Life Insurance

Fill in this dummy about life insurance.

Term, Whole, UL, VUL, etc.

Term you (may) need, the rest you don’t.

How come life insurance salespeople (dressed as financial advisors) are yelling on the corner how life insurance is the new holy grail? I heard one go in depth about a VUL on how it’s one of the last great little known tax shelters.

As a single guy, I have no one who depends on my salary. Why I need life insurance now is beyond me. I’ve been wondering if it is worthwhile to get a policy sooner than later in the event I meet a potential damsel who could be Mrs. CFAvsMBA.

life insurance is not a great industry to be in…insurance overall is tough…life insurance problably the worst…

You really don’t need life insurance if you don’t have a family that depends on your income. Getting it while you’re younger may save you some in premium costs, but not much. Wait until you have a family. Once you have kids, don’t forget to take out a policy on your wife even if she doesn’t work.

The more complex insurance products (basically, anything not term) would only make some sense if you’ve exhausted all other tax deferred investment vehicles.

Term makes sense if you have family or bequest objectives.

A former colleague who is wont to do such things did some extensive research on what was the best deal among life insurance products, and he decided it was 20-year term. He got 20-year policies on both him and his wife right before they started having kids (and now they have four).

That was good enough for me: my wife and I got 20-year term policies two months before our daughter was born. After 20 years, the kid can support herself.

True, but life insurance is a way of providing potentially substantial tax free wealth to your kids. Also in term policies you don’t build a cash value, so if you pay the premiums for 20+ years and let the policy lapse you have nothing to show for it. Yes I know it’s a sunk cost, but depending on the rates you’re paying it may be worth keeping just so your kids get the money when you pass away.

Take me for example. I’m perfectly self sufficient and have no debt. My dad has a $1 Million policy and I’m the sole beneficiary. He set it up when he and my mom got divorced in the event that he passed away and if worst came to worst, I would be able to support myself until I finished school. There is no real “need” for the policy anymore, but at this point the marginal cost of continuing to pay the premium is worth is b/c I’ll then get $1M in tax free income.

To value this, you have to be able to compare an equivalent face value term product, price in assumptions on investment returns for the difference, tax liabilities on the $1M at time of death ($0 today unless he has > $4M other dollars), and develop an assumption on when he’s going to pass. His length of life will eventually cross over to benefitting the ‘term & invest the difference’ approach.


Assume $300 month for the term, $600 for whole ($300 difference for whole vs term - feels reasonable but no idea - assume the $300 term is now invested at 20 years+ or you could purchase another term product but we won’t get into it due to the variability/uncertainty of health/premiums)

7% return

20% tax at death (high in today’s environment but we won’t worry about that)

Break even where the $1M net ($1.25M gross) is at 43 years. At 20 years, the gross value would be $156K, so from then until 46 years the benefit of the whole policy is diminishing, after 43 years you’d be ahead with the term+invest approach.

This illustrates that it’s not a simple question - there are many variables that drive what product makes the most sense. A whole policy like your dad’s could also make sense if he’s not comfortable that he’ll be able to manage the money prudently to ensure it’s set aside for you to accomplish his bequest objective.

I’d bet 90% of people would be financially better off going term+invest, excluding behaviral implications.

^ Yeah, it definitely is a very sensitive analysis. I was speaking in a more general sense since I don’t know the specifics of the policy beyond that it is for $1M, it exists, and is payable to me. I guess his wealth management guy thought it would be a worthwhile piece to keep as it is just a portion of what my dad’s intends to leave me.

So which is it - your dad is is wealthy to the point where $1M is ‘just a portion’ of his worth that will be transferred to you, or he needed an insurance policy to ensure that were he to pass unexpectedly you’d have enough money to get through college?

These statements aren’t congruent (unless he hit the lottery or something after your parents separated and now has become a multi-millionaire where-as before he didn’t have the liquid asset base to support his child were he to pass - that’s not a dig, I’m in the same position - thus the term insurance policy that I have).

“I guess his wealth management guy thought it would be a worthwhile piece to keep as it is just a portion of what my dad’s intends to leave me.”

“He set it up when he and my mom got divorced in the event that he passed away and if worst came to worst, I would be able to support myself until I finished school.”

No, you’re correct. His financial situation has substantially changed. When my parents got divorced and the policy was established, virtually all of his wealth was made up of ownership stakes in two private business, one of which was his own company. So he was paper wealthy with a decent income, but not cash wealthy. Since then, he has retired, both businesses were sold and it’s turned into liquid assets.

Trying to figure this out now. So, we currently max out 401k contributions and I don’t think there are any other tax deferred vehicles available to us (if there are please let me know of them). Would whole life insurance make sense in that scenario?

^Do you have any self-employment income? That is, do you get any 1099-Misc’s? Or does all of your money come from W-2’s?

Ack, I worked a fixed income job once, next to the drooling actuaries, never want to think about that VUL/UL crap again.

Basically it’s all bullshit; people pay in more money than they get back, or the company wouldn’t be in business. They make up a bunch of nonsense products just like the Wall Streeters make up stuff like CDOs. Just buy something simple if you must.

All W-2

^Then there’s not much else available to you. You have the $17,000 (or whatever it is now) for the 401k contributions, plus the $5k from an IRA contribution.

You probably won’t get to write off the IRA contribution, because I’m guessing your income is over the threshhold. But you can immediately convert it to a Roth, which is basically the same as contributing to a Roth in the first place.

So, in what case would whole life make sense if we are looking for a tax shelter? I’m not going to start it up now, but once we have a child I’ll probably have some term and use the whole for tax purposes.

^ Take the Buffett approach. Invest in a really good education for the kid, but leave no inheritance. Makes estate planning pretty simple. Saves paying Greenie huge tax planning fees. Term only for me. Once my kid(s) are >23-24ish, their on their own.

And this conversion avoids the income limits placed on Roth IRAs? I haven’t heard about this and would take advantage if available.