Whole/Universal Life Insurance?

RosieC18 · January 2016

Hey Nesties! It's been a while (I've been traveling for work) but we're facing a retirement puzzle and I'm hoping some of you have similar experiences/knowledge to share. A "financial advisor" we have access to through H's work has been selling us hard on buying universal life insurance as an investment vehicle. I've been pretty skeptical because a) she works on commission and b) I've heard that those are rarely a good idea. However, we are in the market for life insurance that isn't tied to our employers, and this seems tempting.

H would be the policy-holder. He's 30 and quite healthy (no smoking, little drinking). We just took on a mortgage and hope to have children in the next couple years. If we're going to buy something permanent, now seems like the time. We're also trying to ramp up our retirement contributions, and are at a bit of a loss for how. As of this paycheck we're maxing out both H's 401k and my TSP (similar to a 401k, for federal gov't employees). Our income is too high to get a roth IRA and this is being pitched to us as an alternative for tax-free earnings.

Essentially, we'd pay a flexible monthly premium (probably $1000/month now, then $500/month in 5 years). This would give us a face value of around $700k after we vest in 7 years. However, we'd also get a guaranteed 4% interest rate on our contributions (in reality it hasn't dipped below 6% in over 20 years). We could then "borrow" from the account in retirement, essentially lowering the death benefit. Those earnings aren't taxed and whatever is left when we die would go to our beneficiaries tax-free. You do pay a small amount of interest on those loans, but again that just comes out of the eventual payout. That 4% is before fees, but the projections they showed us based on the average return has us getting paid out at around $1.2million. We've priced out a similar program offered by USAA, but the returns are lower (only 1% guaranteed) and we'd have less flexibility with our premium. We like that flexibility because there's a good chance our incomes will continue to increase for the next 3-5 years then fall to around $150k/year and stay there.

Everything I've read says that these are usually not a good idea... except for higher income folks who are maxing out their traditional retirement contributions and don't qualify for roth investments. Obviously the idea of a guaranteed minimum return is really tempting, we need life insurance anyway, and I do want to be more diversified in terms of our tax burden. On the other hand, I really don't want to get scammed or fall prey to a high pressure sales pitch. If we don't buy one of these products we will probably both just get term insurance, which I know is what's usually considered the best way to go.

I know this is seriously a FWP, and I'm really grateful to be in a position to worry about this, but I also feel in over my head and I don't know where to go for objective advice.

Help?

kmurphy2131 · January 2016

I'm not sure that I completely understand how the program works, so my opinion could be null and void if I misunderstood. If it works how I think it does - I wouldn't do it. I feel like life insurance is something you need even more earlier in life, then as time goes on (mortgage is paid down a bit, kids are older, savings is larger etc) you don't need it as much. It seems to me like with this program, you aren't purchasing $1Million in life insurance, you have to invest money into it to grow to that point. If thats the case, if something were to happen to one of you sooner, you wouldn't have that large life insurance policy.

simplyelise · January 2016

That whole life policy is horrible. Have you talked about doing a backdoor Roth? You can still fund a Roth for each of you each year by opening a traditional IRA and then converting to a Roth IRA. There is no MAGI limit on who can do conversions. That gets you another 11k a year towards retirement and in a tax-advantaged account. You'd be spending 12k a year for the whole life.

If you want to go beyond that, I'd look at more traditional investing in mutual funds or bonds if you'd like to have a slower but more predictable growth option. Or consider real estate investment.

hoffse · January 2016

simplyelise said:

That whole life policy is horrible. Have you talked about doing a backdoor Roth? You can still fund a Roth for each of you each year by opening a traditional IRA and then converting to a Roth IRA. There is no MAGI limit on who can do conversions. That gets you another 11k a year towards retirement and in a tax-advantaged account. You'd be spending 12k a year for the whole life.

If you want to go beyond that, I'd look at more traditional investing in mutual funds or bonds if you'd like to have a slower but more predictable growth option. Or consider real estate investment.

This. H and I had to do a backdoor Roth in 2015, and we'll have to do one every year going forward as long as our incomes stay where they are.

There is an income cap on a direct Roth IRA contribution, but there are no income caps on regular IRA contributions or conversions to Roth IRAs. So instead of one step, you just have two steps to get to the same result. Tax planners figured this one out before the ink was dry on the legislation, and the IRS has blessed it as a permitted transaction. There's actually a form you fill out each year to declare it on your tax return, and it's common enough that it appears on TurboTax and HR Block's software. You simply don't take the deduction for the initial IRA contribution, since Roths have to be funded with after-tax money.

Re: whole life - I have used whole life policies for estate planning purposes, but these have always been for extremely high net worth individuals whose estates are going to exceed the exemption - we're talking tens of millions of dollars - and we have to get as much money out of their estates as we can. Whole life policies are useful for some people, but not for most of us.

I'll also say that I have personally encountered agents trying to sell these policies advocate for certain tax treatments that either haven't been vetted by the IRS or really toe the line. Every now and then I have to research a "new" life insurance/estate planning structure, and it almost always gives me heartburn when I start looking at it. That's not to say that whole life can't be used for good estate/retirement planning - it certainly can - I'm just saying that sometimes people get carried away with all the creative uses for it, and that can bite you in the butt later on. Take any tax advice she is giving you with a grain of salt.

Until you have significant assets, I would just stick with term life. If you guys are diligent about saving, you will probably be self-insured in your 50s-60s anyway, and will no longer need life insurance. Term life is really really cheap if you buy it in your 20's/early 30's.

**None of this is tax/legal advice.

hoffse · January 2016

2 other thoughts:

1) On Fidelity at least, going through the conversion from a traditional IRA to a Roth IRA is really easy. It's literally just a couple clicks of your mouse to make it happen. I called in to have them help me the first time I did it, and once they showed me where it was, I was actually a little embarrassed that I had called. It was pretty obvious.

2) I'll second the idea that if you are maxing out all of your tax-advantaged accounts, you might just want to look at standard taxable investments. If you guys have access to a 401(k), IRA, etc. and start maxing them out in your 20's, you really ought to be millionaires well before you can dip into them anyway.

If you want to retire early (or at least want the option), you'll need some other investment vehicle to fill in the gap until you turn 59 1/2. H and I have started doing some very minor investing in regular taxable accounts for this very reason. We are really just getting started with that, but we hope to save enough in there to enable us to at least partially retire in our early 50's.

CuriousKiddosMama · January 2016

Get term life. That is a really, really expensive way to 'shelter' your money. We had an advisor tell us to do that once, after really looking into the program he was trying to sell us, it was just reall expensive. We have 1.25 million in term life insurance on dh, and that costs us about $2000 a year. His health (on a major diet) is actually getting better where he may get a better rate when we look into changing his policy.

What was this came down to for us is, essentially you are overpaying for life insurance by 10k every year. What makes this even worse, is that for the first several years, a lot of that extra $ disappears and goes towards fees, commissions, etc. If you have a decent financial advisor you should be able to find a fund making more than 6% on average, and the money left over from the fund all survived you and goes to heirs or spouse (as opposed to well, you took a loan out, which was neat because we don't tax you on it- duh, it's a loan, and then we diminish your death benefits by the loan).

Hope that makes sense. We decided we can invest 10k a year much better than an insurance company can.

MommyLiberty5013 · January 2016

I would do term life as others posted. And, get a policy on BOTH of you. Both policies should cover major debts, as well as funeral expenses, and any future major living expenses or education expenses for your future kids.

Why on both of you?

Because let's say one of you dies and the other has to go work full time and you need to pay for child care.

DH has $1.6M and I have $330k. We have 3 kids under age 6. I do not work outside the home.

hoffse · January 2016

MommyLiberty makes a really good point about how much you need. H and I currently have a $500K policy on each of us. Our works provide another $250K as a benefit, though like you we didn't want to rely on that.

We don't have kids and we both work. I'm probably going to increase mine to $1M before I turn 30 this fall, because we're going to TTC at the end of the year, and the prices go up at age 30.

We aren't looking at life insurance as a way to completely replace income since we both work and both plan to continue working. Our salaries are within $10K of each other. We currently insure enough to cover burial expenses, pay off all debts (including mortgage), and provide some good savings so that the survivor could take a leave of absence from work for a few months and grieve.

We will increase coverage for kids to fund college and defray some childcare expenses, but probably not enough to never have to work again.

If one of us stayed at home, the working parent would need enough life insurance to replace their income completely.

RosieC18 · January 2016

Thanks for the straight talk everyone. I think we're going to look at IRAs and term insurance instead.

brij2006 · January 2016

I sell life insurance, and will say that unviersal/whole life policies give insurance agents and most financial advisers a bad reputation. Oh, and the commission for the first year is usually 75%. So yeah, everyone wants to sell those policies. They're cash cows.

One thing I will add to the others, if it's an investment strategy that seems too good to be true, or is too complex that you don't fully understand it, then don't do it.

You are in a good financial position. Utilize that to your best ability. Get with a different financial adviser. One that doesn't even offer whole life insurance or annuities. Keep your investments simple. The best way to retire with money and dignity, is only partially a numbers game, it's 90% the fact that you put money aside and let it grow.

Max out the 401k and TSP like you currently are, do a back door Roth IRA, and then pile up cash in mutual funds.

Not sure how things are for you, but I would also take that time and extra money to pay off your mortgage (if you have one). Or if you rent and want to eventually buy, then pile up cash to maybe buy a house in cash instead of taking out a mortgage.

For insurance, term is your best option, and at some point you will become self-insured. Not having life insurance doesn't mean you aren't protecting your family, it means that you have done well with your wealth building tools and you do not need it.

You guys are doing a great job. Stick around and ask more questions when you aren't sure on something or even want some other thoughts.

Whole/Universal Life Insurance?

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