?

The answers to the questions that you have asked differ from company to company and from policy to policy. To find out the answers to those and other questions, you really need to talk to an insurance agent. I once sold life insurance, but it was many years ago. Term life is good for some situations and it may be what is right for you, but if it were me buying a policy, I would buy whole life. Unfortunately the life insurance industry has always had two big problems, agents who lie, and agents who don't know what they are talking about.

 

[pb4uski]

In a way you have it. For whole life the premiums are initially higher than term for similar coverage and in the later years the premium is lower that equivalent term coverage would be. In a sense it is 50 (or 60, or 70) year term but if sometime during the term you decide you want out, you can walk away with your cash value.

These policies can makes sense if you have a long time horizon that you will need insurance. I have a policy that I bought when I was 22 and over 34 years has generated a 5.1% annual return if I cashed it in today plus if I had died my beneficiaries would have received the face amount.

The annual rate of return currently is about 5.8% and that is giving no value to the insurance benefit. In other words, the cash value at the end of the year is equal to the cash value at the beginning of the year + premiums + 5.8% interest.

 

[mathjak107]

seems to me the death benefit costs are all of the premiums you paid for decades as well as all the interest and dividends you reinvested . 30 years of interest and dividends are actually part of that cost basis too not just the premiums paid if you carap out after 30 years with a whole life policy..

that seems very very costly for insurance .

 

[pb4uski]

seems to me the death benefit costs are all of the premiums you paid for decades as well as all the interest and dividends you reinvested . 30 years of interest and dividends are actually part of that cost basis too not just the premiums paid if you carap out after 30 years with a whole life policy..

that seems very very costly for insurance .

I don't think so. My premiums paid since inception have been 100. My cash value is 266 or over a 5% annual return on my 100 of premiums paid. If I die today, my family gets 628 tax free.

These are real numbers but indexed to the cumulative premiums being 100.

 

[veremchuka]

Whole life is expensive! Buy term it is a fraction the cost. You need insurance to provide income for people that depend upon you if you were not there, period, investing is not what insurance is for but a salesman would disagree with me.

 

[james7]

I don't think so. My premiums paid since inception have been 100. My cash value is 266 or over a 5% annual return on my 100 of premiums paid. If I die today, my family gets 628 tax free.

These are real numbers but indexed to the cumulative premiums being 100.

This is exactly why in my post above I said I would buy whole life, not term. Not to say you shouldn't buy term; term may be right for you. No, I am not a life insurance salesman, but I did sell it more than thirty years ago.

There is a saying in the life insurance world, "those who nothing about life insurance buy whole life, those who know something about life insurance buy term, and those who know a lot about life insurance, buy whole life".

 

[pb4uski]

I was in the first camp (knew nothing about insurance) when I bought the policy. By the time I knew something about insurance, it was better for me to keep the policy than surrender it.

I think the whole life/term decision depends on how long you need the insurance coverage for. Whole life is also called "permanent" insurance for a reason, if you need coverage for a long period (for example you think you will be very successful and have an estate to protect) then whole life can make sense. I think for most middle class and upper middle class people, term provides the protection they need when they need it at an affordable cost.

 

[ripper1]

Never mix insurance products with investing. Universal or whole life insurance is a scam that only benefits the insurance company and puts the salesmens children through college. Go to a web site like accuqoute and buy a term policy and be done with it.

 

[FinanceDude]

i was just wondering if as you age the internal cost of insurance goes up even though your running more on your dime.

Actually, whole life policies internally become more efficient over time. If you ever look at a policy illustrations, there is little to no cash vale built up in the first 3-4 years. This is because they paid the agent a large commission that first year. However, over time, the agent just receives a retention bonus for every year the policy stays on the books, so the CV increases more quickly.

Whole life is priced for your "whole life", so you overpay something fierce early on and then "underpay" as you get older. They are NOT investments products, no matter what the agent says. Very rich people buy large whole life policies, because IRS tax rules make them good wealth transfer vehicles. The average person does not need whole life, it is WAY oversold.

 

[73ss454]

Actually, whole life policies internally become more efficient over time.

They become more efficient over time for the Ins Company. As the CV rises it gets the Ins Company off the hook each year for less and less money out of their pockets. Yet the premium stays the same.

Also the Ins Company decides each year what the dividend will be, some how I know that was never in my favor.

What FD said is correct IMHO that it's good for the ultra rich and those who will leave businesses to their heirs.

 

[FinanceDude]

What FD said is correct IMHO that it's good for the ultra rich and those who will leave businesses to their heirs.

There is another situation it is used for. If there are strong genetic dispositions for a serious illness, like heart disease that runs in families, etc, some parents buy WL for their kids. In the event they become uninsurable as an adult, at least they have some coverage. Most insurance companies will underwrite a baby for up to $50K of WL without a paramed. That way the kid gets a potable policy when and if they become uninsurable..........

 

[Brett_Cameron]

Here is my experience with a Universal Life Policy over 29 years: http://www.early-retirement.org/forums/f28/questions-about-overfunding-a-universal-life-insurance-policy-59605.html

Cost of insurance was printed on an annual statement and started at ~$31/month for $200k coverage when I was in my 20's. Cost of insurance at at age 55 was almost $80/month. Monthly interest on cash value was still above cost of insurance but was projected to rise exponentially as I aged, eventually depleting the cash value unless I upped the premiums paid.
http://www.early-retirement.org/for...-a-universal-life-insurance-policy-59605.html

 

[Independent]

i know the premiums stay the same but does the internal cost of insurance and fees increas over time eating away more and more of the inyterest and cash value?

when a policy is considered paid up does that mean the face value and cash value of the policy are equal.?

what about cost of insurance when its paid up .? do they still charge you cost of insurance even though for the most part your self insuring with the cash value.?

If you are talking about the guaranteed values, the formula is simple:

(beg of year cash value + some portion of the gross premium) * (1+ some interest rate) - q * (face amount - end of year cash value) = end of year cash value.

The "q" is the probability of dying during that policy year, so it increases as you get older. But the (face amount - end of year cash value) quantity decreases every year. So the product of q * (face amount - end of year cash value) does not increase as fast as q.

You use "internal cost of insurance". If you mean q, it goes up every year. If you mean the product, that's more complicated.

When a policy is paid up, the same formula applies, but the premium component is zero. In every example that I've seen, the interest on the prior cv exceeds the cost of insurance, so the policy cv continues to increase after it is paid up.

The cv will eventually match the face amount. The common insurance term for that is the policy "matures" or "endows". At that point the ins company simply sends you a check for the face amount.

Yes, as the policy gets older you are increasingly self-insuring. That's why they are able to keep the premiums level or even make them go away.

It's common that the "some portion of the gross premium" term is zero in the first policy year, as the company is trying to recover it's marketing/issue costs.

Non-guaranteed values generally follow the same formula, but the important thing is that they are non-guaranteed. So any claims about "paid up" based on non-guaranteed stuff need to be examined closely.

"Universal Life" contracts disclose the factors in the formula above. That allows them to automatically deal with cases where people skip premiums or pay extra or want to change the face amount. "Traditional Whole Life" contracts do the math in the background and just show you the result. They assume fixed premium and benefit schedules so all the calculations can be done in advance. But, they require special procedures for changes.

 

[rescueme]

"question about whole life"

IMHO, "just say no".

I had a BIL who "bet" his financial future on this "investment".

It didn't work out...

Insure what you need to insure, with the lowest cost (regardless of any proposed "gain") over the long term.

You get insurance to cover "risk".

You invest to maximize "future returns/income".

Don't confuse the two (products)...

 

[FinanceDude]

So, noone's read "Bank on Yourself" on this forum?

 

[noone]

So, noone's read "Bank on Yourself" on this forum?

Yes, I've read it. Stop dragging me into these silly discussions!

 

[Alan]

Yes, I've read it. Stop dragging me into these silly discussions!