RP from ML- life insurance?

[Bernadine]

We had our second meeting with our financial advisor last night and discussed life insurance. He recommended a mix of term and life, which I think is good. But he recommended $1mil in coverage for each of us. Which just seems excessive. We gross about $150k/year. I owe $300,000 on my house, which is in my name only, and he owes about $70,000 on his house, which is in his name only. We could both afford our mortgages separately if something happened to one of us, although it would be a stretch.

I have no idea what is a good amount to have. I have a policy through work which pays out about a year's worth of my salary.

Also, what is the general thinking on whole life insurance?  The way he explained it is that it would back up our retirement savings, and that we could use it for income.

[ijack]

I'd find a new FA that didn't try to sell me whole life insurance.
Do you have kids or plan to have any?

[rosiedozie]

I wouldn't factor in your work life insurance to the equation - there are a million scenarios where you could lose that benefit.

I'm no help on the whole life insurance, we have term only. From what I understand it's going for high earners to get some tax benefits, which isn't us

[Bernadine]

FI has a son, we plan to have one.

So really, whole life insurance is not worth it? I have no idea.

[ijack]

do you gross $150k a year total, or each?
I would do enough to cover paying off both houses and enough for 2 kids college funds.

[Bernadine]

Oct 2, 2013 10:01:10 GMT -5 ijack said:

do you gross $150k a year total, or each?
I would do enough to cover paying off both houses and enough for 2 kids college funds.

Total.

[gt7301b]

Have you maxed out all retirement vehicles and still have access cash each month? If so, I might start looking into whole life. The price difference between the two is shocking, you'd be much better off buying term and investing more in your retirement accounts.

I'd look at $750,000 - $1,000,000 for each of you.

[ijack]

so, $370k for houses, $200k for college?

[h]

I would absolutely pass on whole life. It is generally a bad idea unless you are fairly wealthy and using it as a part if a comprehensive tax and estate planning strategy.

We have fairly large term policies ($1.5M on each of us privately, plus an additional $1M on H and $250k on me provided by H's employer for next to nothing). Our thinking is that in the event if either of our deaths we would want the surviving spouse to be able to take some time off and then work at a lower paying, more family friendly job and/or hire a bunch of help. We have three young kids and plan to pay for college for all of them, and staying in our house while saving for college would not be possible on one reduced income. Plus, if something were to happen to both if us, we would want to leave enough money to cover all costs for our chosen guardians to buy a larger house and raise the boys while still leaving money for college and hopefully giving each of he kids a little nest egg. It would be horrible enough for them to lose both parents. I would really want them to at least be able to start off their adult lives in good financial shape.

And we are still pretty young and healthy and therefore cheap to insure. We will reevaluate when we (and the kids) are older. Right now I sleep better knowing we are generously insured.

[Deleted]

Whole life is rarely a good idea...brokers/FA make a TON of commission on them, so anyone who pushed them would make me question their other advice.

[Bernadine]

Oct 2, 2013 10:19:33 GMT -5 ijack said:

so, $370k for houses, $200k for college?

Yup, that sounds about right.

And if it makes a difference- my income is $100,000, FI is at $50,000.  So I assume I need a higher policy.

[dr.girlfriend]

Go with simple term, and DEFINITELY shop around. I thought State Farm would be a good deal, because they were best for us for home and car insurance, but I got a policy with Prudential for half of what State was quoting even with a multi-policy discount. I used selectquote.com to price-shop, I highly recommend them.

[Deleted]

Oct 2, 2013 9:46:08 GMT -5 Bernadine said:

We had our second meeting with our financial advisor last night and discussed life insurance. He recommended a mix of term and life, which I think is good. But he recommended $1mil in coverage for each of us. Which just seems excessive. We gross about $150k/year. I owe $300,000 on my house, which is in my name only, and he owes about $70,000 on his house, which is in his name only. We could both afford our mortgages separately if something happened to one of us, although it would be a stretch.

I have no idea what is a good amount to have. I have a policy through work which pays out about a year's worth of my salary.

Also, what is the general thinking on whole life insurance?  The way he explained it is that it would back up our retirement savings, and that we could use it for income.

Well the reason agents recommend whole life is b/c they receive a higher commission. I have a friend who sells LI and he recommends a mix of whole and term so the whole life insurance dividends can pay the premium for the term insurance. I disagree and strictly deal with term insurance, though if you are maxing all tax-advantaged vehicles (401k, IRA, HSA where applicable) and you are not saving 15+% of your income in those vehicles, it makes sense.

I would get 10x each of your salaries, if that is $750k each, then fine. If it is $1MM for you and $500k for him, fine. You need to not only think about your current expenses, liabilities, etc., but also what you may do in the future and how those obligations will change your overall financial picture.

You have to factor in the cost of childcare/after care, household help, extended LOA from your job if one of you were to pass away. 

Realize that the earning potential of a deceased spouse is $0, and thus their salary can no longer be used for saving or retirement.

[Deleted]

Agree with the advice above.

check out Suze Orman's website to learn more about why whole life is a ripoff for most of us.

Also...ask your FI how much commission he makes on the term insurance, versus how much he makes on the whole life insurance.

[Deleted]

In your situation, I would want about $750K in life insurance on each of you. A million only if you want to get fancy. I'd want to be able to pay off the houses, have a college fund for the kids and have enough to cover time off work/extra help around the house/daycare, etc. We each have a $500 K whole life policy in addition to our term policies and use them for tax advantaged savings/retirement planning. At your income level, I believe I would stick with term life.

[Deleted]

Oct 2, 2013 12:17:13 GMT -5 @publius said:

Can someone explain the tax advantage of whole life? We're in the process of buying life insurance as well and I'm of the opinion that it would be better to buy term and invest the difference but H is leaning towards a combination.

You pay no current federal income tax on potential cash value growth. As the cash value accumulates, it is not subject to current taxation.
You pay no federal income tax if you borrow cash value from the policy through loans. As a general rule, loans are treated as debts, not taxable distributions, if structured properly. This can give you access to cash value on a tax-advantaged basis. After a sizable amount of cash value has built up, it can be borrowed against to help supplement retirement income as your need for life insurance decreases and in many cases, you’ll not income tax on the gain. (Keep in mind that these loans are charged interest and reduce the death benefit and cash value; if a policy lapses or is surrendered with an outstanding loan, a portion may be taxable; and there are certain polices that are subject to different tax laws.)
Your beneficiaries generally pay no federal income tax on death benefits. Therefore, a $500,000 policy delivers $500,000 in benefits with no deductions and no withholding required.
Avoid estate taxes on the death benefits. You can avoid potential estate taxes on life insurance death benefits by transferring ownership of the policy to another person or trust more than three years before your death. Your tax advisor or attorney can explain the particulars for your circumstances.

www.newyorklife.com/products/tax-advantages-permanent-life-insurance

www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp

[Deleted]

You can't borrow against term policies. They don't build cash value like whole life policies do.

[Bernadine]

Thanks all, this was very helpful.

[Deleted]

Oct 2, 2013 12:53:10 GMT -5 @publius said:

Oct 2, 2013 12:41:34 GMT -5 @mrsspunky said:

You can't borrow against term policies. They don't build cash value like whole life policies do.

But if your invested the difference you'd have the money in a more liquid form and wouldn't need to take out the loan. At least that's where my mind is in all of this.

Which is why it best suited for those with incomes such that they max out all tax-advantaged options and are still not saving enough for retirement. There's no tax advantage to having investments in a taxable account, except that capital gains are less than ordinary income rates. I 100% completely agree with you, and that's why I don't have any whole life besides a small policy my parents purchased when I was younger, that now pays for itself.

[hocus2]

BTW -- if you have a step son is your FI required to carry life insurance which names him as the beneficiary? I believe this is sometimes stipulated in a divorce. If that is the case you really need two policies (or at least 2 beneficiaries).

Overall whole life insurance doesn't not make sense for the average person. If you long term earning potential if very high that might be something to consider. We only have term insurance.