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Old 2nd November 2007, 07:35 AM   #1
CLOCK
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Default Life Insurance Question

I was thinking about life insurance the other day (for that matter any insurance really). Aren't you just betting that something bad is going to happen? Wouldn't it be better and more optimistic to put the money you would pay towards insurance into a savings account?

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Old 2nd November 2007, 10:14 AM   #2
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Maybe. My understanding is that when people or companies handle things along the scenario you describe it is called "self insurance". I think it is common for some large businesses to self insure themselves. For example, I once worked for a large US company (one of the top 10 employers in the whole country) and they were self insured. While I have heard this for large corporations, my understanding was their wealth/size was a factor ... while I'm not so sure the same would apply for an individual. I think it would depend largely on the individual's personal financial situation and if they could afford the risks of self insuring. If so, perhaps a worthwhile consideration.

Another option with life insurance is 'return of premium' policies.

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Old 29th November 2007, 10:40 PM   #3
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While the death benefit certainly isn't to be underestimated as it can can help the surviving spouse remain in their house, pay for their children's college education, and help maintain lifestyles, etc., etc.

The living benefits of permanent life insurance should never be underestimated.

Where else can you have money grow on a tax deferred basis with the ability to withdraw or borrow the money completely tax-FREE? And, there are no penalties for withdrawing money before 59 1/2 as there are with qualified retirement plans.

I have showed many of my clients how to use cash value life insurance as supplemental retirement income; how to fund college educations (with the same benefits and more flexibility than 529 plans - and no adverse affect on obtaining financial aid), and so much more.

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Old 2nd December 2007, 10:44 AM   #4
Corey Bryant
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Caledonian Life might be one option as well. They helped me out last year in attempting to get life insurance (unfortunately with my health diagnosis, no one will accept me). But they were fantastic in trying to understand my needs.

Talk to a few agents - let them know what you want / expect. My roommate looked into it as well and term life was not beneficial to him so he got another plan - which also allowed him to claim part of it on his Federal Income tax returns.

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Old 2nd December 2007, 08:42 PM   #5
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Depending upon your age and your state of residence, there are also guaranteed issue life insurance policies that might be available for you.

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Old 13th March 2008, 05:11 PM   #6
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I really like term insurance. I think (especially if one can get cheap term from a union or professional society or association) that cheap term combined with something like a 401(k) or SEP really beat the cash value insurance option.

The problem with the insurance option is that the expenses can just gnaw away at your investment returns...

It's often sort of impractical to find cheap term insurance, though, because the agents don't make any money selling it. (And they obviously need to make a living just like the rest of us.)

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Old 13th March 2008, 05:24 PM   #7
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Term insurance definitely has it's place... but, it's not for every situation.

For example, 98% of all term policies lapse. Either:

a) because after a certain period of time the premiums increase (drastically),

b) It's not renewable after a certain age (in New York it's 80)... and since life expectancy is past 80 for the most part, when you really need the insurance it's not there for you, and

c) People stop paying the premiums because they don't see the value in it.

The major difference between a 401(k) and a SEP plan (or a Traditional IRA) is that every dollar that you withdraw from those qualified retirement plans are taxed as ordinary income, and for the most part you can't access the money before you turn 59 1/2 without paying a 10% IRS penalty.

However, the cash value in a life insurance policy grows on a tax deferred basis (just like a qualified retirement plan). HOWEVER, in most cases, you can access the cash value TAX-FREE. This makes fabulous income streams to supplement retirement income. Especially if you think like I do, taxes will only go up in the future, not down. So, if you can withdraw money tax-FREE you're keeping more of the gains.

Also, there's no age restriction for accessing the cash value in a life insurance policy. You can withdraw the money or borrow it (at extremely favorable rates) at any time.

Sincerely,

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Old 19th March 2008, 04:43 PM   #8
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If you put the premium, say $500, into a savings account and die that year your heirs get $500 plus 4% interest. If you'd used that money to outchase a $500,000 term life policy they get 1,000 times more money.

It's not a bet, it's protecting your loved ones. You're insuring your lost income so your family can pay the bill while figuring out how they're going to pay the bills in the distant future.

You're basically giving them 5 years income (that's the rule of thumb when deciding how much to buy) so your wife or husband can get trained and go to work.

One more thing, buy term life not Whole life or universal life. The rate or return on your money on those policies is VERY low.

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Old 19th March 2008, 07:06 PM   #9
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Quote:
Originally Posted by dschachter View Post
If you put the premium, say $500, into a savings account and die that year your heirs get $500 plus 4% interest. If you'd used that money to outchase a $500,000 term life policy they get 1,000 times more money.

It's not a bet, it's protecting your loved ones. You're insuring your lost income so your family can pay the bill while figuring out how they're going to pay the bills in the distant future.

You're basically giving them 5 years income (that's the rule of thumb when deciding how much to buy) so your wife or husband can get trained and go to work.

One more thing, buy term life not Whole life or universal life. The rate or return on your money on those policies is VERY low.
Great points about protecting yourself and your family BEFORE you start to save and accumulate wealth through investments (or put the money in a bank).

The rule of thumb by the way is 10 times their income. But, to be honest I've never used that rule of thumb. Every case is different. One has to look at their entire situation to determine the amount of income that needs to be replaced.... For example if a family has young children then college funding has to be considered. If they don't then you don't need to protect that asset.

As for the term vs. permanent argument, again a blanket statement that the return on your money is VERY low isn't correct. With a variable universal life insurance policy, your cash value is invested in mutual funds (or a fixed rate of return). How you allocate is a function of your risk tolerance, goals, and objectives. The more risk you can accept, they greater return you're expecting.

Those that choose a whole life policy like the idea of a steady return (just take a look at how the markets have performed the last few months to understand why some people might favor that), and also the idea that after a certain number of years the policy is "paid up" and the policyholder doesn't have to pay premiums for the rest of their life.


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Old 15th April 2008, 03:53 AM   #10
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Wow what a bunch of sharks. I would never buy from anyone who suggests 5 times income or 10 times income. Its outrageous.
Term life should be fine, and you don't need to buy from an agent. There are plenty of online brokers who will sell you a term policy.
As long as you are investing alongside the term policy then you willnot have a problem when you reach 80, as you will have sufficient funds to take care of your funeral, family etc.
I can't comment on the tax efficiency side as I am non US resident, but it seems as though there are some good points made here.

I have worked in insurance for the last 8 years and am a Director with a big firm. I have 3 times my salary from work, 200K that I took out as additional cover (term) when I got married and also have a permanent health plan so that I am covered if I can't work (living benefits). Anything above that will have to come out our savings, property and other investments.

Hope this helps to clarify from someone on the inside.

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