Is it smart to take out an Adjustable CompLife policy at age 62?
My investment manager at a large insurance company recommended that I purchase a $515,000 adjustable term policy at age 62. The premiums for this policy are $33,000 per year for seven years. The policy would be paid in those seven years, with some dividends being paid or used to purchase paid-up additions. If I were to pay this amount, I would stop contributing, and maxing out, my 401(k) for the remaining years before I retire. I would also have to withdraw from my IRA to pay for this policy. I plan on retiring in three to four years, and I've had a government pension since 2008. My investments total nearly $1,500,000. My wife will retire next year with a pension, and plans on taking social security at age 62. Is the high cost of this insurance policy worth the returns?
I don’t see any reason to do this. With a government pension, a wife with a pension, social security benefits combined with a $1,500,000 investment portfolio, I don’t see any need for life insurance coverage.
Looking at things from an investment standpoint, withdrawing money from an IRA and discontinuing 401k contributions to purchase a life insurance policy makes no sense. You will owe taxes on anything you withdraw from your IRA and you may be foregoing an employer matching contribution in your 401k.
Asking whether the cost of the policy is “worth the returns” is kind of a funny question because whole life insurance policies tend to provide low returns. I haven’t seen the illustration for this policy, but whole life policies tend to provide returns similar to other fixed income investments. Not to mention, the premiums you pay can lead to negative returns for the first several years of a policy. You typically have to hang on to the policy for a long time to even earn a decent fixed income return. If you’re investing for that long of a time horizon, you could invest at least a portion of that money in stocks which have historically earned much higher returns than fixed income investments such as bonds or whole life insurance.
It’s probably a better idea to keep your money in your IRA, continue contributing to your 401k, and invest in a diversified portfolio with an asset allocation that is suited to your financial goals.
The answers I have seen so far advising you against this are well reasoned and I agree - so I won't go through all the details they did. It doesn't appear that you have liabilities that will outlive you so its probably not a good investment. A 7 pay life is not a term policy though, so not sure why they are calling it term. Anyway, seems expensive and unnecessary in my opinion.
The first question I would ask is do you even need life insurance, and if so, for what? What risks are you trying to insure? Insurance is first and foremost to insure a risk, and should not be sold as an investment vehicle. The limited investment options are far down the list of reasons for insurance. With a pension, if you actively manage your investments to limit downside risks, it seems to me you have plenty of money for retirement given the limited information you provided. And if you have to take out money from your IRA & pay the taxes to fund the policy, that is even more troubling.
I would recommend getting advice from a fee based advisor who doesn't work on commissions and acts as your Fiduciary. But I think you have already answered your own questions.
Hope this helps and best of luck, Dan Stewart CFA®
I am glad that you are seeking advice in this situation, because we have seen clients being taken advantage of with insurance products in the past. Considering that you would have to stop contributing to your 401(k) and withdraw from your IRA to pay for the policy then I would say do not continue with the term policy. My own biases will be evident in my response, so I would also suggest seeking another opinion in person. A great place to start is the NAPFA website which is an association of fee only advisors who are not allowed to sell commission products like this life insurance.
There are several red flags to me in your question. One you asked if the insurance policy is worth the returns. No. Life insurance is not a vehicle for increasing wealth. The only people that get wealthy are your beneficiaries after you die. Second, you and your wife both have pensions plus Social Security plus investments of $1,500,000. Why do you need life insurance? This concept was difficult for me when I first started in the financial advisory world. I thought everyone had life insurance so they had something to pass to their kids. But you reach a point where life insurance is not needed, because you have accumulated enough wealth to be self-insured. I would rather you take withdrawals as supplemental income to allow your wife to defer Social Security to a later age. Red flag number three: you have to withdraw from your IRA to pay for the policy. Withdrawals from your IRA are fully taxable so now the cost of this policy is even greater than you first thought.
We give presentations to residents and physicians about being wary of life insurance products. We once had a resident come up to us afterward and say she and her husband were told to buy a million dollar life insurance policy for each of them, and they were told it was better than the company's 401(k) plan. After we canceled the policy for her, bought her regular term insurance until the kids were out of the house, had her max out her 401(k), and receive the company match it was a $28,000 annual swing in her favor. The only person getting rich off of that life insurance policy was the insurance broker that sold it. In addition, if she died her beneficiaries would receive the same $1 million from the life insurance plus her 401(k) investments.
Again, I really would encourage you to meet with a fee only advisor for a second opinion. This insurance product has all of the indications of a terrible idea for you.