Insurance products for retirement

[Jayy]

So I got suckered into one of those financial review sessions and my "financial advisor" who we all know is really an insurance salesman starts pitching all the benefits of having cash value life insurance, an annuity, and getting Long Term Care. I'm 40 and in good health but am open to having an alternative savings account, lifetime income, and insurance to care for me once I'm old and brittle. Currently our family financial health is good, we're very fortunate and life a very comfortable lifestyle.

I'm just on the fence which way should I go, which ones I should consider and which one isn't necessary. I just feel that if I'm fully insured for any adverse health condition, I'm less likely to live a healthier and safer life. While the converse, if I'm not so fully insured I'm more likely to be more cautious about my diet, health, and strenuous activities. Would greatly appreciate some honest feedback since we all know insurance agents are highly incentivized to make sales from their high commissions.

Thanks so much!!

 

[pacergal]

If anyone is dependent on your income, you need some form of life insurance, usually 20-30 year term is a better option. We did not have any of the others, but do have 2 dual lifetime pensions
Do lots of investigation. on the others. I think it depends on your circumstances, finances for retirement , comfort level, etc.
Just my thoughts.

 

[Souschef]

I agree with Pacergirl abut a term insurance policy. You do NOT need an annuity. There are many threads here discussing them, mostly negative.

As far as LTC, there is a current thread on it. We opted to self insure because the rates were crazy.

 

[OldShooter]

I carried guaranteed renewable term insurance through my professional society until the kids were gone, our assets were up, and DW would not need to relay on my income. It was very cheap. Now there are any number of internet sites where you can see options for this simple type of insurance. Forget longer term policies and just renew annual term until you don't need it any more. Also forget level premium policies; as you age and prosper you will easily have the ability to pay an increasing premium. No reason to strain now and give an interest-free loan to the insurance company.

IMO disability insurance is important and cheap. At least it was when I decided to give it to all my employees as a benefit. Disability is a low-probability event but could be horrible without insurance. Lots of tricks with those policies, though, so be sure to do some reading. Example: coverage if you can't do your usual work vs coverage if you don't have the ability to do any kind of work. Big difference.

We self-insure for LTC. We have the money.

Annuities and cash value life insurance are tools for moving your money to the salesperson and his company, particularly at your age. Take the money you'd spend on those and save it in the most tax-efficient way you can.

Re existence or absence of some type of insurance affecting my behavior, it won't happen even if maybe it should. That's just the way we humans are IMO.

 

[pb4uski]

So I got suckered into one of those financial review sessions and my "financial advisor" who we all know is really an insurance salesman starts pitching all the benefits of having cash value life insurance, an annuity, and getting Long Term Care. I'm 40 and in good health but am open to having an alternative savings account, lifetime income, and insurance to care for me once I'm old and brittle. Currently our family financial health is good, we're very fortunate and life a very comfortable lifestyle.

I'm just on the fence which way should I go, which ones I should consider and which one isn't necessary. I just feel in the eathat if I'm fully insured for any adverse health condition, I'm less likely to live a healthier and safer life. While the converse, if I'm not so fully insured I'm more likely to be more cautious about my diet, health, and strenuous activities. Would greatly appreciate some honest feedback since we all know insurance agents are highly incentivized to make sales from their high commissions.

Thanks so much!!

Cash value life insurance aka whole-life aka permanent life is a great product if you have a long term need for life insurance. Since the mortality cost increases as you age the higher premiums in the early years of the policy effectively fund the mortality cost of the later years and it all averages out. Unless you have dependents or other people who rely on your income you have no need to life insurance. Finally, I wouldn't recommend a whole life policy for savings though I will concede that the whole life policy that I bought in 1977 as a 22yo college graduate has worked out ok.

Similarly, a 40yo probably doesn't need an annuity. At your age, the only annuity that you might consider is a multi-year guaranteed annuity aka MYGA which is the insurance industry's version of a bank CD. If you have fixed income investments then MYGAs today offer much more attractive interest rates than CDs.

A 40yo doesn't need LTC insurance.... you can buy that much later in life if it is something that you need. I've looked at LTC insuance many times and the value proposition has been underwhelming each time.

Final thought... ditch the FA... if s/he's recommending these product then s/he doesn't have your best interests in mind.

 

[Jayy]

@pb4uski,

Thanks for your response, I actually have a term life policy that will lapse long after my daughter is a legal adult so I'm covered in that regard. I was thinking the cash value life insurance wouldn't be too bad as a savings vehicle and IRA alternative. I'm not positive but I believe my wife and I are near our maximum income levels where we can contribute to an IRA. With life insurance, I could set up a husband/wife policy to grow our retirement funds and withdraw later in life tax free. The death benefit would be a nice bonus but not the primary since we have term, primary focus is to grow the cash value inside the policy tax free. I discovered the search feature and will see if people are using life insurance in that regard.

Regarding the annuity, I like the concept of lifetime income aka a rich man's social security but what are other alternatives - K1 from royalties

Finally, LTC. I think this is something no one needs until they actually need it and the sales person will give you real case scenarios of people who actually needed it! Lol I don't know, sort of on the fence. I suppose if I built up enough of a nest egg from the cash value life insurance followed by a form of life time income, I should be ok without LTC??

Again, planning to research more of each product not that I found the Search feature and the FAQ pages.

Thanks again!

 

[RetireeRobert]

@pb4uski,

Thanks for your response, I actually have a term life policy that will lapse long after my daughter is a legal adult so I'm covered in that regard. I was thinking the cash value life insurance wouldn't be too bad as a savings vehicle and IRA alternative. I'm not positive but I believe my wife and I are near our maximum income levels where we can contribute to an IRA. With life insurance, I could set up a husband/wife policy to grow our retirement funds and withdraw later in life tax free. The death benefit would be a nice bonus but not the primary since we have term, primary focus is to grow the cash value inside the policy tax free. I discovered the search feature and will see if people are using life insurance in that regard.

Life insurance policy as you are explaining above may be useful for your purposes. As long as you understand features, how things work, and what are your costs as compared to alternatives, it may be a worthwhile tool for you.

You say you are looking at growing funds tax deferred (funds over and above what you could put in an IRA--or instead of what you might be disallowed from putting in IRA because of income limits). Then getting access to and use of some of those funds tax free later in life.

Real estate could accomplish those two goals for you as well. Investment "buy and hold" real estate could provide tax shelter of growing asset values along the way. You could access some of the increased value by taking out a mortgage on such real estate, and that would give you tax free use of a pile of cash. Tradeoff is need to manage (or buy management of) investment real estate, while life insurance pretty much just sits there, no management needed.

 

[RetireeRobert]

As to tax sheltering benefits of whole life insurance, readers may want to consider this informative piece: https://theinsuranceproblog.com/tax-benefits-of-whole-life-insurance/

 

[Luvtoride]

Good article Robert. Thanks for posting.

Not sure I agree with one strategy in the article. Unless one plans to completely “drain” their cash value, I’m not sure why you would withdraw the premiums paid first vs just taking policy loans to access the cash value. Tax free either way.

 

[Closet_Gamer]

Lots of good advice in this thread.

I remain convinced that conflating insurance and investing needs is a bad idea -- and big companies always win over consumers when things get complicated.

I never thought of OldShooters approach to rolling guaranteed renewable insurance and letting the premium float up. We did 20 year level terms which were not that expensive but were a bit pinchy at first. Ours will expire over the next few years and won't get renewed as the kids will be safely away and we could live wo the assets anyway.

+100 on disability insurance. A little life lesson I just took...my DW was always CEO of the house with the kids so we had the view that since she had no income, we didn't need disability insurance. As some of you may know, she became catastrophically ill last year. Amazingly, she's 98% recovered though most of the scenarios involved significant long term disability and costs. If that had come to pass, particularly when the kids were younger, it would have injected huge costs into our lives. In retrospect, we probably should have carried disability on her even thought she wasn't working to bring in $$$.

 

[pb4uski]

... Not sure I agree with one strategy in the article. Unless one plans to completely “drain” their cash value, I’m not sure why you would withdraw the premiums paid first vs just taking policy loans to access the cash value. Tax free either way.

Most of the whole life policies that I'm familiar with you can't do partial surrenders/withdrawals.... you can only do partial surrenders with universal life of variable life policies... so a policy loan is the only way of achieving a partial surrender for basis for a whole life policy.

Also, you can't policy loan 100% of the cash value... it's 90% or 95% of the cash value and a year of policy loan interest as I recall.

So if one wants to invest in a low return asset and pay mortality cost when mortality coverage isn't needed for the tax benefits then go for it, but you'd probably be much better off buying term and investing the difference in a Roth IRA.

 

[Luvtoride]

Pb,
Some of us cannot make contributions to Roth IRAs due to income limits. Also, maxing out my 401k contributions including over 50 catch up for years.
Wouldn’t insurance products such as Variable Universal Life be an no option to provide tax free growth and retirement cash value with loans?

What else do you suggest?

 

[VanWinkle]

Here is a good thread over at Bogleheads concerning Variable Universal Life Ins.

https://www.bogleheads.org/forum/viewtopic.php?t=317024

Real situations may enlighten you before you invest in this product.

 

[pb4uski]

Pb,
Some of us cannot make contributions to Roth IRAs due to income limits. Also, maxing out my 401k contributions including over 50 catch up for years.
Wouldn’t insurance products such as Variable Universal Life be an no option to provide tax free growth and retirement cash value with loans?

What else do you suggest?

Depending on your situation you could do backdoor Roth contributions.

IMO municipal bonds would be better than any life insurance product. It will have better yields and you won't have to pay for mortality coverage (directly in the case of VUL or indirectly in the case of whole or permanent life) that you don't need.

 

[OldShooter]

@Jayy, I would like to draw your attention to the two most important statements in this thread:

So I got suckered into one of those financial review sessions and my "financial advisor" who we all know is really an insurance salesman ...

... ditch the FA... if s/he's recommending these product then s/he doesn't have your best interests in mind.

For additional reading I suggest guru William Bernstein's excellent paper "If You Can": https://www.etf.com/docs/IfYouCan.pdf (free 16 page download), particularly the section beginning on page 12 entitled "Hurdle Number Five: The Financial Services Industry Wants to Make You Poor and Stupid."

 

[brett]

I never had whole life. Not a fan.

I did have term, lots of it when I had dependents and there was risk. Slowly reduced the term to 0 at FIRE.

The only insurance I have is $15K from my DB. I now longer have the financial risk so I see no benefit to it. Our resources are such that my spouse would be just fine without any insurance payout on death.

Not a believe in combining insurance with investments. Any time I have looked at this I have found the t's and c's to be confusing. Seems to me to be a way for the vendor to downplay high admin costs and questionable returns.

 

[Jayy]

Real estate could accomplish those two goals for you as well. Investment "buy and hold" real estate could provide tax shelter of growing asset values along the way. You could access some of the increased value by taking out a mortgage on such real estate, and that would give you tax free use of a pile of cash. Tradeoff is need to manage (or buy management of) investment real estate, while life insurance pretty much just sits there, no management needed.

So I do have some rentals and they spit out extra income but you're absolutely correct that you are running a business. I've had them for about 10 years and plan to sell them off gradually within 15 years.

My goal is to generate multiple streams of income given the state of social security, 9 out of 10 of my friends aren't expecting to receive any. I'm forced to look at alternatives, someone here mentioned muni-bonds which are tax free or perhaps TIPS but are taxed. So it seems like a tax free savings account other than a ROTH IRA and lifetime income other than social security
(in theory) is a unicorn

 

[pb4uski]

....given the state of social security, 9 out of 10 of my friends aren't expecting to receive any. ...

Too bad that 9 out of 10 of your friends are ignorant. Even if Congress does nothing then existing tax revenues will be sufficient to pay ~76% of SS retirement benefits once the current $2.9 trillion surplus is depleted in 2033.

... The OASI Trust Fund reserves are projected to become depleted in 2033, at which time OASI income would be sufficient to pay 76 percent of OASI scheduled benefits. ...

 

[Jayy]

@pb4uski

Well, most of my friends are either younger Gen Xers or older Millennials. Whether OASI can fund us all in 2051, I'm not going to put all my eggs into that basket. I'll report back in 2051 to see who's right. Lol

 

[youbet]

Even if Congress does nothing then existing tax revenues will be sufficient to pay ~76% of SS retirement benefits once the current $2.9 trillion surplus is depleted in 2033.

Sorry, but you're missing the point. The issue is if Congress does something, not nothing. They may implement means testing, change the payout formula for existing recipients, change the rules so that additional folks who have paid in nothing or little qualify and therefore pull in the depletion date, etc. They have plenty of time to change the rules and have shown little inclination to hold back.

 

[pb4uski]

Actually, where you say that they have no inclination to hold back, history suggests that you are totally wrong. SS is still the third rail of politics, which is exactly they have held back and not done anything.

The last time they made a major change to SS was in 1983... 38 years ago. As you know, they extended the full retirement age in a phased manner by two years... from 65 to 67. At the time, the oldest participant that was impacted by having their FRA extnded from 65 to 65+2mos was 45 years old... so they were given 20 years notice of the 2 month extension of their FRA. The other extreme was a 23 year old participants who were given 44 years advance notice that their FRA would change from 65 to 67.

The point is that Congress has a solid history of NOT having changes significantly impact current SS recipients or participants that are close to their FRA and given the politics involved I don't see that changing at all. I concede that there may be proposals to do some of the things you posted about, but it is very unlikely that they would ever make it out of committee and even more unlikely that they would ever be passed by both houses and signed into law.

Keep your tin foil for cooking.

 

[OldShooter]

Given the OP's age at 40, I don't think that worrying about SS one way or another should affect his planning. At that age IMO save-to-the-max should be the mantra, because he has 20-30 years for unexpected things to happen, including especially inflation. So trying to precision plan particular retirement numbers is a waste of time. Maybe when he's closer to ER he will want to start cranking numbers, including FireCalc type exercises. But not now.

 

[athena53]

Final thought... ditch the FA... if s/he's recommending these product then s/he doesn't have your best interests in mind.

Yep. Not coincidental that the FA recommended products that pay generous commissions.

If you have people who would suffer financially if you died, you may want to buy term life insurance. Try to get some that covers a long enough term (say, if you have kids, till they're 22) or is guaranteed renewable in case you develop health problems down the road.

As others have said, annuities have been discussed on many threads here, generally not in a favorable light.

You may also want to look at the threads on LTC insurance- it's historically been underpriced and many people have been faced with the nasty choice of paying the same premiums for less coverage, paying greatly-increased premiums or walking away from it. I'm 68 and will be able to fund my own if needed. It's more complicated for a married couple.

Your "advisor" did not mention disability insurance and you may want to look into that if your employer doesn't offer it.

And please, don't let the existence or lack thereof of insurance determine your health habits. I can tell you from personal experience what a joy it is to be on only one prescription and to be able to travel, kayak, bicycle, etc. and to NOT wake up with aches and pains. Taking care of yourself is its own reward.

 

[youbet]

Actually, where you say that they have no inclination to hold back, history suggests that you are totally wrong.

This article from the SS folks themselves gives a nice history of our SS program. What became clear to me is that there have indeed been big changes to the philosophy and administration of the program over time. Yes, many of the major changes have been decades apart. But as you said, the last major change was in 1983. Maybe that means we are overdue? Or we can take your view which says that lack of recent major change indicates no further changes going forward?

https://www.ssa.gov/history/briefhistory3.html

Also, there was a lot more changed in 1983 than NRA. Check out this list:

https://www.ssa.gov/history/1983amend.html

 

[pb4uski]

I guess I haven't been clear... it would not surprise me if there are major changes made and we are probably overdue for some major changes... given advances in medicine and longevity since 1983 I suspect another increase in FRA is very possible...but if they do it similar to how they did it in 1983 then the impact on a 45 year old today would be negligible... and the impact of changes in FRA on the 40 yo OP would be slight. If I were 40, I'd be more worried about things like increases to the cap or even a slightly higher tax rate. Given the third rail nature of SS, I'm betting that the Congresscritters will spread the pain around very broadly.

But back to what I said earlier...worst case... if Congress does nuttin'... then we'll see a 24% haircut to benefits in 2034... but that is far different from assuming $0!