Life Insurance: term, whole life, and universal. Help!

[cristina47454]

I am so clueless about this kind of thing. DH and I both have policies, but not even sure what kind.  I know that one kind is the "smart" kind to have, but which??

Also, a couple of years ago my elderly parents purchased a whole term policy. I think it's "second to die" - so that when they are both gone, us kids will get a tax free lump sum. (depressing, right?). Except my mom hit 80 and the monthly premiums went from $7k/year to $30k/yr and they are trying to decide whether to continue to fund it. Their annuities were supposed to fund the premiums, but something smells funny.  They are about as financially savvy as I am. Did they get taken advantage of?? Does a policy like this ever make sense?

[laohaire]

The smart kind is term life.

Think about what you want life insurance to acheive for you. The purpose is not to make your beneficiary "win the Lotto" for lack of a better way of saying it. It's too help your dependents get by after you are gone.

So if you died, what financial strains would happen to your children and husband? Would any children have to go into daycare that wouldn't normally? What is the loss of your salary to the family? Are kids in private school thanks to your income, for example?

I took 20 year term life. That covers my daughter growing to age 21, ostensibly she would be independent or very close to it. If I died after that, financially speaking my husband would have to cover funeral costs (not much) but he will manage.

If I died next year, my husband would have a problem financially supporting the family by himself while raising our daughter the way we had hoped to. So the insurance would address a lot of those problems, take a lot of pressure off while the family mourned and readjusted to a new way of living.

It sounds cool to "save" your "investements" with universal, but it's well known it's a very bad deal. They push it so much because it sounds so good to prospects, and it makes the industry a ton of money. And it makes them a lot of money because it's a bad deal for you.

[Stayseeliz]

My DH sells insurance. Anything but term is a waste of money. I'd tell them to cancel it and put whatever they were spending on it into savings. The pp is right-insurance is about helping dependents get by after you're gone. We'll carry good insurance until the children are on their own since they are our main concern.

[sunnysandiegan]

I agree with what PPs have said.

Also, though, really think about the policy amount and the monthly commitment. A lot of people take out huge policies and pay quite a bit every single month for the "what if" scenario. Insurance companies make a lot of money on life insurance, even term life, due to the fear factor.

Everyone's comfort level is different and should be respected. Risk tolerance and income levels and education levels and a lot of other factors come into play.

For your parents, I'd really encourage them to think hard about WHY they have life insurance. If they feel they need life insurance, at least a term policy would be better. Beyond caring for dependent children or other dependents (one spouse is employable and one is not or some other situation where an adult is unable to care for themselves), I don't think life insurance is the best way to go. Retirement savings and other savings/investments (low-risk at their age) will keep all dollars within their control. The $7K they've been paying every year is money they could have been saving outright with no strings attached. If all their children are independent, what is the insurance money FOR?

Just some food for thought.

[ILoveMyBabyBird]

Originally Posted by Stayseeliz 

My DH sells insurance. Anything but term is a waste of money. I'd tell them to cancel it and put whatever they were spending on it into savings. The pp is right-insurance is about helping dependents get by after you're gone. We'll carry good insurance until the children are on their own since they are our main concern.

i agree, dh was going to sell insurance as a side job and took some tests, and honestly life insurance should really be a temporary thing, ie to use while you are building savings/trust fund and that is what should be left to the children. It doesn't make sense to pay 30K a year, why not save it.

[cristina47454]

I think they are worried about all the taxes when they die? Gads, the whole topic is so depressing.  They have several homes and some acreage and  I think they are trying to make sure we are not bombed by taxes. Although I think the magic number is $7m and I don't think their assets approach that.

And I'm pretty sure dh and I have term insurance. We are probably overinsured bcs when we bought it our situation was much different (had our own business). But we're 12 years into a 20 yr policy, so doesn't seem to make much sense to change it - although in 8 yrs our youngest would only be 10, so maybe we SHOULD change it?

[LifewithSage]

I would suggest they let the policy lapse and take some of that $30k savings and invest in a good fee-based financial planner that can help them plan their estate.  There are other ways to shelter the money from tax rather than buying into an extremely expensive life insurance policy.

If they are mostly worried about their kids and the tax burden of the estate, then have they thought about distributing their estate now rather than when they die?  IDK all of the ins and outs of their situation, of course, but you can give up to $1.0 million max in your lifetime for free.  So, if they wanted to distribute property or more money than the annual gift allowance they can certainly do so without any tax implications (on the gift side of things). 

[Stayseeliz]

I heard Dave Ramsey say last night that he only ever suggests term for parents with younger children and some sort of burial policy for children if parents don't have the cash to pay for a funeral up front should something happen.

[Jayray]

We have a little bit of whole life insurance because it's basically a tax-free savings account.  We can cash it out any time.  I'm not sure if that is different than "whole term."  I'm not sure what that means.  But maybe they should just look into cashing it out.