I'm 37 years old and paying $1,500 per month for a whole life insurance policy; is the high cost worth it for the low yield, or even promised long-term value?
I purchased a whole life insurance policy four years ago. The premium is $1,500 per month. The reason I purchased the policy was to provide an alternative source of income during market down turns, the possibility of tax-free income from dividend payments, and the option to borrow against the policy if I need to raise capital to make a purchase at some point. I also purchased the policy for the purpose of estate planning. After four years, I'm not sure whether the high monthly cost over a long time period, and for such a low yield, or even the promised long-term value, is worth it. The current assumption is that there will be almost $1.5 million in cash and $2.6 million in insurance at age 70. I am currently 37 years old.
What's the best approach for me? Should I change it into a paid up policy, increase the term and invest the difference? If it's not a good time for me to have a life insurance policy, should I purchase one at some point?
As someone who is a 34 year financial advisor I feel I can relate to your situation. Prior to becoming an advisor I wholesaled to a wide range of advisors and bought into the "Bank on Yourself" idea and purchased a whole life insurance policy for my wife. After paying the premium for five years I gave up and surrendered the policy, it just doesn't make sense for us. If you take what I am investing in that policy and compound it out over our lifetime then I am much better off with the investment. We had a broker sell one of our physician clients on a whole life insurance policy for her and her husband, and they were paying $1,500 a month. He sold it as a "Roth for the Rich" and said it was better than investing in the 403(b) at the hospital. If she died her family would have received the million dollars in life insurance, but the insurance company keeps the cash value. After we surrendered the policy and set her up with a term life insurance policy then her family would receive the million dollars in life insurance AND the money in the 403(b). People don't get rich off life insurance while they're living, and I saw too many life insurance policies that were not set up correctly where the owner had to pay back the loan or the entire loan would become taxable. There are policies designed specific for this type of investing, but you won't get it through a typical broker. If you fall into the very small percentage of people where this makes sense (and I would say even if your income is there then you're still too young) then you'll want to work with a high end broker.
We work with many physicians and large families, but our philosophy is to not let the tax tail wag the investment dog. There is a lot of tax planning that can be accomplished prior to buying whole life insurance. All I would ask is that you get a second opinion. If you build a net worth that you have an estate problem then that's an awesome problem to have. With this much time prior to accessing your retirement money then I'd focus on lowering fees and when appropriate diversifying investments to private equity, hedge funds, etc. The point is to build enough wealth to be self-insured and not pay for life insurance at all.
Good luck to you,
Matt Ahrens, CIMA®
If you have dependents, then having insurance is extremely important. Pure insurance (Term life) is the cheapest form of insurance and if you get it for an appropriate amount and appropriate duration, then it should take care of your requirements. Whole life insurance adds an investment product to the pure life, and you get the benefit of tax deferred (Not tax free- more on that later) investment option. Personally, I am not an advocate of whole life, but I do understand that there are some benefits, the biggest being that it forces you to save, although you can do that using retirement products such as a 401 (K).
To see it makes sense for you consider the following:
1. Based on your numbers, it seems your whole life insurance will give you about 4-5% rate of return over about 30 years. If you think you can do better than that then obviously it is not for you.
2. Taxes: Have you maxed out your 401(K) to which you can contribute $18,500 or $24,500 over the age of 50? If you are self-employed, you can sock away up to $55,000 into retirement products such as a SEP IRA or a Solo 401 (K). These accounts give you the same tax deferred status as a whole life insurance (i.e. if you use it as an investment and not for your dependents- in the latter case there is not capital gains or income tax although there maybe estate taxes).
3. The dividends and cash value you receive from whole life are not taxed up to the amount or premiums you have paid. Anything over that is taxed as ordinary income.
4. Estate planning: Lifetime estate tax exemption is $11.2 MM for the next 7 years and will revert back to 2017 level of $5.49MM adjusted for inflation. The amount is double for a married couple. Your estate does not have to be through a life insurance to derive this benefit- in fact insurance proceeds are included in the estate if owned by the deceased. The point being you don’t necessarily have to buy whole life insurance for estate planning.
5. If you take withdrawals from the whole life then the death benefit is reduced by that amount.
6. Liquidity: Fees in life insurance are usually front end loaded which means you will be penalized if you withdraw or surrender early- moreover, your cash value only accumulates to a meaningful amount over several years. If you need more liquidity then you may want use other options
Those of you who follow me on Investopedia know I have answered this question a few times by saying I am not a fan of "insurance products" masquerading as investment portfolios. You can take your $1,500 per month and invest a lot more intelligently.
You should only carry enough life insurance to fill the financial hole that your death would make in other people's lives. If you have a house and a wife/husband, carry enough term life insurance so the benefit pays off the mortgage and leaves him/her with enough to afford to continue his/her lifestyle without interruption. If you have kids, boost the amount. If you are single with no rependents and no debts, why carry insurance at all? I did a quick Google search and found someone offering $2 million in coverage for $55.63 per month to a 40-year-old man.
Whole life policies usually pay a low return and come with high fees. If you have the discipline to put away $1,500 per month consistently and without fail, then in 33 years (at 7%) you would have $2.3 million with full flexibility to access it in emergencies or downturns. And at age 70 you probably won't need life insurance at all.
First, decide how much life insurance protection you need now and in the near future. Purchase term coverage to cover the need, with a policy that extends through the length of time protection is needed. For example, if you have young children, a 20-year level term policy may make sense as it would be in force through their college education years.
Once you have the proper amount (and length) of term coverage in place, cancel your whole life insurance policy! Instead, invest your $1,500/month in low cost index funds. Over the next several decades, this process should provide amble assets in your retirement years.
You may not need life insurance for your whole life; therefore, there is no reason to commit the amount that you are each month to your current whole life policy.
Thanks for your question.
Couple things to think about here. Is the $1500 per month you are putting into this policy taking away from other retirement savings? Do you need life insurance? - Do have kids? or spouse a few other reasons to have insurance?
If you are already maxing out your retirement account and are looking for tax free income in retirement - I would call this type of Policy a RICH PEOPLE ROTH. If can have many benefit if used properly. But sadly many people are sold these policies because they can come with high commision for the insurance salesperson. Not a terrible retunr 5% but not as good as you could get on other policy like Indexed Univeral Life.
Assuming there is no cash value (not the case) you would be earning about 5% per year if you wait until 70, it if hits the $1.5 million dollar value. That could then be withdrawn for tax free retirement income.
If you don't need the life insurance and aren't maxing out your 401k etc I would talk with a fee only fiduciary financial planner (someone who doesn't sell insurance) and what the best coarse of action would be on this policy. You may want to look into turning of the paid up additions if you don't need the life insurance. Or look at lowering the death benefit so you can pay less premums. Then put that money towards you other financial goals.
the next step will likely depend you the small print of your current policy. What options are available and what are best for you.
Best of Luck