Pension and Life insurance question

[emer95]

I'm a teacher and I'm looking forward to a pension when I retire. I want to get a life insurance policy for myself, and I'm torn between a short term policy, or a whole life policy that will allow me to maximize my pension. My husband and I are torn about what to do. He has a good term policy through work.

Does everyone who has a pension worry about maximizing it, or is this something our life insurance salesman is trying to talk us into? The whole policy is about $300/month for 25 years and it's for a $500,000 policy that builds cash value. I am seriously hesitant about sinking that kind of money into this.

We are clueless about this kind of thing and any advice would be appreciated.

ETA: I'm 35 and I'll be working for another 25 years, if that helps in the equation at all. Thanks!

 

[Christine]

Admittedly, I am very stupid about this sort of thing, but I have always read from most financial advisors that term insurance is the way to go. If you want to "invest" money, do it on your own and not through a life insurance company. If you are healthy, term insurance is pretty cheap each month and gives you the protection that you need. Generally, I am told that the closer you are to retirement, the less life insurance you need. Life insurance is not there to make anyone wealthy upon your death, it is usually to do things like provide an income for when a working person dies and has a family to continue to support.

 

[Tanzanite]

I got talked in to a policy like this when i could no longer pay the premiums cashed it in got way less than i put in these policys are a way to make the agent wealthy Suzs Orman talks about them on her web site .Ilost big time.

 

[bumbershoot]

Dave Ramsey also is negative about whole life policies. He wants people go get to a place where they "self-insure", so while you are building wealth you get term life.

He says that, for instance (making up numbers from what you mentioned and what he has said), you pay 300 a month to the whole life, but most of that money doesn't go towards anything that you'll get...it's all fees and such. Whereas if you paid $50 towards term life and invested the other 250, you'd be MUCH better off at the point where the term life policy ends.

 

[emer95]

Tanzanite, I'm so sorry.

Christine, thanks for the help. That's what I've been thinking too, but my agent said I'm different than the general population because of the pension. We left and told him we needed to think about it.

 

[emer95]

Dave Ramsey also is negative about whole life policies. He wants people go get to a place where they "self-insure", so while you are building wealth you get term life.

He says that, for instance (making up numbers from what you mentioned and what he has said), you pay 300 a month to the whole life, but most of that money doesn't go towards anything that you'll get...it's all fees and such. Whereas if you paid $50 towards term life and invested the other 250, you'd be MUCH better off at the point where the term life policy ends.

Thanks, bumbershoot. That makes a lot of sense.

 

[mjkacmom]

According to DH, a CFP for 20 years, whole life policies have to be the worst investment out there - get term.

 

[PatsMom]

Permanent insurance is not the best for most people. Especially young people because you can buy a lot of term insurance for not much money when you are young and healthy.

However, the pension maximization approach your agent is speaking of is one of the exceptions to the permanent life insurance rule. Although you are young to be starting the approach, it should be though of in the few years before retirement. Basically the approach is to find out what the difference in your pension payment is with and without a survivor benefit. If the pension reduces by $200 per month to provide a survivor benefit, the question becomes could you buy enough permanent life insurance to replace that benefit for your spouse and not pay more than the $200 per month. In effect the insurance is providing the survivor benefit. Calculating the present value of the pension income stream is a fairly simple process. That is how much life insurance you need.

The advantages of this approach include if the spouse dies first, you can keep the policy to leave something to your kids or you can just drop it and have higher income every month. You could also drop the face value of the insurance periodically (and lower the premiums) and effectively give yourself a raise. That is because as the years pass and the number of years you need to replace income decrease, the present value of the income stream also decreases.

Dave Ramsey and Suze Orman give very general advice to the masses. Sometimes their advice is just plain wrong to financial professionals and sometimes it is taken out of context. A great example is saying that term life is always the answer - it might be the right choice 90% of the time but some people have a real need for permanent insurance.

The drawback to waiting until you are nearer to retirement to look for a permanent policy to replace your pension for your spouse would be that something could happen that would make you uninsurable. Then you are forced into taking the survivor option - not the end of the world but might not be ideal.

Instead of whole life, you might want to look into low load universal life. A policy that is designed to not build up significant cash value. For most people, life insurance should not be considered an investment. To buy a policy for any future gains accumulated in the policy usually is not a sound tactic.

 

[golfgal]

Ok, I will come from the other side of whole life and I am a HUGE fan of whole life insurance FROM THE RIGHT COMPANY. There are some really crappy whole life policies out there.

We have some very, very nice policies and have had them for about 20 years. They have some very nice cash values. We have them as our "bond" or fixed income portion of our asset allocations because they are getting about 6.5+% return vs the 1.2% of bonds right now.

We will have some estate planning issues down the road and our whole life policies will help with that. If you have term and that runs out at 65 chances are you won't be able to GET life insurance to maximize a pension or use for estate taxes so you will be stuck giving the government about 48% of what you planned to leave to your kids.

Also, if you do the math, at least with our plans, term insurance is WAY more expensive in the long run then whole life insurance. We could have the dividends pay for all of our premiums now and never have to pay again. If we look what the term we have cost us compared to what the whole costs us minus the cash value the term is more then DOUBLE the cost over the past 20 years.

Insurance companies LOVE for people to "buy term and invest the difference" because term life policies almost never pay out and they are pure profit for the company (less then 1% pay out).

Our whole life policies are very much like a Roth IRA so if you can't contribute to a Roth, like we can't, then the whole life is a GREAT option.

They aren't our only investment but they are the ONLY thing that went up in value (by a lot) in 2008 so they are a good, stable portion of our portfolio .