I know this is an age old question, but I really would like guidance on what I should do here. I’m a 28 year old single male with no kids, so I know right there most people say I don’t have a need for life insurance. However, I am really interested in being financially stable when I’m older. I have a 401k plan and will get an IRA (possibly Roth) after I leave my current job next year, but those aren’t going to be available to me until I’m 65-70 and I plan to retire in my 50’s at the latest. Also, those investments are taxable once I withdraw.
I have an uncle who says he’s looking out for me by offering me Custom Whole Life Insurance policies. They are very expensive compared to term policies, but the benefits are that they are self completing in the event of a disability, the values only go up and don’t fluctuate with difficult economic times, and the interest payments to you once they are paid up are tax-free. Two possible scenario’s are below. Any thoughts are appreciated. Thanks!!
1) CWL with 0,000 face amount. Annualized premium of ,567.08 (0.59/month) payable through age 55. Potential tax-free annual payments starting at age 56 of ,179.
2) CWL with 0,000 face amount. Annualized premium of 08.44 (2.37/month) payable through age 55. Potential tax-free annual payments starting at age 56 of ,389.
Bill 5:03 pm on February 5, 2010 Permalink
lifeinsurance.awardspace.info – try this one. I have their insurance and, as remember, they can provide such a service.
mbrcatz 5:03 pm on February 5, 2010 Permalink
OK, back up. What I’m hearing, from you, is that the GOAL, is wealth building. You want to invest, you want to accumulate money.
Life insurance is a crappy, crappy, crappy investment tool. RUN THE NUMBERS. 90% of what you pay in, YOU LOSE, automatically!! You only get "earnings" on the 10% CASH VALUE.
If you could invest in the stock market, buying stock of a company, that you KNOW you’re going to lose between 80% and 90% of every dollar you put in, would you do that? OF COURSE NOT!!
This guy is probably making 95% commission the first year. He’s selling you a tool for DEATH.
Potential tax free annual payments, ARE NOT GUARANTEED! They’re wishful thinking!!! Why do you want life insurance that pays itself if you get disabled?? What’s the POINT??? So when you die, WHO exactly gets the money??
Now, let’s run the numbers. The stock market has averaged about 12%, in any given 10 year period, since inception. With this big market correction, I’d bet the next nine years, it’s higher, but for the sake of arguement, let’s say 10% apr. On average.
Now, let’s use this cute little calculator, and plug in your numbers:
http://www.msfinancialsavvy.com/calculators/monthly_deposit_savings_calculator.php
Scenario 1: You have a lump sum of $216,703.21 sitting in your account. On average, if you move everything to cd’s at that time, your annual interest income, not touching the principal, would be $10,835. Conservatively. Your buddy is proposing that you let the insurance company own that $216,700, and give you 40% of the interest, while they keep 60%. What a DEAL!~!~!~ Not.
Scenario 2: You have a lump sum of $817,046.94, and at 5% CD interest, your annual income from just the interest, would be $40,852. That’s even worse, he’s suggesting that the insurance keeps the $817,000, and pays you the same 40%, keeping 60%.
It’s worse, because in reality, they’re keeping that money earning around 10%, so they’re actually paying you about 15% of your interest, while they are keeping 85%. Oh, AND they keep the principal.
More importantly, look at the value in your account. It’s not even going to take that whole 27 years, before you’d have more in the account, than the policy would pay out if you die. And of course, if you do die, they ONLY pay out $100,000, and keep the rest of the principal. Plus interest, of course.
ALWAYS run the numbers – and clearly, this "uncle" is NOT looking out for your best interest – he’s trying to line his pocket with commission. That second policy, his commision on this deal, if you are silly enough to buy into it, is probably going to be about $6,000 the first year. Just for the record.
Computer Guy 5:03 pm on February 5, 2010 Permalink
Your uncle may mean well, but you would do much better to just put those payments in the investment of your choice. Whole life insurance is not an investment. It only makes money for the insurance company.
If you ever get some dependents, look into term insurance. As you have noted, it is much less expensive, and meets the need.
Grandpa
mob442 5:03 pm on February 5, 2010 Permalink
You are an extremely smart young man planning your financial future at such a young age. Most your age don’t even have a clue until it’s too late. I’m a California life agent for 10 years and I believe your uncle is giving you great advice. Ask all those people who lost all their money in their 401K’s recently. If the insurance company he’s with is solid financially, I say go with it. You’re not only getting permanent insurance at a young age, but your cash is building tax-free. I have clients who lost their shirt with their investments and their insurance was still in tact with no monetary losses. A great book to read by Patrick Kelly is called "Tax-Free Retirement". This book changed the minds of many I’ve shared it with as far as investing. It will help you to make an educated decision rather than just listening to all "the voices". The masses are programmed by IRS to believe that 401K’s are one of the best investment resources. Why? Because Uncle Sam gets paid – BIG TIME! He’s convinced everyone to defer paying taxes on the seed, so that they end up paying taxes on the harvest!
As far as which kind of life insurance to buy, I’ve cut and pasted a response to a prior question on this board, so here it is:
There are two types of life insurance: Term and Permanent. Term is temporary insurance and permanent is Whole Life or Universal Life. Term Insurance is only for the period of time you’re insured – 10 years, 20 years or 30 years. Whole Life and Universal Life are for your whole life.
The advantages of Term insurance is in your younger years you can get a large face amount for a very low cost. The disadvantages of Term insurance is when your term period is up and when need it most in your later years, the cost is extremely high and unaffordable. At that point the policyholder cancels the Term. Another disadvantage of Term insurance is the risk you may become uninsurable due to health issues such as diabetes, heart problems, cancer or a number of things that will cause an insurance company to decline renewing your policy.
The disadvantages of Whole Life or Universal Life insurance are the initial cost is higher than Term. The advantages of Whole or Universal Life are: the initial cost is fixed, it’s permanent coverage whether you become uninsurable or not (as long as your premiums are paid), it builds cash that you can either withdraw or borrow, you don’t pay taxes on the money taken out of the policy (as long as the policy stays in force), it’s a forced savings you otherwise would not have put away for yourself. Another advantage is the fixed cost is far less than Term in the later years, the time when you need life insurance the most. The best time to purchase Whole or Universal Life is in the younger years.
Purchasing life insurance is a personal matter. No particular type of insurance fits all. Everyone has a different family situation requiring the proper financial plan. I’m a California licensed agent for 10 years. You may e-mail me with questions at mob442ins@yahoo.com.