Term Life Insurances-equity Index Life Insurance?
Posted July 24, 2009 – 4:36 am in: term life insuranceIs Equity Index Life insurance a good investment VS Term life insurance and put the remaining balance into an Index fund like with Vanguard.
Tags: Index, Insurance, Insurancesequity, Life, Term
5 Comments
Its always a bad investment when you put it inside a life insurance policy. Mutual funds has annual operating expenses. Life insurance has its own operating expenses as well such as policy fees, account fees, commissions, and so on. Combine these 2 expenses together, your actual returns on your investment will always be lower than what is stated in the mutual fund’s annual statement. For example, the mutual fund may state a 12% return, but since it is inside a life insurance policy, you will get 5-8% on your money.
Besides getting returns that are lower than what is stated, if you die someday, all that investments in the life insurance policy will be kept by the insurance company. Your beneficiary will get at least the minimum face amount. I say minimum because the face amount will include a portion of any gains in your investments. If there is a loss on your investment, there is a guarantee minimum death benefit of what you originally paid for.
So 3 big cons of Equity Index Life Insurance:
1) Its very expensive compare to term insurance
2) High annual expenses that eats away the returns.
3) Investments kept by insurance company upon your death.
If you want to invest and also have life insurance at the same time, keep them completely separate. You can achieve this goal only by buying term insurance since it has no savings plan (cash value) attached to it.
Life insurance is a horrible place to invest money. You can do 10 to 100 times better if you simply purchase term life insurance for the amount of coverage you need, and invest the difference.
The typical insurance salesman will push the equity/cash value plans as great investments, but its not because they truly care about your financial goals, its because they get a bigger commission for selling those policies. The reason they get more commission is simple, because the company makes more profit off you.
The most common argument in defense of horrible cash value policies is that the average person doesn’t actually invest the difference. I think this argument is bull. Even if the average person blows the money on themselves, at least they got something for their money instead of just handing it over to the stockholders of an insurance company as a thank you gift for ripping them off. Plus, YOU always have the opportunity to be the exception to the norm, and be the guy who actually lives on a budget and a financial plan, and actually gets the advantages from having extra income available for investments.
Let’s take a better look at that last answer. Truth be told term insurance policies usually pay a higher commission rate. Insurance companies make more money off of term policies because only about 2% ever pay a death benefit. That’s why they advertise term policies so much.
As for buy term and invest the difference, let’s say you did it successfully for the last 10 years. How is that looking now? It doesn’t work for a lot more reasons than just discipline. Discipline is just the biggest reason. Watch out for variable policies because of the risks I just mentioned.
Finally he commented about stock holders. He was right on there I would recommend using a top rated mutual insurance company for your insurance that way the policyowners are the shareholders of the company.
Now for your questions, there is no straight forward answer because it depends on the policy. The thing with equity indexed policies is that they are very confusing and have a lot of nuances. It can definitely work better than the index fund with the right policy. The extra benefits are less market risk, disability benefit, tax free growth, withdrawals and death benefit and it also may provide some creditor protection as well as possibly collateral in the right situation.
If you are young and healthy, the simple answer is: buy term and invest the difference. The real question is how disciplined you are to 1. invest the difference. 2. keep the investment going (not freak out during market downturns and not spend the money for thirty years), 3. not need to take a loan during the entire time. 4. not get disabled and lose the money and the insurance.
What is theoretically a better buy may in the long run not be a better deal. Suggestion: Buy a permanent policy, supplement with term, and also make an investment. That hedges early death, disability (with a disability waiver rider on the permanent life), and living too long (investment and permanent life).
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Hope that helps, post back if need be- regards- Richard Man U
You must decide for yourself which makes more sense to you. Here’s a scenario:
Male age 30:
30 year Term Insurance – $100,000 Face amount, Prem. $28.00 monthly
At age 60 – Prem. $267.00
61 – $294.75
62 – $326.33
63 – $362.58
64 – $403.75
65 – $449.41
66 – $498.75
67- $552.58 (you get the picture)
Index Universal Life minimum percentage paid 3.1%, maximum 14.0%;
Premium $68.08 monthly.
Age 65 Cash Value: $102,538 – Death Benefit: $202,538
70 – CV: $153,910 and upwards – DB: $253,910 and upwards
Premium: $68.08.
Tax-free withdrawal
401K – $1,200 annually @ 8.5% average
Age 65 – $250,897.58
35% Tax bracket ($87,814.15)
Remaining $163,083.43
If you don’t live, the heirs pay inheritance taxes on the remaining balance which could be about 45%, maybe more, depending on circumstances.
I recommend staying away from Variable Universal Life. Index Universal Life is safe without the risk of losing your money. You only participate in the gains and not losses. Your heirs pay no taxes on the death benefit.
I suggest doing your due diligence before making a decision. Calculate how much money you want to invest and consider the amount of taxes you will have to pay. A sound financial portfolio includes permanent insurance along with outside investments such as a 401K.
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