Life Insurance - Whole vs Term vs Universal

[ICUMD]

Curious to know peoples thoughts on Life Insurance.  I've been recently approached by many an insurance salesperson.

 

I'm not interested in using Insurance as an investment vehicle, but would like to offset estate taxes in the event of my demise.

Inheritance tax can be quite steep in Canada.

 

Does anyone have any thoughts or experience with this?

For some reason, I just don't quite trust the Insurance sales people....

 

Thanks.

[KCLarkin]

Does anyone have any thoughts or experience with this?

For some reason, I just don't quite trust the Insurance sales people....

 

You are right not to trust them. The commissions they earn are ridiculous.

 

I don't think tax avoidance is a great reason to buy insurance. If you have young kids and you are the sole breadwinner, then term insurance might be worthwhile.

 

Otherwise, my philosophy is why waste my living days worrying about taxes. Especially if I'm dead. It's not the worst thing in the world if some of my estate goes to pay for the military, healthcare, and education. I'd rather have that money go to the government than insurance salesmen, lawyers, and accountants.

 

 

[nkp007]

Spent a ton of time researching various policies for my family.

 

Got so confused. A lot of policies are mixes of investment vehicles and life insurance and I couldn't understand the assumptions and possible scenarios.

 

Ended up buying term policies. Knew exactly what we were paying and what the payout would be.

 

Life insurance is a service and lots of people hate paying for it knowing that they likely won't "utilize it" so insurance companies disguise the policies in investment vehicles.

 

 

 

 

[Tim Eriksen]

I think they marry insurance with investments to increase commissions, not to disguise the insurance.  Term insurance is cheap and pays low commissions.  Most insurance people can't make a living selling it.  Whole life and universal life policies are substantially larger resulting in substantially larger fees and commissions (~ 10x) .  A few years after college I briefly worked for John Hancock as a commission agent in Sacramento. My recollection is that the universal life policy had an expense ratio of around 13% over the cost of straight term insurance and no load mutual funds.  The only benefit to pairing them was if you were near death since the insurance part would cover any market decline.  I remember the lead sales guy finding me reading the contract details and he said "why are you doing that?"  I wanted to know what the cost to the buyer was.  I couldn't in good conscience sell the product.  Were they better off than with no insurance? Yes.  But they were so worse off compared to buying term and investing the difference it was ridiculous.  Insurance agents have no fiduciary duty to do what is best for the client.

 

         

[oddballstocks]

I have a term policy myself.  Seems fine, it'll cover everything for a while for my wife and kids.  I have a policy on her as well.  If she were to die I'd have to hire a nanny or daycare or something for the kids.  It's cheap for both of us, but we purchased in our 20s.  Term is the best way to go without a doubt.

 

I don't know what the estate tax is like in Canada, but it starts at $5m in the US.  You can pass on $5m tax free, if you're married it's $10.9m.  If you're worried about this it means you're in the $5m-10m+ range for wealth.  And honestly I'm not sure asking a message board is your best bet.  I'd go visit an attorney who specializes in this stuff.  Spend the $2-3k and get legitimate advice for your specific situation.

[KCLarkin]

I don't know what the estate tax is like in Canada, but it starts at $5m in the US.  You can pass on $5m tax free, if you're married it's $10.9m.  If you're worried about this it means you're in the $5m-10m+ range for wealth.

 

There is no "estate tax" in Canada but any capital gains are realized and taxed to estate. One exception is that U.S. has an extra-territorial estate tax. So even Canadians are subject to the U.S. estate tax if they have more than $5M (or $10M per couple).

[rb]

As KCLarkins said, there is no estate tax in Canada. From a tax planning perspective it's much better to realize capital gains gradually in retirement than to bother with something like life insurance.

 

Also in Canada the sales commissions for life insurance are so ridiculously high that I don't see how you can come up on top in almost any scenario. That's the reason you've been approached by so many insurance salespeople.

 

ICUMD, I'd recommend learning more about the taxation system in Canada to devise a good plan. Don't take advice from insurance salespeople. I deal a lot with this sort of stuff. You can PM me if you have some questions or want to dig into something.

[rkbabang]

I bought a 30 year term policy when I was 30 yrs old.  I don't want to even try to understand all of the other types which are supposed to be half insurance / half investment.  Buy a cheap term policy and invest your money elsewhere.

 

[gokou3]

When I was in my early 20s, I bought a $100k whole life insurance with monthly premium of $48, payable until I am 60 or something.  I am supposed to be able to have this $100k cash value when I am old.

 

When I was 33, I also bought a $500k term life insurance in a group plan with monthly premium of $39.  Premiums will increase every 10 years, but still you can see the huge difference in premiums per coverage amount.  I am sure if I take the delta in premium and invest it, I would have a portfolio greater than the cash value in my whole life insurance.

[GregS]

I have strong views on this -> Consider term life insurance if you have dependents.  Do not get any other kind of life insurance.

 

I bought some whole life years ago before I knew anything about investing or finance.  I took a bath when I surrendered the policies, but given the low rate of return and lack of liquidity and flexibility I couldn't justify holding even w/ the loss.  My former agent owns two Ferraris. 

 

The complexity of various life insurance products (other than term) comes from the fact that they are basically combining investing with insurance and doing it in a way to hide their exorbitant fees and terrible returns.  When you also consider the lack of liquidity, lack of flexibility, counterparty risk, opportunity cost, it just doesn't make sense.  There's almost always a better way to accomplish your financial goal, including tax avoidance in most cases.  And after-tax returns are what matter. 

 

There are a narrow set of people who need a permanent death benefit.  These are usually people whose net worth is tied up in illiquid assets like a business and their heirs will need cash so they won't have to sell it.  If this is you, get some estate planning now.  If you are not one of these people, tell the agents to take a hike. 

 

As for estate taxes, I have no idea about Canada, but in the US, estate tax avoidance is not a huge issue for most people.  As others said you need to have millions before you pay anything.  And while life insurance proceeds are not going to be subject to income tax to the beneficiaries, they will be part of your estate for the estate tax (there are some complex ways to minimize that, but get a lawyer).  As I mentioned, permanent death benefit can provide liquidity to pay estate taxes which can be critical if your assets are tied up in a business or land that you don’t want your heirs to have to sell, but if you have sizable liquid assets like stocks it’s probably unnecessary.

 

This website has a ton of great information on life insurance not found anywhere else.  Here is a post for starters:

 

https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

 

Feel free to bounce anything off me via PM. 

[KCLarkin]

The complexity of various life insurance products (other than term) comes from the fact that they are basically combining investing with insurance and doing it in a way to hide their exorbitant fees and terrible returns.  When you also consider the lack of liquidity, lack of flexibility, counterparty risk, opportunity cost, it just doesn't make sense.  There's almost always a better way to accomplish your financial goal, including tax avoidance in most cases.  And after-tax returns are what matter. 

 

Your agent may also show you a prospective return of x%. What they don't tell you, is that this is a return of capital plus return on capital.

 

And your agent probably won't let you review the contract either. I once had a financial advisor refer me to an insurance agent to "price out" insurance. The insurance agent refused to let me take the contract home to review. So I fired my financial advisor (who I actually liked).

 

Definitely avoid anything other than term insurance.

[boilermaker75]

I have never purchased life insurance. I have had a policy through my employment. If I didn't, I probably would have bought a term policy when my daughter was born. I have also said no to long-term health care policies. These are also expensive for what you get. Typically 80-90% of the first year premiums go as a commission to your financial advisor followed by additional payments in future years.

[bookie71]

First, why are you buying insurance?  Most are buying it for protection, not as an investment. 

When we were younger and had a bunch of "dependents" I wanted enough insurance to get them through college and to keep my wife from having to marry someone so she could take care of them.  My eyes were opened when I found out that whole life  of about 10,000 cost about the same as 100,000 term (this was in the early 1960's.

I ended up buying 500,000  term with a term of 20 years and the premium would increase every 5 years (theoretically my income would go up which it did).

The big problem then was finding a salesman who would talk to me, with the internet that shouldn't be a problem now.

From having several insurance salesmen as clients over the years you will notice the cash value starts growing after about 3-4 years. This is because of the high commissions paid to the salesman.

 

 

 

[ICUMD]

Thanks for everyone's input!  This board has been far more helpful than any Investment advisor, banker or accountant I've ever had (poor luck perhaps!)

 

All of you have confirmed for me that Whole Life and Universal have investment components that complicate the issue of what you're actually paying for and have returns that are marginal at best.  Commissions are far too excessive.

 

As I'm currently 41 yrs old and have no dependents yet, I think I will hold off on any insurance product for now.  I think a defined Term of 20 yrs or so may be useful upon having children to cover them until they are adult age in the case I die early. I think this would help avoid liquidation of my investment portfolio to pay taxes on Canadian 'capital gains' (and not estate taxes as several of you have correctly pointed out).  Some people mention these insurance products as a tax planning strategy.  I have to say, I don't see the benefit in this regard.

 

[rkbabang]

I would like to look into term life insurance. Any recommendations on a company? Also is 20 yrs better or 30 yrs?

 

For 20yr vs. 30yr. it would depend on your age I think.  I bought a 30 yr term at 30yrs old figuring that it would protect my family for my expected work life, hoping that by the time I was 60 my house would be paid off and all my kids would be adults.  I'm in my 40s now and if I was buying it for the first time I would probably look for a 10 or 15 year policy, certainly no longer than 20.

 

I don't know about companies, I just got a few quotes and picked one.

 

[bookie71]

If yo are going for the shorter term, be sure it is renewable if your health should change

[rkbabang]

If yo are going for the shorter term, be sure it is renewable if your health should change

 

Or that it lasts as long as you think you'll need it.  Do you really need life insurance in your 60s+?  You shouldn't have any debts or young children, and should have saved a substantial amount by then that paying for life insurance isn't necessary.  If you are 65 or 70 years old and need life insurance you are doing it wrong.

 

 

[bookie71]

I dropped all my life insurance at about 55 or so, when all the kids had finished college.  Saw no need for more.

 

[boilermaker75]

https://www.youtube.com/watch?v=Y-mg_NmKKRc

[bobozou]

Emily - I happened to shop for life insurance recently;  I'll share my methodology/recommendation below;  If you don't care for for the details, try havenlife.com (i receive no compensation for endorsing them... felt compelled to say that since I'm peddling life insurance after all)

 

In addition, I agree w the above posters in that I bought enough coverage to last me until the anticipated age that my family wouldn't need my life insurance (~55 yrs old).

 

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My main goals are to a) get (LOTS) of quotes, and b) avoid spending hours talking to financial-sales-people (FAST).  In total, I got what I needed in <1 hour.

 

 

0) General Info - there's a lot of complexity out there.  I can't help you here.  If you want simple, just stick to 'term life insurance' (which is what I opted for)

 

 

1) Nerdwallet - they have a list of life insurers, as well as a multi-insurer online quoting aggregation system.  Pretty helpful.

 

https://www.nerdwallet.com/blog/insurance/best-life-insurance-companies/#methodology (list of insurers)

https://nerdwallet.quotacy.com/quote.php#basic (multi-insurer quoting system)

 

 

2) Geico/Lifequotes - Geico uses a site (lifequotes.com) create another multi-insurer online quoting aggregation system as well.

 

https://www.geico.com/life-insurance/  (start a quote)

http://www.lifequotes.com/

 

 

3) Haven Life - this is an insurer (fully owned subsidiary of Mass Mutual).  They are all about making it easy/simple.  It took about 5 minutes to complete their process, and they gave a (single) competitive quote (no medical exam required - many other places may/will require this to start the policy).  This is also who I ultimately opted to go with.

 

www.havenlife.com

[TonyG]

Emily,

 

Usually they will ask you if you have any debts (mortgage,line of credit, etc). Add them all up. Any kids? Add 40K per kid in case something happens to you so that they are covered for university/college. Funeral Expense say round 15K. Then if something happens to you and you work and support your kids, take your annual salary and multiply it by 3-6 times. Thats a general number of how much you would need. if you feel you need more or less, you can add to that number or subtract  from it.

[mhdousa]

Should I get an agent or apply online? Is it better to get multiple term life with smaller amounts? I was checking online and the premiums increase more with higher coverage (and not in the same ratio). Is that any of their business if I get insurance from multiple companies and later cancel as I wish? I am thinking of 10 years as 20 years is very expensive.

 

If yo are going for the shorter term, be sure it is renewable if your health should change

 

Or that it lasts as long as you think you'll need it.  Do you really need life insurance in your 60s+?  You shouldn't have any debts or young children, and should have saved a substantial amount by then that paying for life insurance isn't necessary.  If you are 65 or 70 years old and need life insurance you are doing it wrong.

i'm looking at layered policies. E.g. buying 3 different policies, one for 10 year, one for 20 year, and one for 30 year. Let's say each policy is for $500k each. You would have 1.5m in coverage for years 0-10, then 1m in coverage for years 11-20, then 500k in coverage in years 20-30. This is much cheaper than buying a 1.5m 30 year policy.

 

Something to think about if it applies to your situation.

-M

[jmp8822]

What do you mean by 'if you do not care about the details'?

 

I am reading that getting insurance without medical exam is not recommended.

 

Is there a way to figure out how much term life amount I may need? It appears that if you apply for too much at random, it is a red flag.

 

emily -

 

I used to be in the insurance business and think I can help you think through this.

 

Step one - find one brokerage firm or agent that will quote 10-20 top companies term insurance. (i.e. don't go to state farm, then allstate, then northwestern mutual, that would be too time consuming. Find a single agent/firm with access to all the major term life companies - that's all you need to get the best pricing.) Examples of top companies would be Protective Life, Principal, AIG, Mutual of Omaha, Brighthouse, Minnesota Life, North American, John Hancock, etc. There are lots of good ones.

 

Step two - Go through underwriting with whoever has the best top-line pricing, from the list of possible prices the agent quoting multiple companies provides. I.e. the top of the list cheapest per 100k of term with the best health class (see attached example).

 

Other notes: Most companies term policies now have conversion options that are built into the policy. So, you could hypothetically get a 10 year term policy for cheap (relative to 20 year term) and get a new 10 year policy (reapply) in year 9+ of the first policy. The conversion option is important because if you have good health upfront (meaning you qualify for the best rates), you can convert it inside the policy limits to a permanent policy at the same health class you had at the beginning of the 1st policy if your health changes for the worse. In other words, you get a decent/good rate on a permanent policy via conversion if your health gets much worse over the first 10 years, in a worst case scenario. However, ideally you stay healthy like you might be today for the next 9+ years, and you pocket a large spread of money over the next 19 years with two 10-year term policies versus one 20-year term for example.  The conversion option of the first 10 year policy is your fallback if you need the insurance for longer with a negative health result.

 

Also, have the agent show you differences in pricing between 500k and 1M etc. It should get cheaper per $1k of insurance as it goes up. There is a fixed policy fee in every policy that makes larger amounts cheaper, all else held equal.  I.e. $500k 10-year term could be $250 per year, while $1M might be $400 per year. So, you only pay $150 per year more for the 2nd $500k of insurance.

 

If anything above doesn't make sense, please ask questions. Hope that helps some.

 

[Peregrino]

What do you mean by 'if you do not care about the details'?

 

I am reading that getting insurance without medical exam is not recommended.

 

Is there a way to figure out how much term life amount I may need? It appears that if you apply for too much at random, it is a red flag.

 

emily -

 

I used to be in the insurance business and think I can help you think through this.

 

Step one - find one brokerage firm or agent that will quote 10-20 top companies term insurance. (i.e. don't go to state farm, then allstate, then northwestern mutual, that would be too time consuming. Find a single agent/firm with access to all the major term life companies - that's all you need to get the best pricing.) Examples of top companies would be Protective Life, Principal, AIG, Mutual of Omaha, Brighthouse, Minnesota Life, North American, John Hancock, etc. There are lots of good ones.

 

Step two - Go through underwriting with whoever has the best top-line pricing, from the list of possible prices the agent quoting multiple companies provides. I.e. the top of the list cheapest per 100k of term with the best health class (see attached example).

 

Other notes: Most companies term policies now have conversion options that are built into the policy. So, you could hypothetically get a 10 year term policy for cheap (relative to 20 year term) and get a new 10 year policy (reapply) in year 9+ of the first policy. The conversion option is important because if you have good health upfront (meaning you qualify for the best rates), you can convert it inside the policy limits to a permanent policy at the same health class you had at the beginning of the 1st policy if your health changes for the worse. In other words, you get a decent/good rate on a permanent policy via conversion if your health gets much worse over the first 10 years, in a worst case scenario. However, ideally you stay healthy like you might be today for the next 9+ years, and you pocket a large spread of money over the next 19 years with two 10-year term policies versus one 20-year term for example.  The conversion option of the first 10 year policy is your fallback if you need the insurance for longer with a negative health result.

 

Also, have the agent show you differences in pricing between 500k and 1M etc. It should get cheaper per $1k of insurance as it goes up. There is a fixed policy fee in every policy that makes larger amounts cheaper, all else held equal.  I.e. $500k 10-year term could be $250 per year, while $1M might be $400 per year. So, you only pay $150 per year more for the 2nd $500k of insurance.

 

If anything above doesn't make sense, please ask questions. Hope that helps some.

 

Layering is what I did, it was cheaper.  Got a 10-year and a 20-year in my mid-30's.  Figured if I needed more coverage, it would still be cheaper to buy a shorter policy when the first expires.

 

I also recommend diversifying your insurers, on the off-chance one decides to start up a Financial Products division

[Mephistopheles]

Who would have thought all these fancy life insurance policies would be so hard to understand, even for investment experts like us?

 

My dad has had a "flexible premium variable life insurance" policy for many years. I'm sure it was a bad deal when he signed up but after all these years I'm trying to figure out whether it's worth to keep going or to cash out. I have very little information at the moment but can look more things up and post.

 

For now what I know is:

- Face amount of policy is $350,000

- Portfolio value is about $200,000

- Death benefit adds the 2 to make $550,000

- Every year there is like a $1,000 + in insurance fees taken from the portfolio

 

The portfolio is invested in a mix of equity and bond funds. If we move the money out now, we'd lose the $350,000 potential in terms of death. However we'd save whatever thousands of annual on insurance fees.

 

Can anyone tell me how to figure out what the most economic course of action is?