Poll:Life Insurance Choices

[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.

Reduced it to over time down to O as my children grew up, as we FIRED, and as the private policy renewal increased in price with age.

 

[Out of Steam]

Why would he need insurance out to 68YO?

I just bought a small ($125K) 10 year term life policy in my late 50s, replacing a larger policy that reached the end of its term.

I was concerned that our daughter was not truly independent yet, and that my wife would be digging deeply into retirement savings too soon if I died before then.

 

[njhowie]

Well, I am the loner who voted for return of premium...which is what I signed up for 7 years ago after giving it a significant amount of thought.

1. It's quite easy to say "Just take the difference in premium every year and save/invest it". However, what guarantee do you have about what kind of return you can expect over the 30 years? None really. The return of premium guarantees the return you'll get, and it will be tax free.

2. It is a form of forced savings. If you choose the straight term policy without return of premium, will you have the discipline to put away the extra amount? Some will, most won't.

3. A few years in, the policy does begin to accrue cash value which will accelerate as time goes by. After some time, should there be a need to terminate the policy, some amount would get refunded. That's not a reason I decided in favor of this policy, but it is a feature.

4. I'm an extremely healthy individual and I fully expect to have the premiums returned to me at the end. Of course it is a calculated risk - me vs. my longevity. If I die and don't make it, well, I ended out purchasing a somewhat expensive life insurance policy. However, do I really care at that point? The policy is still going to pay off to my beneficiaries.

5. At the time, I did read up extensively on the product, scoured every article I could find on the topic (both pro and con), and liked/trusted the insurer offering it (ING, which is now Voya).

6. Over time, life expectancy has been increasing. Premiums for ROP policies have generally been going up, and fewer insurers are offering it as an option today versus a few years ago. My interpretation is that in general, insurers don't want to issue these policies because it is not very profitable to them - i.e. the insureds are getting their premiums returned at the end of the term.

 

[njhowie]

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?

If you go and use a future value calculator, taking the $1600 annual difference, to get back the $78k after 30 years, you get an annual rate of return of 3.15%. Again, this is the guaranteed rate of return after taxes. At this time, there's nothing wrong with that at all.

 

[OldShooter]

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?

Well, that is the straight money question and the way FI people (and one of Richared Thaler's "econs") probably would look at it.

But the difference is $1600/year to him and the difference between a level premium policy and a plain term policy is probably another $1K +/-. So, IMO quite a bit of money being laid out by a 38YO with young kids. Is the extra cost significant to him or might it be a burden? What if he becomes unemployed? He might be able to carry a straight term policy but have to bail out of a level-premium policy.

To @njhowie's point, what if he put that extra payment into a Roth and got (tax free) stock market returns for 30 years? IF we're talking investments, I think that is the logical comparison.

 

[njhowie]

But the difference is $1600/year to him and the difference between a level premium policy and a plain term policy is probably another $1K /-. So, IMO quite a bit of money being laid out by a 38YO with young kids. Is the extra cost significant to him or might it be a burden? What if he becomes unemployed? He might be able to carry a straight term policy but have to bail out of a level-premium policy.

To @njhowie's point, what if he put that extra payment into a Roth and got (tax free) stock market returns for 30 years? IF we're talking investments, I think that is the logical comparison.

I purchased mine at age 47, the numbers were somewhat different, and I was likely a little further along as far as life/career, so I can appreciate this perspective.

 

[Cobra9777]

...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.

+1

DW and I both worked and we each had employee life coverage equal to 1 year salary at no cost to us. We also bought a very inexpensive 20-year term life policy when the kids were very young that covered both of us. It was just big enough to pay off the mortgage. IIRC, the premium was $24/mo. Theory was, the survivor could easily carry on with no mortgage plus the extra salary for that first year. We cancelled the policy around year 18. Kids were out of the house, college was covered, mortgage was paid off, and we had plenty of money for the survivor to carry on. I never understood the point of whole life.

 

[OldShooter]

... I never understood the point of whole life.

That's because you are not an insurance agent. Whole life policies are very motivating for them.

 

[pb4uski]

^^^ Ignores that there are some situations where people need permanent life insurance (principally estate tax situations) and whole life does a pretty good job in those situations.... but for most people, I would agree whole life is not the best choice.