The term-life VS. whole-life insurance debate...

[roughdraft274]

Ok guys, looking for some advice from financially minded people regarding investing and life-insurance.

As for the details: My wife and I are both about to be 27, own a house which we are paying a mortgage on, which is our only debt, and are thinking about having a kid. I make about 70% of the income and she makes 25-30% depending on how much overtime I'm working at the time or how many hours she is working. If I had to pay the bills myself in the event of an accident, I could most likely do so with minimal impact, cut down on unnecessary expenses etc, but definitely would not be able to manage without me so we have been talking about life insurance. Right now I am looking for advice on how much we need, what kind we need, and extra investments on the side.

Ok, so every place I have been reading online recommends term life insurance, if you can manage to save your money or invest your money on the side. There should be no problem with us as far as the savings go. I'd probable set up an IRA or something to make automatic withdrawals every month from our bank account and have term insurance, that way when the term insurance expires we have a good bit of savings as our insurance.

Does everyone generally agree that this is the best way to go? Term life and invest the difference?

Does our fairly young age make whole life a better option?

What investments on the side are you generally going to have? I'm thinking a ROTH IRA might be the best option. My employer has my 401K through fidelity and am currently looking at opening up the IRA there and getting the term insurance through metlife, who my mortgage is through. They've both been good companies thus far (though I guess all companies are great when it comes to just taking your money, lol) Would anyone suggest better companies for these products? Any option that would be better than the Roth IRA? Just a plain IRA?

We are about to meet with a family friend that deals with these things but I want to be semi informed before meeting with him. I have a hard time just taking people's words when it comes to money.

Thanks for any advice

 

[MaggieD]

Ok guys, looking for some advice from financially minded people regarding investing and life-insurance.

As for the details: My wife and I are both about to be 27, own a house which we are paying a mortgage on, which is our only debt, and are thinking about having a kid. I make about 70% of the income and she makes 25-30% depending on how much overtime I'm working at the time or how many hours she is working. If I had to pay the bills myself in the event of an accident, I could most likely do so with minimal impact, cut down on unnecessary expenses etc, but definitely would not be able to manage without me so we have been talking about life insurance. Right now I am looking for advice on how much we need, what kind we need, and extra investments on the side.

Ok, so every place I have been reading online recommends term life insurance, if you can manage to save your money or invest your money on the side. There should be no problem with us as far as the savings go. I'd probable set up an IRA or something to make automatic withdrawals every month from our bank account and have term insurance, that way when the term insurance expires we have a good bit of savings as our insurance.

Does everyone generally agree that this is the best way to go? Term life and invest the difference?

Does our fairly young age make whole life a better option?

What investments on the side are you generally going to have? I'm thinking a ROTH IRA might be the best option. My employer has my 401K through fidelity and am currently looking at opening up the IRA there and getting the term insurance through metlife, who my mortgage is through. They've both been good companies thus far (though I guess all companies are great when it comes to just taking your money, lol) Would anyone suggest better companies for these products? Any option that would be better than the Roth IRA? Just a plain IRA?

We are about to meet with a family friend that deals with these things but I want to be semi informed before meeting with him. I have a hard time just taking people's words when it comes to money.

Thanks for any advice

If I had the future obligation of a family, I would definitely get term life. Here's some idea of cost on both kinds:

$500,000 30 Year Term Life Insurance:

27 Year Old Male - $595 per year
27 Year Old Female - $450 per year

$250,000 Level Pay Whole Life Insurance:

27 Year Old Male - $1,535 per year
27 Year Old Female - $1,337.50 per year

Read more: Life Insurance at 27 Years Old - Age 27 Life Insurance Rates and Information

Reason for my recommendation is that, if you save your money, you can probably do much better return-wise when compared to the guaranteed returns! of the insurance company within a whole life policy. I underlined "guaranteed returns" because projections are shown using their best-guess estimates which are much higher than the guaranteed returns. This is, of course, because the guaranteed returns are the ones you'll live with if they're wrong. (Ha! Freudian!)

A second reason is that you can afford more insurance -- a greater bang for your buck -- if you select term. And when a little one comes into the picture, that changes everything. If one spouse dies, the burden on the one that's left is enormously different. If you have a child and your wife should die? You're looking at full-time childcare expenses on top of everything else. If you die? Your wife's got to be able to replace your income for a period of time.

If you're talking with an insurance salesman, he will tell you to buy whole life -- or something other than term -- because that's where the commission is.

So. My advice is to buy term insurance. It's much cheaper. You'll buy more because of that...you'll feel you've done the exact right thing for your family...and you won't go broke paying for it.

Live long and prosper!

 

[roughdraft274]

If I had the future obligation of a family, I would definitely get term life. Here's some idea of cost on both kinds:



Reason for my recommendation is that, if you save your money, you can probably do much better return-wise when compared to the guaranteed returns! of the insurance company within a whole life policy. I underlined "guaranteed returns" because projections are shown using their best-guess estimates which are much higher than the guaranteed returns. This is, of course, because the guaranteed returns are the ones you'll live with if they're wrong. (Ha! Freudian!)

A second reason is that you can afford more insurance -- a greater bang for your buck -- if you select term. And when a little one comes into the picture, that changes everything. If one spouse dies, the burden on the one that's left is enormously different. If you have a child and your wife should die? You're looking at full-time childcare expenses on top of everything else. If you die? Your wife's got to be able to replace your income for a period of time.

If you're talking with an insurance salesman, he will tell you to buy whole life -- or something other than term -- because that's where the commission is.

So. My advice is to buy term insurance. It's much cheaper. You'll buy more because of that...you'll feel you've done the exact right thing for your family...and you won't go broke paying for it.

Live long and prosper!

It sounds like good advice Maggie, Thanks.

Here's my problem, I need to explain this to my wife and her parents in a way where they don't think I'm an idiot for wanting term. To them, they see it as throwing money down the drain, where as with whole life you definitely get something.

Basically I'm looking for a way to where I can sit them down and show them the real returns from a whole life policy, and the real returns from a term life policy + sticking any saved money in to an IRA. Everyone I've read or talked to so far has said that the IRA will, if history is any indication, generate much more money than the whole life will, getting to the point that the IRA will be worth $100,000, or more, more than the whole life insurance plan will be worth.

 

[Lutherf]

It sounds like you're talking about having the insurance in your IRA. Is that what you're planning? If so I'd really, really recommend against that since the distributions will be taxable and if something happens to you before either of you turn 60 there's a penalty on top of that. As things stand right now the beneficiary payment on a life insurance policy isn't treated as taxable income so putting it in an IRA completely blows that deal.

If your plan is for long term growth with a guaranteed payment at some point in the future than an annuity is the way to go. The down side to that is that you will pretty much be locked into whatever rate of return you buy it at. Even variable annuities don't tend to vary all that much.

At your age a ROTH is a good idea because it will have plenty of time to grow and odds are that the growth will outpace any tax savings you get from a traditional IRA (which you will be limited to investing in since you have the 401(k)). That doesn't mean that a traditional IRA is a bad idea because you can get the IRA through pretty much any financial institution and open up a whole lot more options than Fidelity will offer in your company plan. In fact, I'd consider opening an IRA at a fee only broker and rolling your vested 401(k) money into it from time to time as that will give you a whole lot more control over the growth.

I'd also recommend that your top priority right now should be savings. You should have enough saved up to cover 6 months of expenses before you delve too deeply into other investments. Furthermore, if you're thinking about having a kid then also consider starting to save for college now. Pick a state with a good 529 plan and start socking money away. Distributions from a 529 plan can be used for anything education related including room and board and depending on the state you can put a whole lot of money away.

 

[roughdraft274]

It sounds like you're talking about having the insurance in your IRA. Is that what you're planning? If so I'd really, really recommend against that since the distributions will be taxable and if something happens to you before either of you turn 60 there's a penalty on top of that. As things stand right now the beneficiary payment on a life insurance policy isn't treated as taxable income so putting it in an IRA completely blows that deal.

If your plan is for long term growth with a guaranteed payment at some point in the future than an annuity is the way to go. The down side to that is that you will pretty much be locked into whatever rate of return you buy it at. Even variable annuities don't tend to vary all that much.

At your age a ROTH is a good idea because it will have plenty of time to grow and odds are that the growth will outpace any tax savings you get from a traditional IRA (which you will be limited to investing in since you have the 401(k)). That doesn't mean that a traditional IRA is a bad idea because you can get the IRA through pretty much any financial institution and open up a whole lot more options than Fidelity will offer in your company plan. In fact, I'd consider opening an IRA at a fee only broker and rolling your vested 401(k) money into it from time to time as that will give you a whole lot more control over the growth.

I'd also recommend that your top priority right now should be savings. You should have enough saved up to cover 6 months of expenses before you delve too deeply into other investments. Furthermore, if you're thinking about having a kid then also consider starting to save for college now. Pick a state with a good 529 plan and start socking money away. Distributions from a 529 plan can be used for anything education related including room and board and depending on the state you can put a whole lot of money away.

Thank you that's really good advice.

We have the 6 month thing down. If we were to lose both of our jobs, and we cut out the un-required expenses we could get by for about a year. We have stuck that extra money in a savings account at our bank that we can pull out for no fee's at any time. It's our permanent (that's the plan) emergency fund.

I'm not sure what you mean by have the insurance in your IRA.

What I am thinking is get a thirty year term life policy, and invest heavily into an IRA or Roth IRA, and at the end of the 30 years, we would have an IRA worth the amount that the term life was for so life insurance wouldn't be needed anymore.

What distributions will be taxable? The distributions from a roth IRA?

I'll have to look in to annuities. Not very familiar with them.

 

[Lutherf]

Thank you that's really good advice.

We have the 6 month thing down. If we were to lose both of our jobs, and we cut out the un-required expenses we could get by for about a year. We have stuck that extra money in a savings account at our bank that we can pull out for no fee's at any time. It's our permanent (that's the plan) emergency fund.

I'm not sure what you mean by have the insurance in your IRA.

What I am thinking is get a thirty year term life policy, and invest heavily into an IRA or Roth IRA, and at the end of the 30 years, we would have an IRA worth the amount that the term life was for so life insurance wouldn't be needed anymore.

What distributions will be taxable? The distributions from a roth IRA?

I'll have to look in to annuities. Not very familiar with them.

Sorry for the confusion. It sounded to me like you were planning on buying the life insurance inside the IRA. If you did that then any distributions from the IRA would be taxable including any insurance benefits paid.

Your ability to contribute to your IRA is going to be limited because of the 401(k) but if your wife doesn't have an employer sponsored plan you can contribute full amounts to her IRA. What you need to consider at this point is whether the tax benefit of contributing to a traditional IRA today will exceed the benefits of tax free distributions from a ROTH at a later date. Generally speaking, at the time you retire you would want to have less taxable income because that will affect how much of your social security is treated as taxable. That being said, who the heck knows what Social Security will look like in 40 years.

The benefit of an annuity is that you get a guaranteed and predictable benefit. The trade off is that your rate of return is more or less fixed and the funds in the annuity are not liquid. Personally I like the idea of an annuity as one part of the retirement plan and then prefer to supplement the rest with equities, land, real estate and other appreciable assets that retain a higher degree of liquidity.

 

[roughdraft274]

Sorry for the confusion. It sounded to me like you were planning on buying the life insurance inside the IRA. If you did that then any distributions from the IRA would be taxable including any insurance benefits paid.

Your ability to contribute to your IRA is going to be limited because of the 401(k) but if your wife doesn't have an employer sponsored plan you can contribute full amounts to her IRA. What you need to consider at this point is whether the tax benefit of contributing to a traditional IRA today will exceed the benefits of tax free distributions from a ROTH at a later date. Generally speaking, at the time you retire you would want to have less taxable income because that will affect how much of your social security is treated as taxable. That being said, who the heck knows what Social Security will look like in 40 years.

The benefit of an annuity is that you get a guaranteed and predictable benefit. The trade off is that your rate of return is more or less fixed and the funds in the annuity are not liquid. Personally I like the idea of an annuity as one part of the retirement plan and then prefer to supplement the rest with equities, land, real estate and other appreciable assets that retain a higher degree of liquidity.

That's the thing about ROTH IRA's vs. a regular IRA. I'm not really sure how to go about figuring if my tax benefit me better either way. I'm just not sure how to arrive at a conclusion.

My wife doesn't have a employer sponsered plan. Does that mean that if we were to open up an IRA in her name we could donate the full $5000 allowed every year?

 

[Fisher]

I think your original plan is fine. With term life it is easier to add on more coverage as your life changes by just buying different policies. If you are getting a big benefit ($1M+), it also is a way to stack policies that require no physical to get to that coverage. You also have less risk if the company goes under. Whole life is not as great a deal in the long run as people think IMO. It is also not unheard of for some of those companies, like my dad's did, to force you to convert your investment side into their stock or take change on the dollar if they cancel the line you are in down the road. If a future employer provides life, it also costs you nothing to dump your policy and go with theirs. Lots more flexibility with term IMHO.

 

[Lutherf]

That's the thing about ROTH IRA's vs. a regular IRA. I'm not really sure how to go about figuring if my tax benefit me better either way. I'm just not sure how to arrive at a conclusion.

My wife doesn't have a employer sponsered plan. Does that mean that if we were to open up an IRA in her name we could donate the full $5000 allowed every year?

Yes, you could contribute the full amount to her IRA.

The calculation for whether you are better off now with a traditional IRA instead of a ROTH is incredibly funky primarily because there is no way to get the numbers "right". There are just too many factors that you don't have control of. That being said, if you put $5k/yr into an IRA (either kind) that averages 6% growth you'll have roughly $250k when you hit 72.5 (the age at which you are required to start taking the money out). Assuming that over the course of your working life (starting at 27 and ending at 72) you generally pay an effective tax rate of 15% you will have saved roughly $35k in taxes if it went into a Traditional IRA.

If, on the other hand, you put the money into a ROTH then your tax savings will come after retirement. If you set things up so that you have very little taxable income at that point then distributions from the ROTH won't trigger additional taxes and you could, in theory, end up with a zero tax rate. Under current rules your required distribution would be right around $10k so you would save tax on that amount and a quick calculation would show that you won't save as much BUT should you need to pull that money out in a big chunk because of medical issues or something else you won't have to worry about jumping a bracket or taking a really big tax hit that you weren't planning on.

 

[wolfman24]

If I had the future obligation of a family, I would definitely get term life. Here's some idea of cost on both kinds:



Reason for my recommendation is that, if you save your money, you can probably do much better return-wise when compared to the guaranteed returns! of the insurance company within a whole life policy. I underlined "guaranteed returns" because projections are shown using their best-guess estimates which are much higher than the guaranteed returns. This is, of course, because the guaranteed returns are the ones you'll live with if they're wrong. (Ha! Freudian!)

A second reason is that you can afford more insurance -- a greater bang for your buck -- if you select term. And when a little one comes into the picture, that changes everything. If one spouse dies, the burden on the one that's left is enormously different. If you have a child and your wife should die? You're looking at full-time childcare expenses on top of everything else. If you die? Your wife's got to be able to replace your income for a period of time.

If you're talking with an insurance salesman, he will tell you to buy whole life -- or something other than term -- because that's where the commission is.

So. My advice is to buy term insurance. It's much cheaper. You'll buy more because of that...you'll feel you've done the exact right thing for your family...and you won't go broke paying for it.

Live long and prosper!

My father was a life insurance agent for over 30 years and he hated term life insurance. He got red in the face if you even mentioned it. But then something changed. About 10 years before he retired he would recommend term to his younger clients and whole life to "established" people. He woulld not tell us why and we knew better than to ask.

The only problem with term is the bubble at the end. I am not sure if you can buy another policy from the same company to avoid the bubble but even if you can't there is probably no harm in buying one from someone else.

Do they have term life with no end of term bubble?

 

[wolfman24]

It sounds like good advice Maggie, Thanks.

Here's my problem, I need to explain this to my wife and her parents in a way where they don't think I'm an idiot for wanting term. To them, they see it as throwing money down the drain, where as with whole life you definitely get something.

Basically I'm looking for a way to where I can sit them down and show them the real returns from a whole life policy, and the real returns from a term life policy + sticking any saved money in to an IRA. Everyone I've read or talked to so far has said that the IRA will, if history is any indication, generate much more money than the whole life will, getting to the point that the IRA will be worth $100,000, or more, more than the whole life insurance plan will be worth.

Term policies have the same force as whole life. they apply equally to the client the only difference which when you look at it is not a difference at all if the dividend.

Plus its alot cheaper for the same coverage.

 

[PirateMk1]

It sounds like good advice Maggie, Thanks.

Here's my problem, I need to explain this to my wife and her parents in a way where they don't think I'm an idiot for wanting term. To them, they see it as throwing money down the drain, where as with whole life you definitely get something.

Basically I'm looking for a way to where I can sit them down and show them the real returns from a whole life policy, and the real returns from a term life policy + sticking any saved money in to an IRA. Everyone I've read or talked to so far has said that the IRA will, if history is any indication, generate much more money than the whole life will, getting to the point that the IRA will be worth $100,000, or more, more than the whole life insurance plan will be worth.

Do you buy auto, home, business insurance? If you do then its the same principle. Auto, home and most other insurance isnt sold as an investment why would your life insurance be different? Dont buy insurance for an investment its not. Buy insurance for insurance. Get the best you can for the best price you can from the best company you can. you cant go wrong that way. If the unthinkable happens you are covered. Keep your investment portfoilio seperate and worry about it seperately.

 

[roughdraft274]

Do you buy auto, home, business insurance? If you do then its the same principle. Auto, home and most other insurance isnt sold as an investment why would your life insurance be different? Dont buy insurance for an investment its not. Buy insurance for insurance. Get the best you can for the best price you can from the best company you can. you cant go wrong that way. If the unthinkable happens you are covered. Keep your investment portfoilio seperate and worry about it seperately.

The way you put it is how I'm thinking about it now.

 

[PirateMk1]

The way you put it is how I'm thinking about it now.

By the way a side note your getting some good advice here from the others, Lutherf and MaggieD especially. My only other additional advice would be to before you invest or for that matter seek an finacial advisor, is to study up on they world of investing. Just when you thought homework was behind you. Dirty little secret is you get stuck with MORE homework the more succesful you want to be. The only difference between that world and yours when you get down to it is the lingo. Learn their language so you got an idea what your advisor is saying a) and b) determine if they are trying to baffle you with bull****. That lesson applies to anything from auto mechanics to health care. Oh before I forget, last piece of advise. Learn to negotiate, take a negotiation class. It will be one of the smartest things you have ever done. You get what you negotiate. How do you think those big time ball players get big time money, they earn it?