I have read from many different sources that term insurance is the best way to go, and just invest in mutual funds. But, I personally know a few people who own cash value policies. They have something called "equity indexed" life insurance (not variable life insurance) and seem to be pretty happy with it. Does anyone know anything about or have any experience with this kind of insurance? I'm considering going with something like that because I was told it's basically term insurance with a savings component where you earn interest based on the upward movement of the S%26amp;P 500, but you're not actually investing in the market so there's supposed to be no downside risk.
Anyone? Thanks.
What is the truth about cash value life insurance?
It's amazing to me that almost every time I see a question about life insurance, I see most people saying buy term and invest the difference. I also see a lot of folks try to compare cash value life insurance to an investment. This is awful.
Obviously I can't explain everything, but here is a list of the most common lies and misconceptions about life insurance:
http://www.twintierfinancial.com/article...
Anyway...before I go any further, I have to say this because it really bugs me that so many "experts" are confusing everyone else: cash value life insurance is not an investment.
IT IS NOT AN INVESTMENT.
It is a "life insurance death benefit with a savings component.". Savings component, not "investment component". Savings. There is a big difference.
What do typical cash value policies pay? 1-2% up to maybe 4% or 5% if you're lucky after commissions and sales charges. What do bank CDs pay? 1-2% up to maybe 4%, maybe 5% if you're lucky. Do you see any similarities?
Hardly ever do I hear the "term and invest the difference" folks talk about the FACT that about 1% of term policies ever pay a claim. That's one of a few reasons term insurance is so cheap.
They also live in a fantasy world where mutual funds will pay you 15% a year and you will never lose money. In retirement, you have many hundreds of thousands of dollars, but you will be either un-insurable (because you are too old) or the cost of insurance will be too high. This is OK according to some because you have all those hundreds of thousands of dollars and you don't need life insurance. They forget about what the IRS and lawyer fees/probate will do to all that money after you die.
The problem with the term and invest the difference approach is that you have 100% of your money in the stock market. What happens if the market takes a dive right before you are ready to retire. Suddenly, it doesn't matter how "smart" you were with your money. Do you remember the post 2000 crash?
Now, having said that, I don't think that you need to put every dime you have into a life insurance policy. They are long-term contracts, so they take 20 years or so to show their true value.
I hate to say it, but it sounds like there are just way too many people out there that have bought into Suze Orman's and Dave Ramsey's B.S.. That's too bad, because they are very well respected authorities in this industry and yet some of the stuff they are telling folks is absolutely false and I've proven it over and over again.
Anyway...a lot of these equity indexed life insurance policies are universal life insurance, which is basically a term insurance component married to a cash value account.
Some individuals think these equity indexed insurance policies are very complicated, but they are actually pretty easy to understand. The policy pays interest based on the upward movement of the stock market. It's then credited to your policy cash values use one of several formulas. The formula is what really determines how much you can potentially earn, and this is where a good advisor or insurance agent can be invaluable.
All an index represents is a number used to measure the general behavior of stock prices by measuring the current price behavior of a representative group of stocks in relation to a base value. The Dow Jones, for example, measures 30 of the largest and most established companies in America; often referred to as “blue chip” companies. It consists of companies like Wal-Mart, and Microsoft. The S%26amp;P 500, on the other hand, measures 500 large cap companies, most of which are American.
To make an equity indexed life insurance contract work, there needs to be two components: bonds (or bond-like instruments) and index call options. A bond is a debt instrument - a loan if you will - made by the Government or a corporation to another party, usually an institution like a bank or a life insurance company. These pay a fixed rate of return. If the bond is going to pay (i.e. if the debtor - the Government or the corporation - does not default on the bond) it will pay the stated interest rate. There is no question about what the interest rate will be, only IF they will pay.
An index call option is a stock option. A stock option is the right - but not the obligation - to buy or sell stock for a preset price (which is set when the option is purchased). There are two types of options: call options and put options. A put option is the right to sell stock at a preset price, and a call option is the right to buy stock at a preset price. So, for example, if you thought that a company’s stock was set to gain value, but you weren’t 100% sure that it would, you could buy a call option for much much less than buying the actual stock. Essentially, you are able to control a large amount of stock with very little money up front. You don’t actually own the stock and you don’t ever have to buy the stock, which is what gives you protection if the stock doesn’t do as well as you expected. However, there is an expiration for every option. And...the longer the expiration date, the more expensive the option will cost.
An index call option is a call option on a stock index - usually the S%26amp;P500 stock index. Banks and insurance companies are able to use a very precise mix of bonds (to guarantee the contract owner’s principal plus a small amount of appreciation) and index call options (to capture the upside potential of the stock market) to produce a new type of contract that gives the contract owner the upside potential of the stock market, without any of the downside risks associated with a direct investment in the stock market.
To make sure that you don't get "taken" or pay excessive commissions to the insurance agent, tell the insurance agent to "solve for the face amount". They should know what this means. If they give you a funny look, or say that they don't know what you're talking about or try to talk you out of that idea, get another agent.
Solving for the face amount means you take a dollar amount you want to set aside, and you buy the MINIMUM amount of death benefit you can possibly buy for that specific dollar amount. The MINIMUM amount of death benefit, not the maximum. This ensures that you get the most bang for your buck. Because most of these policies are universal life insurance, you might be surprised at how much insurance you can actually get buying the policy this way.
It will cut into the agent's commission, reducing it sometimes by quite a bit, but it's the only way to really cheapen the cost of insurance and maximize the amount of cash value you get back on a permanent policy. Not all agents and advisors are out to "take you for a ride" so to speak, so be careful who you listen to.
You should divide yourself into two parts: savings and investments. Stick to life insurance for long-term savings, or a high yield savings account for a way to help save money short term.
Then...diversify. You don't need to put every last dime into an insurance policy or saving account. Buy some no-load mutual funds, stocks, and learn how to invest.
The "buy term and invest the difference" crowd are saying something like this: "Buy dirt cheap insurance, and invest in mutual funds (maybe some stocks). You'll earn 10-15% and you'll be set for life."
I say this: "Instead of trying to make 100% of your money earn 10% or more, take 80-90% of your money and put it into a safe place, like cash value life insurance, and then use the remaining 10-20% to buy speculative investments and try to earn 20%, 30%, 50% or more.
Learn everything you can about investing in gold, IPOs, energy stocks, mining stocks, etc. for that 10-20%. You won't be putting 100% of your money at risk that way.
But now I'm moving off topic. The equity indexed life insurance is a good option depending on what you want or need it for. It's permanent life insurance protection with a *savings*, not investment, savings component.
Reply:I find it very interesting that the "asker" picked this answer as the best, when by far the most common answer was different than this one. Without going beyond what is one the thread, I have to wonder if there is a connection between the "asker" and the "answerer". Report Abuse
Reply:Almost all financial advisors who do not get a commmission from the products you purchawe prefer term life insurance to whole life because you can buy much more insurance for each premium dollar. Generally, the consenus is that people can invest their remaining dollars more efficiently than the return they get in the cash surrender of the whole life policy.
Attached is a link that explains the equity indexed life insurance idea. It looks as if the policies offer the insured to participate in some of the upside of the stock market while in essence also providing protection against loss in the market.
These plans apear to have many potential variations in them. One variation is what is the percent of the market percentage increase that the insured gets credited. Some policies have a limitation of 50% others are 80%. So, for example, if ther stock index gets a 15% return, the insured gets either 7.5% or up to 12% of the return. However, the policies also have a maximum return cap such as 10%. If the policy has that cap, then the cash surrender value is limited to a maximum 10% increase even if the market increase was 15% (and even if you have an 80% participant policy which would normally let you get a 12% return if there were no cap).
The downside protection will vary as well. Some insurers offer a guaranteed minimum return of, say 2%, but others say the minimum is 0% (which applies if the market has negative return for the year).
One insurance company whose literature I read says that the market return is based on the S%26amp;P 500, a nice index, but it excludes the dividende component of the stock return. Since the average dividend yield on the S%26amp;P 500 is in the area of 1.5%, this gives the insurer another 1.5% in which the insured does not participate. Historically, dividends are a large percentage of total stock market returns, so the market effect of excluding dividends could be a significant drag on the market return of the cash surrender value. The insureer also had the power to change some items like the interest cap rate and so on.
Based on what I have read, the premiums are likely to be higher for this product since the insurer is surely buying some market risk protection for guaranteeing some market rate of return and a minimum return.
It is very clear to me that you have to make sure you understand the idea of what index the policy is tied to (S%26amp;P 500 for example), what the market participation percentage is (do you get 50% or 80% of the market return as your return), whether there is an annual return cap whic further limites the market return, whether or not dividends on stocks are included in the stock index return and what the minumum return rate is. And compare premiums for different options (50% vs. 80%, diferent levels of guaranteed minimum return, etc.), including term insurance.
The whole package is likely to be much more conusfing and hard to evaluate than a normal insurance policy.
Personally, I have always preferred term insurance since I can get it for less cost and I invest my own money as I wish.
Reply:Make sure you do not buy any equity indexed annuity. The story sounds good , make money when the market is up and never lose money when the market is down. In the long run the fee's and hidden costs kill the contract. Also there are usually crazy surrender charges like 19 years. If you buy cash value life insurance I would go with 3 options
1. Whole Life
2. Term
3. Universal Life with a Secondary Guarantee ( Like a Infinite term) Not Flexible though
Reply:Term is much less expensive, up to 1/10th as much as whole life, or its variations. Term is also like renting, you get nothing in return, unless you die during the term period, and your heirs profit. It is pure family protection.
Whole life means you pay for insurance............. your whole life. Yes, you can borrow against it, but will be charged interest on your own money. Yes, it does earn interest, but ususally not more than 3%. Yes, if tied to the S%26amp;P, you "may" get more............... you may not.
You will do better in LEVEL TERM for 20 or more years, if you invest the savings or part of the difference from what you would have spent buying whole life.
Also, there is much higher commission for agents to sell anything but term. They do not do what's best for the consumer, but for their own pockets, as they will get a percentage of what you pay year after year after year, as long as you pay this policy. You will help them in their retirement.
I got into insurance this year, then got out of it, due to its deceptive practices, and unbelievable contradictions.
Reply:Well, here's what you do. Look at the cost of the term insurance, then look at the cost of the equity indexed life insurance. Now, subtract the term from the equity indexed life premium, and pretend you're investing it at 10% for 20 years, use this calculator: http://www.msfinancialsavvy.com/calculat...
Now, see how much of the value you're paying in to the equity indexed life actually goes to investment. Um, you're going to be WAY WAY WAY ahead - like have 10X as much money - if you go for term/invest the difference.
The people that are happy with their equity indexed life are thinking, "wow, I'm getting 10% on my cash value!" when they should be thinking, "wow, only 10% of what I actually pay in goes to cash value, which means I"m paying about 7X as much as I should for this life insurance!"
Using life insurance as an investment tool is for people who are really bad at math. Life insurance is NOT a good investment tool - the vast majority of the money it makes goes to the insurance company, and the agent.
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