Is a cash value life insurance policy a good idea for me?
I am roughly 10 years from retirement. My advisor has recommended that I place the conservative part of my portfolio into a cash value life insurance policy that I will be done paying in 7 years. It yields a 5 percent return after the paying period. Is this a good idea?
When I see advice like this my 'Spidey sense' starts to tingle and I worry the advisor might be motivated to sell a product, rather than give you good advice. If you have a need for life insurance during retirement, this could be good advice. Very few people, however, have a need for life insurance during their retirement.
Some examples of when you might need life insurance include:
- You still have minor children to care for and get through college.
- You own a business and have a buy-sell agreement in place with other owners.
- You have a sizable estate and are want liquidity to pay for estate taxes (you don't owe estate taxes unless you have well over $11 million in net worth)
From your question, I didn't get the sense you fall into any of these categories or the other categories which would make life insurance appropriate for you. If you do have a true need for life insurance, then the advice is sound. If you don't, likely your advisor is also an insurance agent who is getting a kickback (commission) from the insurance company for selling you the policy. Maybe ask him how much he and his company will make from this policy.
Life insurance is generally a poor investment vehicle, as the cost of the insurance and other fees will eat away at the returns you get. I also am highly suspect of the 5% return being a fixed guaranteed return. More likely this is a projection and your return will vary depending on market conditions or the investment returns of the insurance company. Meaning it is not as safe as you might think.
I would recommend having a fiduciary and fee-only financial advisor to do an analysis of the policy and compare the insurance policy projections to what a diversified bond portfolio might do over the same time period. You may be surprised by how much the advisor didn't tell you in their advice.
Because this is such a big issue with non-fiduciary financial advisors, I offer the analysis for free to help people make more informed decisions. Even still, I think it would be worth you paying an advisor to help you with this decision as the true cost of the decisions could be enormous.
It depends first and foremost on whether or not you have financal obligations (e.g., a mortgage or other debt, income replacement for a surviving spouse, etc.) or desires (e.g., childrens' or grandchildrens' college education, legacy gifts, etc.) that you need or want to fund even if your not around to fund them. If so, then some form of life insurance may be a good idea. If such needs or wants are temporary in nature (e.g., only until a mortgage is paid off or until college students graduate), then term insurance for a term-of-years that coincides with the timing of these needs or wants may be most appropriate with two exceptions.
#1, If the financial obligation or desire is permanent (e.g., to pay estate taxes or make a bequest), or is at least longer than your life expectancy (i.e., term insurance is only available up to your life expectancy), then a cash value life insurance policy may be a good idea.
Or #2, if your are in a high enough tax bracket that tax savings on tax-deffered growth of the cash values could be more than enough to offset the higher internal policy costs in a cash value life insurance policy, then a cash value life insurance policy may be a good idea.
To determine if such tax savings are more than enough to offset these internal policy expenses, make sure your advisor provides you with a schedule of year-by-year costs that the insurer expects to charge you for the cost of insurance and policy expenses (commonly referred to as the "detailed expense pages" of the hypothetical illustration/proposal), and compare those costs to the tax savings you can reasonably expect (i.e., multiply the "interest credited" column also from the "detailed expense pages" by your expected tax bracket in your retirement years). If expected tax savings are higher than these extra internal costs, then a cash value life insurance policy may be a good idea.
Does all that make sense?
While I do not know much about your situation, it would seem as though you may have the wrong advisor.
As a CFP and a Fee- Only Registered Investment Advisor, who has been helping clients for over 35 years, I have never made a recommendation like the one that was made to you.
Advisors are paid in three ways: 1) commissions, 2) fees paid directly by the client and 3) a combination of the first two. Any time there is a commission there is a conflict of interest between what is best for you and what is best for the sales person and the company paying the commission. In your case, the commission may be the reason for the Life Insurance recommendation.
Cash value life insurance pays the sales person a big commission for selling the policy. All that money does not stay in the policy it is gone forever. With all life insurance there are costs that are deducted from the policy every month or quarter that get larger the older you get. That money too is gone forever. Then there is the operating cost of the insurance company, their profits etc. All that too comes out of every policy sold and that money is gone forever.
As I said before, I do not know your situation, but you may be better off getting a paid second opinion from a CFP that does not sell insurance.
Not a good idea.
Money in a life insurance policy is not liquid without loans or taking out money that would reduce your death benefit. So, it should not be treated as the conservative portion of your portfolio. However, it is wise to pay off the life insurance that you will keep until you die while you are working. That will give you one less expense in retirement.
This comes down to my fundamental belief: life insurance should be separate from money needed for everyday living.
You do not share your dependent status. If you have dependents who will need the proceeds of a life insurance policy when you die, perhaps. If you have no dependents, look elsewhere. There are other ways to achieve the benefits you outline. Other benefits also provide liquidity should you need to sell. Life insurance works best when purchased young and held for a very long period.