Life Insurance Vs. Savings Plan?

[DHK]

Amount at Risk Definition | Investopedia

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Please tell me a whole life company that pays out cash value + face amount at time of death, I'm not being sarcastic, I'm open to being wrong

I'm being very precise with my terms. What you're asking for in this post is cash value + face amount. That is only available in UL death benefit option B.

You're being very imprecise with your terms. I used the term net death benefit, not face amount. Face amount is the BEGINNING of calculating the benefits of a permanent life insurance policy, not the end - assuming that we're talking about a UL, IUL, or a participating whole life.

 

[Golfnut2112]

I certainly cannot argue with a person making a decision of something not to sell and calling that an ethical basis of their "product to sell" decisions. However, your "statements of fact" in this and the previous post run contrary to posts in this thread, my personal experience and broader site content.

Comments about using life insurance as a savings vehicle were not made to construe life insurance as the "be all" "end all" of savings vehicles. The op asked whether life insurance or savings was/is "better". The responses indicated that there are a variety of vehicles to be used in accumulating wealth and that life insurance has a significant place in the product array. A client would be poorly served by any advisor that recommended a single product to the exclusion of all others, whether that product is life insurance, a stock account or a roth ira.

Saying that a single person does not need life insurance is an arbitrary and incorrect prospect pre qualification. A parallel would be my driving down a dusty country road in the south eastern US and saying "The residents of that house do not need a bible dictionary because they have a rusty pickup." or The residents of this house do not need a bible dictionary because it has green shutters." IMO a person's marital status, single or married is not a qualifier of whether or not they need life insurance. From the limited perspective I have at this time I would say that the sale of a life insurance policy is dependent upon the abilities of the life insurance agent and the probable purchaser to merge the probable purchaser's perceived need for life insurance, the probable purchaser's real need for life insurance and the probable purchaser's ability to pay for life insurance with an appropriate product the life insurance agent can provide.

(Please understand in the following remarks I am using rounded numbers for both time and dollars-the concept is the issue.)

If you look at the "popular forums" list, you will see that the "final expense" forum has roughly twice the amount of posts as the "life insurance" forum. Yet in my current state of knowledge, I would consider final expense insurance to be a subset of life insurance. One for which there is a broad desire and need and one which is based precisely on the principle of saving for future needs. This is sold to, and meets the needs of, folks "originally single" or "resingled" or "firstly married" or "remarried".

I made inquiry in the final expense forum. A seller of final expense products told me that a $10K policy is one of his most commonly asked for products. At age 72 in the state of Kansas I can buy a $10K whole life policy for $740 a year. If I was 32 I could buy the $10K policy for $160 a year.

As it happens, 40 years ago I had gotten out of the service and was attending school on the GI Bill. For the first time in my life I had a small bit of extra money. I decided that one of the things I should do was to purchase a life insurance policy so, in the event something happened to me-such as a car accident, my death related expenses would not be a burden to my parents. I think the arguments at that time were "don't use life insurance as savings-whole life is not a wise purchase" "buy term if you need insurance and just pay for the insurance". I had had a great deal of trouble finding jobs, keeping jobs and saving any money-so I disregarded that advice because I considered that whole life would be a "forced" savings plan. I purchased a $10K whole life policy for---- $160 per year!

In the ensuing 40 years I was fired 4 times. I was unemployed 6-8 years of that 40. Savings accounts, IRA's, a Merrill Lynch Sharebuilder account and a 401k account and a $100K life insurance policy came and went. At one point when I had been unemployed for around 2 years, was diagnosed with cancer and we were making payment on 2 houses because I am a hoarder, I almost lost everything including the $10K life insurance and became homeless with a family of 4. My retirement is arthritis and social security with a travel horizon of the backyard and the grocery store. If my final medical costs, whenever they choose to appear, have much substance or significant duration, any financial resources I have will disappear like straw in a hurricane. Through all that I have managed to keep that $10k policy Only because of accumulated cash value and the policy loan provisions for premium payment-including I think 6% interest.

Now let's assume I can beat the mortality tables and go to at least 92, ie another 20 years. (And let's ignore a discussion of paying more in premiums than the face of the coverage because I don't know how to deal with that.)
$740-$160 = $580 per year. $580 / yr for 20 years = $11,600. $160 per year for 60 years = $9,600. Buying a $10K policy while in my 30's, single, with no kids and "not needing insurance" and holding it for 60 years is cheaper than buying the same coverage at age 72, when "everybody" is buying it and just holding it for 20 years.

(the following does not agree with what customer service told me, I'll have to get some clarification because they said I'd paid $8k+.)
At $160 per year for 40 years I'd have paid $6,400. I have a cash value in the policy of $6k+.

In short, arguments that a (young) single person with no children does not need life insurance, or that life insurance is not a savings vehicle, have no standing in this corner of the world.

If you read the last two sentences of my post, you will see I never said single people have no need for life insurance. What I DID say is that a single person with no kids or no need for life insurance will be better suited in a Roth.

I do sell a lot of life insurance and think it is a great financial tool, however it is not the end all products that should be used in every situation.

 

[LostDollar]

If you're using whole life as a savings account, you're doing it wrong. You can't withdraw money without penalties, fees and interest, and if the person does, the company keeps all the cash value!

Don't get me wrong, I love whole life, it's great for burial insurance, terrible as a savings account.

I don't see that as a correct statement. I have had access to a free armored car service with a time travel capability. They have carried $6K through 40 years for me. I meet up with them once a year at a rest stop and add funds to a trunk in the cargo area. The money has been "saved", ie preserved for my use. I can choose to use the money in one of several ways. I can remove it from its container and expend it upon the activities of current daily living. I can leave it in its container, continuing to conserve it for a future use, such as paying expenses of my death and burial. I can leave it in its container, continuing to conserve it for the benefit of another upon my death. I can remove it from the container temporarily, retaining the container and the right to replace it in the container. this requires an administration fee (interest) to be paid to the party keeping track of the temporary disbursement and storing the container for future refill. This is no different than fees wealthy people such as Warren Buffet or Donald Trump would pay to those who assist them in the management of their financial resources. And in fact, the company holding the storage container for me shares a bit of their profits with me each year.

I do not still have any of the savings accounts I had from 1975 to 2005. I only have a very small portion of the IRA money I had from 1975 to 2005. I do not have the Merrill Lynch sharebuilder stock account I had in the 70s. I do not have the 100K life ins policy I had 10 years ago. I still have the $10K life ins policy I purchased in 1975. It served its original purpose of sheltering my parents from the (remote) financial risks of my death while I was single and around their home. It now serves as a savings vehicle for me-as previously stated.

To my knowledge, I have never had any penalties or fees associated with a borrowing. Statements have just shown premium due, loan principal outstanding and current interest for the year just finished. As long as there is sufficient available cash value, the premium and interest due can be added to the outstanding loan balance, preserving the policy structure for another year.

 

[pfg1]

I don't see that as a correct statement. I have had access to a free armored car service with a time travel capability. They have carried $6K through 40 years for me. I meet up with them once a year at a rest stop and add funds to a trunk in the cargo area. The money has been "saved", ie preserved for my use. I can choose to use the money in one of several ways. I can remove it from its container and expend it upon the activities of current daily living. I can leave it in its container, continuing to conserve it for a future use, such as paying expenses of my death and burial. I can leave it in its container, continuing to conserve it for the benefit of another upon my death. I can remove it from the container temporarily, retaining the container and the right to replace it in the container. this requires an administration fee (interest) to be paid to the party keeping track of the temporary disbursement and storing the container for future refill. This is no different than fees wealthy people such as Warren Buffet or Donald Trump would pay to those who assist them in the management of their financial resources. And in fact, the company holding the storage container for me shares a bit of their profits with me each year.

I do not still have any of the savings accounts I had from 1975 to 2005. I only have a very small portion of the IRA money I had from 1975 to 2005. I do not have the Merrill Lynch sharebuilder stock account I had in the 70s. I do not have the 100K life ins policy I had 10 years ago. I still have the $10K life ins policy I purchased in 1975. It served its original purpose of sheltering my parents from the (remote) financial risks of my death while I was single and around their home. It now serves as a savings vehicle for me-as previously stated.

To my knowledge, I have never had any penalties or fees associated with a borrowing. Statements have just shown premium due, loan principal outstanding and current interest for the year just finished. As long as there is sufficient available cash value, the premium and interest due can be added to the outstanding loan balance, preserving the policy structure for another year.

That is the beauty of PLI. Imagine if your policy was big, the numbers and benefits multiply exponentially. Good stuff.

 

[Klutch]

Amount at Risk Definition | Investopedia

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I'm being very precise with my terms. What you're asking for in this post is cash value + face amount. That is only available in UL death benefit option B.

You're being very imprecise with your terms. I used the term net death benefit, not face amount. Face amount is the BEGINNING of calculating the benefits of a permanent life insurance policy, not the end - assuming that we're talking about a UL, IUL, or a participating whole life.

Yet I used the term face amount & cash value, saying the beneficiary doesn't get both at death. You claimed that I was "so wrong". I understand what you're saying, but my statement is still correct.
If a client purchases a 10K whole life policy, keeps it for several years, and it has built up 8K, at their death the beneficiary will still only get the 10K. You can try explaining concepts that will be confusing to the layperson, but that doesn't change the amount of the check they'll be getting, and that's all they care about.

I'm not trying to make enemies, I appreciate the info you've shared, but it doesn't contradict what I've stated.

@LostDollar, at this point your cash value is probably close to 10K. Why not cash out and put the money in the bank? As you said, you no longer need the coverage. You'll almost certainly get a better rates of return investing the ~8-9K you'll get by cashing out.

 

[DHK]

If your face amount and net death benefit = $10k, it is composed of the $8k cash values + $2k net amount at risk, assuming no loans.

Btw, that example would be a non-par whole life or a final expense policy.

See pages 7-11. Notice the rising cash values and often a rising death benefit.
A Lesson in Life Insurance

The formula of net death benefit = net amount at risk + cash value - any outstanding loans... is correct.

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If you don't either understand it and/or communicate that to your clients, you will be spreading mis-truths about life insurance. And I personally believe that professionals would not intentionally spread mis-truths about such a wonderful product that has so many benefits to it.

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Maybe the NAIC should mandate that life insurance illustrations have a column showing the net amount at risk? This way it's easier to add the cash values + net amount at risk - loans = net death benefit during any given year of the illustration?

 

[Klutch]

If your face amount and net death benefit = $10k, it is composed of the $8k cash values + $2k net amount at risk, assuming no loans.

Btw, that example would be a non-par whole life or a final expense policy.

See pages 7-11. Notice the rising cash values and often a rising death benefit.
A Lesson in Life Insurance

The formula of net death benefit = net amount at risk + cash value - any outstanding loans... is correct.

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If you don't either understand it and/or communicate that to your clients, you will be spreading mis-truths about life insurance. And I personally believe that professionals would not intentionally spread mis-truths about such a wonderful product that has so many benefits to it.

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Maybe the NAIC should mandate that life insurance illustrations have a column showing the net amount at risk? This way it's easier to add the cash values + net amount at risk - loans = net death benefit during any given year of the illustration?

Okay, let's use your logic, then, as the cash value builds, the client is losing their "net amount at risk", the money doesn't disappear, the insurance company keeps it. i.e. Either way, the beneficiary will ONLY get 10k if the insured dies on day 1 or day 10,000.

The idea that insurance needs more regulation (as you suggest) is the reason we have Obamacare.

 

[DHK]

And yes, the net amount at risk goes lower and lower as the cash values build. The money doesn't disappear. It is paid out as a component of the death benefit. The death benefit doesn't just appear out of nowhere.

I mentioned disclosure for the illustration, not regulation. Big difference. It would help to clarify exactly what I'm talking about because most agents don't seem to remember it from their licensing class. And yes, this was brought up in my pre-licensing class 12 years ago.

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I'm very precise with my words. However, when you're using various terminology, you don't seem to be. Words mean things.

Take this example:
You're looking into your lover's eyes and say "When I look into your eyes, time stands still." Pretty good, right?

Or you could say "Your face could stop a clock." You said the same thing, but two completely different things at the same time.

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Keep in mind that this is the life insurance forum, not the final expense forum. The final expense forum deals primarily with policies that have $10k face amounts (to use an example).

This forum deals with $10,000 annual premiums. The selling methodology and level of expertise needs to be higher to be able to sell such policies.

 

[LostDollar]

(Aside to DHK, apologies, I'm quite sure my following remarks are going to slaughter the mechanics of life insurance and reveal levels of ignorance of which I am not aware. They are just my attempts to set aside anger, bitterness and envy and do the best I can with what I have right now. )

@LostDollar, at this point your cash value is probably close to 10K. Why not cash out and put the money in the bank? As you said, you no longer need the coverage. You'll almost certainly get a better rates of return investing the ~8-9K you'll get by cashing out.

I don't know for sure what my cash situation is with this policy and this company does not make it easy for me to see that. I am going to have to determine whether accumulated dividends are paid out in addition to the death benefit or whether they would be included in the death benefit at a final payout.

Because of those uncertainties, I'm just arbitrarily going to use your 8K guess.

Age 72, $10K face policy, $8K cash value, $160 annual premium. Annual dividends now exceed $70 per year.
Policyholder intends to live to age 92 or beyond. Policyholder has wife who will outlive him.

Policyholder will choose NOT to cash out the policy and put $8K in the bank because:

a) Having the money in the bank is riskier than leaving it in the life policy.

b) Policyholder could earn 25% on the cash value in 2017.
(for me that probably has an opportunity cost of $8,000 x 0.5% = $40 )

c) Policyholder will probably get a return in excess of 40% on his 2017 premium.

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In thinking about my career and its failures, I have had to give some thought to how poorly wishful thinking and envy pay over a substantial period of time.

In thinking about Social Security, I have had to give some consideration to a thought process of "Mine, Mine, Mine!"

I think there are some interesting underlying conflicts in this thread:

Long term vs short term thinking

An emotional approach of "Mine, Mine, Mine!" vs an approach of definition by contract law.

 

[BYSFG]

With this side bar topic of "net amount at risk," I'm pretty sure the licensing courses covered it with those beautiful graphs/charts showing the correlation between the two, cash value and face amount.

At least my classes did.