Is it smart to buy Life Insurance?

Water Cooler
#21

You know, I atually pondered this last night. (As some of you will someday find out, when you’re rocking a baby at 2:00 a.m., you think about lots of weird stuff.)

I’m not so sure that the insurance is really an entirely sinister idea. You’re probably in the best health that you’ll ever be in, so your premiums will be as low as they ever will be. Sure, nobody “needs” the proceeds right now (though it might be a little consolation to your Mom), but in a few years when you are married with kids, you’ll definitely need some.

IMHO - there’s only two types of insurance–term and variable universal. Palacios stated the case for term. Although what he said is true, it’s not necessarily complete, though.

Life insurance costs the same, no matter what kind of plan you’re in. That is, it costs the same to insure you for $500k, whether it’s term, whole, variable, universal, or whatever. The difference lies in the other features of the plan.

If you decide to buy permanent life insurance (which is probably overkill for a 24 year-old), then get Variable Universal. You build cash value by investing money in subaccounts (like mutual funds). They increase/decrease in value (just like mutual funds). Then someday, you can either withdraw the money, or use it to buy more life insurance.

EG - let’s say that at 40, you have $150,000 in cash value accumulated in your life insurance plan, and you decide that you don’t want to pay for the plan anymore. You can either a.) withdraw the money tax-free, 2.) stop paying, and instead, the life insurance company will pay the premiums out of your $150k, or 3.) buy a single-pay premium whole life policy (basically–you get as much insurance as $150k will buy).

Some people criticize VUL’s because the cash value isn’t “guaranteed” like it is in whole life or universal life. That’s true, but it’s just like any other investment–they’re not “guaranteed” either. But VUL allows you the flexibility to change your allocations to the subaccounts. If you want a guaranteed payment, just choose the guaranteed fixed-rate subaccount, and your VUL becomes “guaranteed”. (Other policies don’t have that flexibility–you can’t invest in stocks with a cash-value whole life policy, should you decide to change your mind.)

#22

No. Premiums will be low for term and jump drastically for whole life or a variable universal life policy.

#23

One thing I forgot–the mutual fund and insurance shill financial advisor might tell you “you’re just throwing your money away with term insurance. At least with a permanent policy, you’re guaranteed a payout.” While this may be true, it doesn’t mean it’s a good buy.

Like I said before, it costs X amount to insure a person who is X years old. For example, it might cost $1.53 per $1,000 to insure a 24 year old. (I’m making up the numbers just for illustration.) That is, if you want a $250,000 policy, it will cost $382.50 to insure you for a whole year. At age 25, that premium might increase to $1.61 per $1,000. Then your premium would cost $402.50. And the premiums keep increasing every single year.

(FYI - This “cost of insurance” doesn’t change, whether it’s a term, whole, or variable policy, because the cost of insurance is regulated through the state commisioner. However, the price that you’re quoted may vary because of insurance riders and other features.)

You might say, “But Greenie, my premiums don’t increase every year. They stay the same.” That’s true, because they’ve priced in the the increases in the cost of insurance when they quoted you the premium. So, in the above example, they wouldn’t charge you $382 in the first year and $402 in the second, they would just charge you $392 per year for two years.

[Edit - CvM posted while I was typing. But now we know why term insurance appears to be cheaper–it’s only insuring you for the next 5 or 10 years, while your cost of insurance is low. Permanent polcies price in the cost of insurance when you’re 40, 50, 60, and 70.]

If you were to actually take the cost of the insurance (after all the riders and other stuff has been stripped away), and take the future value of those cash payments, it’s highly likely that you’ll pay more in premiums than you’re insured for. (And if you think about it–this has to be true in the aggregate. If it weren’t, then insurance companies would pay more in proceeds than they receive in premiums, and they’d go out of business.)

At any rate–I said all that to say this: Don’t let the sleazy insurance salesman lie to you financial advisor inform you that “permanent life insurance is cheaper in the long run than term.” That’s bullshit not entirely correct, and now you know why.

#24

I have $500K of term life insurance that I got at age 30 that costs less than $30 a month. Life insurance does have a very very positive NPV if you die early. That is why it makes sense to buy term only. Like CFAvMBA said, it is a risk management product, not an investment product, although it can be for muppets willing to pay high fees. You want to make sure that your kids and wife are able to support thenselves as if you had never died. That is the point. I would say that everyone with dependents that is not able to self-insure should buy term life insurance, but if you are 24 with no dependents, what is the point? You’ll surely be able to buy cheap term insurnace in your 30s. Don’t let the salesmen tell you any different.

#25

FTFY

#26

advisor is making huge commission off of your whole life policy dude - that’s why he is jamming it down your throat

you are 24, spend the premiums on booze and ho’s…once you settle down and have a family, then get yourself 20 or 30 year term…

don’t pay this crook a commission of 5% (or more) for something you don’t need

#27

Sounds like a good discussion, though I skimmed after getting 1/2 way here. Basically, life insurance is for two things:

  1. If you have people you care about who depend on your income, this can help replace it or buffer the loss if you die. If you don’t have this, it usually doesn’t make sense to have life insurance, unless…

  2. If you have a ton of money, there are tax advantages to wrapping it into an insurance policy and having the insurance policy do the investing (which of course you might direct or not, depending on how you arrange it).

Other than that there is pretty much no reason for life insurance.

Most people are most concerned about children and spouses. Term life insurance makes a lot of sense, then, because at some point, the kids will grow up and be at least somewhat self-sufficient. Spouses can generally be taken care of through wills and estate planning at that point.

#28

^Permanent life insurance sometimes makes a lot of sense for estate planning, too, since the proceeds aren’t taxable. (Well, they’re not income-taxable. They might be estate-taxable, but that’s a different story…) Essentially, It’s a way for the old person to shift a lot of the tax burden onto themself.

Also, it makes sense in business and succession planning. If I’m partner of a company, and I know that I’ll need to buy my partner out if he dies, I can take a life insurance policy on him, so I have funds to buy his part of the business.

But in general, I agree with BChad. If you’re just thinking about your wife and kids, the best advice is “buy term and invest the difference.”

#29

I only buy life insurance on my wife.

#30

^I’m sure she appreciates that.

#31

Yeah, but then if you die you’re royally screwed.

#32

I’ve talked about this on here before. Obviously I need term on myself so my wife and kids are taken care of, but I have a hefty policy on my wife as well. I’d be screwed if she died.

#33

Though it’s cheaper to buy life insurance when you’re younger, i think what you need most is disability and medical insurance. Unless you have to support your parents? otherwise i think life insurance is a waste of money.

#34

Respect.

#35

Remember that the reason to purchase life insurance is for the people who depend on you and for those you care about. Risk management all the way.

Life insurance can also be an excellent tool to minimize taxes on an estate.

#36

Only get it if you have dependents and get a term policy. I got a $1 million 20 year term policy at 36 years old for about $80 a month.

#37

You’ll probably need LI well after that 20 year term expires.

#38

^Yeah, but he’ll be 56, and the kids will most likely be out of the house, and should be able to fend for themself. Hopefully the wife will also have sufficient means to take care of herself.

It probably wouldn’t hurt to revisit it at the end of the term, though.

#39

That sounds cheap, given that the undiscounted cost is less than 2% of $1 million and mortality rate for males is quite a bit higher than that over that age range. I suppose you are not a member of the same hang gliding club as FrankArabia, JDV, etc.

http://www.ssa.gov/oact/STATS/table4c6.html

Also, I would start sleeping with an eye open between ages 55.8 and 56, since there is a strong incentive for waifu to collect your earnings for 20 years and then arrange an accident right before the contract expires.

#40

And anyone with an estate greater than five and change. The guberment is waiting. Profiting on the death of its people.