Life Insurance along with 401k / ROTH?

[J.Apple902]

Hey awesome people,

I've been through a series of meetings with my financial adviser and he is proposing something for my financial future which would be a new concept in my eyes, which is life insurance. Brief summary:

Salary: $55k, been working for 14 months (age 25)
Debt: $60k (student loans)
EF: $5k+
401k: 6% salary to 401k, 5% match, began recently
ROTH: still accruing starter liquidity, launch goal is fiscal 2013
Other debt: none, auto owned, renter

My financial adviser is suggesting I begin a $100k life insurance policy. The plan would be set up in this fashion http://i.imgur.com/lpxcJbf.jpg. The funds would be placed into a mutual fund with average annual return of 8.04% which is managed by the privately run insurance company(competitive with returns of many 401k/ROTH mutual funds for an investor of my age).

Comments? I have another meeting on Wednesday. Thanks!

[disneysteve]

Comments? I have another meeting on Wednesday. Thanks!

My comment is to cancel the meeting and find a new adviser, or better yet, do it yourself from now on. Your "adviser" isn't looking out for your best interests. He is looking out for his own. He is a salesman and nothing more.

[J.Apple902]

thank you Steve. I respect your opinion and have seen you around. Why do you think he is only in it for himself? Maybe expand a little? Thank you!

[sblatner]

It is normally recommended that you buy term life insurance. At 25, if you are healthy, you can get a lot of insurance for very little per year. As a 47 year old female, I just got a $500,000 policy for $320 per year. You could probably get a $1M policy for that much.

Suze Orman say no whole life insurance ever.

At the age of 25, you might not even need life insurance yet. Depends on if you are married and have kids or own a house. You might want to check in to see if you have life insurance at work.

Not sure what the length of terms are but you might see if you can get a 35 or 40 year term plan.

I think the only one who wins with the type of life insurance your broker is advising you to buy is the broker.

[kork13]

Bottom line: Life insurance is NOT an investment.

The problem with your "advisor" is that he's suggesting you put in a bunch of money each month for a life insurance plan with a peanuts payout (if you were to die), which will slowly accrue a "cash value" that will NEVER add up to (let alone exceed) the sum total of your payments. The "advisor" is suggesting this to you because in the process of selling you this life insurance policy, he will earn a very healthy commission off of whatever your purchase. And let's be clear, you're not "investing" anything, you are "purchasing" a product.

Do you need life insurance right now? That should be his first question. If you don't have anyone dependent on your income (children, spouse, parent, etc.), the answer is very possibly "No." If that is the case, stop right there. Why purchase life insurance if you don't need it?

Second, in almost every circumstance, you will earn much more from investing your money in a regular mutual fund in your investment account (even if you include the cost of buying some TERM life insurance for yourself, which is exceptionally inexpensive) as compared to "investing" via a life insurance policy. For your reference, a $100k 20-yr term life insurance policy on a healthy 25y/o would likely cost less than $150/yr, versus the >$1250/yr cost you're looking at. Take the extra $1100/mo, invest it in a normal mutual fund at Vanguard or wherever, and you'll have about $15,900 in 10 years (vs. $10,400 with the insurance), and in 20 years it'll be about $50,300 (vs. $32,000 with the insurance. (This assumes the same 8% annual return from the mutual fund of your choice)

Going the insurance route has much higher costs, it removes all control and flexibility from your investment, and oh by the way... has he talked to you yet about "surrender fees"? They're outrageous. You have to pay the insurance company a couple thousand dollars in order to get access to your own "invested" money. If you want to invest, do it yourself. Don't pay a middle-man insurance salesman (because that's really all your "adviser" is to you at this point.)

For your own sake, please take our advice: Ditch the salesman, and if you really do need one, find a better (fee-based, non-commission) adviser. This guy is NOT in it to help you with planning your future... He's only interested in lining his pockets.

[MonkeyMama]

Agreed with the others.

I'd be kind of stuck on if you even need life insurance in the first place. What is the point of the life insurance? Who would benefit? (Generally life insurance benefits your spouse and/or children). So let's back up and start from there.

[disneysteve]

thank you Steve. I respect your opinion and have seen you around. Why do you think he is only in it for himself? Maybe expand a little? Thank you!

I agree with everything kork posted.

[witchkizzle]

I'm going to agree with everyone else here. Get rid of that advisor.

You really don't need an advisor at all for your purposes, but if you want life insurance, then get it. I bought mine a little bit before I actually "needed" it, but it's worked out fine so far. Your 100k whole life policy would be about 2 times the cost of my 1 million dollar term policy that will be good until I'm 52. (I'm 26 right now)

I promise you will do better to invest the difference on your own. You can get a higher payout upon death and have money left over to invest on your own.

So, again, get rid of that investor. Opening up a Vanguard account and investing in low cost indexed mutual funds will payoff for you, more than likely.

[J.Apple902]

And to top it off guys, I work for a great employer who already provides a $100k life insurance policy. He knows this, so this guy really is just trying to make commission huh?

[elessar78]

...The plan would be set up in this fashion http://i.imgur.com/lpxcJbf.jpg. The funds would be placed into a mutual fund with average annual return of 8.04% which is managed by the privately run insurance company(competitive with returns of many 401k/ROTH mutual funds for an investor of my age).

A basic SP500 Index Mutual fund, should give you approximately the same return and you can buy that yourself. Past performance is no guarantee of future success, but since the 1950s the SP500 returns have been quoted anywhere from 8.25% to 11.1%.

When I was your age, one of my friends got into a "money management" gig and tried to sell me life insurance as well. He didn't stick with it long, don't know if he realized what he was doing or that he couldn't get clients. He pitched it to me that it was a good investment, I found it really weird because we met and he listened to my goals and came back with the life insurance pitch.

[disneysteve]

And to top it off guys, I work for a great employer who already provides a $100k life insurance policy.

Assuming you actually need insurance, disregard what your employer provides. It's a nice little perk but get yourself term coverage for the full amount you need and let the work policy just be a little bonus. That work policy doesn't stay with you if you change jobs. Also, as a job benefit, it could be withdrawn at any time if the employer decides he needs to cut costs. Besides, if you actually need insurance, 100K probably isn't nearly enough. The standard rule of thumb is 8-10 times your income so assuming you earn more than 10K/year, you are very underinsured (if you need coverage).

[witchkizzle]

And to top it off guys, I work for a great employer who already provides a $100k life insurance policy. He knows this, so this guy really is just trying to make commission huh?

In a word, yes.

Not all financial advisors are salesmen like this though, and sometimes whole life policies ARE the right choice. Usually, though, the people who can "get away with" having a whole life policy are usually very high net worth individuals who are looking to use it as an estate planning tool. (and even this i'm fuzzy on, so it may not be right)

55k a year mid-twenty year olds, though? I would have a hard time with that one.

There is a very good thread on this forum that deals with whole life policies with great contributions by all the veteran forum members.

This is the link to that thread.

http://www.savingadvice.com/forums/personal-finance/64417-indexed-universal-life-insurance.html

I highly suggest checking it out.

[Robert742]

If you plan on having a spouse and kids, you should look into term insurance now, in case you become uninsurable in the future when you need it.

If it's important to you to have a life insurance death benefit passed on to someone whenever you die, look into a good participating whole life insurance policy, or guaranteed universal life policy.

If you are making this purchase for long term investment growth, use the money instead to get that Roth IRA going -- you have until 4/15/13 to contribute for 2012, how much you can contribute depends on what your income for 2012 might have been.

Even many knowledgeable insurance agents recommending permanent insurance for cash value purposes, do not recommend variable universal life insurance, like your "advisor" is pitching you, due to high fees and other issues.

I'm sure the "advisor" is not seeing you as a sucker and trying only to make a commission. The "advisor" is pitching you as they were trained, and probably thinks it's what you need. The problem is the "advisor" is trained to sell products, not help you make wise financial decisions. You were probably told a lot about a "tax free" return you can borrow when needed, that makes it a smart financial move, but the reality always falls short of the sales presentation.

It's not hard to learn the basics of investing, and adopting an index approach meeting your goals, and beating the long term returns of the investments recommended by most financial advisors.

[Snydley]

Hi-
I wound up on these boards just a few weeks ago because I became suspicious of my financial advisor. We had already purchased two whole life policies for DH and I and he was suggesting we purchase one for my 5 year old.

I read Suze Orman, Dave Ramsey, and spent hours scouring the internet trying to find someone who thought this type of investment was a good idea. No luck.

I fired my advisor and we cancelled our policies. We're out ~16K.

DH and I wanted a financial planner because we didn't want to have to think about investing. After this experience I'm eager to learn and I will never hire an advisor again.

Go on your own and no whole life policy!

-Jen

[parafly]

Here is my advice to you.

- Ditch the financial adviser.
- Forget about life insurance for the time being.
- Increase your retirement contributions to 15% gross income through 401K and Roth IRA.
- Build your emergency fund to 3-6 months of expenses.
- Pay down your student loans as quickly as possible.

All of these goals can be achieved on your own without wasting money on a financial adviser. Good luck.