Life insurance

[nolanfan34]

OK, I admit I'm not much of a finance guy, and I know little about the insurance world. My wife and I currently have life insurance through our carrier. We did it back after we got married, mostly to cover the amount of our debt in case something happened to one of us. Since we're young, we did a 10 year policy at the time and the monthly cost is very cheap overall.

Now, we got a letter in the mail about rolling over one or both of the policies into a "permanent" policy. After talking to our agent's office, they explained that it's a policy that lasts forever, earns interest and dividends, blah blah. And of course the price is a lot higher for the same amount of coverage.

So, what's my strategy here. My guess is that we're better off sticking with shorter term policies, and saving money through other means, 401k, etc. Maybe this is a finance forum question.

Just looking for some thoughts, and figured there might be others who would also be interested to learn the answers.

[swede123]

Your understanding is pretty similar to mine. The whole-life insurance thing is more or a racket than anything, giving you less flexibility with your investment decisions.

If both you and your wife are in good health, have an education, opportunities for good jobs etc. you should consider a Accidental death and dismemberment policy. These policies typically don't cost very much in terms of premiums but they only pay out in terms of an accidental death or significant injury (loss of limbs, injuries requiring permanent bedrest etc.). This way you can set up the policy to comfortably cover the survivor for a shorter period of time, after which the person is expected to move on and start paying for stuff.

Swede

[JasonK]

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So, what's my strategy here. My guess is that we're better off sticking with shorter term policies, and saving money through other means, 401k, etc. Maybe this is a finance forum question.

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My guess is you're correct. Insurance as an investment is usually a bad idea.

[Setof8s]

As an insurance advisor (in Canada)(US tax laws may differ), I can give you some insight.

Life insurance has 4 basic applications:

1) Pay off debt you are responsible for: final expenses, mortgage, loans, shares in a business etc.

2) Income replacement: provide for spouse and children by providing a lump sum that will generate interest incomeand/or use the principal to replace a large portion of the income lost, due to the income earners' death. i.e. 1,000,000 invested safely should earn 5% or $50,000/year.

3) Estate planning: assets (like unused retirement $, or family vacation property) generate a growing tax bill, capital gains tax in Canada, that must be paid when the assets transfer to the next generation. The most cost efficient way to pay this bill is with permanent life insurance.

4) Investment - Other than your retirement saving account, a permanent insurance policy is the only other place I know of where cash can grow on a tax-deferred basis. I wouldn't recommend investing here first. I would first maximize registered retirement investments, then real estate, then it's a toss up between annually taxed investments and permanent insurance.

Hope this was helpful, pm if you need more info.

[Hopey]

Just be certain that your wife (and kids?) would be taken care of if you died suddenly. My 40 year old uncle suddenly dropped dead a couple of months ago, and now his family is in big trouble financially. He ran his own small business, but never purchased any life insurance. The family had to take up a collection for the funeral.

[nowags]

There are two types of life insurance

1. Term life insurance - cheap, and pays out big compared to what you are paying for it. this is what you originally had. You have to die whenever and however it says to get paid. Some of these get pretty ridiculous for how and when too.

2. Whole life insurance - More expensive, Pays out no matter when, where or how you die. Usually these end and pay out the complete amount to you whether you are dead or not at a certain age, say, 100. with a policy like this you would get a check for the amount of the policy (200,000 or whatever) on your 100th birthday.

Talk to a financial advisor about which you need for where you are. Mine has me on a whole life policy, which is good to have regardless. If you have kids you eventually want to get through college, that is where term usually comes in. My dad carried term for while we grew up, and he dropped it after we graduated college, for example.

[Fishwhenican]

Insurance is a horrible investment.

The optimal plan would be to buy enough term insurance to cover whatever expenses you see needing to cover if you were to die tomorrow. While paying for the term insurance you need to be investing money to eventually become self insured and not even need the term plan. The problem arises when a person buys the term plan and does not make the investments (savings whatever) to cover them so they eventually do not need any insurance.

Also, people with children should never ever have more than a minimal amount of insurance on a child. ($5000 to $10,000) Basically enough to cover funeral expenses should a child die. You should never want to make money on the death of a child!

[TheMetetron]

Life insurance is for poor people (for the most part).

[Skoob]

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Life insurance is for poor people (for the most part).

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What's your definition of, "poor?"

[Freakin]

Term insurance is considered "rental" insurance. You have to pay for it forever, and your premiums increase over time in accordance with how likely it is for someone at your age, gender and health to die.

Permanent insurance is like "buying" insurance. You generally have fixed premiums for your whole life. You build up cash value in your policy (which generally doesn't even START to breakeven with what you've paid into it for the first 10 years of the policy). As an investment, it doesn't make sense for a lot of people.

I sold life insurance for a little while.