Real price of WL insurance?

May 10, 2008

  1. Carol
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    Carol Expert

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    I am not an agent. I am someone who is going to buy life insurance next week, and looking for a few answers. So I figured, where should I look for my answers if not here, among life insurance professionals.


    Here is my question... hope to find an answer here.

    I am a divorced mother with 2 teen kids. I am applying for a life insurance. I have been thinking to get a term one. To secure my kid's colleges and future mortgage (I'm planning... well, better say, dreaming to buy a small condo in a year or two).

    Now, the agent put together a table for me, showing net premiums, cumulative net premiums, cash value and death benefit.

    Very first thing I notice, is that, say, I pay 3,500/year for 40 years. I reach age 80, for example. My net premium for all this time is 3,500/year, my cash value about 357,000 (current), and face value is 503,000 (current). If something happens, insurance company pays FACE value only, right? So my cash value is... gone. Which means as far as I understand, that in reality in the end I pay for WL not only my premiums, but also the cash value. Premium plus cash value, that the insurance company takes in the end - THAT is a real price of my WL. Or , in other words, the real value my beneficiaries would get is 503 - 357 = 146. Answer: 146,000.
    Am I missing anything?
     
    Carol, May 10, 2008
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  2. senior-advisor-indiana
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    senior-advisor-indiana Guru

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    Your beneficiaries would recieve the whole face amount,503k. The insurance company keeps the cash value but it is not deducted from the death benefit.
     
  3. NewHealthStrategies
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    NewHealthStrategies Super Genius

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    Buy level term insurance and be disciplined enough to invest the savings of premium you'll get in something like a mutual fund, stock, bonds, a '68 Corvette, etc.... you'll be way ahead of the game.

    NO nationally recognized financial advisor would advise you to buy Whole Life unless you are in need of major estate planning and have already maxed out 401(k)'s or other retirement plan options..... nor would I.
     
  4. Carol
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    Ok, then… If my cash value at that time is 357,00, and initial face value of my coverage was 250,000, than why my beneficiaries don’t get 357+250 = 607,000?
     
    Carol, May 10, 2008
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  5. SportsNut
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    Nope, you are missing very little. Unfortunately most people that are buying this type of product aren't thinking this purchase through as much as you have. Congrats on doing the exercise.

    Take it one step further and factor in that in 40 yrs, or whenever that age 80 might come around, and the actual death benefit is 503K with a net diff of 146K over the c/v, that is 146K in 40 yr out dollars... so if one were to advance that with conventional wisdom and factor in usualy inflation (or devaluation of the currency to REAL spendable dollars) this is comarable to maybe 25K in today's dollars. Not that much.

    On another note, when one is dreaming today of owning a condo, this means that cash flow is not abundent. The purchase a life insurance policy that would command such a high percentage of you spendable dollars is NOT a wise choice... Nor is it good advice for one to recommend such a vehicle for you to purchase either. You should immediately seek another advisor who is much more in tune with ones needs, as opposed to his own (visa-vie the commission that he will earn on the sale of that WL policy).

    As has been mentioned, but term and invest the difference in a fund that will put you into that condo sooner, which will likely be a better investment than c/v of a life ins policy. The 500K of term ins could be acquired for 20% of the cost of the WL policy, on a 20 yr basis. In 20 yrs, if you do the right things with your finances in the mean time, your insurance need will be different than it is today. You could renew the term for another 10 yr period, or other plan as needed.

    Just the way that I view things here...
     
  6. NewHealthStrategies
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    NewHealthStrategies Super Genius

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    Carol, you have to look at this from two separate angles. One is the DEATH BENEFIT of $500,000 which, for this argument, say costs $1 per 1,000 today.... but will cost $15 per 1,000 in 20 years.... so it's an INCREASING COST TO INSURE you for that $500k.

    The company will charge you, not $1 per 1,000 today.... but instead will charge you let's say $12 per 1,000 today and put some of that EXTRA $$ into the CASH VALUE and let it build..... over time, as you contribute WAY more than the actual cost of the coverage, your cash value will build and if you die, the company will honor its DEATH BENEFIT pledge of $500,000, but does NOT add the cash value... this is why Universal Life and it's offshoots were so popular in the early 80's.

    You're seeing all the components correctly though... just do the math.... in 10 years if you had $10,000 of cash value, the company is really only "insuring" you for $490,000... but the cost of that insurance is constantly going up as you age.... thus the logic behind charging you higher premiums in the early years.......

    At some point, usually 95, the cash value equals the Death Benefit (if you were to live that long.... and the company will pay you the $500,000.

    Does this make sense or I have I served to utterly confuse the issue even further?
     
  7. Carol
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    Thanks for your replies. You are very-very helpful, I'm getting more facts at this point and it helps me to decide...
     
    Carol, May 10, 2008
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  8. Carol
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    I'm far from having anything to which word "major" would apply.
    I have 2 kids - college student and HS student. I did not maxed out my 401k. I don't own a home yet. Still saving money to put at least 10% down. But as I said, I'm alone, single mother. I am looking for a little bit of safety for myself and for kids.

    My agent tries to get me WL, and I see some advantages of it - loans, for example, - but I have a feeling that WL is really good when you play with big numbers.

    His argument was, with term I lose all the money I pay for the premiums. With WL, he said, my insurance can help me to pay off the mortgage. Imagine, he says, I buy a home and take 30-y mortgage say for 300,000. When I'm 65 I still have to pay another 10 years. So at this point I can take a loan or surrender my policy and pay off the mortgage.


    I did my own quick research. Yes, I'm losing the money I pay for term, but there seems to be a way to minimize my losses. I'm thinking about getting a term that would be synchronized with my mortgage, if such exists. 300,000 coverage in the beginning, then slowly going down as my mortgage is becoming less and less. And it would keep my premium on lower level, because the coverage would be lees and less. Do you think this idea would work?
     
    Carol, May 10, 2008
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  9. Carol
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    I checked the cash value in year 2 of the WL policy. In the print out I got from my agent, in year 2 I have $530 in cash value (guaranteed column), or $594 (current). Basically, for the first two years I don't accumulate any cash value. Year 3 = $3540.
     
    Carol, May 11, 2008
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  10. NewHealthStrategies
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    NewHealthStrategies Super Genius

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    Carol:

    As you can see... there is little upside to buying a WL policy Virtually all of the professionals on this site would agree with that statement, except for those that make a living selling WL policies.

    There is no recognized financial planner that would encourage you to buy WL. They virtually ALL say buy term, and invest the difference.

    There is nothing left to arm you with other than simple math and common sense. Don't be misled by general assumptions and nonsense such as policy loans, etc... the bottom line is that you will have more money to spend as you like if you simply get some term insurance and systematically invest the money into whatever vehicle you're comfortable.

    In other words, buy insurance and buy investments... but don't buy them in the instrument! The math doesn't work, never has and never will!

    As you can see in the very illustration the agent gave you, you spend $3,500 a year times 3 years which is $10,500 which if you cashed in the policy would give you a return of a whopping $3,540. This means the insurance cost you around $7,000 a year. As you know, a 20 year level term policy would have cost you around $600 a year or $1,200 total....
    So you've spent $5,800 more in two years or about $240 a month MORE than you should have spent.

    Heck, you could buy a new car for that $240 a month and have it be worth more than $3,500 in 3 years....... and we ALL know what a horrible investment a new car is!!!! Don't we?!

    Best of luck to you.......
     
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