Question by Bruce: Life Insurance?
My wife and I are looking at getting life insurance. We are 28 and 32 and have two children. Is it better to get term and invest the difference or go whole life with tax deferred interest and dividends? We are looking at the Knights of Columbus for our insurance and they have said they pay 4.75% annually and anywhere from 8-9% on dividends.
I was thinking about going about half term and half paid @ 65 whole life.
Best answer:
Answer by Michael R
Personally, I like the Universal Life policy. With it, you gain some advantages over the traditional whole life. You still have the good interest rate (currently 4.4-5%, depending on the company), but you can get tax free income. If you take out the money as “policy loans” @ 0% interest (some policies charge a nominal interest rate) the income you can receive is tax free. At 4.75% and your age, term and invest the difference strategy would have to make you 9-9.5% to keep up with the universal life because you have to pay taxes on your gains every year unless it is set up as an IRA. If it is an IRA, taxes are due when distributions are taken, potentially placing you in a higher tax bracket during retirement. Contrary to popular belief, your tax rates in retirement are usually higher than when you are young (You pay off the house, the kids leave: all of your deductions are out the window) With the UL, premiums are flexible. The cash value that is accrued in the policy can be payable upon death in addition to the face value (again, tax free) so you don’t lose your money like you do in a whole life if you do die.
Next, paid @ 65 whole life… that is an option, but I don’t like it much. You pay all of your premiums on the front end. If you don’t die young, it works out. If you do die young, you have paid way too much for your life insurance. (It’s great for the agent – commissions are great on the high premium)
Third, term products are great for temporary needs (i.e. covering the house that you plan to pay off by retirement, kids’ college funds in case of death, etc) The fallacy I see most often is that people think they won’t need life insurance when they are old. There are some things that don’t go away – funeral expenses, income for your spouse, etc. (pensions do not always grant survivorship rights, and I hope you don’t depend on social security) Cover your short term needs with term, put enough to live comfortably in a universal life. Then if there’s any left, you can take some higher risk investments, like stocks. I would generally stay away from mutual funds because they usually underperform the market. They are so big, it takes them too long to react to the market and they miss big opportunities.
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