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It's a tool like any other and it fits specific needs. There are many kinds of policies with riders that can do different things. The term / whole debate depends on your objectives and your overall financial picture. There's no one size fits all. A proper term policy is a great tool to have in your toolbox, but it shouldn't be the only one.
Term policies will pay out if you die within the term. They don't build value and aren't a substitute for a retirement plan. They're bricks, not houses. If I were buying a term, I'd consider a few riders (return of premium--pays you back if you don't die within the term) and accelerated benefit (pays you if you have a chronic condition, but don't die.) That's just to name a few.
On whole life policies, they're designed to supplement retirement. If you die before it's fully funded, it will fund a portion of your retirement. If you live, you have funded a portion of your retirement. Again, it's a brick, not a house. It has some options, such as flex premiums (pay up during fat months and pay less during slim months), and accelerated benefits. You can also borrow against the policy if you run into a jam along the way.
If I were buying a term, I'd consider a few riders (return of premium--pays you back if you don't die within the term) and accelerated benefit (pays you if you have a chronic condition, but don't die.) That's just to name a few.
The bolded part probably warrants a whole separate thread, but I wanted to at least discuss it a little.
Return on Premium (ROP) riders seem to take the "invest the difference" debate to yet another level. For the most part, it would seem to me they're worth taking if you're very risk averse, or have poor discipline. After all, it's kind of a forced savings plan, but in the insurance market. It starts to blend in that 'whole life' mentality into a 'term' scenario.
Another way to think about these riders (and really any insurance in general) is that the insurance company has done their calculations, and always (try to) offer you a deal with negative expected value. They have to, otherwise they would make no money and go out of business. Thus, you really should only be taking insurance deals where you can't easily absorb the blow otherwise. In this case, they think the opportunity cost of your riders over 30 years is more than your total premium payments.
But speaking of absorbing blows: covering your future earnings over the next 10/20/30 years? Sure, that makes a lot of sense, even if it's -EV. The ROP rider (in which the amounts are probably almost 2 orders of magnitude lower than the death benefit)? Doesn't make the cut for me, though I can see how it's attractive to some people. Especially w/ that whole "forced savings" piece I mentioned earlier.
Another way to think about these riders (and really any insurance in general) is that the insurance company has done their calculations, and always (try to) offer you a deal with negative expected value. They have to, otherwise they would make no money and go out of business. Thus, you really should only be taking insurance deals where you can't easily absorb the blow otherwise. In this case, they think the opportunity cost of your riders over 30 years is more than your total premium payments.
But speaking of absorbing blows: covering your future earnings over the next 10/20/30 years? Sure, that makes a lot of sense, even if it's -EV. The ROP rider (in which the amounts are probably almost 2 orders of magnitude lower than the death benefit)? Doesn't make the cut for me, though I can see how it's attractive to some people. Especially w/ that whole "forced savings" piece I mentioned earlier.
Another way of putting it - insurance of any type (life, health, property & casualty) is first and foremost a risk mitigation tool. You are paying the insurance company to take a certain amount of risk away from you. The insurance company stays in business by figuring out the actual cost of doing so and having you pay that amount plus some extra because hey, they have to make a living as well.
An individual looking to purchase insurance has to figure out just what risk they want to foist off on the company, and then how much they're willing to pay to do so.
Short version is that I agree with your point and am just putting out a slightly different way of viewing the issue.
the base of every investment pyramid should be mitigating dameges to those investments that you feel can happen and would be a blow to your wealth if it happened.
taking a percentage of those gains on those assets and protecting them through insurance is a good idea.
whether it is long term care insurance , fire insurance ,life insurance ,liability insurance or annuities which are income insurance they all can play important rolls and should not be confused with things you do with those assets which is grow money.
it rarely makes sense to try to self insure. why?
because being that is money you may need on a moments notice that is money that has to be kept safe and secure. the amount of money i would have to tie up to self insure our long term care is huge. i can invest that money more aggressively ,take 1% of the average gains and buy a policy to insure us properly.
when folks say they will self insure it really means they have no plan and no coverage. had you had that self insuring money in market investments in 2008-2009 and needed it 1/2 would have been gone.
it sounds good to say i will self insure but it usually ends up a disaster waiting to happen and there is no plan for any coverage in place..
I imagine a 20 year term with a $1M benefit is around$50/month...
yep...I just ran a quote over @ Metlife on a 35 year old female in excellent health...$55/month.
Hers is 30 year. Plus, I don't recall if she got the optimal rate since her father passed of a heartattack at 35. I get my car, boat, homeowners etc through AllState and they couldn't come close on our term life pricing.
So, does someone gainfully employed , fifty years old with no debt, adult children and 5 million in assets "safely" invested need life insurance?
Same scenario 60 years old?
If so, how much?
No. We have our life insurance set to expire (1Mil) at 50 and then the other (1mil) at 65. At 50 our kids will be through college and at 65 our retirement savings would be enough to see us through the rest of our lives anyway.
So, does someone gainfully employed , fifty years old with no debt, adult children and 5 million in assets "safely" invested need life insurance?
Same scenario 60 years old?
If so, how much?
I would say "Yes".
This is a case where you'd want PERMANENT insurance as part of your comprehensive estate plan to cover estate taxes...because I'd assume that assets are going to go up...not down.
How much?
You need to contact your estate planner to get an idea. A couple hundred grand in life insurance premium in order to save a couple million in taxes is money well spent, IMO.
This is a case where you'd want PERMANENT insurance as part of your comprehensive estate plan to cover estate taxes...because I'd assume that assets are going to go up...not down.
How much?
You need to contact your estate planner to get an idea. A couple hundred grand in life insurance premium in order to save a couple million in taxes is money well spent, IMO.
Actually, these days that's a tough call, because at 5M net worth they'd have zero federal estate tax liability (assuming no prior lifetime gifts). Also, the lifetime fed exemption of 5.34 million is adjusted up every year for inflation.
That said, if they have state estate tax exposure then insurance to cover that might be a good idea. Similarly if most of their net worth is in a small business that is illiquid and/or likely to appreciate considerably in value, then life insurance would be more strongly indicated. And so on, but if someone is in that situation they need to consult professionals rather than read stuff on the intermawebz that could be totally wrong.
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