Whole Life Insurance...am I getting ripped off?

[Absinthe]

Our agent sold my fiancee a $50,000 policy last year (unknown to me) of whole life insurance.

Premiums are less than $50/month right now.

He is telling us the benefits of the cash value and equity building...and how the policy can be used to draw from in the future, tax free.

Everyone I speak to says whole life insurance isnt necessary. That might be true, but what about using it as a means to invest. If you can afford the premiums, is it a bad idea to purchase a policy?

Neither of us have dependants and we are both self sufficient so, god forbid, we wont need life insurance on eachother at this time.

But the premiums he listed in the policy actually dont look bad. After 15 years the policy is paying for itself and there is no need to continue to pay premiums...the policy is making enough to support itself. And it can be used as tax free cash if we choose...that would decrease the death benefits, but again we dont need that.

Thoughts?

 

[billyr98]

i will ask tkiry1 when i talk to him later, he does this for a living.

 

[Hawkeye]

http://money.cnn.com/2001/09/17/living/lifeinsurance/
http://www.smartmoney.com/consumer/index.cfm?story=20011105

It's $600 a year, so your financee is paying $12 per thousand coverage for whole life. It's okay - and that cost will go down as the years go by, but to me, $50,000 seems awfully low for an insurance policy. On the flip side, as you noted you had no need for the insurance so perhaps that's how that figure was arrived at. Most agents will try and sell you on 4~7 times the annual salary you make.

Whole life makes sense to me if you think down the road you're going to have some dependents/debt that you'd want taken care of if you are gone. It also makes sense to me if you want to "lock-in" the premium because the price will only go up as we age and/or get ill.

Anyways, the policy is there already right? Canceling now would just result in all the upfront investment being lost. The initial payments are all for the premiums and your cash value is going to be minimal at best.

Oh and if $50,000 turns out too small, you could look into boosting it thru your employer's group life insurance or via a term policy. Who knows, maybe you get married and have quadruplets. =)

 

[Carlo]

There are many different opinions on life insurance. I myself view whole life as a "rip off" insurance or a poor man's saving instrument. I'm of the opinion that when I want insurance I want "pure" insurance without bells and whistles.

Without question, best bang for the buck is term life insurance. For example, I've got a couple of different policies but my smallest is 250K and that runs me $28 a month (I'm 41). It would be about $4-6 cheaper a month for a female at the same age.

Different people view insurance differently. I for example had at one point 5 policies worth about 1.7 million. I figured that was what I needed to pay for my 2 kids education, payoff the mortgage, pay for a couple of vehicles and allow my wife to not work until the kids get into high school/college (if at all). As the years progressed I dropped a couple of policies since they weren't needed anymore as the 1.7 was down to about 1 million. When I got divorced last year I further dropped my life insurance down to 2 policies at about 460K which is all I now need since I don't need to support the wife anymore although I still have 200K set aside for her because she would still be raising the kids and has her own house.

My way of thinking is you figure out how much you need if something was to happen to you tomorrow and insure for that. Each year reevaluate how much you need and make changes as needed. If done correctly each year you would need less and less insurance as your mortgage is getting smaller, your life expectancy is getting shorter etc.

With term insurance it's easy to redo the policy because there isn't a gimmick involved and it's pure insurance. With whole life it can get difficult to change things.

Just my 2 cents,
Carlo

 

[mladencovic]

Definitively a RIPOFF, no question about it. Miniscule investment growth, and not a real investment for that since you can't realocate that money anywhere else. Once you draw against it, you insurance part of the "investment" losses a lot of its value. No real tax benefits since you pay income tax on those premiums (unlike 401K, IRA etc.), and if my memory serves me right, you might have to pay tax on the distribution (not that you would care, being dead, but the benefitiary might). Plain term life for insurance and real investment securites for real investment.

 

[cmsurfr22]

absolutely a rip off...term is the only way to go. i used to work for a company that all they did was go around and convert people's whole life insurance to term and not only save them money but give them better coverage for less and invested the difference of what they used to pay and what they pay now to make them money! i would switch to nothing but term life insurance

 

[Hawkeye]

Just a point of information...
whether it is whole or term and the person dies, the money is not taxable.

http://www.irs.gov/faqs/faq4-9.html

Are proceeds paid under a life insurance contract taxable and do they have to be reported as income?

Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person the benefits are not taxable income and do not have to be reported

 

[Phyl]

If you're going to be investing any serious amount of money in insurance you can use a Crummey Trust to pay for the insurance and allow the money to be a tax deduction now and a no tax insurance benefit later.