Poll:Life Insurance Choices

[akck]

My son has been offered 2 choices for a 30 year $1 mil policy. I already steered him away from any other policies. The first was just your standard term policy. The second was a policy that would return premium payments at the end of the policy term. I told him to find out the cost difference before deciding and I was wondering what this group thought?

 

[Big_Hitter]

how old is he?

 

[CRLLS]

My guess, and it is only a guess, is that the value of the "return of premium" is less than neutral, meaning the insurance company gets more than their actuarial share of $$. The only real benefit is, if he lives to the end of that 30 yr period, then he gets his premiums back free of taxes. It doesn't show up in his AGI. This would have to come as an increased cost in monthly premiums. In exchange, he earns no interest on those "higher" premiums paid. As the COL increases, the buying power of those returned premiums, if he even lives to collect, decreases.

Can he easily afford to pay the higher premium, and will he need the extra tax-free $$ in 30 yrs? I'm sure, it can be shown to be better or worse by using different assumptions over the next 30 years. Just be aware that actual value to him can be far different than an Insurance company's illustration. There is no one right answer. It depends on DS's financial goals and plans.

As my daddy told me many times as I was growing up, "Figures don't lie, but liars can figure". Be careful.

 

[akck]

He’ll be 38 this year, so the policy pays out at 68. I found his original quote and it looks like the options are a total premium payout of $30k versus $78k. So the real question is it worth investing an extra $48k to get $30k back?

 

[Breedlove]

Buy term invest the rest , I heard a financial adviser on radio talking to a retired person who had a friend wanting to sell him life insurance . The radio financial planner told the guy to chase the insurance man off . He encouraged the younger folks to but a term policy , never a full life.

 

[Big_Hitter]

Buy term invest the rest , I heard a financial adviser on radio talking to a retired person who had a friend wanting to sell him life insurance . The radio financial planner told the guy to chase the insurance man off . He encouraged the younger folks to but a term policy , never a full life.

I'm glad I bought a whole life policy in 2000 instead of buying term and investing the difference. Bad decade for equities.

 

[Big_Hitter]

He’ll be 38 this year, so the policy pays out at 68. I found his original quote and it looks like the options are a total premium payout of $30k versus $78k. So the real question is it worth investing an extra $48k to get $30k back?

that's about when I bought my whole life policy, I was 36

if I had those two choices I'd just do the straight term; is $1M going to be enough?

 

[joeea]

He’ll be 38 this year, so the policy pays out at 68. I found his original quote and it looks like the options are a total premium payout of $30k versus $78k. So the real question is it worth investing an extra $48k to get $30k back?

No.

Buy insurance to mitigate the risk of losing your son's stream of income.
Invest in the stock market, not insurance products.

 

[OldShooter]

Why would he need insurance out to 68YO? I think I dropped my life insurance in my 40s. Kids gone, good equity in the house, adequate start on retirement savings for DW, and DW's salary adequate to support her if I checked out.

You son shouldn't be paying for life insurance beyond the point where his death would cause financial hardship for his family. Life insurance is not some kind of lottery ticket.

The "return of premium" thing: They would not offer it if they didn't make good money from it. It's a gimmick. No calculations are necessary to know this. Useful rule: The more complicated a financial product is, the more likely it is that it was designed to make money for the seller, not for the buyer.

 

[pb4uski]

Similar story here.... dropped term in my late 40s once the kids were out of the house and we had enough that DW would be ok if I was run over by a beer truck. So he may really only need that term coverage for 10-20 years so the cost will be less than $30K.

 

[akck]

that's about when I bought my whole life policy, I was 36

if I had those two choices I'd just do the straight term; is $1M going to be enough?

$1M was only meant to last long enough to get his daughter to and through college and wife back to full time work, not through her retirement.

 

[akck]

Why would he need insurance out to 68YO? I think I dropped my life insurance in my 40s. Kids gone, good equity in the house, adequate start on retirement savings for DW, and DW's salary adequate to support her if I checked out.

He started a family later in life, so kid won’t be out until he’s 60ish. So there’s a hedge there in case of graduate school or more kids.

 

[OldShooter]

He started a family later in life, so kid won’t be out until he’s 60ish. So there’s a hedge there in case of graduate school or more kids.

OK "60ish" If he's 38 this year the kids will be out of college before 60YO.

I'd put a sharp pencil to the plan. By "60ish" he will have (I hope) built up significant retirement savings that could be considered as a hedge. And "60ish" is not 68. It still looks like too much insurance to me, but I'll shut up now.

 

[brucethebroker]

Focus on the fact that life insurance is first and foremost for the death benefit/liquidity. Death benefit during your pre-asset/accumulation years (to protect dependents from loss of your income) and liquidity when you need the quick cash at death to prevent sale of needed assets (to buy out partners in a business, or protect the family farm from estate taxes). "Return of premium" is a sales gimmick.

Whole life offers "return of premium" plus, and has the added benefit of fixed premiums for life. And many polices are actually "paid up" by dividends after 15-20 years or so. The arguments against whole life (Dave Ramsey calling it "garbage", for example) have been around for decades. But, for some who cannot seem to save money/or invest without "forced savings", it could be a good choice.

Is your son a saver? Does he fully fund his 401-k? If so, term may be the best choice.

BTW, widows don't care if the policy was term, "return of premium" or whole life.....

 

[brucethebroker]

PS-have your son determine how much insurance he really needs. Has SS survivor income been taken into consideration? That monthly income can be substantial. How much does he have in his retirement account or savings? Employer life policy? Cash is cash.

A million dollars of insurance seems too much like a neat, round number. He may actually need less.

 

[DrRoy]

No.

Buy insurance to mitigate the risk of losing your son's stream of income.
Invest in the stock market, not insurance products.

+1

 

[akck]

Thanks all, I’ve relayed what has been said to my son. So far, he’s elected to just consider term life only. While he’s considering 25 and 30 year term, he’s leaning towards 30 because the cost difference is around $10/month.

To answer some questions, he is a saver, contributing at least the minimum needed to get the employer match and rebuilding his emergency fund (recently changed jobs). Once the above is done, he’ll split the funds between his 401k and student loans and the goes for any pay increases. I think he likes the idea of $1M policy and it’s likely he needs less.

 

[kcowan]

How about reducing term? Start high, maybe $2m and reduce to zero by 68.

I have level term half mill since 2002 intended to replace my pension. Now I am thinking it will pay tax on accumulated capital gains.

 

[Texas Proud]

At first not enough info, but saw you put down the difference so it was an easy choice....

 

[OldShooter]

... While he’s considering 25 and 30 year term, he’s leaning towards 30 because the cost difference is around $10/month. ...

Obviously, then, he's looking at a "level premium" policy. This involves his lending money to the insurance company at low or no interest during the early part of the policy in order to have them apply it to the higher risk of death late in the policy. This also means that he will be paying more now, when his earnings are lower than they will be later in life when he will be earning more and better able to pay a slowly increasing premium. Finally, I think it may mean that it will be difficult or expensive to cancel the policy before its scheduled end. These policies do, of course, generate higher sales commissions for the agents.

The best term policy IMO is guaranteed renewable and has payments based on age. Then as the insured's income grows, the payments grow too. Towards the end, too, he will start to see what he is really paying for however many extra years he wants. I think that simple policies like this can be easily and inexpensively bought on the internet. I'd encourage him to at least price this option. He might get a very pleasant surprise.

 

[pb4uski]

+1 Though I'm not sure about difficult or expensive to cancel before end of term... if you just stop paying the premiums the policy will cancel... nothing difficult or expensive about that.

 

[OldShooter]

+1 Though I'm not sure about difficult or expensive to cancel before end of term... if you just stop paying the premiums the policy will cancel... nothing difficult or expensive about that.

Well, my thinking re "expensive" is that the insured will probably be forfeiting all the excess premium dollars that he has paid early in the policy life to level out the premiums near the end, where the actuarial risk becomes larger than the level premium amount.

My thinking on "difficult" is that in the very unlikely event that he can recover some of those early overpayments, his agent is going to fight tooth and nail to keep that money by putting him into some other kind of insurance "investment."

Maybe not, but that is my logic in making the prediction.

 

[pb4uski]

He can avoid the first part by getting annually renewable term unless he is totally sure that he needs $1m of coverage for the entire 30 year term. Or if he is unsure, perhaps split the difference and get a 0.5m ART policy and a 0.5m 30-year level term policy.

He can avoid the second part by buying direct and not using an agent

 

[OldShooter]

He can avoid the first part by getting annually renewable term unless he is totally sure that he needs $1m of coverage for the entire 30 year term. Or if he is unsure, perhaps split the difference and get a 0.5m ART policy and a 0.5m 30-year level term policy.

He can avoid the second part by buying direct and not using an agent

Exactly. But I see absolutely no need for a level premium policy. Sure, premiums on a standard term policy will rise with age, but his income will probably also rise. Also, inflation will reduce the effective cost of the later premiums. The only thing he needs with the standard term policy is guaranteed renewability and I think that is fairly easy to get.

 

[brett]

I bought term through my employer. As much as I could at very attractive rates.

Never considered whole life for a minute. Bought extra on the market since I did not want to be dependent on my employer.