Are these a sham or not? I always avoided them like the plague but it appears financial advisors are pushing them more and more. Am I missing something? Has anyone on here ever had a positive experience with them using the Cash Value to buy homes or cars later in life?
OT: Whole Life Policies
- Thread starter TheBigUglies
- Start date
Take a look at this from Dave Ramsey. Term is straight forward. I understand it. If I die it replaces my future earnings. I never can understand Whole Life. Too many moving parts plus as Dave Ramsey said life insurance is intended to replace your income if you die not to be an investment vehicle.
www.ramseysolutions.com
Term vs. Whole Life Insurance: What’s the Difference?
In the epic showdown between life's two great insurances, term and whole, who wins?
www.ramseysolutions.com
Last edited:
Take a look at this from Dave Ramsey. Term is straight forward. I understand it. If I die it replaces my future earnings. I never can understand Whole Life. Too many moving parts plus as Dave Ramsey said life insurance is intended to replace your income if you die not to be and investment vehicle.
Term vs. Whole Life Insurance: What’s the Difference?
In the epic showdown between life's two great insurances, term and whole, who wins?
Be careful with Ramsey. While I agree with his GENERAL financial principles, personal finance isn’t a 1-size-fits-all kinda deal. For example my wife and I use a points credit card and pay it off every month. Works for us but Dave would lambast us for this.
As for whole life, we have 2 policies but we use them as investment vehicles and not for the insurance. We have term policies out as well.
If you are using them as Investment Vehicles, are they working out for you?
The thing that is scary is that say after paying in for 10 years, then life gets in the way and you can no longer pay the monthly amount you set up. Can you take your money out? It is not going to be nearly what you put in because some of that monthly amount goes towards the premium of the policy? Can you take money out to buy a 2nd home?
Usually you’re better off buying term insurance and using the difference in the premium to invest rather than pay for a whole life policy. Whole life investment returns are generally not as strong as other types of investments.
sounds like something Sandy Weil would say via AL Williams.
Let me ask, where else can your money grow tax deferred and then have tax free withdrawals?
I don't think the withdrawals are tax free on whole life policies. You would get taxed on the interest and dividends that are supposedly making your cash value grow? Or am I misunderstanding?
They are a complex financial instrument and not right for everyone.
Either a) take the time to understand them or b) trust your FA.
If you do neither, don’t use them or you will spend your time worrying about your decision.
Either a) take the time to understand them or b) trust your FA.
If you do neither, don’t use them or you will spend your time worrying about your decision.
most policies allow for 'loans' from the policy, these would be tax free. I'd ask that question, when I take withdrawals is this a 'loan' or a withdrawal ? (which would be a taxable event)
Whole life policies have benefits if coverage is needed past age 70, cost of term drastically increases with age...or if buying money at a discount. Key man insurance is a great way to obtain wealth for future generations or endow an organization at a discounted rate. Many churches utilize this form of gifting since insurance benefits escape probate. I have an irrevocable policy naming Penn State as beneficiary and cost to me was 22% of the death benefit...best part is Penn State can use the policy face value as collateral.
First and foremost, I am not a financial advisor. Do not take this as financial advice… HAHA
For us, it’s still too early for us to reap the benefits. we're only 40 and we started them about 4 years ago so it's gonna take some time until it becomes worth it. It is part of our long-term strategy though. The plan is to have the cash value grow tax deferred at a fixed rate, then later in life be able to tap into it (loan) without having to pay penalties or taxes, then the death benefit will cover the taxes and loan (provided you leave money in the policy to keep it active). but again, we have term policies so we're not reliant on the whole life policies for coverage (any outstanding loan is paid through the benefit, meaning the benefit is lower).
as to your questions
you can get a policy that gets "paid off" early, like 15 or 20 years. but the way it's set up is that if you can't pay for an amount of time, the cash value funds it.
as to how it grows, think about it as a home loan amortization schedule.the policy payment is front loaded and your cash value grows bigger the longer you keep it.
you can surrender the policy (bad), withdrawal from the cash value (tax free only on the cash value up to what you've paid in), and loan (what @s1uggo72 was talking about which MY UNDERSTANDING is that you can take as much loan against the value as you want, and you aren't hit with any taxes or fees provided you keep the policy open and continue paying the premiums. when you die, the death benefit covers the fees and taxes)
only if you use the money for college expenses, otherwise its taxable income, and perhaps a 10% penalty
the death benefit pays back the loans, so therefore no taxes, anything left over goes to the benes. The biggest risk is to have the policy collapse, that is the loans > than the cash value.
There is also variable whole life, which instead of investing at a fixed rate you invest in stocks etc.
No, terrible for investing money. Simple reason, a portion of your premiums are for what they call the cost of insurance, or COI. If 10% of your premium goes to cover the cost of the insurance on your life, only 90% goes into the cash value. If you invest in anything else, stock, bond, CD, mutual fund, 100% of your money goes into the investment. So you are down 10% compared to other investments right from the beginning. That said, WL policies have their place. If you want to provide 1 million to care for your wife and family, it could take you years to save that much, but you have that coverage day one of the policy. Depends on what you need, a death benefit or an investment vehicle. Also, if the former, are you better with a cheaper term policy and invest the difference? Again, depends on your circumstance.
Ramsey's target audience is people that don't even know how to pay off their monthly credit cards. Those folks don't have any business looking at something as complex as whole life policies. There's places where it makes sense to get one, but for most people they aren't necessary, are overly complicated, and better off buying term life and investing the difference in premiums (whole life premiums are much more expensive).Take a look at this from Dave Ramsey. Term is straight forward. I understand it. If I die it replaces my future earnings. I never can understand Whole Life. Too many moving parts plus as Dave Ramsey said life insurance is intended to replace your income if you die not to be an investment vehicle.
Term vs. Whole Life Insurance: What’s the Difference?
In the epic showdown between life's two great insurances, term and whole, who wins?
Since whole life combines both insurance and investing it makes sacrifices in both areas, and the commissions are really high early on so they don't really start to amount to a valuable tool in your investment portfolio until you are in one for many years. I got in one early and now it gets me guaranteed higher annual returns than a high yield savings account, do now it's valuable and has the benefit of options like taking out loans, using the cash value to pay the premiums, etc. It's not for everyone but can be useful with the right approach, and requires a very long term commitment to really get much out of it.
Last edited:
Dave's advice on credit card points isn't really pertaining to the finance side of things, it's the personal side of things. Studies have shown that people simply spend more money when using credit versus cash/check. Therefore, too many find themselves in heaps of debt and the reward points will never make up for the interest lost.
People like you and I are what credit card companies refer to as deadbeats. I maintain a strict budget and spend within that budget monthly. All credit cards are paid off monthly and I reap the benefits of the rewards. However, I'm very conscious of what I spend and I'm not tricked into overspending while using other people's money. I can get away with using debit cards, but I prefer the security and additional rewards offered by credit cards.
If we're being honest here, the average person has credit card debt and does not have the willpower to handle their personal finances using credit cards. Those are really the people he's referring to. He's also not wrong in saying that millionaires didn't get their status with reward points.
Very well said. It takes dedication structure and discipline to do it but the benefits are there. I understand Ramsey speaks to much less disciplined people, because the vast majority of people are less disciplined. But that is why I think it takes a certain type of person to get into whole life policies as investments. You need to have discipline and dedication to continue to build your cash value to eventually reap the benefits.
Roth IRA. A better investment.
Whole life is the worst “investment”.
A Health Savings Account can be useful too. Tax free contributions & gains and withdrawals if the funds are used for allowable purposes.
Roth IRA contributions are limited. A whole life policy has unlimited contributions
Get unlimited access today.