Should I terminate my Universal Life Insurance policy and put those premiums towards investing inside a Roth IRA?
I'm 27 years old, single with no dependents. I feel like I got suckered into a ULI for the savings benefits, but my premium is $100 a month! Should I keep my investment going or cut my losses and start investing that $100 a month into a Roth IRA instead? Is keeping my life insurance separate from my savings a smarter choice?
Seperating insurance and investments is one philosophy in the financial services world. (Buy Term Invest the Difference) There are pros and cons to this approach. I find it becoming more prevalent amongst financial pros and I'd argue it is not in the clients best interest to take such an ideological approach.
The smarter choice is relative to your situation. Can't really comment since I don't have all the facts but here are some thoughts to consider:
My concern is to make sure you have adequate life insurance first. Do you want a life long permanent death benefit? If so, keep it.
How long have you had the policy? Do you have anyone else that would or could depend on you financially now or in the future? Maybe not ,maybe so, a lot will change in your life.
You are really young (and probably are looking to invest in higher yielding investments?) but this policy might be one to hold on to long term. One of the biggest cons of not sticking with permanent insurance is that quite frankly you do not know what the future holds. It may be well intentioned that you will not need insurance in the future because you have no debt or have a lot in your retirement accounts but I'd argue it is worth keeping as a tool for you to have. Your family situation may change.
You don't know if you are going to live to 30 or 100. You don't know how you will die. Your death might accompany high medical or other costs prior to death that you may leave others responsbile for. Your financial situation may not be that strong at the time of death and your family would not be financial secure without having the insurance payout. A lot to consider here that shouldn't be taken lightly . As the saying goes: It's better to have it and not need it than to need it and not have it.
Your health my change. So by choosing to not keep the permanent life insurance now could mean that you may no longer be able to buy insurance in the future.
And just a side note: If you are dead set on surrendering it, you might want to look into a 1035 exchange tax free to an annuity if you are looking to beef up retirement savings. And also make sure you have other insurance in place before surrendering it.
If you were sold a UL policy as a savings strategy, you definitely got suckered.
See what you can get converting to a paid up policy, if that's possible.
Then save the $100 in an actual savings vehicle. Bank account if you don't have at least $10k there. Otherwise the Roth is fine.
One more reason not to do investment/savings with an insurance agent. Ugh.
Without full information on your situation, it's tough to make a firm recommendation. However, I've looked at a number of these situations in the past and have almost always advised letting the policy lapse.
First, you are a young man so it is reasonable to assume that you've not invested much in the ULI thus far. Its surrender value is close to nil as commissions are typically front loaded in policies of this nature. Effectively, your premiums to date are money out the window. Importantly, prospective contributions will also be impaired by the ULI's bloated cost structure. These expenses include admin fees, mortality charges, sales charges, possibly premium taxes etc.
One way to do a reality check is to compare the premiums you would pay as a 27 year old for a 20 year level premium TERM INSURANCE POLICY with the same death benefit against the monthly premiums you are paying on the ULI. You will find a substantial disparity. I obtained a generic quote of $36 /month for a someone your age for a $1,000,000 death benefit. Yet with all the extra you are paying, you have little cash value in the ULI. That should be a sign.
You may or may not need life insurance. As a young single man without dependents, there are probably other financial priorities. And, if you need life insurance, term policies are the way to go. Yes, there are certain professions and estate planning applications for which permanent life insurance is useful. You almost certainly do not fit in those categories.
And, yes, a Roth IRA is a fine savings vehicle for someone in your position. I'd encourage it if your income level qualifies you.
I suggest keeping the policy. I assume you have not owned it very long since you are 27 years old. While a $100 per month may be a lot to you today, in the long-run it is a small amount and if you keep the policy for the long term it will have a positive return. Also, life is full of changes and you may have a need for life insurance in the future. The returns on the policy over time will be better than bank returns or government bonds and very close to a conservative bond fund. Consider this to be the fixed income portion of your investment portfolio and all of your future investments can be toward more volatile investments.
Also, I would think you were issued a good rate for being young and healthy. That will not always be the same for your life. I personally experienced my insurability decline after the age of 40 and more after 50. I've also seen this happen to my friends and clients. So having the insurability locked in at a low cost for the rest of your life is not a bad thing.
Like I said if you consider the insurance cash value as a portion of your long-term fixed income portfolio you really haven't had a loss but if you get out now you will secure a loss. I've used the cash value in old policies I had to pay cash for a car and to help with my children's college expenses. I would advise against buying more insurance but I would suggest you fund this policy at the current level or more if allowed to have the long-term fixed return.
The short answer is yes. I'm 33 years old, so I can relate to your stage of life pretty easily. I have one client who owns an IUL (similar but not the same as what you own) if that is any indication of the rarity I recommend the permanent life insurance -- his situation was unique though.
Buy term insurance (if you need the life insurance coverage) and invest the difference into a Roth IRA. I would not own permanent life insurance as an investment vehicle unless you are very wealthy and need to implement more complex estate planning strategies. My guess is that is probably not the case.
More importantly, it sounds like you haven't even begun maxing out the other retirement vehicles like a 401k or Roth IRA. You will get much better growth on your money in the long-run by investing your money in non-insurance products. Lower fees and more transparency. Not to mention if you ever need to withdrawal your money in a jam.... Well, guess what? You basically surrender everything you paid into the policy during the early stages of ownership. In other words, your $100 per month for the last year gets you $0 in a liquidity event.
The bottom line is a ULI is not a very investor friendly strategy for someone that is 27.