Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 16%
$32.50 /mo
$390 billed annualy
MONTHLY
$39 /mo
billed monthly
7 day free trial. Cancel anytime
Personal Finance
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated almost 5 years ago on . Most recent reply

User Stats

2,778
Posts
1,849
Votes
Mike McCarthy
  • Investor
  • Philadelphia, PA
1,849
Votes |
2,778
Posts

Is Life Insurance a good idea?

Mike McCarthy
  • Investor
  • Philadelphia, PA
Posted

I know this is like asking "are peas good" and will get a lot of "it depends" answers, but here's the basic question:

If your death (and subsequent lack of cash flow) will significantly affect your family and loved ones, you should have life insurance.  Kids can't go to college, house has to be sold, not sure if we can afford the services, etc.  Great, get life insurance.

But if you have a good rainy day savings, wife has her own job, we live in a modest house, have investments that will provide some continued cash flow... is the cost worth it?  I've always looked at life insurance like a refrigerator extended warranty.  If you can't afford to replace the fridge when it dies, maybe the warranty is worth it.  But if you have enough money in your account to repair/replace it when needed, it's a waste of money.  Is life insurance the same 'scam'? Or have I just had a skewed vision of life after death?

Most Popular Reply

User Stats

815
Posts
790
Votes
Thomas Rutkowski
#5 Personal Finance Contributor
  • Financial Advisor
  • Boynton Beach, FL
790
Votes |
815
Posts
Thomas Rutkowski
#5 Personal Finance Contributor
  • Financial Advisor
  • Boynton Beach, FL
Replied

Life insurance is more than just a death benefit. 

1. The cash value of an over-funded policy can be used to generate tax-free retirement income. Contrary to what you'll here from the haters, that I'm sure will be coming out of the woodwork, it is a very efficient savings vehicle in its own right. Cash value can generate 2-3 times the income of the same amount of money in an IRA/401(k) or brokerage account. As a result, the lower potential earnings power doesn't have the effect you think it does. $1 Million of cash value can generate as much after tax income as $3 Million in traditional retirement assets in an IRA. And even if it doesn't earn a better rate of return, its still the safe money of your retirement portfolio. 

2. The cash value of an over-funded policy can be leveraged. This is a powerful source of funds for deals. It allows you to put your money to work in two places at one time. No different from leveraging one of your properties to invest in another. Listen to my interview on @Seth Ferguson 's podcast for an explanation of the numbers. You can make more money by putting your money into cash value and then leveraging it to invest in "A" than you would by simply investing directly in "A".

3. Estate taxes are high! Life insurance in an irrovocable life insurance trust (ILIT) can make sure that all of your assets pass to your heirs.

Its hard to go wrong with a properly designed, over-funded policy. The death benefit protection is there in the years it is needed. The policy's cash values will quickly reach parity with the premiums meaning you can get back the money you put into it. If you need the money for retirement income, it is there. If you don't, it simply passes to your heirs.

Most of what you think of as the high cost in a permanent policy is the cash value. The cash value is quite literally you saving up your own death benefit over your expected lifetime. If you surrender the policy, you get that back.

  • Thomas Rutkowski
  • Loading replies...