Help with choosing life insurance

[Miss_Lala]

DH and I are thinking about starting a family somewhat soon, and would like to have life insurance set up before things start happening. He's met with an insurance salesman that is a brother of his co-worker and is asking that I meet with him as well. DH has already met with this man and is attempting to sell me on a Whole Life policy. I'm really hesitant as I haven't read any good things about them, but he keeps using "estate tax" and "hedge our bets" and it sounds like he's already been indoctrinated. I'm all for a term policy.

What's the truth? Can they be good, or are they only awful?

Any help would be appreciated.

 

[Bimmerbill]

Level term is best, from everything I've researched. Keep insurance and investment seperate.

I just picked up a $500K 20 year level term policy for $38 a month, age 42.

 

[Urchina]

I second Bimmerbill. Term life insurance is what we use because it's economical and provides us with just what we need, nothing else.

Maybe you should ask yourself what you want the life insurance for. For us, DH's life insurance is designed to replace a few year's worth of income. My life insurance (I stay at home) was designed to provide enough money to pay for childcare and a housekeeper for several years, until the kids were older. We prefer to use other vehicles (such as low-cost index funds) for our investments.

Whole-life policies may be useful to some folks, but they're especially useful to the folks who sell them, because they can generate fat commissions. In addition, you're paying a significant management fee for your "investment," which detracts from any returns you might possibly see. And, you have to be sure that that insurance company is going to be around for a while, otherwise if they go bankrupt your policy and cash could go "poof." Take a look at what's happening to even gold-plated companies like AIG and I'd think twice.

And as for estate taxes -- do you have a huge estate that needs to be protected? If so, why are you getting estate advice from an insurance salesman? If you're worried about estate taxes and have a sizable estate (over $2 million or so) go to an attorney who specializes in estate planning, or read a good book about it. Nolo press has some nice ones.

Here's another thing: If you get term life insurance now and decide later on (after more research and planning) that a whole life policy would be in your best interest (which it probably isn't), then you can get a whole life policy. However, if you get roped into a whole life policy now and in two years decide you really only need a term policy, you may be stuck, since many whole life policies have early contract termination penalties.

There are several folks on the boards who have more information about the whole vs. term issue, hopefully they'll be along shortly....

 

[mickeyd]

brother of his co-worker and is asking that I meet with him as well. DH has already met with this man and is attempting to sell me on a Whole Life policy.

You should probably shop around for the best policy. Try Google.

An agent is trained to look after himself before looking after the client. He/she will receive much more commission if you purchase a WL policy. He needs you to help feed his family and the commission on term insurance is much lower than WL/VUL/UL or any other life product other than term.

Have you explored how much it costs to increase any group LI that may be able to be obtained @ work? It is often less expensive than individual term or WL.

 

[Miss_Lala]

And as for estate taxes -- do you have a huge estate that needs to be protected? If so, why are you getting estate advice from an insurance salesman? If you're worried about estate taxes and have a sizable estate (over $2 million or so) go to an attorney who specializes in estate planning, or read a good book about it. Nolo press has some nice ones.

No estate as of yet to think of, but he's thinking of later on. I don't think it will be an issue for us, as I plan on using our money before we kick the bucket. My problem with an attorney is that DH is a lawyer, and has already told me that all tax attornies would agree that whole is the way to go. I keep telling him that, except for him, I don't trust lawyers.

Overall, I am the finance side of the two of us, and he knows that I know more about money in general. If I say no firmly, then we won't do it. I just need reasons to back up what I'm saying so that I don't sound like I'm lording over all of our cash.

Thanks for the help so far!

 

[Goonie]

My personal opinion is for Term Life......not Whole Life. For reasons the others have already stated. I used Insure.com to find what I was looking for, for a price I was willing to pay. I didn't get put on any mailing or phone call lists either! I filled in the info required, and got a list of quotes from which I chose my policy. 100K for $26/month....I was 48, and didn't need a physical or doctor's note anything. It was as simple as could be, and I didn't have to deal with any [-]greedy, self-seeking ba$tards[/-] salesmen.

As others have said......keep insurance and investments separate. Insurance is there as a safety net in case the unthinkable were to happen. Investments are there to make money for you. Insurance salesmen are there to grab your hard earned money for THEIR OWN benefit....NOT yours.

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BTW, I also always try to avoid doing any kind of financial business with my friends or relatives, or with the friends and relatives of those friends and relatives. It seems to help keep peace and harmony in my little world!

 

[ERD50]

No estate as of yet to think of, but he's thinking of later on.

I think the application of a Whole Life Insurance policy as any sort of 'remedy' to Estate Taxes is way overstated.

1) Whole Life is a long term commitment, due to the cost of getting out of the policy.

2) You can't predict the future. Estate Tax regs change, your estate value changes. IMO, long term commitments of questionable value don't make sense when applied to long term unknowns.

3) Most of the stated benefits of Whole Life fall apart unless you also assume it is a good investment vehicle. There is very little support for that, outside of the people who profit from selling it.

4) Liquidity *may* be a valid use of Whole Life, to pay an Estate Tax that is due. But, since you don't even know if you will have an Estate issue, and you further don't know if you would have a liquidity issue on top of that, it seems like an expensive way to cover a 'what if, and what if, AND what if....', scenario. I suspect there are cheaper ways to get or plan for liquidity if you need it.

One more suggestion - stay out of 'arguments' with the insurance salesperson. They are experts at defending their products (else they would starve), and will make the deal sound good to uninformed people. Then, you will look like you are the one contradicting the expert. I would suggest you explain to DH the cons and show evidence and do it away from the salesperson. Then just inform the salesperson you have chosen not to use their services. There really is no good in discussing it with them, just inform them of your decision.

My two cents.


-ERD50

 

[FinanceDude]

No estate as of yet to think of, but he's thinking of later on. I don't think it will be an issue for us, as I plan on using our money before we kick the bucket. My problem with an attorney is that DH is a lawyer, and has already told me that all tax attornies would agree that whole is the way to go. I keep telling him that, except for him, I don't trust lawyers.

Overall, I am the finance side of the two of us, and he knows that I know more about money in general. If I say no firmly, then we won't do it. I just need reasons to back up what I'm saying so that I don't sound like I'm lording over all of our cash.

Thanks for the help so far!

Most term insurance issued by mutually owned insurers is convertible to term for a period of time (mine is 10 years), so it gives you time.

The replacement cost of term at higher ages is quite high. Many folks think they will have enough money to self-insure when their term policy expires but most don't. Something to consider.......

Whole life is sold because the agent will show a flashy illustration showing how their company consistently credits 8% or something to the cash value. However, the buyer never sees the 20 pages of disclaimers following that page........

 

[brewer12345]

People have hinted around the reasons why whole/UL/VUL is worse for most people than term, but missed the two main reasons:

1) Cost: these policies are expensive. The first year's premium typically goes to pay the salesman's commission and after that you pay mortality, overhead, premium tax, etc. expenses. Then you get a yearly dividend inside the policy to build up cash value, but it is dependent on how the portfolio or the insurer does that year. The cash build up is not guaranteed and the exact details of all this are usually not real transparent.

2) Transparency: With term you pay an annual amount and get a fixed amout of coverage for a specific time period. With a permanent policy you dump in a premium year after year and get mortality coverage for as long as you keep the policy up, but the cash value is dependent on a whole host of thing you have no control over and most of the time you have no idea what the drivers of these factors are.

Especially since you don't have kids or an estate yet, I would go with term. Pick a 20 year term policy and make sure you have conversion rights. We got 20 year term policies that are convertible for the first 15 years. Cheap, and if we decide to dump the policies we are not out big money.

 

[gqlefty]

Insurance

life Ins. is meant to replace a "depended on" income. Have the kid, then take out a 20 year level term policy. Also think about getting disability ins. There is a better chance you will become disabled during your working lifetime than kicking the bucket. Have you ever tried reading a VUL policy? Takes a lawer to understand one!!! M2$

 

[harley]

My mom (recently widowed and financially illiterate) has 3 Prudential Whole/Universal life policies on herself, with me as the beneficiary. I recommended she cash them in, since she needs the money and I don't. She finally called, and they told her she had a total surrender value of $59K. And if she cashes them in she'll owe $25K in taxes. I know she's been paying ~$600/yr on one of them since 1966. The others are about half the premium. By the time she called me back she was pretty confused and I couldn't get a clear picture of the situation.

I've called the rep she talked to twice this past week, but no answer and no call back. I'm giving him the benefit of the doubt and assuming he was on vacation last week. If he doesn't call tomorrow (Monday) I'm just going to take whoever is available and go through it with them. I know they'll have to call her for permission to talk to me, but I want some answers. I can't believe what she told me is accurate. If she had put the money in CDs averaging 5% she's have had more than double that just for the one plicy. Just in case anybody is still interested in insurance vehicles for investment purposes.

 

[brewer12345]

If she had put the money in CDs averaging 5% she's have had more than double that just for the one plicy. Just in case anybody is still interested in insurance vehicles for investment purposes.

Ah, but let's not forget that these policies offer something that CDs do not offer: mortality coverage (face value) in the event of death. They are not and were never designed to simply be savings accounts, and the guarantees/mortality coverage costs money (which a CD does not have to keep up with). These are protection-type policies, not savings vehicles.

Not that I necessarily recommend it, harley, but depending on how old your mom is and what kind of shape she is in, she might be able to sell these policies in the open market for a lot more than the surrender value.

 

[harley]

Ah, but let's not forget that these policies offer something that CDs do not offer: mortality coverage (face value) in the event of death. They are not and were never designed to simply be savings accounts, and the guarantees/mortality coverage costs money (which a CD does not have to keep up with). These are protection-type policies, not savings vehicles.

True, and she bought them for the insurance aspect. In which case (IMHO) she would have been better off with a term life policy and put the rest in an investment vehicle. I can't see how an agent can justify selling the whole life if after 42 years you make a percent or two after taxes, and have a relatively tiny death benefit.

Not that I necessarily recommend it, harley, but depending on how old your mom is and what kind of shape she is in, she might be able to sell these policies in the open market for a lot more than the surrender value.

Never heard of this. I assume you would change the beneficiary to the buyer, and they would take over the payments? She'd never go for it, I'm sure. But it's an interesting suggestion.

 

[brewer12345]

Never heard of this. I assume you would change the beneficiary to the buyer, and they would take over the payments? She'd never go for it, I'm sure. But it's an interesting suggestion.

Pretty much. Google life settlements and I am sure you will learn more than you need to. It is still a bit of a wild west in the industry, though.

 

[FinanceDude]

Pretty much. Google life settlements and I am sure you will learn more than you need to. It is still a bit of a wild west in the industry, though.

If she needs cash, it's not the worst option there is. However, its not like she's going to get 95% of her cash value or anything.......

 

[Sarah in SC]

DH and I are thinking about starting a family somewhat soon, and would like to have life insurance set up before things start happening. He's met with an insurance salesman that is a brother of his co-worker and is asking that I meet with him as well. DH has already met with this man and is attempting to sell me on a Whole Life policy. I'm really hesitant as I haven't read any good things about them, but he keeps using "estate tax" and "hedge our bets" and it sounds like he's already been indoctrinated. I'm all for a term policy.

What's the truth? Can they be good, or are they only awful?

Any help would be appreciated.

Miss Lala, I would suggest that in your situation you should look at term coverage for income replacement needs should you or your DH die while caring for dependent children. That type of coverage, commonly called 20 year level term, is both economical and easy to obtain through a broker (easy to compare policies).

What you are being pitched is very lucrative for the salesman. I own term and consider it sufficient for my and DH's income replacement needs should one of us die during our accumulation years. I would highly recommending separating those income replacement needs from your investment objectives and estate planning needs down the line.

And to show the total lack of objectivity that 3 years studying insurance (among other things) for the CFP will give you....RUN LIKE HELL.
Thanks,
Sarah

 

[FinanceDude]

Miss Lala, I would suggest that in your situation you should look at term coverage for income replacement needs should you or your DH die while caring for dependent children. That type of coverage, commonly called 20 year level term, is both economical and easy to obtain through a broker (easy to compare policies).

There's also term you can buy that returns your premiums if you don't die, although it is more expensive, it is still cheaper than whole life.

What you are being pitched is very lucrative for the salesman. I own term and consider it sufficient for my and DH's income replacement needs should one of us die during our accumulation years. I would highly recommending separating those income replacement needs from your investment objectives and estate planning needs down the line.

Disability insurance is almost as important as life insurance.

How well are you covered there? Disability has cost more people their financial lives than dying young.........

 

[Sarah in SC]

Ditto on the disability insurance--cheapest through your workplace but not portable that way. And you are way more likely to be affected by a disability than a death, statistically speaking.

 

[saluki9]

If she needs cash, it's not the worst option there is. However, its not like she's going to get 95% of her cash value or anything.......

All of the deals that have passed through our offices have been far in excess of the cash values. If they were less, why would anybody take them?

We had one guy who got several hundred $K for a term policy.

 

[FinanceDude]

We had one guy who got several hundred $K for a term policy.

How big was the face?

 

[Miss_Lala]

So, we met with the guy and, being stubborn, I didn't take the advice, and proceeded to get into an argument with him over whole. I told him to not even start his pitch because there was no way we were doing it. I've talked it over with DH, he's on board with me for term. As for disability, the guy brought it up, and we do need a little bit more coverage for DH, my income is only icing, and going to disappear when a little one comes into the picture (hopefully within the next year).

Thanks for all of the advice. I really appreciate it!

 

[harley]

I visited my mother today, and we called Prudential about the whole life policies. As I was sure, she was mistaken. I knew she couldn't owe $24K in taxes on a $39K surrender policy. It was $24K taxable. She's been paying her $600/year on the policy, racking up those monstrous 3% dividends since 1966. What a scam. And the policies were sold to her by her trusted insurance agent, my uncle (her brother). He's 84 and not all there now, so you can't really get mad at him. It just goes to show how the agents can convince themselves that they are really helping their clients while they are actually helping themselves.

Anyway, I doubt if she had gotten term she would have invested the difference, so maybe this worked out for the best. The money will be there if she needs it in the future. Otherwise it will pass to me tax free. I don't need it, and maybe I'll do the "buy the policy" thing from her, giving her cash now. I'll need to figure out how to word it so she doesn't get her dander up.

 

[saluki9]

How big was the face?

It was $1M, but he was in his 70's and not in great shape.