Cash Accumulation life insurance
Real Estate Agent · Buffalo, NY · Member since 2018 · 4 posts · 4 votes
I have been working with a financial advisor for about a year now and he is strongly suggesting permanent life insurance. I am skeptical about it because I would rather save the money that I would put into the policy and instead put it towards a real estate investment. Also, I am only 21 so life insurance seems like a waste of money right now. He is pushing it because it is a guaranteed return of 5% and it is also tax free. Is permanent life insurance worth it?
@Peter York your financial adviser is actually an insurance salesman. The 5% return is nonsense. Ask him this question. If I pay $10,000 each year for the next 5 years, how much money can I withdraw at the end of year 5? Spoiler alert, it is not $50K pus 5% per year.
Why is he pushing this insurance? Because 30-70% of your first year premium goes to pay his commission. Top performers may even get as much as 100% of the first years premium. In other words, these policies are extremely lucrative to sell. You pay in for years and have nothing (besides life insurance).
Ask yourself how does the insurance company make their annual return? The answer is they invest your money in bonds, mortgages and the stock market. Nothing special and there is no magical way for them to get a better return. If you peel away the expenses, you are better investing all the money directly in those things yourself. Or better yet real estate!
You don't need life insurance if you are 21 with no family. Once you have a family, get a term policy that ends once the kids are out of college. Invest your other money in real estate.
If you are considering life insurance, ask your planner these questions:
Fair questions to ask, but good luck getting a straight answer.
Also don't forget the tax-free nature of insurance payouts. Once you completed your contributions for your permanent insurance policy any draws against the cash balance including the appreciation is tax free. I wouldn't say just go dump all your cash on a policy but use that as a diversification vehicle.
How many years would one have to contribute before contributions are no longer necessary?
Just a couples things to point out: if your whole life insurance policy is only earning 4%, you have the wrong policy. If you’re setting up a pool icy right now you should be hitting 5-6% without even trying. I’ve got a company right now with guaranteed interest of 4% and a dividend that has been running about 6% the past 10 years or so. Make sure your policy earns a dividend.
Hi Zachary,
When you say guaranteed interest of 4% plus a 6% dividend, are you saying that this policy earns 10% in aggregate....tax free?
Tony, yes, guaranteed interest and the declared dividend are two separate things. I wouldn't say you're making 10% aggregate because it's not an investment. It's a dividend issued on a policy based on your cash value. You will have the expense of insurance (I'm a by the letter kind a guy here). I'm not talking about more money for insurance, I'm just talking about the same money being spent in a way that it provides more tax free money to your beneficiaries.
The guaranteed interest is a commitment from the insurance company that your policy will grow by that amount. For example. When I take out a $100,000 policy on my 2 year old daughter and I pay that policy off in 20 years, it will cost me $700/ year (or $14k after 20 years). Once she's 22 years old, I never have to pay into the policy again. The guaranteed interest will grow that cash value to $100k by her age 121 and until that time her life will be covered for $100k. That growth from $14k to $100k is achieved through the 4% guaranteed interest lest the cost of coverage. This is the kind of reason I think buying insurance at a young age can be beneficial. If paid monthly, that policy would be $61/ month. I just quoted a $100k policy for a $100k policy for a 53 year old man at a standard rating. The quote was $49/ month paid for 20 years. At the end of that he has no coverage. This policy when my daughter is 53 will probably have a death benefit of $200k-$250k after all the paid up additions from the insurance company. Probably around $80k in cash value. She will still have that policy even if she can't afford it (because it won't cost anything if I pay it off), or if she gets sick. It will still be there. She never has to worry about the term running out.
My recommendation with whole life is to always pay it up early. That way the company does all the work for you. You don't have to worry about it. Especially for kids. All of my friends who were given whole life policies that still had a payment due, try to get rid of them. They don't see the value.
In addition she will get a dividend every year. It adds to the tax-free cash value by purchasing paid-up coverage (that is the most tax advantaged thing you can do with a dividend payment). The company i most often used has declared a dividend over 6% 11 of the past 14 years. The other 3 years the dividend was 5.98% (2011), 5.6% (2010) and 5.6% (2009). The most recent divided for 2019 (they're declared the end of the year before the dividend goes into force) was 6.23%. Once you get a dividend payment in your policy, it can't go down. That is your money in your policy. The only question is how much will you get next year? These rates are not guaranteed. The reason they are tax advantaged is because they are considered a return of premium.
My point was just that sometimes to understand how a policy will preform compared to another one, you need to consider more that guaranteed interest. You can buy a whole life policy from your Farmer's agent, but that doesn't mean it will pay a dividend. There's more to loose settling just for the guaranteed number.
I never tell people to do this for the investment aspect. It's not a strong investment. It's is a cautious one though. That's the main concern. The example I gave with my daughter, that's no where close to trying to tweak the numbers. I show what that can look like in the video I posted. All the same though, it's not a bad place to toss a few dollars until you need them.
@Jack Orthman
That’s great you don’t have to pay for it, but 22k a year in premiums is a lot of money. Wouldn’t a 100k free and clear rental house every five years be better? As other have mentioned borrowing against their policies sounds just like a line of credit on a rental. Add rent and tax benefits and I don’t understand why you’d want whole life. 20 or 30 year term and then self insure seems the better way. If an advocate for whole life could put a spreadsheet showing difference I’d be interested as I’ve heard this agreement several times over the years and never got it. For a 2MM policy I pay $85 a month for. I’d hate to think what the whole life equivalent is. Probably a mortgage payment on a nice quad.
I was paying $22k per year because I was in my 50's when I purchased the property and I think wanted a plan where I paid it off in 10 yrs vs. 20 or more. I am not an expert in the insurance field. At your age and when you go with a 20 year policy you will probably pay only a few thousand dollars a year for a $500k policy. I don't have a clue.
I would never get life insurance with the thought of borrowing money against it. I have not checked my policies for several years, but about 10 years ago I had a cash value of $450k in one policy. Sure, I could borrow money and buy a multi-unit property and make 10 times more money, but it is not in my blood to do business like that. I worked hard to pay the policy off and I want to leave it that where where I don't have to live a stressful life leveraging, thinking and having to do more accounting and writing more checks.
We can always look back and say I could have made 10 times more money by borrowing against my insurance, but we have to remember that we were not as wise several years ago and we were not as sure about about how things would work out. So, if we did borrow against our insurance we would have been assuming more risk.
From what I saw, the cost for whole life insurance is about double the cost for term insurance, but when you put in on a spread sheet over a period of 30 to 40 years I am guessing that the cost for whole life insurance is less than 25% the cost for term. When you get older you will not pay one penny for whole life insurance and when you buy term insurance you policy cost will increase by 200% or more and you will have to make monthly payment until you die. You get absolutely nothing when you stop paying.
I am starting to feel like an insurance salesman!
@Jack Orthman
That’s great you don’t have to pay for it, but 22k a year in premiums is a lot of money. Wouldn’t a 100k free and clear rental house every five years be better? As other have mentioned borrowing against their policies sounds just like a line of credit on a rental. Add rent and tax benefits and I don’t understand why you’d want whole life. 20 or 30 year term and then self insure seems the better way. If an advocate for whole life could put a spreadsheet showing difference I’d be interested as I’ve heard this agreement several times over the years and never got it. For a 2MM policy I pay $85 a month for. I’d hate to think what the whole life equivalent is. Probably a mortgage payment on a nice quad.
You're absolutely right Josh. It does make more sense to buy term and invest the difference. The average person doesn't do that. The average age of the person that I sell coverage to is 50-70 (they'll often repeat to me that they're still in the process of buying term and investing the difference). You're paying $85/ month because you're young and healthy. The chances are the insurance company will never pay out on your claim. It's good money for them that's $20k if it's a 20 year policy with little chance you'll collect. What people find as they get older is that the need for life insurance doesn't really go away. Your reasons for needing coverage just change. Insurance offers people who otherwise are not looking to establish a trust a way to handle simple money transfers (often people with trusts as well).
I would never try to sell someone a whole life policy (especially with payments until age 100) unless it is what meets their financial goals. Loans against a whole life policy are similar to a line of credit without the fees, the application, the structured re-payment or the taxes. This is not meant to be borrowing other peoples money, it's the ability to store your money in a place where it can continue to grow tax free if you're using it or not. For some people, it makes no sense. But, to the person with a savings account earning 1-2% it's a compelling alternative.
No one here is arguing that this is an alternative to investing in the the market or real estate. I didn't cash in my houses to buy whole life. It's a hedge to balance your portfolio.
If your 'financial advisor' makes money off selling insurance and is not required to disclose the huge commissions some here have noted, shouldn't they have to call themselves Insurance Salesperson instead?
You know, all financial advice is selling (unless you go to a fee-based financial advisor). This is something the industry struggles with. Do we stop collecting commissions and go to fee-only advice? At the end of the day I have to pay my bills and no one gives me a tip when I put the time and research into finding the best life insurance company for them. I've put more work into life insurance than I did for my MBA. There's a lot of research. Would you be willing to pay your advisor hourly like a lawyer to find your coverage? Even then it's tough. I have financial advisors who conference me in their meetings with clients to help them find the best rates, because the advisors just don't know the market like I do.
You currently cannot buy life insurance without someone making a commission. It is how the entire industry works.
@Zachary Paschke
Just disclose your fees. And call yourself an insurance agent and not a financial advisor. With something as complicated as insurance and as much money on the line, there should be a lot more transparency.
@Peter York
Just get a term policy when you have dependants to look after. You already answered your question. And you already feel the pressure of a commissioned salesperson pushing you into something that is best for them, not you.
I've been a salesman for more than 50 years and I sell more than $1.2 million every year to homeowners for every type of construction and repair. Customers can be strange with their myths and misconceptions. Suppose, a customer has the option to purchase a job from me for either $5,000 or $10,000. The customers often think I make more money and am screwing them when I suggest the $10,0000 job, but it doesn't work like that. I make more profit on $5,000 jobs where my crews can get in and out in one day with the $5,000 checks in their hands. A $10.000 job requires more of everything and by the time it is finished I may have 5 days of labor, more material, 5 days of company overhead and lose two or three $5,000 jobs because I cannot get to them. I guess you call pushing for the $10,000 jobs, "stepping on dollars to pick up nickels".
The same is true for insurance. An insurance salesman is going to sell a lot more less-expensive policies than the more-expensive. So, why would an insurance salesman not sell the less-expensive policies and risk losing every sale by selling pushing for a more-expensive policy. He would be much better off selling 5 less-expensive policies than trying to nail one big one and get nothing.
I disagree about buying term insurance. Especially, if you have children because when you have children you need to spend your money more-wisely and when you stop paying on term insurance you have nothing. Zip! Zero! Zilch! And, you have wasted the money and may not be able to buy insurance to benefit your children because the cost for half the face amount for term insurance may be double the cost.
My family is 'set for life' because I was smart enough to buy whole life policies in addition to my $750,000 term policy that I made payments on for 20 years and it is not worth one penny today. I could have thought I was on Easy Street when I purchased my $750k policy and stop buying insurance, but I realized how worthless the $750k policy would be if I lived more than 20 years. So, I was smart enough to buy $4 million more worth of whole life insurance and now every policy is paid in full with the exception of the two policies that replace my term insurance and I am paying almost three times more for the insurance than I would have had to pay when I got my term policy a bout 24 years ago.
It is not a smart move at a your age to buy term insurance now and wait to buy whole life when you are older and cannot afford to pay the higher cost.
I don't think it is wise to think you can save money on insurance, invest the savings in real estate and make even more money. The reason you buy insurances is because you don't have a crystal ball and you don't know what will happen in the future. You may get into an accident in 20 years and you may not be able to afford to switch from term to whole life. Your investing savvy may not be as acute as you think.
My term policy cost me only $250 per month for $750k. I paid a total of $60,000 over the 20 years and it is worth zilch today. $60,000 completely wasted. I could have purchase a whole life policy at the time. The cost for 20 years was probably $120k for the same amount. Today, I would still be insured for $750k, would have some cash value and the policy would be paid in full for life. Maybe? I am not an insurance salesman, but I know how to spend my money, wisely. Sometimes?
@Peter York as an insurance agent I would never recommend a whole life policy to anyone much less a 20 something with no family. Whole life is just that, a hole for your money. The fees and expenses outweigh any perceived interest in the cash value of your policy. If you want a permanent policy, go with an Indexed Universal Life policy. The cash value will grow based on popular market indexes and won’t cost as much. Premiums are also lower than whole life policy’s.
I would however, look at combining a term policy with an IUL. Keep your cost down, get more coverage and use the money you save not purchasing an expensive whole life policy and invest it in actual investments, ie RE.
Go with a whole life policy!
Cons for IUL
Advantages for whole life
I guess if you believe like Jack Orthman does that trying to outperform the investment of an insurance company is like playing craps at the Las Vegas tables, then yes....by all means go with a whole life policy. For the rest of us who can outperform an insurance company's investments and don't feel like waiting 7+ years for your cash value to catch up to your premiums paid (this isn't even considering the time value of money), go with a cheaper version of permanent insurance or go with a term policy and put the money saved to more efficient use.
The last thing you want to do is take the advice of someone who admittedly only has a foggy understanding of his policies.
@Peter York Life Insurance is different from Real Estate Investments and serves a different purpose.
To answer your question: life insurance is worth having, for sure. Now, if you are saying you don't have money for both, then that is a different question.
On the other end, if you are able to do both then you should but it all depends on what type of REI are you able and/or willing to do based on your circumstance. For instance, do you want to be an active or passive investor? Or do you want to keep your day job while investing on the side?
Answering these questions may be a great start for you to determine what will be best for you.
Good luck...
@Peter York this is exactly the strategy I use to invest in real estate and other investment opportunities. I have a whole life permanent insurance policy. I have become my own banker with this vehicle and take loans against it to invest in real estate deals as well as other investments.
The advice I would give you though is to make sure you work with an infinite banking practitioner because it is extremely important that the policy is structured to suit your needs. Not all life insurance policies or life insurance salesman are creayed equal. Do your homework before jumping in so you understand fully what you are jumping in to, how to use your new “be your own banker” system, and the discipline it will take. Study Mr Nelson Nash’s work become your own banker, read as many books on the subject as you can.....many are free. Search be your own, infinite banking system, cashflow banking system, what would the Rockefeller’s do, the banking effect. For me it has been a game changer
@Zachary Paschke
Those are good points and I totally agree with you the average person is uneducated in these matters and needs help saving and investing. Whole life, forced 401k that used to have to opt in and now you have to opt out, matches, etc. all good things for average people who aren’t going to take the time and blow all their money regardless of how much they have.
But on this forum with ambitious smart people I don’t get why they would do this. Even though other posts have been on here over the years. That was my point. This person paying 22k a year in premiums would be much better getting a free and clear rental every 5 years or so. No debt. Very limited risk. Very limited work. Much better upside. Easy to pass down in his estate and relatively liquid in the scheme of things. I get joe six pack won’t do this but I’d assume someone on bigger pockets would.
I appreciate your thought here. The truth is this conversation goes much deeper than how to provide income. I think the average person with a disposable $22k/ year may not be the average person on this blog. Your solution assumes a person has time. I get a call at least once per week from an otherwise health person that got a surprise health condition. I’ve gotten calls from family members of clients that said they wanted to think about coverage and passed away before taking it out. Every week I get calls from people motivated to purchase coverage because they had to pay cash for a parent / spouse’s funeral.
So, for your example, if your buying a free and clear house once every 5 years, term probably makes sense. How long will it take you at a house per year to build enough cash flow for your family? If you die just after you acquire the first house, what will our spouse do while trying to continue raising children? Sell the house? For a profit? Maybe, maybe not. Will they operate one rental house to make the $400/ month they get off the one house?
Even if you do service past the age needed to build your self-sustaining rentals, do you not want a good return on your money in the meantime? You don’t want to have a free death benefit where you’re making 4% guaranteed interest and a 5-6% dividend? You’d rather leave it in a savings account making 1%? For years?
Self-insurance is not a decision you make based on a plan. It is a decision you make based on your reality. If you have sustainable income coming in without working, or from the profits you can afford to pay the help you need, then, yes, you’re probably able to self-insure. That is definitely not the average person.
When you come on a blog like this though and belittle people for trying to protect their families, that’s not productive. Not every decision can’t be perfect because life is not perfect. We can’t assume we have the time for our well laid plans.
I’m not here to try to talk anyone into insurance that doesn’t want it. I, on a daily basis see the ramifications of these kinds of decisions when they’re made. You may not want or need insurance, but you sure do not want to be the reason someone takes half-cocked advice and doesn’t protect their family. Especially if you don’t understand their full ramifications of what their death could mean to their family and business.
Funny how they keep changing names of life Insurance. Sounds like a whole life policy stay away from its terrible way to have life insurance.
Life issuance should be used if you die and leave wife /children with un paid BIG bills.
I bought term insurance read up on its fact I need to drop it I really no longer need it.
The cost of whole life insurance can easily exceed a term policy with the same death benefit by thousands of dollars a year. As a general rule, expect whole life policies to cost five to 10 times more than a comparable term policy.
Go with a whole life policy!
Cons for IUL
This is nonsense.
Again. The cash value of a life insurance policy is literally the policy owner saving up their own death benefit. That is why your premiums to get a big policy in your 50s were so high. You have a shorter amount of time in which to save up the death benefit. The insurance company is buying term and investing the difference.
A UL/IUL is no different from a Whole Life. What the Whole Life policy calls "mortality costs" the UL simply prices out as a 1-year term. Its the same thing under the hood. The insurance company reserves are all invested in the same exact kinds of assets: Treasuries, Bonds, Mortgages, etc. Nice safe, secure assets with predictable growth.
The difference in an IUL is that they take the interest that would have otherwise been credited to the policy's cash value and they use it to hedge in the Index Options markets. They are trying to buy as much movement in the market as they can get with the money they have to spend. Some years there are zero return because the options expire worthless. But other years they are able to capture large market movements. The only important factor is that they capture some portion of the "Equity Premium": the extent by which the return on the equity markets exceeds that of the debt markets.
The dividend/Interest earning of a Whole Life policy is tied to the return of the bond markets. The same is true with a true Universal Life. However, the returns of the IUL will capture a portion of the Equity Premium. Insurance companies are playing a very long term game. Even if the net return is just one percent higher over time, that will have a significant impact on the policies internal costs. Nobody cares that the returns don't include the S&P 500 dividends. So what? Anything greater than the debt market rate of return is an improvement in the policy's performance. All they are after is a portion of the equity premium.
If you take two identically designed policies (One a Whole Life and the other an IUL with the same premium and same Death benefit, ), the IUL will most assuredly outperform the Whole Life.
Both types of policies start off with exactly the same resources (Premium) and face the exact same liabilities (Death Benefit). The cash value of the IUL will grow faster. And since the cost of insurance covers the delta between the Cash Value and the Death Benefit, the internal costs of the policy will actually be lower, not higher.
Whole life policies have mortality costs too. And they get more expensive every year just as they do in an IUL.
Funny how they keep changing names of life Insurance. Sounds like a whole life policy stay away from its terrible way to have life insurance.
Life issuance should be used if you die and leave wife /children with un paid BIG bills.
I bought term insurance read up on its fact I need to drop it I really no longer need it.
The cost of whole life insurance can easily exceed a term policy with the same death benefit by thousands of dollars a year. As a general rule, expect whole life policies to cost five to 10 times more than a comparable term policy.
There is no "general rule". With a permanent life insurance policy, you are saving up your own death benefit over your life expectancy. The insurance company is simply responsible for the delta between the amount of the cash value and the death benefit. As you age and your cash value accumulates, the risk is shifted from the insurance company to you. If you are older and have a shorter life expectancy, your premiums are more expensive simply because it takes more money to make up for the shorter planning horizon.
When you consider that the cash value belongs to you, and you'll get it back if you surrender the policy, permanent insurance is really not more expensive than term. They are buying term and investing the difference... under the hood of the policy.
@Peter York this is exactly the strategy I use to invest in real estate and other investment opportunities. I have a whole life permanent insurance policy. I have become my own banker with this vehicle and take loans against it to invest in real estate deals as well as other investments.
The advice I would give you though is to make sure you work with an infinite banking practitioner because it is extremely important that the policy is structured to suit your needs. Not all life insurance policies or life insurance salesman are creayed equal. Do your homework before jumping in so you understand fully what you are jumping in to, how to use your new “be your own banker” system, and the discipline it will take. Study Mr Nelson Nash’s work become your own banker, read as many books on the subject as you can.....many are free. Search be your own, infinite banking system, cashflow banking system, what would the Rockefeller’s do, the banking effect. For me it has been a game changer
The policies designed by infinite banking practitioners are not funded to the maximum. They are certainly "over funded" policies, but they are not funded to the maximum limit. Their gimmick is convincing you to put in more premium later in the form of "interest you are paying yourself". There is absolutely nothing stopping you from simply putting that premium in up front and having even more cash value to borrow against right from the get-go.
I design overfunded policies for real estate investors every day. Every person I talk to want to know: "will I be better off putting $X into a life insurance policy and leveraging the cash value to invest in "Y", or simply taking $X and investing directly in "Y".
Because you are putting your money to work in two places at once, you WILL earn a slightly higher rate of return. If every dollar you put into a policy gives you 85 cents of cash value, but you can earn 3% more on that 85-cents, you will most assuredly catch up to and surpass simply investing in "Y". Its simple compounding growth math.
But if you have a crappy policy design, and you only have 65-cents of cash value for every premium dollar, you can see that it will take a very long time for that additional 3% improvement in investment returns to pay back what you lost in fees let alone catch up to and surpass the returns you would have received by simply investing in "Y".
If you want to use your policy's cash value for leveraging into real estate, you need a properly designed policy that is funded to the legal limit.
@Peter York, what is the purpose you are trying to meet with this investment into a whole life policy? Also, what other investment vehicles is your advisor combining this with?
The biggest benefit of whole life insurance is that it pays the best commissions of any investment product (by a wide margin). I'm a former investment advisor who was licensed to sell life insurance-- the best salespeople I've ever met were whole life salespeople. Even the best boiler room brokers I've met weren't that good.
If the purpose is retirement after 59.5, I would compare the whole life policy to a Roth IRA making 8% with the same monthly investment.
The best forms of insurance for a single 21 year old with no dependents are:
1. Long term disability insurance (if you can get it through your employer at a reasonable price)
2. A reliable paid for car
3. No consumer debt (student loans, car payments, credit card balances, payday loans, etc..)
4. Short term disability insurance (an emergency fund of 3-6 months of expenses in cash)
Your financial advisor won't sell you any of these.
The only folks who push or like whole life/crappy annuities are salesman .