The age old whole v. term life insurance question
Posted in Life Insurance Questions over 3 years ago, 5 replies
submitted by Amber in Phoenix, AZ
Thanks for the input, Andrew.
I actually don't have a problem with the insurance companies making money. That's why they're in business. I also don't have a problem with FAs making commissions off of the sales of these products. Again, it's just business.
From reading your explanation, it does make sense to me and I thank you for it. But it doesn't resonate for me as a consumer so and I think this is my indication that whole life isn't for us.
While I want my children to have a good life, I feel no compunction to live and plan simply so they can inherit well. My job as a parent is to do everything I can for them while they're young so they can make their own way. Acknowledging some feel differently, it seems wrong that my children should profit off my death (just as I do not plan on profiting from my parents'). Just a difference in approach.
So if we take off the table inheritance planning, it seems the main benefit is that I can take a loan out against the policy to cover for something unforseen -- or to finance a future endeavor.
As far as using it for something unforseen, that definitely has some merit -- I'd far rather risk a life insurance policy than equity in a home. But, my counter argument would be that if I put that money into investments or savings, I could borrow against that instead ... and that'd be my actual money.
As far as financing it for a future endeavor (second home, new business, etc.), that can only be answered by whether it seems likely we'd engage in that activity. As you said, "who knows?" It's hard to say now what I might do in even 5 years, much less 20. In this area, it's a gamble.
The only other benefit I see to whole life is that my understanding is that it's exempt from college financial planning models. So if we had a whole life policy of $X with a cash value of $Y, we wouldn't need to declare it when pursuing financial aid for our children. Again, this has merit, although it begs a bigger ethical question for me which is, "if we can afford to pay for our kids' college, shouldn't we do everything we can to do so rather than rely on the government's money?"
What are your thoughts on that last one? Is there another dimension to that I'm not understanding or does it boil down to that kind of ethical consideration?
Thank you for your input on this. I have seen that this is a very much debated issue and while it seems you and I have different opinions, your input is helping me arrive at an informed choice.
Thank you.
-
I actually don't have a problem with the insurance companies making money. That's why they're in business. I also don't have a problem with FAs making commissions off of the sales of these products. Again, it's just business.
From reading your explanation, it does make sense to me and I thank you for it. But it doesn't resonate for me as a consumer so and I think this is my indication that whole life isn't for us.
While I want my children to have a good life, I feel no compunction to live and plan simply so they can inherit well. My job as a parent is to do everything I can for them while they're young so they can make their own way. Acknowledging some feel differently, it seems wrong that my children should profit off my death (just as I do not plan on profiting from my parents'). Just a difference in approach.
So if we take off the table inheritance planning, it seems the main benefit is that I can take a loan out against the policy to cover for something unforseen -- or to finance a future endeavor.
As far as using it for something unforseen, that definitely has some merit -- I'd far rather risk a life insurance policy than equity in a home. But, my counter argument would be that if I put that money into investments or savings, I could borrow against that instead ... and that'd be my actual money.
As far as financing it for a future endeavor (second home, new business, etc.), that can only be answered by whether it seems likely we'd engage in that activity. As you said, "who knows?" It's hard to say now what I might do in even 5 years, much less 20. In this area, it's a gamble.
The only other benefit I see to whole life is that my understanding is that it's exempt from college financial planning models. So if we had a whole life policy of $X with a cash value of $Y, we wouldn't need to declare it when pursuing financial aid for our children. Again, this has merit, although it begs a bigger ethical question for me which is, "if we can afford to pay for our kids' college, shouldn't we do everything we can to do so rather than rely on the government's money?"
What are your thoughts on that last one? Is there another dimension to that I'm not understanding or does it boil down to that kind of ethical consideration?
Thank you for your input on this. I have seen that this is a very much debated issue and while it seems you and I have different opinions, your input is helping me arrive at an informed choice.
Thank you.
-
Amber,
The estate planning issue is a difficult point for me to make. It is a lesson most only learn in their later years, when planning may in fact become cost prohibitive. Also, you seem to be reasoning from the receiving side, and not from the giving side. The point is not that your kids will expect this of you; rather, it will be YOU who will want to ensure inheritance befalls your loved ones.
Again, the conversation is more than just "fun money". Suppose you have a grandchild that has a severe disability and has special needs. Naturally, your love for your grandchild would push you to ensure they have the highest quality care set up for the rest of their life.
Maybe you wish to ensure that the battered women's shelter in your town never has to worry about closing it doors again.
For simplicity's sake, let's look at it this way:
At your death, you have three entities to whom you can give your earthly belongings. Your children, non-profit organizations, and the government. You can only pick two.
Most people know whom they would exclude.
It's your money. You have worked hard to earn it, you were smart enough to manage it, etc. You'll probably want it to go to the places that matter to you (kids and philanthropy).
I imagine it is something you will want down the road, but it is counter-productive for me to press the point....
Tax considerations are also something to consider. If you put your money into mutual funds, whenever you take money out for expenses, you have just created a taxable event.
(BTW, going back to estate/will questions, it takes a heck of a fund manager to create enough taxable monies inside a mutual fund to warrent choosing that startegy over the tax-free death benefit of whole life....remember, the tax man is patient, and will wait for that fat IRA payoff)
Further, policy loans, at least with my company, are charged far more favorable interest rates than any personal loan you could get from the bank.
As far as the college planning goes, I appreciate your ethical considerations. The reason for exclusions is to reward those who have made decisions that benefit the system overall. Whole Life insurance is good for the entire financial system. It works on guarentees (unlike stocks), and outperforms bonds.
Again, what is in your hand at the end? Term's only purpose is peace of mind in case the unexpected happens. Whole Life is the investment. You have an asset that consistently, predictably builds value, and is extremely flexible for every situation in life. Even those you presently think you don't need.
But like I said, that is something I doubt I can convince you of via a message board.
Other than that, please consider this advice:
Your mortgage money is "cheap" money. When I say that, I mean it is not costing you a ton (interest wise) to pay that back. I would consider paying back higher interest bearing credit cards, personal loans, store credit, etc.
Once those are out of the way, you would be wise to invest the rest of the money (mutual funds in the Roth IRA), perhaps increasing your monthly payments. Only do this, however, if you have a plan/timeline for completion of the note. That gives you something to shoot for at least.
Hope this helps.
The estate planning issue is a difficult point for me to make. It is a lesson most only learn in their later years, when planning may in fact become cost prohibitive. Also, you seem to be reasoning from the receiving side, and not from the giving side. The point is not that your kids will expect this of you; rather, it will be YOU who will want to ensure inheritance befalls your loved ones.
Again, the conversation is more than just "fun money". Suppose you have a grandchild that has a severe disability and has special needs. Naturally, your love for your grandchild would push you to ensure they have the highest quality care set up for the rest of their life.
Maybe you wish to ensure that the battered women's shelter in your town never has to worry about closing it doors again.
For simplicity's sake, let's look at it this way:
At your death, you have three entities to whom you can give your earthly belongings. Your children, non-profit organizations, and the government. You can only pick two.
Most people know whom they would exclude.
It's your money. You have worked hard to earn it, you were smart enough to manage it, etc. You'll probably want it to go to the places that matter to you (kids and philanthropy).
I imagine it is something you will want down the road, but it is counter-productive for me to press the point....
Tax considerations are also something to consider. If you put your money into mutual funds, whenever you take money out for expenses, you have just created a taxable event.
(BTW, going back to estate/will questions, it takes a heck of a fund manager to create enough taxable monies inside a mutual fund to warrent choosing that startegy over the tax-free death benefit of whole life....remember, the tax man is patient, and will wait for that fat IRA payoff)
Further, policy loans, at least with my company, are charged far more favorable interest rates than any personal loan you could get from the bank.
As far as the college planning goes, I appreciate your ethical considerations. The reason for exclusions is to reward those who have made decisions that benefit the system overall. Whole Life insurance is good for the entire financial system. It works on guarentees (unlike stocks), and outperforms bonds.
Again, what is in your hand at the end? Term's only purpose is peace of mind in case the unexpected happens. Whole Life is the investment. You have an asset that consistently, predictably builds value, and is extremely flexible for every situation in life. Even those you presently think you don't need.
But like I said, that is something I doubt I can convince you of via a message board.
Other than that, please consider this advice:
Your mortgage money is "cheap" money. When I say that, I mean it is not costing you a ton (interest wise) to pay that back. I would consider paying back higher interest bearing credit cards, personal loans, store credit, etc.
Once those are out of the way, you would be wise to invest the rest of the money (mutual funds in the Roth IRA), perhaps increasing your monthly payments. Only do this, however, if you have a plan/timeline for completion of the note. That gives you something to shoot for at least.
Hope this helps.
Thanks, Andrew. This is helpful. We're fortunate because the only debt we have is a mortgage -- no credit card, student loan, car, etc. Just a house and we have quite a bit of equity in it already.
One other question and then I'll stop beating this horse (you've been really helpful).
From what I can tell, all life insurance benefits (whether via term or whole) are not taxable as income for the beneficiary. Is that correct? But would there be an estate tax on the total value? Where would I read more about tax impacts?
Thank you again.
One other question and then I'll stop beating this horse (you've been really helpful).
From what I can tell, all life insurance benefits (whether via term or whole) are not taxable as income for the beneficiary. Is that correct? But would there be an estate tax on the total value? Where would I read more about tax impacts?
Thank you again.
The death benefit of a life insurance policy passes income tax free to the benficiary.
An easy way to fix the estate problem (if, in fact, your estate is large enough), is to have the spouses own one another's life insurance policies. This way, let's say in the event you die first, your death benefit would pass to the owner and beneficary of your policy (your husband), and not be added to your estate.
If you own your own policy, though the proceeds pass to your husband tax-free, your estate may "increase" in size because the life insurance was an asset you owned. Now that your husband owns it, it is NOT added to your estate, and he can consume it before he passes.
Now, you and husband, upon one of your deaths WILL NOT pay the taxes right then, owning one another's life insurance policies is a way of decreasing assets (the whole point of trusts) at death, so that more goes to family and philanthropy, and less goes to Uncle Sam.
This is not my company, but they have a pretty good explanation of this subject:
http://www.pacificlife.com/Channel/Educational+Information/Life+Insurance+Concepts/Maximizing+Life+Insurance+Benefits.htm
I hope that comes in as a URL.....if not, just copy and paste to your browser.
BTW, I love insurance (yeah, I am ALWAYS the life of the party), so I do not mind answering questions. They are never a burden.
An easy way to fix the estate problem (if, in fact, your estate is large enough), is to have the spouses own one another's life insurance policies. This way, let's say in the event you die first, your death benefit would pass to the owner and beneficary of your policy (your husband), and not be added to your estate.
If you own your own policy, though the proceeds pass to your husband tax-free, your estate may "increase" in size because the life insurance was an asset you owned. Now that your husband owns it, it is NOT added to your estate, and he can consume it before he passes.
Now, you and husband, upon one of your deaths WILL NOT pay the taxes right then, owning one another's life insurance policies is a way of decreasing assets (the whole point of trusts) at death, so that more goes to family and philanthropy, and less goes to Uncle Sam.
This is not my company, but they have a pretty good explanation of this subject:
http://www.pacificlife.com/Channel/Educational+Information/Life+Insurance+Concepts/Maximizing+Life+Insurance+Benefits.htm
I hope that comes in as a URL.....if not, just copy and paste to your browser.
BTW, I love insurance (yeah, I am ALWAYS the life of the party), so I do not mind answering questions. They are never a burden.
submitted by Andrew in Greenwood, IN
@ October 01, 2008 - 10:20 AM
Write a Reply
Instant Online Quotes
Save Up to $475 a Year on Life Insurance.
You will get quite a few people who are exetremely polarized on this issue. Most of the rock-star financial advisors want you to buy term....I tend to disagree.
As a financial advisor, the foundation of any financial plan is whole life insurance.
Why?
Because things change.
Let's say we dropped the WL and bought 20-year level term. In twenty years, you and your husband will be 55.
What else will have happened in twenty years?
*Will you have another child? (perhaps unexpected)
-Natural Birth
-Adoption
-Your sister-in-law and her husband die, and now you have to raise thier kids.
*What will your mortgage situation be?
-Will you take out a second mortgage for X number of reasons?
-Is your interest rate fixed or variable?
-Will you buy another, more expensive house?
*Retirement
-Most people, around age 75, really begin to worry about what they will be leaving their heirs. In fact, they will stop spending down their IRA's and 401k's just to ensure that their passions in life (children, charities, etc.), are taken care of.
With WL life insurance, you don't have to stop spending your savings to leave something for your kids. With permanent coverage, you are guarenteed to leave your heirs tax-free money.
In short, things change. I just hit a couple of issues. What if your husband decides to quit his job and start his own business. What does that do to your financial timeline?
If we had a crystal ball and knew exactly what was going to happen in your life, we would saddle you up with term.
BUT LIFE CHANGES!
Whole Life is the foundation of your financial house, because it is flexible. It grows with you (increasing Cash Value), it never leaves you, and it is extremely flexible in terms of when and how you pay/get money out of the policy.
For example, if you have a policy through a good company, after about the 12th year, you should be able to do a "Premium Offset". This means you have enough Cash Value and are earning enough dividends that the policy can PAY FOR ITSELF!
That is the point where you take the 800/mo you are paying for WL and start sticking it into a mutual fund portfolio. (BTW, unless you are in an extremely high tax bracket, you need to do a ROTH IRA......Traditional IRA's give you a tax deduction, but your withdrawls are taxable.....ROTH IRA's are funded with after tax dollars (just like your WL policy), but come out TAX FREE!)
Anyway, it boils down to this analogy: You can either own the place you live, or you can rent. Now, renting is less exspensive for sure, you don't mess with repairs or remodeling, etc.
However, when you leave your rented place, you have nothing to show for the money you have been paying to the landlord. It is gone.
When you buy your house, however, you build equity, and, if you decide to sell, you will see the fruit of your labors financially.
I would say if you and your husband are not suffering financially, you would be remissed in leaving your WL policy.
Someone on the internet said WL was the insurance companies way of scaming money. In fact, they really make their money on term. The tables are set-up, and they know on average how many people will die in X,Y,Z category. Overwhelmingly, the odds are YOU WILL NOT DIE during your term policy. That's easy money for the insurance company.
To help you out further, I would like to know more about your policy. Who is the company? What is the amount of the coverage? etc.
I hope that helps.