Author Topic: Life Insurance - Whole vs Term vs Universal  (Read 5310 times)

ICUMD

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Life Insurance - Whole vs Term vs Universal
« on: October 26, 2017, 11:10:13 AM »
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.
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KCLarkin

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #1 on: October 26, 2017, 11:26:23 AM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #2 on: October 26, 2017, 11:34:19 AM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #3 on: October 26, 2017, 12:11:17 PM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #4 on: October 26, 2017, 12:11:30 PM »
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.
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KCLarkin

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #5 on: October 26, 2017, 12:28:00 PM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #6 on: October 26, 2017, 12:46:53 PM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #7 on: October 26, 2017, 01:01:27 PM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #8 on: October 26, 2017, 02:01:56 PM »
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

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Re: Life Insurance - Whole vs Term vs Universal
« Reply #9 on: October 26, 2017, 04:50:32 PM »
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 donít want your heirs to have to sell, but if you have sizable liquid assets like stocks itís 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.