Life Insurance Vs. Savings Plan?

[Mike Siegal]

Life insurance, savings plan

Depends on what life circumstances allow the saver/policy holder to retain.

True....suppose the prospect is SINGLE with no kids?

 

[DHK]

Lifetime savings plans are great and are a necessary foundation for lifetime financial security and achievement. Life insurance, properly funded, does this better than everything else... because the compound interest curve is guaranteed (aside from dividend scale or index interest credits).

The miracle of life insurance happens AFTER the 10th year. The first 10 years is the time to "break even" of cash surrender values over premiums paid. In the 2nd 10 years, you can have increasing dividends credited to the policy... then looking back, you could calculate (generally) a 5% per year rate of return from year one. If you fund, hold, and keep the policy long enough, the insurance company will pay you to keep it.

And that makes them a great savings choice for single people as well, as long as they will keep the policy long-term.

Savings accounts at the bank are not a savings. They are a deferred spending account. They are better for short-term and a small emergency fund. Otherwise, they are too easy to access. While life insurance is also easy to access, it's not as easy as showing up at the bank and making a withdrawal. It takes a few more days to get access from your life policy.

 

[LostDollar]

some of that appears to need a better understanding of life insurance and savings than I had 40 years ago. I just checked with the company's customer service. I have an approximately 40 year old Allianz (used to be somebody else forget who) $10K whole life policy-Lady said I'd paid $8K+ in premiums, I have $6K plus in cash value and close to $900 cash in accumulated dividends. (And the insurance is still $10K). (Fidelity Life Collegemaster is popping into my mind, but I don't know if that's right.)

I don't think that's a particularly stellar investment, but in my case, after 3 firings in the past 30 years, with unemployment periods running from 18 tp 36 months, it beats savings, because I have no savings. Being able to fund premiums with loans against cash value is the only thing that allowed me to keep it for 40 years. I think at one point I was up to 4 years premiums plus some cash on a loan. I suspect I've had to borrow against it at least 5 times over that period and am fortunate to have been able to keep it at all.

Re: single with no kids, I purchased a small policy to see that in the event something happened to me, my parents would not have to deal with the costs of my departure. I don't know how common that chain of thought might be.

 

[DHK]

Most whole life policies are sold as a base-only policy with no additional paid-up additions, one of the riders available to put in more cash to accelerate the performance of the policy. Your policy may fit that definition. It's not bad, but it's not "investment grade" as it could've been.

 

[madisonrfoster]

You'll find 4 rules in every whole life insurance policy.
1. The first 2-5 years nothing will be in the cash value portion because it is paying the agent that sold it to you.
2. It gives a 3-5 percent return, not even close to the average of over 10 percent that mutual funds do.
3. They'll say you caneed borrow from the cash value, but you will have to pay it back with 6-8 percent interest.
4. You don't get both. If you die, beneficiary gets the insurance, cash value goes back to the comlany. If you live past 100 (which is when a whole life policy maxes out), the insurance goes away and you'll just have the cash value.

Buy term insurance, and invest in a Roth-ira. The insurance will be cheaper for more coverage, and the investment is money you can draw out tax-free when you retire.

 

[Golfnut2112]

Lifetime savings plans are great and are a necessary foundation for lifetime financial security and achievement. Life insurance, properly funded, does this better than everything else... because the compound interest curve is guaranteed (aside from dividend scale or index interest credits).

The miracle of life insurance happens AFTER the 10th year. The first 10 years is the time to "break even" of cash surrender values over premiums paid. In the 2nd 10 years, you can have increasing dividends credited to the policy... then looking back, you could calculate (generally) a 5% per year rate of return from year one. If you fund, hold, and keep the policy long enough, the insurance company will pay you to keep it.

And that makes them a great savings choice for single people as well, as long as they will keep the policy long-term.

Savings accounts at the bank are not a savings. They are a deferred spending account. They are better for short-term and a small emergency fund. Otherwise, they are too easy to access. While life insurance is also easy to access, it's not as easy as showing up at the bank and making a withdrawal. It takes a few more days to get access from your life policy.

If you sell life insurance as a savings to a single person with no kids or no need for life insurance make sure your E&O insurance is paid up. Why would you not recommended something for their short term savings and maybe a Roth for retirement?

Also there is NO WAY a policy is showing a 5% compounded rate of return by year 20!! Also factor in the loan interest you must pay to access the money and it really becomes a poor savings.

 

[pfg1]

If you sell life insurance as a savings to a single person with no kids or no need for life insurance make sure your E&O insurance is paid up. Why would you not recommended something for their short term savings and maybe a Roth for retirement?

Also there is NO WAY a policy is showing a 5% compounded rate of return by year 20!! Also factor in the loan interest you must pay to access the money and it really becomes a poor savings.

Agree, they should be saving and funding a Roth also... BUT, I believe that beyond that a great way and place to save is inside a life policy. Properly designed and funded can definitely put them over 4% irr by year 20, which certainly is a nice safe money alternative. Plus, at some point they may get married...have kids, etc. Now they are already positioned very well if they do.

 

[LostDollar]

If you sell life insurance as a savings to a single person with no kids or no need for life insurance make sure your E&O insurance is paid up. .

I take exception to that statement, but prior to making a response out of ignorance, I need to know if you are making it based on regulations governing the sale of insurance or personal opinion and/or ethics concerning the sale of insurance.

 

[VolAgent]

I take exception to that statement, but prior to making a response out of ignorance, I need to know if you are making it based on regulations governing the sale of insurance or personal opinion and/or ethics concerning the sale of insurance.

Life insurance requires a need. A single person with no children has limited need. Without assets they want to leave to someone else or debts someone else co-signed for, it is hard to see a need.

I am between the two, I can see the advantage of a single person buying life insurance for multiple reasons, and I have sold it. However, I would not prospect for this person or try to convince them of the need. I doubt you'll have an E&O claim, because you are going to be fighting such an uphill battle against what everyone else is telling the person. A single person better be telling me why they want it.

As for your policy, it sounds like the agent did not have dividends go to paid-up additions, which would have greatly improved things. Of course, once a company is purchased, the new company often is not as generous with the dividends as the old company.

 

[pfg1]

As for your policy, it sounds like the agent did not have dividends go to paid-up additions, which would have greatly improved things.

Yep, div going to PUA would likely have done amazing things on that policy over that time horizon. My wife has one that is about that old... and the death benfit is almost triple what it started at, and the cash value is more than the original death benefit. Tremendous growth, even though its a small policy.

OP, you should see if you can switch the div option to purchase PUA's...