Life Insurance

[Phanuthier]

Somewhat related to the inheritance thread, but also because this is something I just started looking into - I'm at a crossroads in trying to make a decision on deciding on whether to get a term vs. permanent life insurance. I understand the (tax) advantages of one versus the (cost advantages) of the other.

Part of the dilemma for me, besides the higher initial monthly cost of a PLI, is the overhead I'm looking at for a PLI. It makes me wonder about the opportunity cost of the alternative, where I simply purchase a term (20 years takes me to 50 yo, then purchase a 30 year to take me to 80 yo) then use the money I would otherwise save, invest it myself and save on the management fee's (look like 2%, and thats not including administrative fee's).

(Side note : lets assume that I am already maxing my 401k and IRA, a.k.a RRSP and RESP, so there are no other tax advantage vehicles that I can pursue)

So to me, the boiling point for me is - is it advantageous to bend over and accept the administrative and management fee's of a PLI, or is the lower cost term a better option?

Is there any other information I'm missing? Thoughts?

[Cflames_12.5]

I could be crazy but I went with a universal life insurance policy. From my limit understanding of it. It is a life insurance as well as a savings account. It matures when I'm 55 and I can take out all the money I have saved and at that point it has compounded enough interest that it starts to pay for it's self. If I don't withdraw it until I'm say 96 it will be worth some ridiculous amount like 9 mil.

[DoubleF]

I understand the theory of how you can invest the other side, but what if you choose a few bad stocks? I'm sure a dividend paying blue chip is the way to go, but then I'd check all the time and my face would go up and down with the stock price which might make me need to use my insurance quicker. I also would not have the self control to keep my investments settled and probably would emotionally cash out and swap into something OR WORSE, cash out and spend the money on something dumb.

I close PLI? (This terms doesn't sound quite right to me, might have something different) because
1. Peace of mind
2. No touching of the "investment" and no crazy emotional swings watching the market
3. No extra effort needed other than setting the money aside to be vacuumed away monthly (ie: Choosing investment vehicles and/or changing them)
4. Supposedly I'll finish funding it in my late 30s and it will just grow from there?

There are flaws to my idea sure, but that's what I chose. I believe someone has once suggested you can always consider a combination of the two as well.

[cracher]

Is a PLI the same thing as a whole life policy? If so, I've been bleeding into one of those for a while now. The opportunity cost does bug me one every time I pay a premium. The one major advantage I found is that, when applying for a mortgage, it took 10 minutes over the phone to get approved at crazy nice rate (guess it counts as an asset). I can't really stop now that I'm 10 years into mine, but I would not do it again if I could go back. The cash really could be used more effectively.

[Phanuthier]

Originally Posted by cracher

Is a PLI the same thing as a whole life policy? If so, I've been bleeding into one of those for a while now. The opportunity cost does bug me one every time I pay a premium. The one major advantage I found is that, when applying for a mortgage, it took 10 minutes over the phone to get approved at crazy nice rate (guess it counts as an asset). I can't really stop now that I'm 10 years into mine, but I would not do it again if I could go back. The cash really could be used more effectively.

Yes, sorry, PLI = Whole Life Policy... I just came back from a Metlife agent earlier this week who called it a PLI.

To some points above... I have no problem managing my own finances, I manage my own portfolio, retirement portfolio as well as my own health savings account portfolio (its an america thing).

[GP_Matt]

I don't like the idea of combining two different products. It makes it too hard to tell if you are getting a good deal.

I would much rather go with term life and a savings investment plan.
Term life means you pay for coverage only when you need it. Why would you want life insurance when you are 80, you have no dependents at that point and presumably no debt.

[Phanuthier]

Originally Posted by GP_Matt

I don't like the idea of combining two different products. It makes it too hard to tell if you are getting a good deal.

I would much rather go with term life and a savings investment plan.
Term life means you pay for coverage only when you need it. Why would you want life insurance when you are 80, you have no dependents at that point and presumably no debt.

Inheritance for the next generation!

Just kidding

One of the considerations for me is leftover medical bills and possibly funeral costs (how morbid) that I don't want to leave behind.

I agree re: complications with combinging PLI/WLP with a investment, I guess thats kind of the point of the thread... its really hard for me to tell if I'm getting a good deal, so I have not yet been able to make a decision on this yet.

[Ashartus]

Most of my life insurance is on a term policy designed to make sure that if something happens to me the mortgage is paid off and there is money available to look after my kids until they finish school. Once I have no mortgage and no dependents, I figure the only thing I need is to make sure the costs associated with my death (e.g. funeral) are covered.

[automaton 3]

I'd suggest buying a term life policy and investing the difference. Insure for the period of your life that you have dependents.

Your estate is responsible for your debts, not your family. If you are worried about funeral expenses you could make arrangements directly with a funeral home.

[firebug]

As someone who once sold whole-life policies exclusively, I'd suggest buying term.

Remember, you are not buying 'life' insurance, you are insuring future earnings in the event of your death.

Figure out the PV of your future earnings and that is what should be replaced. A year from now, you will need less insurance (as a years worth of future earnings will have been realized). At retirement, you have 0 future earnings and no more need for insurance (however you will have longevity risk and that's why you need to invest the difference).

You can also be more conservative (aggressive?) and consider insuring just the PV of your dependent's future expenses and that should require a smaller monthly premium.

[MoneyGuy]

I sell insurance and make a lot more money if I sell whole-life or UL, but I've never sold a WL policy and have only ever sold one UL policy (the client insisted). I've had this argument with commission-hungry colleagues. Buy term and invest the difference is almost always the best strategy. There are exceptions, as there are to every rule, of course.

[bizaro86]

Originally Posted by Phanuthier

... its really hard for me to tell if I'm getting a good deal, so I have not yet been able to make a decision on this yet.

If a big and profitable company is hiring a commission sales person to sell you something that is complicated enough that you can't figure out whether it's a good deal...

then it's not.

Unbundle the two products, and buy life insurance for your life insurance needs and investments for your savings needs. You can probably buy the exact funds that are in the insurance wrapper outside of it at a lower cost if you think they're great, or something similar but cheaper.

[Cflames_12.5]

So the opposite of what I'm doing?

[Slava]

Originally Posted by MoneyGuy

I sell insurance and make a lot more money if I sell whole-life or UL, but I've never sold a WL policy and have only ever sold one UL policy (the client insisted). I've had this argument with commission-hungry colleagues. Buy term and invest the difference is almost always the best strategy. There are exceptions, as there are to every rule, of course.

I don't disagree with what everyone else is saying, but there is a problem with term insurance in two ways: (1) that the coverage increases as you're more likely to need it (assuming that you keep it long enough to see those renewals), and (2) it expires at 80. If you need/want coverage through that period then obviously you need something to cover you for your whole life. You can buy term-life coverage though and that is just pure insurance (no savings/dividends/investments) and that goes for your whole life, as the name would imply.

I also rarely sell these other types of policies, but I have had clients insist because they don't want to pay forever, not die and have nothing to show for it. I would also note that I have both; some term to cover off the shorter term issues if I were to die and some whole life because I will have tax/estate issues that are there long after I cancel my term policies. Its true that you can convert those term policies to whole life coverage, but its based on your age and frankly the cost never goes down!

As far as the actual investments in the policy I agree with what everyone else is saying; you can do it cheaper on your own. The advantage with insurance though is that its tax-sheltered. so if you have maximized your TFSA/RRSP, and are looking for another vehicle, this is one way (IMO there are still better ways, but its an option).

[Slava]

Originally Posted by Cflames_12.5

I could be crazy but I went with a universal life insurance policy. From my limit understanding of it. It is a life insurance as well as a savings account. It matures when I'm 55 and I can take out all the money I have saved and at that point it has compounded enough interest that it starts to pay for it's self. If I don't withdraw it until I'm say 96 it will be worth some ridiculous amount like 9 mil.

Well you want to be careful here; the illustration might allude to those figures, but they're not guaranteed and it depends on the interest rate used for the projections. Also, and maybe its just your explanation, but if you take out all the money at 55 then you have to continue paying premiums, or surrender the contract. I can't see how you could withdraw everything and have it funded....but maybe I misunderstood what you are saying here.

[Phanuthier]

Thanks for the replies, all.

(PS : Slava, are you doing USA accounts yet? If you ever do, let me know...)

[Slava]

Originally Posted by Phanuthier

Thanks for the replies, all.

(PS : Slava, are you doing USA accounts yet? If you ever do, let me know...)

Not yet, and unlikely to be doing so. I could get licensed there easy enough, and I get very easily get citizenship, but for the time being I will stay in Canada and just enjoy us winning olympic hockey gold and things like that!

Never know though I suppose!

[bizaro86]

Originally Posted by Slava

I don't disagree with what everyone else is saying, but there is a problem with term insurance in two ways: (1) that the coverage increases as you're more likely to need it (assuming that you keep it long enough to see those renewals), and (2) it expires at 80. If you need/want coverage through that period then obviously you need something to cover you for your whole life. You can buy term-life coverage though and that is just pure insurance (no savings/dividends/investments) and that goes for your whole life, as the name would imply.

The cost of coverages increases when you're more likely to die, not when you're more likely to need it. I'm just about to turn 30, have a mortgage, a baby, and a wife staying home with the baby. If I die today, they will need a material amount of money to replace my income. If I die in 25 years from now, the kid will be done school and out of the house, the house will be paid off, and my investments will be sufficient to pay for full retirement for me and my wife. At that point I won't NEED any life insurance at all, even though it's more likely that I'll actually die, which makes the coverage more expensive.

(It's probably worth adding here that the term I have I bought through Slava, and it was a great experience, so no offense is intended to him)

[Slava]

Originally Posted by bizaro86

The cost of coverages increases when you're more likely to die, not when you're more likely to need it. I'm just about to turn 30, have a mortgage, a baby, and a wife staying home with the baby. If I die today, they will need a material amount of money to replace my income. If I die in 25 years from now, the kid will be done school and out of the house, the house will be paid off, and my investments will be sufficient to pay for full retirement for me and my wife. At that point I won't NEED any life insurance at all, even though it's more likely that I'll actually die, which makes the coverage more expensive.

(It's probably worth adding here that the term I have I bought through Slava, and it was a great experience, so no offense is intended to him)

None taken, and we're on the same page. I guess I just meant more likely to use the coverage. Odds of dying in your 30's are slim, but financially it would have a greater impact than someone who dies say at 70 (more likely and of course not a hard and fast rule). For the vast majority of people they need far less insurance at 70 than they do at 30. My position is that rarely do people want/need none because of tax issues and things like that, but a lot of people self-insure at that point and are good with that.

[Cflames_12.5]

Originally Posted by Slava

Well you want to be careful here; the illustration might allude to those figures, but they're not guaranteed and it depends on the interest rate used for the projections. Also, and maybe its just your explanation, but if you take out all the money at 55 then you have to continue paying premiums, or surrender the contract. I can't see how you could withdraw everything and have it funded....but maybe I misunderstood what you are saying here.

From what I understood when I last met with my investor was at a certain time the premiums would be covered with the compounded interest. For me I am not a financial expert so this seemed like a logical path to take. A two for one deal. Get a nice chunk of money for my retirement and also have a life insurance at the same time. But I could have misunderstood too I usually leave these things up to the wife. Me and money we have too much fun.