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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.
It is better to buy term and invest the difference. Base on your age, I would get a 30 year term policy with a spouse rider. How much coverage you should get? Financial experts say you should get 10 times the amount of your annual income to adequately cover the family. If you make $40,000/year, then you should get $400,000 coverage. If your spouse makes $50,000/year, then she should get $500,000. That's a total coverage of almost $1 million. Annual premiums will be between $1100-$1500.
Let's say you invest $300/month for the next 30 years. Mutual funds has a historical rate of return of around 8-12%. If your mutual fund earn an average rate of 10% over a 30 year period, you will have: $683,700. Ok, what if you can only put in $100/month? At 10% in 30 years, you will have: $228,000.
When your insurance agent says they pay dividends on life insurance, that means you are overpaying your premiums. So the company refunds it back to you because there is a federal law that states that you can not increase the value of your cash value faster than a 7-pay whole life (meaning, your cash value must not be greater than what it should be in 7 years).
Life insurance dividend is not the same as receiving a dividend on mutual funds. Dividend on mutual funds are only paid out if profits are recognized and the mutual fund sell its profits to its shareholders as a dividend.
Cash value life insurance doesn't pay out cash value when you die. Buying term and investing the difference gives death benefits and investments if you during the term or just investments if you outlive the term. Cash value doesn't have that flexibility. Report It
Always consider term (and invest difference).
Going this way u will have 3 to 25 times what the other choices will give u. Report It
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.
Term insurance is always the safest bet. Generally, you shouldn't rely upon an insurance product as an investment.
Stay away from Universal Life policies. While the premium may be acceptable now, I've seen literally hundreds of folks who faithfully pay the premium that's billed to them, not understanding that it's inadequate to cover the actual monthly charges for insurance. After paying thousands, they either lose their policies (because all cash value is eaten up) or they are faced with HUGE monthly costs. Do a web search of "Universal Life class action lawsuit" and you'll see what I mean.
For what its worth:
You are both young, you need to look at a Variable Universal Life Policy. A Universal Life isn't bad by any means, but you have some opportunity to gain if the market does what history has shown in a Variable Product. The expenses and fees are high, but the cost of the insurance is about the same and the other part of the premium goes into investments. On the investment side, you will pay anywhere from 3% to 5.5% of premium going in, but remember this is has some tax advantages that should make up for the policy M&E charges in the long haul(20 + years) as long as the policy stays in force. This is also a policy you can increase or decrease face amounts and premiums within guidlines. The policy in my opinion puts you in the drivers seat, you can pick the premium with certain guideline limitations, the face amount upon qualification, and you investments. People I have talked to in the past have told me they are going to buy term and invest the difference. The problem is most dont invest the difference and a trip to Orlando with the kids gets in the way. The policy will make you save. Might be a decent deal for you to look into.
Get term. There are many competitive companies available. If you want some permanent insurance, shop around for other companies as well and look at universal life with death benefit guarantees. The prices are very competitive and not subject to the same fluctuations of interest rate performance and dividends mentioned above..
fyi..dividends are a return of your overpayment of premiums.