matttyl
Footballguy
In this situation, you're correct - but the amount of the coverage (if it's owned by the insured rather than a trust) would be includable in the estate for estate tax purposes.
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Personal Finance Advice and Education! (8 Viewers)
- Thread starter No. 16
- Start date
ghostguy123
Footballguy
matttyl
Footballguy
If you're worth $10m and you die tomorrow, your estate will owe an estate tax (you can exclude $5.45m of it). The tax rate can be up to 40% depending on how large the estate is. Now lets say you're worth the same $10m and you have a $5m life insurance policy that you own, and you die.....well now at your death your estate will be worth $15m in the eyes of the IRS. Makes sense to not own your own life insurance (have a trust on it)....if you're worth that kinda money.
Chadstroma
Footballguy
Yea, taxation is a whole different game of which I know nothing about. I did not mean to imply that there were not tax implications but just replying to the ownership of the funds.
ghostguy123
Footballguy
Well in this case, if she were to die, trust me, there would be zero assets to worry about. She is the type of person who refinances on her house every chance she gets, plus will die with a lot of other debt. So, no assets.
Chadstroma
Footballguy
I believe (not sure on this) that the house is seen as an asset and does not matter if the liability of the lien ends up being equal- if that value of the house is over the amount that the state of which she lives in has put as being over a 'small estate' then it would go to probate court. Again- not sure on that but that is what I would gather being involved in situations peripheral.
ghostguy123
Footballguy
Speaking of life insurance, does anyone recommend return of premium term life over standard term life?
ghostguy123
Footballguy
I was trying to research a little online, and "whole life" was at the top of the list of insurances NOT to buy, lol. That's why I am asking here. I don't know jack about life insurance. For all I know that list was created by someone who knows less about it than I do.
I have some through my work, but not enough, and I should have gotten on this as soon as I found out my wife was pregnant last year. I guess first thing I will do is see what my work offers as far as increasing my policy.
The ROP was somewhat appealing to me because I can easily afford the extra monthly for the premium, which is all returned at the end. I realize I would be losing the earning power on that money, but knowing me I will probably blow that extra money anyway over the next 20 years. At least this way I would get back enough to probably buy a car with it or something before I retire. The regular term life also isn't so bad. I am not sure what the premiums are for 36 year old non smoker in good health (minus being a bit overweight) for somewhere around 200k, but from what I saw online I saw something like 15 a month for 20 years. Does that sound accurate?
No. 16
Footballguy
I need some advice regarding staying with my current employer based on retirement options. I work as a RN at a public hospital. I'm happy where I'm at right now but after reading some articles regarding the pension system I'm scared ####less. The pension plan is great... 2% x "Years of service" at 55. I'm 30 years old so if I work until 60, I can get up to 60% of last 3 years final salary. My current hourly wage is middle of the pack.... not the worst, but I could get about 10-15% more at other hospitals, but the pension plan supposedly makes up for it (though I never calculated the numbers). However, reading these two articles The Pension Fund that Ate CA and The Tragedy of CA Pensions really makes me worried:
So should I stay with my current employer or leave for a 401k? Again, aside from the retirement I'm happy where I'm at, but this is a pretty big deal.
So basically I'm worried that I won't end up with anything or that I'll end up with a lot less than I'm planning on getting. I'm 30 years old and with my experience I am confident I can get a job at another hospital that offers more hourly pay AND an 401k vs pension.
So should I stay with my current employer or leave for a 401k? Again, aside from the retirement I'm happy where I'm at, but this is a pretty big deal.
ghostguy123
Footballguy
Also an RN. When I first started at the hospital I work at we had a similar type of pension plan as yours based on age and years of service. Well, after about 2 years of working that pension plan became my "frozen pension plan", and we now have a completely new plan that is tied into the same investments we are able to choose from with our 403b.
Hint.....the original pension plan was a lot better than the current one.
Hint.....the original pension plan was a lot better than the current one.
FUBAR
Footballguy
Interesting. That's the opposite of the advice than anyone I've read or heard say who isn't trying to gain a commission from selling the product.
Life insurance should be bought with the goal of covering anyone relying on your income, until they no longer need to rely on your income. If you have kids, get enough life insurance to get them to their adult years. If your spouse can't work, that creates a different situation than most of us have, but then it might be better to get yourself in as position to self insure, like by building sufficient assets.
I'm perfectly happy to die without coverage if I'm older than 70 - other than my wife, nobody will be relying on my income and our estate will cover her for the rest of her days.
I have no idea what ROP term life insurance is but I'd look at the cost. Off hand I'd assume it's better to keep this stuff simple and cheap while meeting your intent. We have standard term, which we won't have after we're 70.
AAABatteries
Footballguy
So, I'm a financial idiot. I make decent money and the good news is I'm on track to be completely debt free by the end of this year. The bad news - I don't own a home and I have no clue what to do.
Im saving 10% now and get the company match in to my 401k. That's it - that's all I know about. I need help. So, should I just start on page 1 of this thread - other recommended resources?
Do I need a Roth thingy or a money market account? Did I mention I'm a financial idiot?
Im saving 10% now and get the company match in to my 401k. That's it - that's all I know about. I need help. So, should I just start on page 1 of this thread - other recommended resources?
Do I need a Roth thingy or a money market account? Did I mention I'm a financial idiot?
Dentist
***Official FBG Dentist***
Check our personal finance for dummies from your local library. Read, profit.
Don't use this thread
KCitons
Footballguy
This question isn't just for Ghost Guy. But, why can't you invest the monthly annuity? It seems in these scenarios, everyone assumes that the $159 is spent on hookers and blow. If i leave the money where it is, I'm guaranteed 5%. I then invest the monthly annuity and benefit from any months I can make more than 5%, but lessen the pain when I take a loss.
With the annuity, my floor starts at 5%. With the lump sum, my floor is zero
AAABatteries
Footballguy
I will do that - any quick tips that I should do immediately? Perusing the thread I'm thinking I need 529s for each kid??
AAABatteries
Footballguy
I've got INVESTABLE DOLLARS over here!!
AAABatteries
Footballguy
Is there a hookers and blow chapter in the Finance for Dummies?
Random
Footballguy
Are you planning on buying a house? What are you paying in rent? What would a similar house cost to purchase?
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AAABatteries
Footballguy
Random
Footballguy
How much is rent compared to purchase price of a similar house? This might be the first step in getting ahead.
AAABatteries
Footballguy
FUBAR
Footballguy
ghostguy123
Footballguy
Life expectancy??? Not entirely sure if i just lose all that if I die right after the monthly payments start. Like triple AAA I am a financial idiot with regards to certain things (AAA, yes there is god stuff in this thread, I learned a lot. I also read one of the Boglehead books, and I definitely recommend it).
Also, does it make a difference if the lump sum is invested? For example, taking the lump sum at age 62, possibly delaying and withdrawals from my 403b for a year. Hence, an extra year for that money to grow in the 403b.
It's not like I would plan to take out the lump sum and just spend it all willy nilly.
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Dentist
***Official FBG Dentist***
no, you don't need those, at all.
You need to start with an emergency fund (6 mo worth of expenditures)
then a roth IRA (unless you have some type of work retirement program with a match)
then an HSA if elegible
then maybe work on a down payment fund for buying a home if that's a goal.
adequate insurance?
529 is so far down on the scale of things that you should do that I seriously doubt you'll be able to contribute to this in the next 5-10 years.
matttyl
Footballguy
Obviously it all depends on the situation and the individual. I bolded the above as it's one (likely the main) use of life insurance, but there are others - debt elimination, creation of liquid wealth when it may be needed most, estate tax payoff if needed, leaving a legacy to a school/church/non-profit, special needs dependents, retirement/pension maximization (my latest two cases were concerning this), and others.
Here are just some thoughts - if you're 30 and you buy a 20 year term, you're covered to 50. Lets just say it's a 500k policy, you can get those really cheap if you're health. I ran a quick quote and a 30 year old male can get that 20 year term for $405 a year (obviously you can pay that monthly). After 20 years you've put away 8,100 in premiums - but now you're 50 and you said you needed coverage to age 70. Well, go buy another policy and hope you're still healthy enough at 50 to get a good rate (many are no longer). Even if you are, it's going to be 1,300-2,000 a year for a new 20 year term. Lets call it 1,500. Should you make it to age 70, that's another 30,000 in premiums - for a total of 38,100 in total premiums over the last 40 years and you're still with us at 70 - so you have no coverage going forward, and no equity (cash) accumulated.
Now lets say you have a twin brother who way back at age 30 bought a whole life policy for 500k. It was more expensive from the start, around 2,550 a year. Yeah, that sucks as it's ~2,000 more a year for the first 20 years, and ~1,000 more a year for the following 20. That's a total of 60k more in total premiums over that 40 years, which isn't chump change. You also have ~290k of cash in the policy. Yup, at that point you have put in 102k in premiums, and you have nearly 3x that in cash value (which you can access tax free) - and you've had coverage for the last 40 years, and you'll have coverage at age 71, 72....all the way up till you die. The cash value is totally liquid as well, and you can use it to pay the premiums should you have a cash flow issue. Life insurance can do quite a few things, especially if it's permanent, and building cash.
Yay California!
if the hospital is state run and you are an employee of the State, your pension is probably safer than if you are a city/county employee because of the way the bankruptcy laws work, for what that's worth.
Random
Footballguy
And if you invest the difference (2150 for the first 20 yrs and 1050 for the next 20 yrs @ 5%) you will have 234,000. Possibly tax free if this goes in your Roth each year.
matttyl
Footballguy
I show 223,346 if you invested at 5% net after tax....but the life policy had ~290k of cash (so still 67k more....with less risk - and more options at age 70). You'd have to get in the neighborhood (depending on the policy) of 6-7% net after tax on the "invest the difference" amount to have roughly the same cash in most cases. And remember, the term policy stopped cold with no coverage at some point. The whole life policy has both the cash value you can use, as well as a continuing death benefit should it be needed. I'm in my 30s today, I have no idea if (and how much) coverage I'll need 30 to 40 years from now and beyond. We don't know what estate taxes will be 5 years from now, much less 50.
FUBAR
Footballguy
Accepting your math at face value (happens to be slightly different than I remember from over a decade ago when I actually bought into whole life which I canceled) I'll take the risk that the market beats 7% average over those 40 years.
To be clear, I'm not saying there's never a benefit to whole life. It's just not for most of us normal people and if it is ideal for you, you're hopefully getting advice from somewhere other than this forum.
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Random
Footballguy
You make a solid case, so why do so many financial gurus poo the idea of whole life? Admittedly, I haven't done much research on it, my wife and I each got 200K(?) term about 10 years ago (late 20s/early 30s) for 25/mo total (15me, 10her).
matttyl
Footballguy
I'm an agent, so I also get the bonus of a commission. I didn't account for that at all, though, in the above. The rule of thumb I have (again, depending on the person) but you'd have to get around 6% net after tax on the "invest the difference" (sometimes only 5%, sometimes 7% if you can find "dirt cheap term") for that side account to be equal to the cash value of the policy after about 15 years. That also doesn't take into account the value of having life insurance in force at age 70 and beyond - and at least to me there is huge value in that. It "frees up" other assets - meaning I can spend those knowing that they can be replaced at my death.
matttyl
Footballguy
They feel you can get 10%+ or so (maybe 8%) on the "invest the difference", which most people don't get. You're also taking on risk. Don't get me wrong, you also invest in the market where you can get larger returns - it's not a one or the other type thing, I view it as a both type thing. But if you've got money in CDs or money markets - cash value life insurance will beat those type of safe liquid accounts hands down. Do this for your "safe money", and maybe invest slightly riskier with your other monies in your retirement accounts.
Between my wife and I, we have 3 whole life policies in force today. One is about ~10 years old, the others two are ~3 years. We pay in total just over $3k a year in premiums, and last year the cash value totals of the 3 policies went up by around 3,000-3,500 (so not huge, but the policies are still young). I view it as moving money from one pocket to another since the cash value is still very liquid if needed (I can have a check in hand in 48 hours from those values). I view it as part of my 6 month emergency fund (I already pulled money out of my original one a few years back to put a new roof on the house I had at the time). At retirement, the cash values in the policies are projected (depending on the dividend of the policy each year) to be over half a mill (what's that going to be worth in another 30 years, though?). It will be one bucket I can pull retirement funds from - and I won't be taxed pulling them from that bucket as opposed to a 401(k) bucket or an IRA bucket. What if my retirement accounts take a dive 6 months before I plan to retire? Most people would have to either delay retiring, or retire at a lesser standard of living. Those with monies accumulated in cash value life policies can pull income from them and (hopefully) allow their retirement accounts to rebound before pulling money from them.
Like I said, they can just give you more options down the road.
If, though, you're getting your coverage for 10 or 15 bucks a month, that's tough to beat. If the policies you got were 20 year terms, though, you'll have to make the decision again in about 10 years.
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wilked
Footballguy
Guys, mattyl has a clear bias as an insurance salesman. I don't say that as a negative, just as an obvious 'there you are'. I have no doubt he believes his product is superior to term. I do not sell insurance, so am coming from an unbiased place, and having done extensive research there is no doubt in my mind that term is superior to whole life.
Whole life is complicated, expensive, difficult to understand and filled with fine print. This makes it next to impossible to 'shop', as each plan is somewhat unique and not able to be compared apples to apples.
Term is dead-simple, essentially 'commoditized'. This makes it easy to shop, which forces prices down and makes it cheap. The downside for insurance salesman (and saleswomen) is that that leaves little to pay their commissions, since it is a very competitive and low-margin product.
Put simply - insurance is not for wealth accumulation. I will say it again - insurance is not for wealth accumulation. Insurance is to provide for your loved ones in the event of an unexpected death. Determine how long you need to be insured for (often the biggest inputs are age of children and length of mortgage), pick an amount, and get the appropriate term insurance. Invest your savings that you have now that you chose term over whole, with the purpose of wealth accumulation.
Whole life is complicated, expensive, difficult to understand and filled with fine print. This makes it next to impossible to 'shop', as each plan is somewhat unique and not able to be compared apples to apples.
Term is dead-simple, essentially 'commoditized'. This makes it easy to shop, which forces prices down and makes it cheap. The downside for insurance salesman (and saleswomen) is that that leaves little to pay their commissions, since it is a very competitive and low-margin product.
Put simply - insurance is not for wealth accumulation. I will say it again - insurance is not for wealth accumulation. Insurance is to provide for your loved ones in the event of an unexpected death. Determine how long you need to be insured for (often the biggest inputs are age of children and length of mortgage), pick an amount, and get the appropriate term insurance. Invest your savings that you have now that you chose term over whole, with the purpose of wealth accumulation.
This and virtually 100% of everything you ever read on whole indicates that it's a bad life insurance vehicle for a vast majority of the population. It can be used as a diversification and investment tool only in certain niche instances (typically those who are well off and have retirement and life insurance already covered elsewhere. But very dangerous for most to use as a simple life insurance option.
Cold Dead Hands
Footballguy
My term life insurance is set to cover me until my youngest child is 24. She better be out of college by then. After that I will grab another, smaller policy to cover expenses for my wife.
wilked
Footballguy
i didn't read his example and don't need to. There's no free lunch. As I said, while life policies are very complicated. If his post doesn't extend 10+ paragraphs it doesn't contain all the loopholes, exceptions, and contingencies of whole life. Realistically if he can't sell you on whole life within a post, he should be fired from his job (if he can't sell you in a post how is he supposed to sell in real life)
youre welcome to take his recommendation at face value. I can assure you the picture is much more complicated than presented
youre welcome to take his recommendation at face value. I can assure you the picture is much more complicated than presented
matttyl
Footballguy
I also sell term insurance, and sell a lot of it. It's the easy sale - for the reasons you stated. I never sell one, though, without at least presenting a whole life alternative. You're correct in that it has more moving pieces, but I don't really think the basics of it are that hard to understand. I generalize it and say that the difference between term and whole life is a lot like the difference between renting and owning a house. If you rent - when you move you move with nothing (but it was easy). If you own, when you move you sell the house (for a hopeful gain, or you can decide to remain living there - no one is going to kick you out).
Whole life can do a lot of things well, but it doesn't do anything perfectly. It's not for wealth accumulation, though it can do that. Whole life policies would have greatly outdone the market for the first decade plus of this century. What if you were set to retire in 2008 or early 2009 when the market took a dive? What options would you have? Either continue working, or retire with a lesser standard of living. What if you lived off the cash value of your whole life policy for 2-3 years and allowed your investments to rebound? It gives you options you otherwise wouldn't have had. What if your term policy expired when you retired at age 65, and you were diagnosed with terminal stage 4 esophageal cancer at age 66 and died 4 months later like my father in law? Did my mother in law "need" that insurance money - no, she's doing ok; but had they known this was the situation they definitely wouldn't have picked the term product.
Again, it's not a whole life or invest. It's both. I'm not one to have all my eggs in one basket. It's also not for everyone. With the above poster who was shopping for insurance in his 20s and maybe didn't have much money to spend - term likely would have been the best choice (especially at those prices). For others, I feel that whole life is the superior product for the situation - but it obviously depends on the individual. Maybe for him the answer was one 100k term policy and one 100k whole life policy (even your polices don't have to be one or the other, you could do both).
matttyl
Footballguy
And you're taking the risk of still being insurable at that time. I just had a guy who bought a ten year term policy as he thought at the time it was all he needed. It expired and we looked at getting another one to replace it. He was declined for health reasons that were discovered in the underwriting for the policy. I bet he now wishes he could go back and buy the permanent policy.
FUBAR
Footballguy
The bolded is why you diversify based on time horizons and don't just ignore your investments over 50 years.
Cold Dead Hands
Footballguy
matttyl
Footballguy
I'll simply my above example, I don't want to make it too long and complicated.
30 year old buys $500k 20 year term. It's $405 a year (obviously he can pay monthly). It expires at age 50, and he's spend 8,100 in premiums at this point. He buys new 20 year term at 50 (assuming he's still healthy enough to do it) and it costs 1,500 a year for the next 20 years. He lives to 70, and paid 38k+ in total premiums that he'll never get back.
His twin bought a $500k whole life policy at age 30, it was 2,550 a year. At age 70 he's put in just over 100k in premiums, but has right at 290k in cash (that's about 6% net after tax had the first guy "invested the difference"). He also has coverage at age 71 and beyond where the first guy doesn't.
Now maybe you don't have the extra ~2,100 a year at age 30 and then this might not be for you and that's fine. But if you do, it's at least worth considering for your safe, liquid funds, wouldn't you say?
matttyl
Footballguy
His credentials above all else. Ask if he's paid by commissions or by fee - then ask yourself if you're ok with his answer (either are fine with me, but I'd like to know).
matttyl
Footballguy
Very much correct, but if you diversify and start to go to safer investments around age 55-60, then you can't continue to assume an 8% return on the "invest the difference." You can take more risk for more potential return with retirement funds at age 35 and 45 - but you need to remove some of that risk (and thus potential return) as you get closer to retirement. If at age 60+ you're in money market and bond funds, you can't continue to assume an 8-10% return.
ETA - I feel that one of the things you should diversify with is a whole life policy.
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MattFancy
Footballguy
We got all that. Seemed pretty good experience wise with me. We have a few friends and co-workers that use him and they all recommended him. He is paid by fee, but gets commission if we go with some of the other services and such they offer.
My dad and I had a disagreement on the cost of the fee. He thought it was high, I didn't think it was too bad. So what seems to be the common cost for yearly fees?
matttyl
Footballguy
And you likely will be. I was only trying to make the point that with a whole life policy earlier, that's not something you'd have to worry about. Again, they aren't for everyone, but as I'm sure you can tell I'm a pretty big advocate of one.
Not sure if already mentioned, but one big reason why I'm an advocate of whole life over term is that only about 2% of term policies actually pay off in a death claim - that's why they can be so cheap. The vast, vast, vast majority of people greatly outlive their policy.
matttyl
Footballguy
Depends on the work he's doing for you. If all he's doing is putting you in a set fund in a ROTH IRA or something, then $0 would be an appropriate fee.
Dentist
***Official FBG Dentist***
I know you're not a dentist, but a podcast I listen to called dentist money just addressed this and I learned a lot (it's a 2 part episode) even though I have no intent of ever hiring an
advisor because I know enough TO be an advisor on all but the most complicated tax/estate planning scenarios
http://dentistadvisors.com/podcast/episode11/
http://dentistadvisors.com/podcast/financial-advisor/
It's 80% relevant to basically anyone, the other 20% of the podcast is probably dental specific.. or pertaining to problems of the top 5%
