My single daughter (age 24) and still living at home is being subtly talked into buying life insurance by her financial advisor. (is her getting kickbacks?) She has some health issues that names like State Farm won’t insure her. After an exam, he found her a plan starting at $50/month* for Term Life insurance. I think the term is 5 years. He’s trying to convince her that, down the road, she can convert to a whole life policy and earn money…even further down the road. (*I believe the rate is fixed for the 5 years.)
I’m having second thoughts if it makes sense to pay to make money when she could be banking that money, instead. She has no beneficiaries. The only gain is the promise of earning tax-free money** from the promise of a Whole Life policy in the long run. And, what will Whole Life cost her? (**he claims it is tax-free.)
Consider: When I was just starting out, I had a mature co-worker with a family who never put a penny into life insurance. He put his money in the stock market. (Granted, he understood the market.) But, the point is a little voice tells me there are better investments than paying into life insurance, month after month.
Maybe the SDopers can present some compelling reasons why or why not to buy this policy to start with? Will she just be buying into a sinkhole?
Term life insurance is inexpensive. Excellent option for a young married couple for example. Total waste of time for your single childless daughter. They tell you that you can convert to whole life down the road and starting with a term policy somehow makes that easier but they are lying. The requirements for obtaining a whole life policy won’t change because of the term policy.
That’s because term life insurance isn’t an investment at all, and while whole life is an investment, it isn’t a good investment for everyone. It’s unlikely that whole life is the right investment for a young single person with no dependents who is just starting out in life.
She can invest in an IRA or a 401k to get a tax advantageous investment opportunity, and not pay for life insurance that will be paid out to her parents.
Why does your 24 year old daughter with no dependents and no housing costs need a financial advisor? You don’t need an advisor to tell her to pump every spare dollar she has into an IRA/401k and buy a range of index funds to keep the fees low.
Well, she is doing the 401(K) bit, but she wants to do more. I guess she feels stagnated by her situation and wants to feel she is getting somewhere on one front even if the housing / rental market keeps her stuck at home.
I confess I am an absolute dummy about finances having grown up poor and afraid to take risks. I simply cannot advise her. In my opinion, it’s a rich man’s game; yet, I must concede that investing is a necessary evil. Only rather late in the game did we get a financial advisor…beyond our garden variety 401(K) that has an annual contribution limit. She uses the same person, and I trust him…except I am skeptical on this life insurance matter.
FYI: This reply is for Cheesesteak. I hate how the Board handles replies these days. It used to be a no-brainer.
An unmarried 24 yo with no children does not need life insurance. It’s to protect the ones you leave behind if you die. Who would be her beneficiary and why would they need supporting after she dies?
Edit to add: I made an assumption she does not have children. If she does, just skip this post.
You mean to say that converting to Whole Life is not guaranteed, and she may need another medical exam at which time she may be denied, possibly? (The advisor pitches this in the best light, of course, like conversion is guaranteed.)
Conversion is guaranteed - but the premiums for a $50/mo term policy will be like $250/mo for a whole life policy. And $50/mo may be cheap, or very expensive, depending on how much insurance she’s getting. Is it a $1m policy, or just $100k?
If she has considerable health issues that make obtaining life insurance difficult, then her better option is likely to self-insure (i.e. invest). Whole life insurance can sometimes be a good investment alternative for the conservative portion of a portfolio - but at higher premium levels (due to her health) it becomes less of a deal.
Edit: you also asked about compensation. Yes - an advisor gets paid for selling life insurance. But for a policy that small, it won’t be much. I’d tell your daughter to ask him about coming up with an alternative fixed income (I.e. lower investment risk) investment for the purpose of estate planning (which she doesn’t really need at this moment, but certainly won’t hurt down the road).
It happened that way to me and several other people I know. I took out a 20 year term policy when we bought our first house. I was told then that I wouldn’t need a medical exam to convert to whole life. 10 years later with two kids added to the pack I looked into whole life and was told again no medical exam. Guess what actually happened. I didn’t have a problem passing a medical exam but I know other people who found the same situation and at least one who was outright rejected.
Think about it, they don’t require a medical exam for term life because the terms and rates are based on general actuarial data. Whole life costs more and pays out more, can’t be terminated as long as you keep paying. Why would medical conditions no longer matter for a whole life policy 5, 10, or 20 years down the road? Add to that more language in the contracts that would void them if known medical conditions were not revealed. Maybe when I first took out that term policy they meant it, but since then something called AIDS arrived and cost the life insurance business big time (meaning a slight dip in profitability).
ETA: As @Munch noted, the guarantee means nothing without an established rate. They could say “Sure, we’ll insure you without a medical exam, but it will cost you $1000 a month for a $25,000 policy”.
ETAETA: I still have one of the whole life policies I took out 35 years ago. I had forgotten about it until informed I’d have to start paying for it again. For at least 20 years the premiums were paid from the interest.
Whole life doesn’t pay out more unless you increase the policy. Conversions should be automatic up to the coverage amount of the term policy. Increasing the coverage amount requires underwriting.
There are term policies that don’t guarantee conversion, which should be a part of the contract language.
Edit: automatic conversions to whole traditionally convert to group rates - which are the worst underwriting level (male smoker, “basic” health tier). Taking an exam can really only help you if they offer that option.
Sometimes even the young die, and leaving something behind to those who will bury them can really alleviate the financial burden associated with funerary costs or even settling an estate (meager as it might be). They probably don’t need a $500,000 policy, but $40-50,000 wouldn’t be unreasonable depending on how much the premiums are. You can make anyone your beneficiary on most life insurance plans, so there’s no reason you couldn’t name a parent or a sibling. I’m not a financial guy, so I don’t really look at life insurance from the point of view of it being an investment. It’s peace of mind.
I believe the maximum contribution to the 401(k) plan is $22,500. If she’s actually contributing the maximum, congratulations because few people do that. In addition, she may be able to contribute to a Roth IRA in addition to the 401(k), In other words, she can do more without jumping to life insurance. And I think many of these life insurance products have high fees or high commissions, while investments via ETFs or index funds can be very cheap.
It’s important to keep in mind that financial advisors are often also sales people. They are selling products that make them money. When they recommend you invest in a fund, they may get a percentage up front, during the investment, and/or when you withdrawal. It can be the same with the recommendation for life insurance. It’s likely that the advisor is getting compensated somehow by selling life insurance policies. If your advisor is “free”, then likely they are taking cuts of your investments. The alternative is to pay for their services like you would a lawyer. They often still have good advice and may be a good option for someone who is uncomfortable with investing, but they may also be biased in their recommendations towards what makes them money as well. It would be like going to the Toyota dealership to get advise on what is the best car for you. They’re going to only recommend Toyotas even though some other car may actually be the best for your needs.
I don’t think that life insurance is a good investment for a single, 24-year-old who is worried about saving up for a house. It would be better to put that money into her own savings. If she were to die suddenly, that savings would go to her heirs and could act as life insurance money. Otherwise, she can use the money for her own needs as she sees fit.
Sure. Poor wording on my part. The pay out is a completely new contract with whole life based on the payment terms. Not really related to the term policy payout at all unless you choose that amount.
I’d rather invest that money into mutual funds and list parents as beneficiary as the OP suggested. Unless the health issues are so extreme, when you are 24 that money would probably be better put into an investment than life insurance unless you have dependents. This makes me question this financial advisor.
Edit to add, @filmore said it better than me and I didn’t see it before I posted:
Our money guy left Merrill Lynch, when they were required to push BoA products.
Not only should your daughter NOT be buying this life insurance, but she should be looking for a different advisor as well. Well - clarification. If having this term insurance gives her peace of mind worth $50 a month, good for her. But as far as an investment, she’d have to work somewhat to find a worse one.
Dewey_Finn, I believe I misspoke. I guess I was assuming the max contribution for a 401(K) is as low as an IRA - which, as I recall, isn’t much, relatively speaking. This does shed more light on the matter. Perhaps she should just “KISS” (keep it simple, stupid), keep upping her contribution to her 401(K), and avoid all this “need” for a financial advisor.
Definitely should fill up the 401k before looking to invest anywhere else. I agree with others that a single person with no dependents doesn’t need term life, and $50/month seems really, really high for a young person, especially for just a 5 year term. That’s crazy high.
Whole life can make sense for someone looking for additional tax-advantaged investing, after the 401k and IRAs are all maxed out, but that just seems unlikely for a 24 year old.
When I started having kids, I took out term life that lasted until I thought I would be done working, basically insuring my future income. Now that I’m older, I’ve added a variable life policy, because I have been maxing out some other options. When I was 24, I definitely wasn’t looking at any of this, and that advisor is doing your daughter a disservice.
There are distinct differences in types of financial advisors. A large percentage are sales people, who also provide skilled planning and analysis.
The type to look for are “fee only” (you pay a set amount, instead of them taking a percentage of your portfolio), and “fiduciary”. The term means that they are legally obligated to put your interests first. If they are not designated as such, then they are putting their own interests first (selling you something that they get a commission on.) Jinx, you may like the person who is your advisor (I’m sure they are a great person), and your daughter may also, but it’s sounds to me like they are not a fiduciary. Proceed accordingly with this knowledge.
Icarus, yeah, he claims he’s a fiduciary, but it seems they all do (from our own asking around). Maybe it’s just BS formality. Perhaps they throw the term around loosely.