evanburnside12
New member
I posted this elsewhere before, but I just want to say that seeing this get taken down at r/personalfinance makes me wonder who exactly is in control over there. I made (what I think is) a great case for the flexibility of overfunded whole life insurance. What do you all think?
Let me explain. First, I must clarify that if you have credit card and other high interest debt, then pay that off first before thinking about anything else. Maybe get some term insurance, but that's it. Your first goal must be the elimination of bad debt.
Now with that out of the way, let me get to my point. You're in a good financial position. You have positive net worth and positive cash flow. Conventional advice is then to max out IRA and 401(k) contributions. I think that's a mistake, and let me explain why with an example.
Say 2 years down the line you've saved up 30k. Your car breaks down and you need a new one. You have about 10k in an emergency account, but everything else went to the retirement accounts. How are you going to pay for a new car? Are you going to break into the emergency fund? Well maybe. But it isn't enough to pay for a new car, and now you need to refund the emergency fund. So assume the new car is 30k. You're now paying 5-7% interest on the 20k difference while also putting money into your emergency account. Your additional retirement saving gets put on pause. Meanwhile you're making maybe 8% on your retirement accounts. At best you're a little ahead, but not much. The situation is a wash.
Let's look at an alternative. What if you have 30k in an account that doesn't earn as much interest, but that you can borrow at very low rates, about 4-5% these days. Your full 30k is still compounding if you borrow the money, and you don't have to dip into the emergency fund. All else being equal, this is clearly the better way. Lower interest rates and your emergency fund remains.
Being unable to access money that you've saved comes at a high price. It forces you to borrow from the bank at their interest rates and only the amounts that they're comfortable with. If the analogy is a business or investment loan then forget about it. The latter situation comes out way ahead because the bank is going to charge far higher interest rates.
The problem is summarized like this: your need for finance is more important than your need for a higher interest rate in a retirement account. And what's the vehicle for doing this? The concept generally hated by this sub: overfunded whole life insurance.
Do retirement accounts have tax benefits and higher returns? Yes, of course. The problem is that you can't access those funds, and so any analysis comparing whole life vs stock market investing needs to take into account opportunity costs. And when you take into account what you have to pay in interest while you're waiting to retire, then you'll see that whole life insurance is a far more attractive idea than many lead you to belive.
NB: I'm not an insurance agent and I have nothing to sell, despite what the trolls will invariably claim.