Should i get life cover & a retirement annuity?

Question

The big question that I have battled with for years: should I get life cover and an retirement annuity?

I had 2 kids quite young, before I was financially stable, but we made it work, I am the bread winner with a decent paying job, my wife's salary is just under half of what I earn, so if anything should happen to me I don’t want my kids and wife a battle in time financially. On the other hand I feel that I need every spare cent to pay bills and save up for our next property to make it further in life and it feels like I might be paying towards something that never ever happens, I'm torn.

With the retirement annuity, I do believe in not putting all my eggs in one basket and it’s a very good idea, but I feel that if I take life cover and a retirement annuity my expenses will equal my income, and I'll just be living from pay cheque to pay cheque which will put a huge setback on buying our next property.

FYI, I'm 31 years old if that makes a difference?

Mark S. · Answer

At 31, assuming you're healthy, you should be able to get term life insurance for next to nothing.  Based on what's you've said, I think it's a no brainer.  First and foremost, protect your family.  If you got hit by a bus today, what would your family do?  Would they suffer financially?  Based on what's you've said, the answer is a resounding yes.  Take care of this first.  Worry about your investments next.  As they say, you can't plan for what can go right until you protect against what can go wrong.

Allen Fletcher · Answer

@Jason Malyon

Typically whole life insurance is not a very efficient use of money. Cash accumulates very slowly and the premiums are pretty high. Retirement annuities are a great source of monthly income, but you do pay for the ease of handing over cash and getting a guaranteed monthly paycheck down the road. In your situation I would do the following:

1) Get term life insurance. At your age (assuming you are healthy) we are talking $250k-$500k can cost $15-$50 per month.

2) Re-adjust your budget to live off of only one of your salaries. Try to reduce expenses, pay down, debt, etc. so you can live on your salary alone. This will free up your wife's salary for retirement savings, investing, and building a financial cushion for a stress free life down the road. You may think it is hard to do, but remember live like no one else today so you can live like no else can tomorrow.

3) Create an estate plan that covers all of your bases. If you create the plan early than you have a long time to build it to meet your needs in the future.

Hope this helps,

Allen Fletcher

Brian G. · Answer

@Jason Malyon, you've asked a very charged question and you're likely to get very polarized answers. Surprisingly, the main reason is money.

Simply put, any financial advisor working on commissions or insurance broker is going to be keen on selling you a whole life policy or annuity, because they pay them the highest commissions. It doesn't mean they're a terrible investment for everyone, but they aren't the best options for all and a little moral hazard can arise when someone can earn more money by selling you one over another option that might pay them less.

And detractors to these traditional investments are valid in their reasons to dislike them. They're shitty investments with high costs and you can get better returns putting your money elsewhere. But, they many times leave out the key point: better returns may be had, but the guarantees that these poorer returning investments provide you are the main reason for getting into them. When the markets drop 30%, your policy or annuity is still worth the value you locked in for when you started. You buy a $250k whole life policy, it will never be worth less than $250k. Well, unless the company you bought it from goes bankrupt, which is pretty unlikely if you pick a "mutual" company. That's what you're paying for in higher costs and lower returns; you give up the returns you "could" make to avoid the bad ones that cost you the money you have.

For disclosure before giving my advice, I am a financial advisor, but I am fee only and have a fiduciary duty. I make no money on selling or promoting insurance, so I've got no dog in this fight besides my personal views. My views and position may be drastically different than your needs, so take it with a grain of salt. That out of the way, I do have a whole life policy (for 5 years), but it made sense for me in my financial investment picture.

As for insurance, I'm going to leave out Universal or Variable policies, as I'm not really a fan of the hybrids. I'm more of the mindset of you buy a term if you're just worried about protecting your family against hardship if something happens to you in the nearer term, and whole (after making sure other more appropriate investments are addressed first) is more of another avenue to pass money to your heirs and less of being concerned about what happens in the nearer future. Term is certainly the best bang for the buck and you'll pay less than you would for whole life, but you will gain no cash value and, if you die after the term is over, no money is paid. It's more like car insurance; you pay it and get nothing for it, unless something happens or you've stopped paying it.

At your age, in decent health, (I'm not an insurance broker and just totally guesstimating off of past and more recent experiences; YMMV) you'll probably spend around $1000/year for a $1M 30-year term policy and around $5000/year for only $500k in coverage. Now, that stings, for sure, but there are a few advantages to the whole over term. First, someone gets paid when you die, even if it's at 98 years old (doubtful a term will cover to that age). Secondly, you do build cash value and earn money (dividends) annually.  Those dividends will eventually (around 15 years) be enough to pay your premium each year. You could elect to have that and the policy will stop growing in value, but you don't have to pay the premium anymore. Third, you can keep paying that premium and rolling the dividends into the policy and the value paid out on death will keep growing in value. It's not an investment to build value, but it is about protection in case ______ happens and you want to be protected whether markets are up or down.

Annuities aren't great investments, either. But, they're not investments; they're guaranteed salaries of a certain value paid over a certain period of time. It's better if you are looking more to replace your salary for years, over giving a lump sum once (a life insurance payout) and having to be frugal/reinvest it to make sure it lasts for years.

Anyway, this got much longer than I planned, but I hope it proved to be of some value. Without knowing the whole picture, it would be pretty hard to say you should go one way or the other and since no one else knows that, don't be bummed if you don't have a direct answer. But, that said, hopefully you've gotten some good information on this thread to clarify what you were asking about. If you have any further questions, feel free to shoot. Good luck!

Thomas Rutkowski · Answer

Jason - If you are the kind of guy who asks your mechanic for legal advice, then take the advice of the others that have commented previously. They know nothing about life insurance and annuities and are simply rehashing what they may have heard at one point or another.

A properly designed and over-funded permanent life insurance policy is a great financial tool. This type of policy has the insurance cost (and commissions) minimized so that most of your cash goes straight to the cash value.

The cash value of a permanent life insurance policy will provide much more retirement income than any annuity you can purchase. The beautiful thing about cash value is that it can provide about 2 to 3 times the income of the same amount of money in a traditional retirement account. I've explained why this is in many different threads here on BP.  This blog post is a good summary...

https://www.biggerpockets.com/blogs/7595/53705-thi...

So if you can get 2-3 times the income from the same amount of money, then it doesn't really matter if it grows as fast. But that's not the case either, there are good whole life carriers paying 6.7% dividends this year. An Indexed UL should average >7% with no risk to principal.

Permanent Life Insurance belongs in your retirement income plan as the safe, secure asset at the core. You can risk money in Real Estate or on Wall Street chasing higher returns, but keep some allocation safe and secure.

Brian G. · Answer

@Jason Malyon, I guess I didn't pay enough attention to your location. A lot of this I'm not sure will apply, as I have no idea the market in SA and my advice probably is much less valid. Haha.

Just be careful what you ask your broker and realize that he/she probably gets paid more to sell you crappier products that might benefit the company more than you.

A 401k (and other similar things) basically are regular investment accounts that are called retirement accounts in the US and have some special tax treatment (either now or upon withdrawal). They're at the whim of the markets and not guaranteed at all. Annuities from companies (usually called "pensions" or "defined benefit" funds) are usually guaranteed, but they have been largely killed off by companies and diminished by governments to push the responsibility onto the individual over the company. Personally, I think this is a tragedy and has made retirements worse for a large portion of Americans, but that's a political debate and isn't worth going into here.

Anyway, just be careful in your search for your investment options and be cautions that a person selling you the investment might not have your best interests at heart because they could be getting paid more to sell you junk.

Jason Malyon · Answer

Thanks everyone for their opinions and advice, I think it has made it a bit clearer. Some things might be different where I live in SA, not sure if we have term life cove but will definitely ask my broker.

The one nice thing I like about the life insurance is that only professionals with a 4 year degree, or higher, can be on this specific insurance company, and because we are seen as less risky people we do get a better premium than any other insurance company. And on top of that 20% of your monthly premiums goes in to profit sharing that we get back, not sure when, maybe when you retire, questions that I still need to ask my broker.

The retirement annuity, I just believe in the quote "don’t keep all your eggs in one basket" and plus that tax benefit. A lot of people talk about 401k, not sure what that is, I'm guessing it’s a retirement annuity?

Trevor Ewen · Answer

@Jason Malyon

Most investment-minded personal finance would recommend against annuities and whole life insurance (term is case by case). At least that's my take.

There's an old  Wall Street proverb that says: "Sell down to your sleeping point." To an extent, insurance is very similar. If it helps you care less about the basics, it's doing the job. If it's an undue financial burden, and you have another plan, it's probably not a great move,

Ultimately, this is not the best place for advice, just opinions. I would ask some financially-minded people you trust. Good luck.

Should i get life cover & a retirement annuity?

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