I am not an agent. I am someone who is going to buy life insurance next week, and looking for a few answers. So I figured, where should I look for my answers if not here, among life insurance professionals.
Here is my question... hope to find an answer here.
I am a divorced mother with 2 teen kids. I am applying for a life insurance. I have been thinking to get a term one. To secure my kid's colleges and future mortgage (I'm planning... well, better say, dreaming to buy a small condo in a year or two).
Now, the agent put together a table for me, showing net premiums, cumulative net premiums, cash value and death benefit.
Very first thing I notice, is that, say, I pay 3,500/year for 40 years. I reach age 80, for example. My net premium for all this time is 3,500/year, my cash value about 357,000 (current), and face value is 503,000 (current). If something happens, insurance company pays FACE value only, right? So my cash value is... gone. Which means as far as I understand, that in reality in the end I pay for WL not only my premiums, but also the cash value. Premium plus cash value, that the insurance company takes in the end - THAT is a real price of my WL. Or , in other words, the real value my beneficiaries would get is 503 - 357 = 146. Answer: 146,000.
Am I missing anything?
Buy level term insurance and be disciplined enough to invest the savings of premium you'll get in something like a mutual fund, stock, bonds, a '68 Corvette, etc.... you'll be way ahead of the game.
NO nationally recognized financial advisor would advise you to buy Whole Life unless you are in need of major estate planning and have already maxed out 401(k)'s or other retirement plan options..... nor would I.
Your beneficiaries would recieve the whole face amount,503k. The insurance company keeps the cash value but it is not deducted from the death benefit.
Ok, then… If my cash value at that time is 357,00, and initial face value of my coverage was 250,000, than why my beneficiaries don’t get 357+250 = 607,000?
Or , in other words, the real value my beneficiaries would get is 503 - 357 = 146. Answer: 146,000.
Am I missing anything?
Nope, you are missing very little. Unfortunately most people that are buying this type of product aren't thinking this purchase through as much as you have. Congrats on doing the exercise.
Take it one step further and factor in that in 40 yrs, or whenever that age 80 might come around, and the actual death benefit is 503K with a net diff of 146K over the c/v, that is 146K in 40 yr out dollars... so if one were to advance that with conventional wisdom and factor in usualy inflation (or devaluation of the currency to REAL spendable dollars) this is comarable to maybe 25K in today's dollars. Not that much.
On another note, when one is dreaming today of owning a condo, this means that cash flow is not abundent. The purchase a life insurance policy that would command such a high percentage of you spendable dollars is NOT a wise choice... Nor is it good advice for one to recommend such a vehicle for you to purchase either. You should immediately seek another advisor who is much more in tune with ones needs, as opposed to his own (visa-vie the commission that he will earn on the sale of that WL policy).
As has been mentioned, but term and invest the difference in a fund that will put you into that condo sooner, which will likely be a better investment than c/v of a life ins policy. The 500K of term ins could be acquired for 20% of the cost of the WL policy, on a 20 yr basis. In 20 yrs, if you do the right things with your finances in the mean time, your insurance need will be different than it is today. You could renew the term for another 10 yr period, or other plan as needed.
Carol, you have to look at this from two separate angles. One is the DEATH BENEFIT of $500,000 which, for this argument, say costs $1 per 1,000 today.... but will cost $15 per 1,000 in 20 years.... so it's an INCREASING COST TO INSURE you for that $500k.
The company will charge you, not $1 per 1,000 today.... but instead will charge you let's say $12 per 1,000 today and put some of that EXTRA $$ into the CASH VALUE and let it build..... over time, as you contribute WAY more than the actual cost of the coverage, your cash value will build and if you die, the company will honor its DEATH BENEFIT pledge of $500,000, but does NOT add the cash value... this is why Universal Life and it's offshoots were so popular in the early 80's.
You're seeing all the components correctly though... just do the math.... in 10 years if you had $10,000 of cash value, the company is really only "insuring" you for $490,000... but the cost of that insurance is constantly going up as you age.... thus the logic behind charging you higher premiums in the early years.......
At some point, usually 95, the cash value equals the Death Benefit (if you were to live that long.... and the company will pay you the $500,000.
Does this make sense or I have I served to utterly confuse the issue even further?
Buy level term insurance and be disciplined enough to invest the savings of premium you'll get in something like a mutual fund, stock, bonds, a '68 Corvette, etc.... you'll be way ahead of the game.
NO nationally recognized financial advisor would advise you to buy Whole Life unless you are in need of major estate planning and have already maxed out 401(k)'s or other retirement plan options..... nor would I.
I'm far from having anything to which word "major" would apply.
I have 2 kids - college student and HS student. I did not maxed out my 401k. I don't own a home yet. Still saving money to put at least 10% down. But as I said, I'm alone, single mother. I am looking for a little bit of safety for myself and for kids.
My agent tries to get me WL, and I see some advantages of it - loans, for example, - but I have a feeling that WL is really good when you play with big numbers.
His argument was, with term I lose all the money I pay for the premiums. With WL, he said, my insurance can help me to pay off the mortgage. Imagine, he says, I buy a home and take 30-y mortgage say for 300,000. When I'm 65 I still have to pay another 10 years. So at this point I can take a loan or surrender my policy and pay off the mortgage.
I did my own quick research. Yes, I'm losing the money I pay for term, but there seems to be a way to minimize my losses. I'm thinking about getting a term that would be synchronized with my mortgage, if such exists. 300,000 coverage in the beginning, then slowly going down as my mortgage is becoming less and less. And it would keep my premium on lower level, because the coverage would be lees and less. Do you think this idea would work?
I checked the cash value in year 2 of the WL policy. In the print out I got from my agent, in year 2 I have $530 in cash value (guaranteed column), or $594 (current). Basically, for the first two years I don't accumulate any cash value. Year 3 = $3540.
As you can see... there is little upside to buying a WL policy Virtually all of the professionals on this site would agree with that statement, except for those that make a living selling WL policies.
There is no recognized financial planner that would encourage you to buy WL. They virtually ALL say buy term, and invest the difference.
There is nothing left to arm you with other than simple math and common sense. Don't be misled by general assumptions and nonsense such as policy loans, etc... the bottom line is that you will have more money to spend as you like if you simply get some term insurance and systematically invest the money into whatever vehicle you're comfortable.
In other words, buy insurance and buy investments... but don't buy them in the instrument! The math doesn't work, never has and never will!
As you can see in the very illustration the agent gave you, you spend $3,500 a year times 3 years which is $10,500 which if you cashed in the policy would give you a return of a whopping $3,540. This means the insurance cost you around $7,000 a year. As you know, a 20 year level term policy would have cost you around $600 a year or $1,200 total....
So you've spent $5,800 more in two years or about $240 a month MORE than you should have spent.
Heck, you could buy a new car for that $240 a month and have it be worth more than $3,500 in 3 years....... and we ALL know what a horrible investment a new car is!!!! Don't we?!
Carol you are looking at lots of answers, but you have not examined the questions yet.
Anyone can sell you financial products. And there are no shortage of these "anyones" around. You don't need people pitching products at you. What you need is to sit down and determine your current needs, your mid-term needs, and finally your long-term needs. You need to consider these in the context of where you are NOW in life (single parent with whatever future job prospects you might have) compared to where you WANT to be in 10 years, 20, etc.
Instead of you trying to be the agent, why don't you just be the client. Find yourself a good agent who has on his or her business card the name of an insurance company you have heard of... like New York Life ("the company you keep") or Met ("it pays" and Peanuts) or MassMU ("we'll help you get there) or Mutual of Omaha ("begin today" and Wild Kingdom) as well as many others out there. Maybe talk with two or three until you find someone whom you like and who takes the time to LISTEN to you.
I say that you should choose from a large, well-known house because you have a good chance of getting someone who was well-trained and who will use a good methodology for finding the facts and who will have access to a computer system that will digest all the data and output lots of options. That doesn't mean they will be a great agent, but the odds are with them. However, if someone gives you a solid recommendation about an independent agency, talk with them as well.
Give yourself three weeks to talk with agents and decide on whom you want to work with.
You agent should do a complete and thorough fact-finder and should be able to present you with a compete analysis of what you need to get to where you want to get too... be it money for kids college, buying a home, assets for retirement, etc.
You are looking for solutions. Let the solutions come to you and find someone who will present them in a way that makes sense to you.
Oh for God's sakes Al, life insurance planning isn't rocket science... you don't need to spend hours "chatting" about your "needs" and "goals" in life as though it was some guidance counseling session.
So what if Carol gets 3 people that sell life insurance that agree she SHOULD BUY WL... then I suppose it's a done deal???
The sound concepts behind life insurance are very simple......... here you go........
It's very simple.... you insure ASSETS..... NOT LIABILITIES (such as your children)
How much in assets do you want to insure? Income is an asset and is the simpliest test for the vast majority of people.... if you were to become an overnight angel TONIGHT... how much money would your family need to survive (not live in the lap of luxury, but simply continue in the lifestyle they are used too)?????
If the answer to that question is, let's say: $300,000 invested at 8% interest... this would provide the kids with $24,000 a year in income without ever touching the principal.
Could they get by on LESS than that? Then buy less. There is no reason to buy MORE than you need and certainly every reason to buy at LEAST what you need.
Pretty simple stuff really!
NOTE TO AL:
OK... I'll apologize up front for being so darned confrontational... it's late... but that's no excuse.
CAROL: Al's idea of chatting with two or three other advisors is a good idea... perhaps talking to someone that DOESN'T SELL LIFE INSURANCE... like DAVE RAMSEY, SUZIE ORZMAN or others... that are easily found on the internet.... here's one: CLARK HOWARD! Go to their website and see how they advise you to proceed.....
I own whole life and it works VERY VERY WELL for me and I am securities licensed and I was securities licensed 20 years ago when I first bought it. It is part of my overall financial plan and works for me. It allows me to invest in other areas with a much greater tolerance for risk and reward simply because I can't go backwards with this (life ins) part of my portfolio. (actually I bought my first whole life 10 years prior and was talked out of it by an agent.. I made a mistake in listening then)
One thing your going to get here are alot of opinions that seem to talk in absolutes... AVOID THEM! Nothing is absolutely correct all the time in this business of insurance and investment.
To sit there and tell you to buy term and invest the difference without any knowledge of your risk tolerances is MALPRACTICE. It sounds good, it's sticking it to the "man" but it is like telling someone who needs sound medical advice to "put a wet paper towel on it"...
What you should do is ask the agent to walk you back through your choices, and you have more than two. Have him re-explain the pros and cons of each product he sells and he should have more than two. Just about everybody out here has or should have a variety of products to meet a variety of needs.
Every product sold has a good and bad side to it..every product.
His job should be to explain the good and the bad of each (and there's more than two) and let you decide what fits your risk factors the best.
There is no perfect product for all people, but there is a product that should fit "you" out there.
The reason you've come here is he hasn't explained, he's sold something and you have doubts. Some guys sell "buy term and invest the difference", some guys sell "whole life". Find someone who will explain each choice to you, until you understand and make a choice that fits "you".
It isn't all absolutes, it isn't all math, it's what works for you and your situation and what does the least harm if your plans don't come out as you'd hoped. Time only gives you ONE TRY, if you get it wrong, what product minimizes the error?
Go back first and talk to him and let him get frustrated, but give him a chance to try again. Tell him he needs to explain everything so you can make a better decision. If at that point he's not willing move on.
Nonsense! There is nothing magical or malpractice about simple math!
I continue to ask one simple question on this site that NO ONE has bothered to answer..... find me one, just one named and recognizable financial advisor that would agree with someone buying WL versus Term/Invest or Term/Save or Term/Stick-it-in-a-can-buried-in-your-backyard.
JUST ONE?!
That ought to tell you folks buying the WL line (for the average Joe) out there... SOMETHING?! Probably not!......
Buy level term insurance and be disciplined enough to invest the savings of premium you'll get in something like a mutual fund, stock, bonds, a '68 Corvette, etc.... you'll be way ahead of the game.
NO nationally recognized financial advisor would advise you to buy Whole Life unless you are in need of major estate planning and have already maxed out 401(k)'s or other retirement plan options..... nor would I.
I guess you're talking about suze and dave. Let me start by saying I don't make my living by selling whole life and I think you do Carol a disservice by suggesting that agents who recommend such policies have questionable motives (thus impugning their ethics).
Buy term, invest the diff. lol. Do you really expect her to put the difference into a mutual fund? Great stock market. Buy term and invest the difference in classic car? I expect that the likely outcome is the cost savings will go to living expense.
A nice thing about a wl policy is the forced savings plan. Especially when you use a mutual company like mass mutual, that has a good dividend payout. Stocks and bonds will not guarantee the 357k. Carol, I take it this number is from the guaranteed cash value. The non-guaranteed cash value will include projected dividends. The dividends are not guaranteed, but if you look at mass mutual dividends over the past 20 years, the minimum dividend paid (after the cost of insurance) is 7%. This is in addition to the interest earned.
While whole life insurance is about protection, it can turn into a sweet savings plan. As for you current agent talking about pulling all of the cash value and closing the policy, I find that very questionable. However, if in retirement, you need to borrow against the cash value of the policy, the outstanding loan will be reduced from the death benefit paid out.
Carol, how much can you afford to pay? Do you want to rent or buy? The problem with term is that you are renting your policy, and if you want to continue after the term of your lease, the price can skyrocket.
Aside from the cash value in the wl policy, you will be insured for life. If you pay on it for ten years and then stop, you can choose to own a policy for life that will pay a death benefit (reduced since you stopped paying early, but still something) no matter how old you live to be.
If you want 500k death benefit, and want permanent insurance, but cannot afford the cost of wl, then consider splitting between a combination of term and perm.
Perhaps you only want the 500k until your kids are out of school. Then you might price a 10 year term for 450 and 50k in perm that you will have until you die.
Whole life is not a horrible buy. It may or may not be right for you, depending on what you want your policy to do. Based upon what you have written I think you need to find a new agent, one you are comfortable with and whom you can trust.
The financial community seems to play down the fact that for most people either the NEED or want for insurance is still there long after TERM insurance is no longer affordable. If one buys term and doesn't invest the difference, or doesn't invest it properly, or takes on too much risk, or doesn't take on enough risk, or the markets go against them, etc., etc., etc., they will find themselves wishing they had invested in a good [COLOR=#ffa34f]whole[/COLOR] [COLOR=#ffa34f]life[/COLOR]. Even if they invest properly what is better than coming to the end of [COLOR=#ffa34f]life[/COLOR] knowing that they have a GUARANTEED source of tax free money to pass on to their spouse or other heirs with a cash value that they can access if needed.
Do you think the large premiums I pay for whole life bother me. Not in the least because I know that no matter what happens my wife will never have to work at McDonalds. That is why I believe in WL. I use to have term but I can't afford the risk of being unable to afford it or my health making me uninsurable.
Find yourself a good agent who has on his or her business card the name of an insurance company you have heard of... like New York Life ("the company you keep") or Met ("it pays" and Peanuts) or MassMU ("we'll help you get there) or Mutual of Omaha ("begin today" and Wild Kingdom) as well as many others out there.
This advice strikes me as self-serving, since this is the route this individual has chosen to take.
Find yourself a good agent - absolutely.
An insurance company you have heard of? Not necessary, or even wise for that matter.
Because they run TV commercials or have a blimp makes them what? There are many fine, highly rated life insurers that you've never even heard of! How about companies like Ohio National, Banner, West Coast Life?
If you go to a Ford dealer to buy a new car, what are you going to end up with? What if a Toyota is better for your situation?
You do this with your auto insurance don't you? You've got the PROTECTION that if your death occurs prematurely, your beneficiaries get $500,000.
A healthy, non-smoking 40 year old woman can buy $500,000 of twenty year premium guaranteed term insurance for about $400 per year.
Here's the skinny on your "agent's" recommendation:
Term insurance, he makes maybe a $400 commission.
Whole Life insurance, he makes maybe a $2,800 commission.
Which do you think he'll suggest?
If a health insurance agent tries to sell the consumer a major medical plan instead of a limited benefit or indemnity plan does he do it because he gets a bigger commission on the more expensive plan or because he believes the major medical is a better choice. It is wrong to imute that this agent is only about commission. There are are some people like myself who are securities licensed and have worked for broker dealers who still believe WL is the better choice and it has nothing to do with commission. Up until about 6 years ago I thought buy term and invest the difference was the way to go. I only wish I knew and understood what I know now about twenty years ago.
If a health insurance agent tries to sell the consumer a major medical plan instead of a limited benefit or indemnity plan does he do it because he gets a bigger commission on the more expensive plan or because he believes the major medical is a better choice. It is wrong to imute that this agent is only about commission. There are are some people like myself who are securities licensed and have worked for broker dealers who still believe WL is the better choice and it has nothing to do with commission. Up until about 6 years ago I thought buy term and invest the difference was the way to go. I only wish I knew and understood what I know now about twenty years ago.
This is not about your beliefs, but about the prospect's situation.
There are many situations where permanent life insurance is appropriate. This however, is NOT one of them.
She doesn't even own a home! You still suggest that she should spend $3,500 a year on whole life insurance?
Real price of WL insurance?
I expect that the likely outcome is the cost savings will go to living expense. 
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