The cash value portion of whole life insurance does not pay out to beneficiaries when you die. You can access it during your life via tax-free loans, or use it to pay off future premiums - but as an investment, it’s worse than using the money to fly to Vegas and betting it all on black.
No one is suggesting that a bigger payout to your loved ones isn’t useful. We’re simply saying that spending money on such a rider is only slightly more likely to pay out than buying a lottery ticket. “But wouldn’t it be nice to win $500 million?” Of course it would.
I don’t understand this. If I have an $800k cash value on a $1mm death benefit (because I’m old and have been contributing for a long time), the net amount at risk ($200k) is quite small, so my insurance cost will be much smaller, but when I die, the whole $1mm ($800k of cash value plus $200k of amount at risk) goes to my beneficiaries tax free.
Employer provided life insurance sometimes pays double for a death that occurs on the job. Not sure why that’s done but I assume it’s inexpensive for non-dangerous jobs and may enhance the value of the benefit in the minds of employees.
Your premiums remain the same throughout the life of the policy until you use the accumulated cash value to reduce the premium amount.
If instead you just bought a 20 year term policy, invested the excess amount you would have spent on whole life premiums, and then continued those investments once the term policy ended, you would have a significantly larger sum of money to pass on to your beneficiaries.
I’m pretty sure this is all mostly wrong, but if you want to open up a separate thread on permanent insurance, I’ll be happy to be proven wrong.
In a nutshell, though, my understanding is that term life is pure insurance. Permanent insurance is like a term life policy with a tax-free investment attached to it. The amount you’ll pay for insurance coverage will be pretty close to the probability of you dying over the covered period multiplied by the net amount at risk.
As a former life insurance salesman, I can speak pretty definitively on this. I have never in my life seen a whole life policy that didn’t have level premiums throughout the life of the policy, unless you used the accumulated cash to pay down premiums later in life (you could also use the cash to pay for a paid-up policy, which will be a small shadow of the original amount). A 30 year old is going to pay about ~$5000 every year for a $500,000 WL policy for the rest of his life. A 30 year old will pay ~$225 every year for 20 years for a 20-year term policy for $500,000.
Okay? So you still end up with a $1m policy that pays out $1m at death, regardless of how much cash has accumulated.
If you’re actively using the cash side as an investment, my question is - why? The best policies aren’t earning anywhere near what a market indexed mutual fund is earning, AND you’re at risk by keeping that investment in one specific company. And if you suddenly die before taking it out to treat the grandkids to a beach vacation, it’s all gone.
Munch is correct. He gives excellent investing advice on here.
It’s not tax free. You don’t pay taxes on the amount of the premiums that you take out because those are paid with after-tax dollars, i.e. you have already paid taxes on them. Any earnings you take out however, are only tax deferred until you take them out. But the kicker is that, in addition to all the fees you are paying throughout the life of the policy as well as the meager investment returns, those earnings are taxed as regular income, rather than the lower long term capital gains rates you would benefit from in a taxable brokerage account. Bottom line, don’t buy permanent life insurance unless you understand EXACTLY what you are getting into.
If you take earning out as a loan, they’re tax free. There’s no requirement to pay them back, and it doesn’t reduce the payout of the policy. It was a nice loophole for single premium MECs back when savings account were earning a fraction of a percent and Mass Mutual was offering close to 4% ROI.
I’ve seen a lot of whole life policies. I’ve never seen one that will pay for 100% of the policy on the entire balance of the cash value, let alone one where the premium basis has been taken out.
When I was growing up, I went to school with a girl who lived a couple of houses away. Her father died in a motorcycle accident, but there was also a heart attack before, during or immediately after the accident and, as I remember, determining the order of events was relevant to whether the double indemnity clause paid out. (This is all vague and I only know about it because my father helped her mother work out the issues, or he might just have put her in touch with an attorney.)