Explain Life Insurance to Me
 

Please explain life insurance to me. My parents have been keeping a life insurance fund for me and my sister since we were born. Now we're older, they want transfer policies to our name. Is it worth getting?

Believe if or not, wiki has a decent article:
http://en.wikipedia.org/wiki/Life_insurance

I read that, but question is it worth it?

What kind of policy? Is it whole life, universal life?

When your young it's worth it because it's so cheap. I got some at 18, barely pay a thing a month and everyone's taken care of if something untimely happens. I picked Met Life because of Snoopy. He's a fantastic salesman.

I've heard it's better to choose term over whole life insurance, and to use the savings to invest separately.

It's better for you decide on your investing than some insurance company.

Life insurance is the company betting you are going to live longer than average and the customer betting he/she won't. If you are young the rates will be inexpensive and the whole life style will build up some solid cash value. If you are older term is the way to go and invest the difference. However the key is to systematically invest. That is where the whole life product pays off. I'm partial to Northwestern. They have a solid reputation and the salespeople aren't as pushy as most.

Is it unwise that I am going on 29 and have never really given much thought to life insurance? I mean, I think about it more now that I'm married, and will certainly get a policy when we start having kids... but I don't feel any pressing need at the moment (how does life insurance work when you're living abroad, btw?). Perhaps that's because I don't have a job that's even close to being risky/dangerous.

I don't know if my father (who was a commercial fisherman) had life insurance before my mom got pregnant with me, but before his first trip out to sea during her pregnancy, they got married and he got life insurance... and that has made all the difference in both her and my life, since he died accidentally during that trip. He was 32 at the time.

So I am definitely convinced of the value of life insurance for one's family, but what about if you don't yet have a family? And how does one go about shopping for life insurance?

It really all depends on your current life situation. Think of it in these terms:

If I die tomorrow, what would my loved ones need, in terms of financial security, to live with the same standard of living as they have now.

Since you and your husband have no kids, then life insurance may not be important for you to own. However, if you own a house with your husband, and he needs your income to be able to pay the mortgage, and he definitely wants to keep the house after you die, then perhaps you need to take out a small policy to cover those expenses.

For those who do have children with mortgages and little savings, it is wise to have life insurance to protect the family.


BTW: I used to have a license to sell life insurance, so if anyone needs advice, I will be happy to help.

Lubeboy, it's impossible to answer your question without knowing what kind of life insurance your parents have bought you (if that is the case) or what you intend. As has been mentioned, you can buy whole life (never expires) or term (which has a start and end date).

Whole life can be used as a savings vehicles. Baraka Guru, it's intended to work in conjunction with investments, not replace them. There are also a few insurance companies that will guarantee certain returns. That in and of itself makes it a safe money shelter.

Great advice.

It's funny how many people get talked nto buying insurance for their kids. I mean, who benefits from the insurance if a kid dies? My parent bought a small amount of coverage for our first kid but it was just in case something happened to pay for a funeral. They dropped the coverage after a year. On the other hand, my mother-in-law bought coverage for every grand kid. She then gave them the annuity when they reached 18. If she had just saved the money rather than using an annuity they would have had more to show for her efforts.

But again, insurance only benefits who is left behind. I have enough so my house and cars would be paid off and my wife could live comfortably at the same standard of living for 4-5 years. After that, she's on her own!

This is true, but there are many arguments against using life insurance as an investment vehicle:

From Smartmoney.com

Forced Savings
Whole life insurance is expensive: You're paying not only for insurance but also for the investment portion. That extra cost might almost be worth it if these policies were a good investment vehicle. But usually they aren't. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement."

This isn't the only source I've read with this argument. But these guys do have a good example:

Term: Where the Value Is
To get a real sense of the value of term, let's compare a term policy and a universal life policy. Say a 40-year-old nonsmoking male has a choice between a $250,000 Met Life universal policy with a $3,000 annual premium and a same amount of renewable term coverage with a 20-year fixed premium of $350. At the end of one year, the universal policy, assuming it paid 5.7% per year, tax-deferred, would have a cash value of exactly zero (cash value is the amount you would get back if you canceled the policy). But say he had instead invested $2,650 (the difference between $3,000 and $350) in a no-load mutual fund that averaged a total return of 10% annually. At the end of the first year, he'd have $2,841, accounting for taxes on the earnings at a 28% rate. At the end of 10 years, he would have accumulated more than $46,000 in after-tax savings in the mutual fund. Over the same period, the cash value of the policy would have climbed only to $31,819.

That's not to say that whole life insurance is always a bad idea. Wealthy people can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy. And for the growing number of people in their late 40s or early 50s who are just starting families, whole life is at least worth a look.

Get the article here.

Basically, whole life is great for the wealthy, but I don't think I'd ever use it.

One of the several ways I'm saving for college for my kids is via wholelife coverage. The reason for that particular vehicle is that (along with the 3 or 4 others for each kid, including a 529) if they get scholarships or decide not to go at all, I can control the money much easier and with no penalty later on. If they need it for college, it's there, but it's also there for later on in life and an asset I can hand over when they're ready and need it without them getting penalized.

Then again, my circumstances probably differ from most others who may be buying this.

that's the part that I'm trying to understand. It's choosing yet another vehicle to save. Its hard to remember that when all the negative press you hear about but you don't need "whole life blah blah blah..."

I don't, but when all is said and done, I'm putting things into different baskets, and well to keep it as diverse I have to find new baskets.

Thanks for laying that out.

Sorry, I finally found out what kind it is. It's Universal life insurance through NY Life. There's currently over 10k in my name that my parents would transfer to me. I'm currently single with no real financial obligations besides student loans and rent. My mom just gave me the forms and booklet today. Is it worth reading through and signing up? Looks like a real snoozer.

Yeah, you want that. Your folks are basically trying to give you $10,000 that will most likely grow into something bigger in the future. If they've already started it, you'd pretty much be an idiot not to keep it up.

I agree with Jazz, you want it. Take some no doze and read through it. If you don't understand something find the 800 number and after working your way through the maze of automated voice hell, get a hold of a live person and ask.

You should also listen to those on here that advise you to have more then one egg basket and several eggs in each. I know you said you're single with no current obligations. But trust me saving a little now in a well diversified manner can be one of the smartest things you can do.

This is a bit off-topic, but close enough to what this has developed into that I think it's worth sharing.

If you are young and already planning for retirement (and good for you if you are), then you should spread your money around. You should consider the following and see if they make sense for your plans.

401k
Mutual funds (there's one specific type who's name escapes me but you need to earn under a certain amount to qualify for it. I wasn't smart enough at the time to put money there.)
Whole life insurance (you can cash this out while you're still alive)
Bonds
Stocks

There are costs and benefits to all of these, and not all of them are necessarily sound investments. And this is just my opinion on how I invest my own money.

See, this is where we get disparities. I'm Canadian, so we have other options that are better: Registered Education Savings Plans (RESPs) and the new $5,000 per year tax-free savings account announced in the latest federal budget. The first is tax deferred, the second it tax-free.

This makes whole life as a vehicle for saving for education not so attractive.

But that's the thing, it doesn't have to be for education. Jazz can use 529s which I think is equal to RESPs. But my point is that once you've maxed out on all the things you can use, and this option is left. It is hard to shed all the negative ideas and press about not using whole life insurance as any kind of investment vehicle.

It is hard to shed it all, which is why I admitted that I would use it as a vehicle if I were wealthy, which I'm not. Whole life can be used for certain tax strategies, but these are usually only possible if you have a lot of money. You'd have to be damned wealthy to have maxed out your other options.

Whole life can be expensive, and also realize that the insurance industry isn't driven by consumers, it's driven by salespeople. It attracts some of the most hardest core salespeople out there, because not many people like to think about life insurance, even if it's for their own good. Insurance sales is usually high commission, which means reps aren't always taking what's best for the consumer in mind. Yes, this might even be worse than stand-alone mutual fund managers. But I won't get started on MERs.

If you weigh your options entirely, and you understand how the full spectrum of financial products works, whole life is an option that seems easy and favourable, but once you do the math, there are better options out there. I have term life insurance because I want to pay for the coverage I need, rather than coverage and some other stuff that an insurance rep sells to me that has little to do with direct insurance on my life. I'd rather have more control over my money, and I certainly would like to know what it's doing.

In any investment plan, you want to maximize your capital, minimize your commissions and fees, and maximize your returns. Whole life investments don't stand up very well as a comparison to other methods, especially if you don't have much capital to move around.

In any insurance investment plan, a portion of the proceeds pays the insurance premium. The only benefit is that you're not paying the premium out of your pocket, just out of earnings. But you still pay a premium.

If you're saving for retirement, a 401 is the only way to go if your company matches anything. You're an idot not to take the match. IRAs are go for rolling over when you leave a company or if you don't have access to a 401.

Yes a bit off topic, maybe we should start an investment thread?

Other then the whole life, this looks like a snap shot of my portfolio. I had some term life through work. It made sense to me when others were dependent on my income. That's no longer the case and I'm really too old for whole life to make any sense, IMO.

I have my 401k largely in mutual funds and I can move things around all I want at no cost. A year or so ago I started moving almost all of my mutual funds to funds based on foreign currencies. The way the dollars been free falling I'm glad I did. The gains made by owning Canadian based funds has paid off nicely. I'm guessing the dollar will bounce back but I don't think we've seen the end of the fall, I'm guessing about 3-5 more years of a weak dollar.