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Thread: LIFE INSURANCE.

  1. #1
    God/dess onlythebest's Avatar
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    Default LIFE INSURANCE.

    I was once told that if you purchase a life insurance policy and let it mature like equity on a house,you can borrow against it just like home equity.True or false,and please be specific if it is true.Thanks.

    Melonie or Monty or any other takers well knowledged on this subject?
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    Banned Melonie's Avatar
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    Default Re:LIFE INSURANCE.

    What you say is true of certain types of policies. Whole Life policies are basically an annuity that you buy using monthly payments. Cash value builds up because your monthly payment is actually more than the true cost of insurance, and you can borrow against that cash value.

    Universal Life policies are basically a sector fund investment portfolio in which you buy more shares every month. Like Whole Life, you pay in more than the actual insurance coverage costs, and cash value hopefully builds up. I say hopefully because unlike Whole Life policies which increase in value at a fixed rate, Universal Life policies increase in value depending on the changing values of the sector funds you choose (tech stocks, blue chip stocks, bonds, money market) and can increase a lot or actually lose value depending on how astute you are in switching sectors at appropriate times. Like a Whole Life policy, you can borrow against the cash value of a Universal Life policy.

    Also, any increases in value of Whole Life or Universal Life policies are tax free. This causes some people who need to purchase life insurance coverage anyhow to make use of a Whole Life policy instead of a money market investment, or make use of a Universal Life policy instead of stock and bond investments, in order to avoid having to pay taxes on the dividends/interest/capital gains.

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    God/dess onlythebest's Avatar
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    Default Re:LIFE INSURANCE.

    From what you stated,a Whole Life policy seems to be the better choice of the two.Wow,thanks Melonie!

    One more thing,can you compound the interest or no?Is there any interest at all,and what's the percentage?Thanks again.

    I think I may be getting this confused with IRA's.
    One of woman's cardinal rule: Body parts can be fake,everything else has to be real.

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  4. #4
    Sitri
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    Default Re:LIFE INSURANCE.

    whoa there horsey.

    It takes years to build up the equity in a whole life policy. Universal life policies were created to take advantage of the tax preferences of whole life but separating out the investment element from the cost of insurance.

    You have to look at the cost indexes of the policy to determine if it is a good deal. You can find these factors in the public library.

    I have always purchased one year renewable term life insurance from Metropolitan. They had the lowest cost factors. Invest your money somewhere else for a better return.

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    God/dess Lena's Avatar
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    Default Re:LIFE INSURANCE.

    Noooo... it's an evil conspiracy!!

    Okay, I could be wrong, but this is my understanding of Whole Life. You pay, say $220/month. 150 of that is for the insurance, and 70 goes into the cash value part that's basically like a savings account, except that the insurance company owns it. After a few years say you've got like five thousand in the cash value part and you decide to borrow it (yep, you're borrowing your own money!), then you have to pay it back with interest. You're payment might not change (depending on the policy and the company), but your 70/m that was going into the "savings" part is now going to pay back the money that you've borrowed with interest. Some people just pay on the interest their whole lives.

    If you want to save money, it makes much more sense to just save money. If you need life insurance, buy a cheaper term policy and invest the difference. Like, instead of paying 220/m for whole life, pay 80/m for term insurance and save the $140 difference. At the end of five years, or ten years, or whatever (when the term policy is over) you'll have enough money saved that you don't need life insurance.

    (note - this is just my opinion and I don't know nearly as much as Melonie and Monty about this kind of stuff)

    Lena



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    Default Re:LIFE INSURANCE.

    Lena and Sitri, I agree that a Whole Life policy is almost always a raw deal compared to purchasing term insurance and investing the difference in a money market account.

    When it comes to a Universal Life policy, these CAN be a reasonable choice for a person who needs insurance, who also needs tax relief, who wants to save towards 'early' retirement, and who understands enough about investing to swap sectors at appropriate times. I own a Universal Life policy myself, which has managed to return me about 6% on my money tax free PLUS providing "free" insurance coverage (paid for by the earnings of my sector investments). However, I'll be the first to admit that had I not known enough to switch between tech stocks and bonds and GIC's at appropriate times that my returns would have been fairly disappointing.

    Philosophy wise, I look upon my Universal Life investment as being roughly equivalent to an IRA but without the massive 'early withdrawl' penalties - which is important because I plan on retiring within a very few years instead of at age 59/62/65.

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    Default Re:LIFE INSURANCE.

    I believe that the best course in your investment decisions is to use investments for what they were designed for. I think Melonie pretty much nailed the reason why Universal life exists. I would buy insurance because you want insurance, not as a tax dodge or to save money for when you are 65.

    The way Melonie was talking about her plans for that money from retirement to 65 makes sense. What also makes sense it putting the money you plan to have after 65 in an IRA. Why, when you just said what she said makes sense before 65? The reason is simple--the costs of administering the policy eat into the return. People have to get paid to do this stuff and manage the money. Wise shopping can trim those costs a bit, but you still have to pay them more than it would cost for a low comission index mutual fund to do it. They can diversify, but the S&P500 is pretty darn diversified.

    I would buy only the insurance you really want as insurance, use the tax defferred advantages Melonie identified for pre 65 planned expenses, and chuck the balance in a mixture of Roth and traditional IRAs (especially 401k's for anyone who works for an employer who has a matching program of any degree). (give yourself a little slack on pre-65 planned expenses if it feels better) These IRA accounts can have very low costs and you can control the investments (I would only do part unless you are really savy and willing to live with mistakes). Also do the riskier (risk/reward) parts of any self controlled investments in the Roth. You already paid taxes on that so the money as opposed to the traditional where you are aborbing the risk but Uncle Same gets a cut of the rewards.

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    God/dess onlythebest's Avatar
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    Default Re:LIFE INSURANCE.

    Wow,very insightful.Thank you all for being honest and answering my questions.
    One of woman's cardinal rule: Body parts can be fake,everything else has to be real.

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  9. #9
    Banned Melonie's Avatar
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    Default Re:LIFE INSURANCE.

    I would buy only the insurance you really want as insurance, use the tax defferred advantages Melonie identified for pre 65 planned expenses, and chuck the balance in a mixture of Roth and traditional IRAs (especially 401k's for anyone who works for an employer who has a matching program of any degree). (give yourself a little slack on pre-65 planned expenses if it feels better)
    That's exactly how I've structured things for myself. My Universal Life policy only has like $50,000 of life insurance coverage, with a current cash value quite a bit higher than that, and rising fast thanks to the tax free compounding of my Universal Life sector investment earnings. When the time comes that I 'unofficially' retire at age 45 or 50 or whatever, I can borrow against the cash value of this Universal Life policy to provide extra money until I reach age 59/62/65. At the point where I reach 'official' retirement age (and that will depend on future SSI rules as well as my actual financial situation at that time) , I can then start drawing SSI checks as well as start withdrawing money from my regular IRA without early withdrawl penalties, and will no longer need the Universal Life for anything but insurance coverage.

    Again, the actual "value" of the tax sheltered non-early withdrawl penalty aspects of a Universal Life policy depends on your own tax bracket/total tax rate. Geek is correct that the insurance company takes a bigger "cut" of your sector earnings for management fees than a mutual fund family would, and a much bigger cut than a self-managed portfolio where the management fees are zero. But if you are in a fairly high tax bracket and live in a high tax state and flirt with having to pay Alternative Minimum Tax as I do, the taxes you would have to pay on dividends/interest/capital gains on a mutual fund family or self-managed portfolio can be significantly higher than the management fees charged by the Universal Life company - but which then allows dividends/interest/capital gains to be re-invested tax free and to escape being included in AMT calculations. This is the REAL value of Universal Life policies.

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