Add me to the list of people who say that the OP’s daughter should change her financial advisor.
Life insurance should never be viewed as an investment. You should not be investing money in any life insurance scheme, ever. There are better ways of doing whatever it is you want to do with the life insurance scheme that’s being sold to you. The life insurance company has to make money some way; the only good reason for them to earn that money is that they’re taking on risk that you can’t. Thus, life insurance should only be obtained to support dependents in case of premature death until those dependents can start earning their own money. That’s its primary purpose, and that goal that cannot be replaced with any other investment that you actively seek out.
I suppose that if you have no assets but you have dependents who may have funeral expenses, you could invest in funeral coverage for your dependents so you can afford to bury them. However, it would be better to simply not have any dependents until you have assets available to bury them to avoid giving the life insurance company money for a risk that’s easily self-insurable; thus, this is really only necessary if they are thrust on you without your input somehow.
There’s just something with life insurance (and annuities) that makes people stop thinking rationally.
This is not quite true. There are circumstances where whole life (known by many many names) insurance makes sense for tax or legal reasons, but mostly for high income folks.
My mother purchased whole life policies for my brother and me when we were babies. I ended up getting a wad of cash when I turned 18, that I put into a savings account, and drew from periodically when I was in college and needed money for something-- sometimes pocket money, sometimes a few hundred dollars for a field trip, and once, for the road trip that took me to the school where I spent my junior year as a visiting student.
I still had money left upon graduation.
Also, as a child, I got a very small dividend check once a year that my parents let me have, to do with what I wanted-- it would be about $10 each year.
The policy still exists, and is still building interest-- not a huge amount-- every year, but I have never touched it, and it goes into the capital if I don’t, and I’m going to be 57 soon, so it can be used as collateral for a loan, or rolled into an annuity. The last time I checked (when I was 50), if I purchased an annuity with it, it would pay out enough to cover my utilities plus a little. My plan is to roll it into an annuity when I am 70, assuming I live that long.
My son is my beneficiary, and will get a very good payout from it.
I bought him a policy from the same organization when he was born.
Had I died as a child, it would have paid out enough for my parents to have covered my funeral expenses, plus a little. Maybe enough to take time off work for bereavement. Not sure that was the intent, but that’s how in would have worked.
So yeah-- whole life is a good thing.
It’s not that whole life is a bad thing , exactly. It’s more that most ( or all) of the time, putting those premiums in a bank for the same amount of time is a better investment. Maybe I wouldn’t put that money in the bank or I would end up taking it out and spending on a vacation every year so that none of it stayed in the bank for 57 years - but that doesn’t mean that whole life is a better investment. It means I need a plan that forces me to save.
This is untrue for most whole life policies. A dividend paying whole life policy will most certainly earn more than a savings account would, and probably would outpace CDs as well.
But putting those premiums into an index fund will likely out earn those premiums by a large margin.
Please enumerate the circumstances where whole life insurance makes sense, and explain what the benefits of it are and why there are no other investments that have those benefits. I.e. Cite?
Are you claiming that there are NO circumstances where whole life policies make sense?
Just Google “whole life special needs” and “whole life estate planning”
I’m not going to go through the math and the laws for you, but this is hardly controversial.
Is whole life being sold to the vast majority of people a bad idea driven by commission seeking salespeople. Absolutely. Most of the people who are buying whole life for the reasons I’m describing are doing it under the guidance of lawyers and fee only planners who are not making bank off it. It’s pretty niche. If you don’t have an estate in the many millions or a special needs adult child or a few other specific circumstances it probably doesn’t apply.
Note that there are STATE estate taxes, not just federal, and the exemptions for those can be lower (but so are the maximum rates).
I’m still scratching my head that she even has one to begin with. How is this financial advisor earning a living taking on such clients? Unless that are getting paid through a 3rd party (eg: if access to a financial advisor is some sort of fringe benefit associated with employment) that’s a bit of a red flag for me.
Whole life insurance is likely the easiest and most convenient tool for generational transfers of wealth, since it bypasses estate taxes and probate, while offering a short term multiplication of that wealth (i.e. if you die early on in the policy’s life), while providing access to that wealth in terms of loans against the cash value during the course of one’s life.
It remains a flexible, powerful financial device that is wholly impractical to 95% of the population.
It was likely as a favor to the OP, and a way of generating referrals. In my time as an advisor, I did plenty of work looking over accounts I never had a chance of having my name on as advisor of record, because it was in the best interest of the client to do so, and because it generates potential business down the line.
Is she contributing the max ($22,500 in 2023) annually to her 401k? If she wants to do more that’s where I’d start.
Did they say why? Until recently I could see the interest rates being too low to pay the premium, but not now. My wife has a whole life policy from about 50 years ago which pays the premium.
Not the best investment - at this point the payout is trivial.
My son-in-laws father had a policy (don’t know if it was term or whole life) which he was going to reduce to save money. He never got around to it, and when he died unexpectedly it really helped his wife out. Their finances were a mess, so the money was a lifesaver. And no pushback from the insurance company.
OK, that’s quite possibly the truth, so I probably overstepped things when I said it was “never” correct as an investment vehicle. After thinking about the counterargument that I had against why it could never possibly be a good idea, there were some holes in it. But the basic argument went like this:
The only possible benefit (at least, in my world of making this argument) to structuring an investment as life insurance is to get the benefit of the fact that the proceeds are not taxable. My main counterpoint to this argument was that securities get a step-up in basis at death, so practically any security could be invested in (so long as its income stream from anything other than selling the security was minimal) and have effectively the same tax benefit.
So there’s also the guaranteed amount that you’ll be able to pull from the policy - the cash surrender value. You can’t guarantee that with a publicly-traded security that doesn’t offer much in dividends. You would likely have to invest in something that did have taxable income attached to it to be order to be able to meet the guaranteed surrender value. If it weren’t for the taxation of that income though, you could use whatever strategy that the insurance company uses to guarantee that cash value. I’m not entirely familiar with the taxation of the insurance industry, so I don’t know if they get special benefits from investing proceeds of policies that back cash surrender values, though I will note that with corporate taxes being only 21% now, that’s lower than a lot of personal marginal rates, though you still would need to factor in the overhead of running the insurance company.
What about the death benefit for premature death? Buy term and invest the difference as above. That’s essentially what the whole life insurance company is doing.
So yes - if you’re in a situation where your marginal tax rate is greater than the sum of the taxation the insurance company pays on its investment earnings (whatever that is) and the overhead rate of running the insurance company, buying one of these contracts can afford you a degree of certainty of a payout both in the future and in the near-term upon premature death. However, that will not be the case for most people, and that’s what I was referring to when I said it never was - because almost it’s certainly the case for the OP, which was the main referent. That I referred to it never being a good strategy was meant more in that context, and I failed to consider niche cases.
However, “Just Google It” is a pretty shitty answer when I asked for a specific circumstance. You couldn’t even provide a link yourself?
Maybe by the time they came back they saw the answer that I gave you, and realized they didn’t need to double the efforts. You’re welcome.
I didn’t say “Just Google It”. I provided you specific areas where this would make sense. The Google was for you to go look at how, if you were so inclined. I’m not your financial advisor or estate attorney. I’m not any financial advisor or attorney.
It’s as if you said “this herb wallwort is a universal supplement, everyone would benefit from taking it” and I said Google “wallwort kidney failure” and “wallwort liver cancer” to indicate that folks with those issues might want to, you know, consult their doctors before taking wallwort. So maybe not quite everyone.
It was surprising that interest maintained it this long. I cashed in several other policies years ago. At the time I didn’t think interest would maintain this one for very long but the rates increased enough to keep it going long enough for me to forget about it.
My dad took out a policy on me in 1962 when I was 9 years old. It was for $2400 and the premiums were a whopping $31.44 each year. At some point I took over paying the premiums (and changing the beneficiary), which I have continued to do. It wasn’t until 2015 that the dividends started paying the premium, which has continued ever since.
BTW, this thread inspired me to do a bit of research. Had I (or Dad) put $31.44 into a savings account each year, that account would have had to average almost 6% interest per year to reach the current amount of the cash value of my policy. Of course, had that money been invested in an index fund and averaged a 9% return each year, that account would be over four times as much.
A post was merged into an existing topic: Sageese77 Troll Posts