Thinking about buying whole life insurance. Confused on how it works.

[SphinxnihpS]

So, Sphinxnihps, what percentage of all Americans do you think would benefit from whole life? (vs. term & investing the difference) 2%? 3%?

I completely agree with you that it's a wise decision for some people, but for the vast majority of people (I think you even mentioned something about not for middle class without dependents), it's a poor choice.

I don't know. I wasn't necessarily advocating it, and I certainly was not advocating it for most people. I was just trying to refute some misconceptions (it is always bad, LI is a scam, etc.) and some factual errors (it works like this, no it doesn't). Most of that had little or nothing to do with the OP.

I can say that 100% of the people who will "enjoy" a taxable estate ($5,000,000 of adjusted net worth per person on death this year, and only $1,000,000 starting in 2012) should probably at least consider it as an option for paying estate taxes. Without some means of paying for this tax in cash, the sale of assets, businesses, and real property will be forced in probate.

Tell me how many people will be worth $1,000,000 when they die, and you'll be close to your answer, at least until they change the law.

Part of the problem is that this is often not known until later in life, and by then the people are old and LI becomes prohibitively expensive even if they are perfectly healthy.

I'd say if you earn 6 figures and are over 35 you should think about it, and by think about I mean get objective advice. You will not get objective advice from anyone who sells it.

You have to remember though, it is NOT an investment even though you get a return, so comparing it to market yields is somewhat apples and oranges, and there is some definite value to the product itself, its special tax treatment, and the fact that it can not be cancelled (unless you don't pay).

 

[SphinxnihpS]

There is an instance where a whole life policy does make some sense. A single premium policy taken out on an infant can have some benefits. Usually a parent will make a one time payment of $3K -$4K for a policy from $30K to $50K. This usually allows for loans to be taken out on the policy to help for schooling and such and might also assure that no matter what the child will be insurable.

For kids I find this works best:

Minimum face amount possible, all excess cash goes to paid up additions, APB option. Single or multiple premium doesn'treally matter.

This means that the policy starts off with a low DB (face amount), as kids have no dependents, it would cover their burial. Excess cash to PUAs because that makes the policy DB grow as the CV accumulates, i.e. don't take the dividends in cash, or use them to reduce premium. Now the policy grows with the child. APB stands for Additional Purchase Benefit. It is a rider that costs a nominal amount of the total premium, but it ensures that at defined intervals the policy face amount can be added to without evidence of insurability (medical exam). This is important!

I have a client who did this for her son and daughter when they were infants. At age 3 the son was diagnosed with diabetes. He will never be insurable again (until they cure diabetes), but because his policy carries the APB rider, they can add $50,000 of face amount to his policy every year for up to 10 total purchases. They have now used them all up, but that kid has a $600,000 PLI policy now, with over $100,000 of cash value, and projected to grow to well over $2,000,000 at his life expectancy. He has used the CSV to borrow from to pay for college, and pays it back. He's like 25 now, but if his parents spent out of pocket more than $30,000 total on his policy I would be very surprised.

These are regular middle-class people.

There is an up and down side to all financial decisions, products, plans, etc.

Edit: I would also only seriously consider Mutual insurance companies as their allegiance is to policyholders not stock holders. This is why I like Guardian, Northwestern Mutual, and Mass Mutual.

I would also not use Universal Life for this purpose.