Somebody, in above post mentioned that i need to ask the commission which i hesitated to ask. Now reading your post i am disillusioned. Your views seems pretty straight forward. I agree, the agent got me here. I am holding off the process for now and do more research and will go from there, thanks
Originally posted by
@Kaiser J.:
As others have advised, make sure you understand the whole life policy thoroughly. Much of the jargon is just that - jargon. What an insurance company calls “interest” is actually just return of premium, i.e., “we charged people more than we needed to so here’s some of your money back.” When they say that you earn a certain dividend, they neglect to mention that it’s only on the amount of cash that you have left after they take a very high fee. If you earn 5% on the money, but they took 20% of the money on day 1, then you still lost 16%. The guaranteed IRRs are often quite low and barely keep up with inflation even over the long-term. The returns are guaranteed to be negative for years. My guess is that a majority of sales are made to individuals who do not understand what opportunity cost is and cannot calculate it.
That being said, the policies can make a ton of sense for an individual who wants to ensure that they can take care of a family member or meet another obligation that they know they will need to regardless of their ability to obtain term insurance well into the future. A person with a disabled child who will require medical or other care long-term, for example.
If not for that type of purpose then in my opinion this type of policy should only be considered if you have already done ALL of the following:
- maxed out your employer 401k match and are funding at the annual limit of $18,500+
- maxed out your IRA
- maxed out your HSA
- paid off all of your debt, including the mortgage on your primary residence
- are in the top marginal tax bracket and don’t want to simply own more insured, tax-exempt bonds, which would be much easier and more liquid
- have extra cash every year that you want to accumulate in a semi-liquid vehicle, and are OK with the fact that you will pay someone to hold your cash and then have to pay them interest if you want to use it for something
- value the fact that this may be off limits to creditors / lawsuits (in some states, you should check yours)
- value the ability to leave a legacy even if it is less than what you could have left without the policy
If you can’t check all of those boxes then there are much better alternatives for you. You’ll notice that almost anyone who claims otherwise makes their living by doing so.
One cheap alternative if you really insist on buying this (again, for reasons other than health): buy term life insurance and then take the money you have left over and buy an insured, zero-coupon tax-exempt bond. Presto, you’ll beat the insurers guaranteed return. You’ll trounce it if you buy a riskier asset instead, and you can sell your investment with the click of a button if you change your mind, buy it back the next day, whatever you want. What you don’t get is asset protection from creditors/lawsuits, but you may not have gotten that anyway depending on your state and a good umbrella insurance policy can perform a similar function for many people.
Again, I’m not saying that nobody should buy this. I own some myself, actually. I just think that far more people own it than it actually makes sense for.
