ghostguy123
Footballguy
Is there a link someone would be able to recommend with the layout of how the whole life works in terms of the growth, withdrawals..........
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Personal Finance Advice and Education! (1 Viewer)
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wilked
Footballguy
matttyl
Footballguy
No problem, and happy to help answer any question or clear up any misconceptions. As was pointed about by someone above who's apparently not a fan of WL, it does have quite a few moving parts and he (I assume it was a guy) is very correct.
As to your two direct questions (it looks like others have questions also, and as I don't know how to "multiquote" I'll answer them with another post - so I'm sorry to be so "posty"):
1 - This might be a bit wordy, and I apologize up front, but maybe it will also give answers to any follow up questions you might have. When you buy a term policy, the price is based on the risk that you'll die in the term of time of the contract. If you're 25, male, and in good health, the chance of anything happening to you in the next 20 years is extremely small. The only real situations of note are the rare fatal car accident. That's why carries can price it so small. Because I'm such a fun guy, I carry around "life expectancy tables" in my briefcase (it's on a foldout of a bunch of tax charts and all). A 25 year old male (as of 2011) has a life expectancy of 52.5 years, and a female has 56.9. That's why a 20 (or even 30) year term policy is so cheap - they are taking on hardly any risk. If you did have any serious health issues, they'd just decline you for the policy. Those life expectancies for the 25 year old population who isn't extremely obese, doesn't have any serious health issues, and isn't a tobacco user (all of those are included in the above numbers) is actually well over 60 years.
Now, when they price a whole life, it's totally different. Why? Cause everyone dies. No one lives forever. So lets again look at that healthy 25 year old male with a lets call it 65 year life expectancy (to age 90). The carrier, when pricing a lets call it 250k WL asks themselves - "how much do we need to collect from him every month (or year if paying annually) that we can set aside in a little account, at a guaranteed minimum interest rate, that at age 90 the contract will have grown to 250k?" Cause remember, everyone gets exactly one claim. That little account they are setting your premiums in - that's your cash value (though it's stunted a bit in the early years, as the details of my 13 year old policy show).
Now that the background is out of the way - the policy has to have a minimum return for the cash value to equal at least 250k by age 100 or earlier (cause again, no one lives forever, and they need to build up that reserve for that one claim that's coming). That's the minimum or "guaranteed" return - for most policies it's about 4% or so, and is typically set (or at least heavily regulated) by the bureau of insurance, not the insurance company. But insurance companies also make money (especially when people don't die and they do a good job of weeding out the risk). Stock companies pay this money back to their stock holders and then the balance to their policy holders. Mutual companies (all insurance companies with "mutual" in their name, and some others that don't directly advertise it like that) don't have stock holders, so the money they make gets paid back to it's policy holders in the form of a dividend. My policy is from one of these mutual companies. If you go down about 2/3rds of the way on the link there, you'll see a recent history of dividends from 11 insurance carriers (I'd be happy to share a longer history of any of them, if I can find it if you're interested). The dividend is on top of the minimum base. That DOES NOT mean your cash value will grow by that amount (a huge misconception of the product). That's because the insurance itself still has a cost (you could die in any year, and the carrier has to offset that risk). So the "delta" you ask about is that dividend, which is based on the carrier that backs it and how well they are doing. In the last 21 years, one of those carriers listed has had an annual dividend of about 7.5% - not bad.
You also ask about front end loading payments - also complicated, but turns the policy into a MEC (modified endowment contract) which in general, you don't want to do.
2 - Withdrawals can be either "loans" or "surrenders" - each has advantages and disadvantages, but in general you'd actually like them to be loans (surrenders lower the death benefit and can't be paid back or undone). The rate can either be locked in at the outset of the policy (typically a bit higher in today's world) or adjustable (depends on interest rates), but you can switch between the two during the contract. My policy that I referenced above currently has an adjustable rate (it adjusts at renewal) of 3.93%. My newest policy, though, which also has an adjustable rate, is at 5%. Obviously if I needed a loan, it would be taken from the first policy.
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matttyl
Footballguy
I talked a bit about the guaranteed return above, and how it differs (hopefully) from what your actual return will be. Again, that guaranteed return is typically small, and will still have insurance costs taken from it, so the effective rate is even smaller. It's one of the few products, though, that give you any sort of absolute worst case scenario for what it will be worth 10 or 20 years from now.
Something else that's also misconstrued a lot of places - while you do have both a cash value as well as a death benefit, in a way you don't have both at the same time. Here's what I mean by that - my personal policy that I've referenced a few times; basics is a 170k death benefit and 15k of cash value today. Lets say I took a 10k loan from it today to buy a car or for some other emergency. Well, my cash would now be lowered by that 10k loan (I'm not surrendering, I'm loaning) to 5k. With me so far? Well, if I were to die tomorrow, my death benefit would also be lowered by 10k - to 160k. That's because there's still an outstanding loan against the policy that would have to be paid back. The death benefit that would be paid would be "net" of any loan. If you didn't have any loans at the time of death - no problem, and your beneficiary would get the full amount. But if you did, those would be satisfied first and then the balance (there would always be a balance, you can't loan more cash than you have, and the DB is always more than cash value) would be paid.
matttyl
Footballguy
So given the common 4% rate you referenced above, after costs/commissions are taken out....what's the typical effective rate of a policy?
Also, isn't the term "cash value" misleading...b/c you're not taking the cash out free and clear...you're simply just taking a loan out (albeit you already have the means to pay back the loan upon death).....or am i missing something?
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Dentist
***Official FBG Dentist***
you definitely can, after you have a proper retirement trajectory, own a home, and have reserve cash beyond that.
it's just that, that defines almost no one. If you can be that person, then go for it
I've mentioned this before, but I just started my kids 529 last year (twin 5yo boys)....Biggest driver for me was finding out that I can purchase a home (under some LLC) and when the boys get to college, have them pay rent to me out of the 529. Rental rate is defined by room and board at the school - currently at LSU $8000 per year per kid. So that's $64k I can put towards a house/townhome/apt out of tax free $.
A few caveats here:
(1) You need to watch close how much each 529 fund grows to...b/c you don't want to over fund it. Doesn't matter much right now, but will need to monitor it as they get closer to college age.
(2) B/c you're working with a somewhat limited time frame (b/w 0-18 years), you really need to monitor the types of investments that you have in your 529. Currently, I'm in an all large cap index fund b/c i'm 13 years out. If you want to "set and forget", they do have age based funds similar to retirement funds.....but you don't want to get caught in a down cycle....and it's different from retirement b/c you can't just delay school until the fund picks back up (well you can...but really sub-optimal)
A few caveats here:
(1) You need to watch close how much each 529 fund grows to...b/c you don't want to over fund it. Doesn't matter much right now, but will need to monitor it as they get closer to college age.
(2) B/c you're working with a somewhat limited time frame (b/w 0-18 years), you really need to monitor the types of investments that you have in your 529. Currently, I'm in an all large cap index fund b/c i'm 13 years out. If you want to "set and forget", they do have age based funds similar to retirement funds.....but you don't want to get caught in a down cycle....and it's different from retirement b/c you can't just delay school until the fund picks back up (well you can...but really sub-optimal)
matttyl
Footballguy
The typical effective rate of the policy's guaranteed rate you mean? Well, it's negative in the early years, and probably isn't even back to even for 15 or so. It's not positive for a bit, and likely never gets above 2.5% or so. Looking at my policy now (which may not be fair, as it's already paid a dividend each year of it's 13 years which at this point can't be undone) has had an effective rate (13 years of 1,149 and a cash value just over 15k) of just .37%. At year 30, the absolute minimum cash the policy will have is 47,756 which is an effective rate of 2.15%. Year 43 (my age 65) the minimum effective rate after all costs/commissions would be 2.26%.
But again, that assumes that the carrier never ever pays a dividend at all from now until eternity. The carriers who's dividends were listed in the link I put in above have never done that. Assuming the current dividend on my policy holds for the 43 years (you see in the link that the dividend might go up or down a little each year from those carriers) - my cash value will be 181,566 at year 43 (my age 65). That effective rate is 5.37% - but again, that's based on current assumptions, not absolute minimums. Also, (and just as important) none of those calculations are on just the "invest the difference" had I bought term for my life insurance coverage needs. You'd need to do that, and subtract out whatever the cost of "cheap term" would have been. Doing that, you'd likely see that the minimum effective rate to be around 3.5%ish - and the effective rate assuming current dividends remain relatively constant closer to 6% (maybe even a bit higher).
The cash value could be misleading, depending on what you're trying to do. When I say above that at age 65 my policy will have 181k of cash - I mean it. I can put it on asset statements, I can borrow against it, I can use it to pay the policy's premium if there still is one, I can use it to pay other policy premiums from the same carrier, on and on. I can also take the full amount out free and clear - but if I did that I'd cancel out the insurance - and that hardly ever, ever happens. It is, though, the fair comparison if you're doing the "buy term and invest the difference" calculation. If I wanted at age 65 to take my full 181k of cash and walk away from the policy, I could absolutely do that, I just wouldn't have any life insurance anymore.
ETA - I don't want to mislead. When I say above that if at age 65 I could take the 181k out free and clear, I do mean it, but it would likely be a taxable event. Now, we don't know what tax law will be in 2 years, much less 30 years in the future. But if the tax law then is what it is today, I'll be taxed on the gain of the contract - anything above the basis I'd have in the policy at that time. My basis will be ~49k, and the cash value will be 181k - so the gain would be ~132k. So I'd pay income tax on 132k - but would have 181k in cash in hand to do so. Also, that's really no different than liquidating your 401(k) or IRA, though, so I don't personally view it as a negative. If I were to borrow against it, though, and the policy still stays in force, that loan would be tax free.
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matttyl
Footballguy
Here is a good little tidbit that spells out loans on WL policies better than I did, if you're interested (I think they are talking about VULs in the prior paragraph, and continue to a bit, though)....
Policy Loan
There is a way to avoid the income tax on your cash value growth. You are allowed to take money out of your policy through a loan instead of a withdrawal. The IRS doesn't tax loans. As long as you keep your policy active, you never need to pay back the loan. When you die, it will be repaid out of your policy death benefit. This lets you spend your cash value growth without paying taxes. However, borrowing your cash value will decrease the inheritance for your heirs. If you want to pay back to loan and get your original death benefit, you need to pay your loan back with interest.
Policy Loan
There is a way to avoid the income tax on your cash value growth. You are allowed to take money out of your policy through a loan instead of a withdrawal. The IRS doesn't tax loans. As long as you keep your policy active, you never need to pay back the loan. When you die, it will be repaid out of your policy death benefit. This lets you spend your cash value growth without paying taxes. However, borrowing your cash value will decrease the inheritance for your heirs. If you want to pay back to loan and get your original death benefit, you need to pay your loan back with interest.
Dentist
***Official FBG Dentist***
urbanhack
Fight The Power!
need advice. Selling our condo and moving to Portland later this month. Condo went on the market yesterday and it's on fire. I'm expecting to get offers over the listing price and might actually bank 75K from the sale. I'll be using this to buy a house in Portland later this year or early in 2017. I have at least a six month lease on the place we are renting. What should I do with the proceeds from this sale? Just put it into savings? CD? short term bond? TIA
matttyl
Footballguy
I think you can't do anything with them - unless you want to pay taxes on them. If you have access to them personally, it's a taxable event. If you're ok with that, no issue with a 6 month CD I could see.
urbanhack
Fight The Power!
Do I have to pay taxes on the profit I made selling my home?
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
Random
Footballguy
No, you don't pay taxes on the sale of your personal property (up to like 500K profit). The money is yours free and clear.
FUBAR
Footballguy
call me crazy / stupid / whatever. but we've been putting money into our kids accounts before buying a home. Different circumstances than your "normal" family who lives in one place for 10-50 years. But even now with a mortgage, we'll put money into their Coverdell accounts before paying off the house. Convince me otherwise.
Dentist
***Official FBG Dentist***
Is it possible to take out a loan for retirement where you live if you're short?
How about college, can you take out loans for that?
How confident are you that your kids will support you if you were destitute in retirement?
Too many unknowns: Assuming it's you or your wife's work that cause the different circumstances...if so: How often do you move around? Does your company compensate you for closing costs when you move? Would hate to get caught in a down market when you absolutely have to sell a house to move for a job.
FUBAR
Footballguy
to the first two "questions". To the 3rd, very but we're not counting on that. I never said we weren't saving for retirement, we just haven't bought a house.FWIW, we have the equivalent of 7 years expenses saved in our retirement accounts and a pension (between $3k-$5k per month plus inflation). Plus I'll get another job in the next couple of years. We're only 39, so not fully retiring any time soon.
For the past 17 years it's been my work moving us, but that will change in the next few years. Job doesn't compensate for closing costs. Like I wrote before in here, we are buying our house now because we expect to stop moving and stay here for a while.
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ghostguy123
Footballguy
Speaking of insurance, I met with my insurance guy to just go over all my policies and make sure I had things in order.
I had thought my home insurance was a little high, come to find out my house (which I paid $118,000 for and is maybe now worth $130,000 after some upgrades) has a total loss coverage (not even counting personal property) amount of around $250,000. I was asking the guy WHY, and apparently based on the square footage that is the estimated cost to rebuild the house. I was like whaaaaaaaaaaaaaaaaaaaaaaaaaaaat?????
Made me wanna burn my house down.
I had thought my home insurance was a little high, come to find out my house (which I paid $118,000 for and is maybe now worth $130,000 after some upgrades) has a total loss coverage (not even counting personal property) amount of around $250,000. I was asking the guy WHY, and apparently based on the square footage that is the estimated cost to rebuild the house. I was like whaaaaaaaaaaaaaaaaaaaaaaaaaaaat?????
Made me wanna burn my house down.
FUBAR
Footballguy
When was the house built? 15 years ago when we bought a house built in 1900, we had the same issue. It happens.
Statcruncher
Footballguy
Alright financial wizards help me out with this one. What is the best way to prepare for a child's retirement? I can set up a Roth for my kids but I can't contribute until they have an actual job with taxable income. Savings and CD's suck. What vehicle can I use to throw $10 a week into an account for my 10 y/o so if he winds up with his mother's financial IQ he won't have to eat Alpo when he turns 60?
ghostguy123
Footballguy
1978. If THIS house costs THAT much to rebuild, then anyone building a house in this area is a total moron.
ghostguy123
Footballguy
Statcruncher
Footballguy
I'd rather they have something they are vested in and can contribute to rather than having them hoping I die soon.
Random
Footballguy
This happens on almost all of my rental properties because they are big old houses. Its because your policy is based on replacement cost (and you will have to rebuild it to get the full amount if it burns down). If you want a much cheaper policy ask your ins guy to base it on acv (actual cash value).
My agent always runs them first on replacement cost to so we can have a good laugh ($280,000 coverage on a house we paid 15K for), then quotes it based on a more reasonable acv (usu around 80-100K).
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If either you or your partner are not maxing out your Roth contributions, invest your kid's money in there. You can get at the principal anytime. Then once they are working age, move the money into their personal Roth year by year. I've looked into Government EE bonds, old-school style, and they are horrible. Btw if your Roths are maxed out then just open up an online brokerage account for each kid. Bummer is that they'll have to pay taxes on the gain but its still overly kind of you.
Steve Tasker
Footballguy
The "can't have access to the cash" rule you mentioned is in regard to 1031 exchanges, aka "like-kind" exchanges. That would apply to investment property or income-producing property but wouldn't apply to a personal residence. In a standard real estate 1031 exchange, commonly called a "Starker exchange" named after a court case, the taxpayer sells the property, the buyer pays a qualified intermediary who holds the funds. The taxpayer acquires a new property, and directs the qualified intermediary to disburse the funds to acquire the new property. There are a whole host of rules and regulations and such, but the gist is that if the taxpayer never accesses the proceeds, the gain on the initial sale is tax-deferred.
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Track the $10/week and throw it into a S&P 500 mirroring mutual fund twice a year (minimizing fees and somewhat dollar cost averaging)...when they get a actual job, deposit that into a roth
ghostguy123
Footballguy
Well, if they are bad with money they will just blow through whatever account you set up for them, and then they would be hoping you die soon anyway.Statcruncher said:
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Long Ball Larry
Footballguy
How would you estimate the appreciation of a home over the course of the next 7 years? Is there a general standard % for long-term appreciation? This is in an area that is quite stable, so while I realize that there can be many variables, I would feel comfortable using some historical norm for my purposes, just to get an estimate. I have data for 872 properties in the directly adjacent area. Should/can I use the average increase for those properties (maybe taking out certain sales that might have occurred within certain times in the fairly recent past? like only use anything that sold 10 years ago or more?). Or would some generic historical norm work?
Binky The Doormat
Footballguy
If you must have some kind of estimated number with which to work - I would go with something based on very recent historical appreciation. The other big part of the variables will also depend on what kind of a deal you got - price per SF/where the home is on the neighborhood scale lowest vs. highest.
The estimated number still doesn't mean much.
ghostguy123
Footballguy
Bit of a tangent, but I can't wait until realtors are a thing of the past, or at the very least some form of selling homes where if I want to sell a home worth about $150,000 and buy a home worth about $150,000 I don't have to pay 10 grand to sell my house and pay another 10 grand for an inflated price on my new house..........all to cover realtor fees.
The way things are online now, this HAS to change soon. Has to.
Sorry. Rant over.
The way things are online now, this HAS to change soon. Has to.
Sorry. Rant over.
matttyl
Footballguy
Steve Tasker
Footballguy
The whole 103x series is related to transactions with tax-deferred or otherwise special tax consequences. 1033 deals with my favorite tax term, the involuntary conversion....meaning casualty loss, theft loss, eminent domain issues, etc.
matttyl
Footballguy
Sort of related to your question - at what age can you start taking steps to start a credit history for a child? My folks did so for me, which greatly helped me when buying a car, house, and I would imagine other situations I wasn't even aware of. And what steps would you suggest?
wilked
Footballguy
This one's pretty easy - estimate 0% (real, or tracked with inflation nominal). That matches historical for housing returns
Quote from Robert Shiller below, where he expounded on the point - "Don't invest in housing"
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Chadstroma
Footballguy
Generally 18. You might be able to find something 17 years if you are on it but generally not since at age 17 they are legally unable to enter in a contract and thus could walk away without any recourse.
I usually strongly encourage a student credit card when kids turn 18 for the very reason of establishing credit history since the biggest factor to credit is length of history. When a kid turns 18 you can get them a student credit card fairly easily that will tend to have a 200-500 credit limit. Make sure they don't over use it and get themselves into a hole and pay on time.
The other way most kids establish credit history is student loans. Almost everyone either get a student credit card, student loans or a car loan (but car loans to establish credit will be like 20% interest).
Chadstroma
Footballguy
I would set up a trust and write it up that the trust so that it provides for their retirement after you are gone. In the meantime, it is your money (well as trustee) and you control it. It is further 'controlled' even if you are gone because a trustee can not legally go against how the trust is set up.
You can also set up the trust to take care of education etc. Lump sums at certain ages, etc. Set up the beneficiaries (or change the vesting to the trust) on your own accounts, properties, etc.
There is no way for you to know how disciplined/good with money or not your child will be. A retirement account is in their name and they will have access to it. They could end up going thru a drug problem early in life and drain it all. This would protect against that.
matttyl
Footballguy
Chadstroma
Footballguy
Depends on the lender but that is a possibility for sure. But I would go with a student credit card at 18 first and worry about the car loan as needed. IMO
matttyl
Footballguy
FUBAR
Footballguy
interesting. I'd think housing would keep up with inflation, buying long term is better than renting long term, and if you can buy a house and rent it out to pay the mortgage, that not a bad investment. But no, I wouldn't buy a house predicting any real gains.
Chadstroma
Footballguy
Yea, I am in the boat that the realtor value of what they use to provide to what they provide now is not in line with compensation. There still can be some value but things they did provide before are just not important in the information age we live in. You don't need local knowledge of crime, schools, etc now. You don't need them to know when a house is on the market. You basically need them now to see the houses because they have it set up that you can't unless you have a realtor.
FUBAR
Footballguy
We are absolutely thrilled to be buying without a realtor. Unique circumstances but saving ~$20k is a huge win.
