Whole or Term?

[evanburnside12]

@deltoots Get whole. Set it up with a low base policy and a high term rider. Then dump as much money as you can into it. You now have covered your family in the case of death and have a base of capital that is constantly growing and that you can borrow against whenever you like for whatever you like.

 

[innocent7]

@evanburnside12 I agree 100 %; mind you, my policy is with a mutual insurance company, therefore compounding the effect of dividends even more to us policyholders

 

[bluebrown]

@evanburnside12 Why not just dump all of that money into your bank account instead of blowing it on a whole life policy? Then you have 100% tax-free cash value the whole time, instead of waiting 10-15 years just to break even.

 

[jessica50332]

@bluebrown There is a strong bias in all of your comments. You likely have been burned by a shoddy life insurance agent or haven't had exposure to a good one.

 

[bluebrown]

@jessica50332 Please give us an example (with numbers) of how whole life insurance makes financial sense. I’d love to hear it.

 

[jessica50332]

@bluebrown (All from an Ontario, Canada perspective)

Sure. Now, keep in mind Term is the right product for 90% of people. Whole Life is great for those that have maxed out their TFSA/RRSPs/FHSA, but especially for the self employed.

Let's use you as an example.

You're a lawyer, you gotta make pretty good $$$.

Let's assume you work for yourself. You would be incorporated, right? Of course!

So, because you have a savy accountant, and are quite smart yourself, you have a holding company.

Now....

Assuming you live in Ontario, your personal tax rate is going to be 53%. So you're going to take what you need and leave the rest inside your Operating company. You may invest within your Op Co, but remember all growth is taxed, and then taxed again when brought into your personal accounts.

So where Whole Life makes a ton of sense is this.

Let's say you're 35yo.

For a $1,000,000ish face value policy, you'll need to deposit $50k/year. Think of it as hiring an employee that isn't going to cost you employer taxes, won't cause a lawsuit, doesn't need a Christmas party, and will continue to make you money for life while providing a service of a death benefit.

You'll make this deposit for 4 years, and then the policy will live off of its dividends.

Year 1/age 36: 48k cash value, 1.38 mil death benefit
Year 5/age 40: 231k cash value, 1.78mil death benefit
Year 15/age 50: 363k cash value, 1.45 mil death benefit
Year 30/age 65 643k cash value, 1.32 mil death benefit
Year 40/age 70 781k cash value, 1.36 mil death benefit

The program is held by the Hold Co, allowing for tax free transfer of funds from the Op Co, to the Hold Co. Insulating the company owner from any creditors and lawsuits.

So, money that would otherwise be taxed HEAVILY when trying to get out of the one pocket and into the other is given a tax free growth environment that only required 4 years of contributions. This money is then accessed by leveraging it a lending institution. When invested you can write the interest off. It does not impact your borrowing power, and is seen as an asset.

Could you invest it in the market? Sure.

Is your crystal ball better than mine? Not sure.

Life Insurance is subjective. It's a love letter to some and a financial tool to others.

If you're hellbent that this is wrong and you can make more money elsewhere, then the please, go and do so.

Some people want the security, and that's not free.

The biggest thing to remember with permanent insurance is that you are EMPLOYING A SERVICE. I feel that gets lost when the discussion arises. Nothing is for free.

Yes term is cheaper when young. But is it really worth spending 5-8k (and more) a year when you're in your 50-60-70's? Even getting a small permanent plan in your 30's and having it structured to support itself will be of value later in life. Commonly used for final expenses.

If this does not satisfy, then I fear your mind is already made up. Whole life has a purpose, and it's very useful when structured correctly.

 

[evanburnside12]

@bluebrown

Why not just dump all of that money into your bank account

Because whole life earns more and you don't pay taxes on the interest like you do in a bank account.

instead of blowing it on a whole life policy?

You are always guaranteed to make money with whole life insurance. Please don't use false descriptions.

Then you have 100% tax-free cash value the whole time,

Also false. You pay taxes on the interest you earn on a savings account.

instead of waiting 10-15 years just to break even.

This is only true if it's structured to maximize immediate death benefit. If you maximize cash value your break even is around year 4 or 5. And you always have a death benefit that always exceeds what you've put in.

 

[bluebrown]

@evanburnside12 Whole life gives you close to zero return. The only way you get any positive return at all is if you pay premiums for many, many years, or else you’re actually negative.

The selling point is that you don’t have to pay any taxes on that negligible return, if you even get the negligible return at all? Wow sign me up.

 

[evanburnside12]

@bluebrown

Whole life gives you close to zero return.

It gives you a guaranteed annual 2-3% with around a 6% dividend rate. That may not be to your liking, but that isn't "close to zero return."

The only way you get any positive return at all is if you pay premiums for many, many years, or else you’re actually negative.

Absolutely and unequivocally false. You are contractually obliged to always have a positive return.

The selling point is that you don’t have to pay any taxes on that negligible return, if you even get the negligible return at all? Wow sign me up.

Most everything that you say about these policies is false. It's no wonder you hate them. You hate what you believe to be true about these policies, not the policies themselves.

 

[bluebrown]

@evanburnside12 Lol please give me a monthly premium quote for this hypothetical whole life policy that guarantees me 2-3% returns plus a 6% dividend. Let’s suppose I’m a 30 year old and I want $1 million. All I have to do is pay $2k per month for the rest of my life?

How am I not better off paying $100 per month on a $1m term policy and investing the $1,900 per month that I’m saving?

 

[evanburnside12]

@bluebrown

I’m a 30 year old and I want $1 million. All I have to do is pay $2k per month for the rest of my life?

I don't know the exact figures, but yes this is the right idea.

How am I not better off paying $100 per month on a $1m term policy and investing the $1,900 per month that I’m saving?

Because if you die before you've accumulated that amount then your beneficiaries will be out of luck and have to pay taxes on whatever you accumulated. And if you die during a recession? Double ouch.

 

[bluebrown]

@evanburnside12 No, they won’t be out of luck, because I have a term policy.

 

[evanburnside12]

@bluebrown And 98% of the time it's a complete waste of money. Life insurance companies make more money on term life than any other policy.

 

[bluebrown]

@evanburnside12 Yes, a complete waste of a very small amount of money. It’s insurance. It’s there just in case something catastrophic happens. You home insurance, health insurance, and car insurance also usually end up being a “waste of money.”

The problem is when you sell insurance as an “investment” and charge people exorbitant premiums so the insurance agent can make huge commissions.

 

[justadog]

@deltoots I would suggest get a convertible term insurance policy from a carrier that has a strong whole life product like Guardian, MassMutual, New York Life or Northwestern Mutual. Take your time to learn what whole life insurance is in detail. If you want it, you can change some of the term insurance into whole life without medical underwriting. If whole life isn't right for you, you just stick with the term policy.

 

[tetrahedron]

@deltoots I went with a hybrid approach - survivor whole life - legacy planning + better cash value growth and 15 yr term for both me and my wife.. term was very cheap for me; wanted to have some protection till the cash value grows in the whole life

Note that Whole life is basically dead money for the first 5 years; after which it does well ; it acts as a financial cushion after you have paid off 8 years and the death benefit will adjust itself for inflation in the long run.

Some go with Universal life as well, but premiums are not guaranteed and can shoot up big time in your later years potentially depleting all of your cash value.

 

[michaelphemo]

@deltoots term for income replacement and cover debts. ie, a 20yr term large enough to cover the child expenses thru college, or a 15/30yr decreasing term to match your outstanding mortgage. if the company doesnt have "return of premium" riders for the terms, find one that does. this essentially allows you to get your money back after the terms over.

whole life for nest eggs and funeral expenses. if youre interested in the investment side of WL like dividends, be uncomfortably prudent in getting all the information from the agent. it would require a large monthly payment for the dividends and cash value to ever be useful. nest egg would be like "i have $500k savings for my child when I'm gone, but dont want to her to deal with taxes or risk the money getting drained by the debt in my estate" so you take out a $500k WL and effectively transfer the money via premiums. that way the money goes directly to your kid with no interference, and if you passed away before you paid up the policy, kid gets the death benefit and the remainder of the savings.

above all, figure out what you need insurance for. make a list of how much $ either of you would need to maintain your lifestyle without the other, and how much your child would need if youre both gone. google a life insurance needs analysis sheet if you need guidance. unless you have a financial advisor who does this stuff for you, or you tell the life agent all of this information, youll be just as uncertain as you are now.

 

[ativyl]

@deltoots Even if you decide to have another child 3 years out they would be 26 by the time a 30 year term policy ended. So from a life insurance only perspective the term makes sense. However, the largest expenses in a life insurance policy as an investment is the life insurance. From an investing perspective, if you are going to buy the life insurance anyway a whole life, Index Universal Life or Variable Life policy may make more sense.

Assuming you are in a high tax bracket whole life creates a lot of options for you that term does not. Your emergency fund compounds faster and safer tax free. You can replace HELOC oriented borrowing. If you are still saving for a down payment you have an effective way to do it...

 

[levnishbar]

@deltoots Why not both?

 

[bethellens]

@deltoots I suggest get permanent life insurance. Get 1 policy for your husband joint life or family rider. Get one policy for each kids. Life insurance is a financial planning that mean your future and kids should take into consideration. I also agree with agent you migh need term to cover your current expenses until your expense is lower. I think you need about 4 policy total. You can exclude your kid two police but it helpful you do have it for them