Is cash value life insurance a good investment?
August 11, 2008 2:44 PM Subscribe
Is cash value life insurance a good investment?
I've met a couple of times with some financial advisors from Northwestern Mutual and they are pushing something called a cash value life insurance policy as a great retirement investment. According to them it has tax advantages over roth IRAs and 401k while outperforming them and having less risk. I can't find too much on the web about cash value life insurances, anyone have an understanding of them?
I've met a couple of times with some financial advisors from Northwestern Mutual and they are pushing something called a cash value life insurance policy as a great retirement investment. According to them it has tax advantages over roth IRAs and 401k while outperforming them and having less risk. I can't find too much on the web about cash value life insurances, anyone have an understanding of them?
Best answer: Remember that the proverbial truck can run you over at any time. So, if you are a family breadwinner, you should have some kind of life insurance, but term insurance is a much better idea. Buy it while you need it, that is, while someone is dependent on you, while you have kids that need college educations, while you have a mortgage to pay off. Cancel it when you have net worth that's sufficient for your loved ones to carry on without you.
Term is much cheaper than cash value insurance. Put all your other savings into IRA or 401k and don't listen to life insurance sales pitches.
posted by beagle at 2:57 PM on August 11, 2008
Term is much cheaper than cash value insurance. Put all your other savings into IRA or 401k and don't listen to life insurance sales pitches.
posted by beagle at 2:57 PM on August 11, 2008
Best answer: It's not a good investment. If it were such a good investment, why would people need to sell it so hard, on commission?
posted by Cool Papa Bell at 3:18 PM on August 11, 2008
posted by Cool Papa Bell at 3:18 PM on August 11, 2008
Best answer: Not usually, imo, but there circumstances where I think it's not inappropriate. I almost always prefer term insurance.
posted by small_ruminant at 3:24 PM on August 11, 2008
posted by small_ruminant at 3:24 PM on August 11, 2008
Response by poster: Hmm, they pushed it in the meetings specifically as better than 401k's and Roth IRA's, complete with spreadsheets and everything. That seems highly dishonest, almost fraudulent. I should have known it was bunk when they asked me for the numbers of some of my friends. Reminded me of a MLM scheme.
Thanks to all for the responses, I'll definitely stay away from this one.
posted by no_moniker at 4:07 PM on August 11, 2008
Thanks to all for the responses, I'll definitely stay away from this one.
posted by no_moniker at 4:07 PM on August 11, 2008
It appears to be a good vehicle for estate planning. IE, if you're rich. The pure rate of return may not be so good, but if you count it against estate taxes at the end of life, the return starts to look good.
posted by gjc at 4:12 PM on August 11, 2008
posted by gjc at 4:12 PM on August 11, 2008
It depends how you use it. If you don't ever tap into the money, it is a poor investment - no doubt about it. However, if you take advantage of the fact that you can borrow against the cash value (where the interest is tax deductible) then it can be awesome financial mechanism for tapping into some capital so that you can be your own bank, so to speak. You basically are able to loan money to yourself.
The interest rates for taking loans against cash in a cash-value policy are usually pretty low (my NYL policy loan interest rate is currently 5.25%). Again, you cannot make the blanket statement, it is a bad investment, without taking into consideration how you can use the leverage cash value can provide.
I would caution you: Although you do not have to pay your loan off, you should cause any outstanding loans against your policy at the time of death will reduce your death benefit by that amount. Carefully look at the ledger your agent shows you. Ask him what the internal rate of return is on your policy for every single year using guaranteed values.
I always like the old rule of thumb, "If your agent cant calculate the present value of an annuity, don't do business with him".
posted by yoyoceramic at 4:35 PM on August 11, 2008
The interest rates for taking loans against cash in a cash-value policy are usually pretty low (my NYL policy loan interest rate is currently 5.25%). Again, you cannot make the blanket statement, it is a bad investment, without taking into consideration how you can use the leverage cash value can provide.
I would caution you: Although you do not have to pay your loan off, you should cause any outstanding loans against your policy at the time of death will reduce your death benefit by that amount. Carefully look at the ledger your agent shows you. Ask him what the internal rate of return is on your policy for every single year using guaranteed values.
I always like the old rule of thumb, "If your agent cant calculate the present value of an annuity, don't do business with him".
posted by yoyoceramic at 4:35 PM on August 11, 2008
The issues with cash value life insurance policies are reasonably covered in the links already posted.
First, never again go to that financial advisor.
Second, go get yourself a copy of Personal Finance for Dummies (yes, I hate the title too, but the book is awesome). It covers things like; cash value life insurance policies are almost always not a good idea, financial advisers that make commissions are bad. Read it cover to cover to cover. Do the things it tells you to do, and re-read it (or at least relevant sections) every year as you work on various aspects of your financial wellbeing.
posted by fief at 8:41 PM on August 11, 2008 [1 favorite]
First, never again go to that financial advisor.
Second, go get yourself a copy of Personal Finance for Dummies (yes, I hate the title too, but the book is awesome). It covers things like; cash value life insurance policies are almost always not a good idea, financial advisers that make commissions are bad. Read it cover to cover to cover. Do the things it tells you to do, and re-read it (or at least relevant sections) every year as you work on various aspects of your financial wellbeing.
posted by fief at 8:41 PM on August 11, 2008 [1 favorite]
Financial advisors who make commissions are not always bad. I know some pretty stellar ones.
The answer to most financial questions is "it depends." If there was one thing I had to say was nearly always bad, it'd be blanket statements.
posted by small_ruminant at 8:48 PM on August 11, 2008
The answer to most financial questions is "it depends." If there was one thing I had to say was nearly always bad, it'd be blanket statements.
posted by small_ruminant at 8:48 PM on August 11, 2008
The "just say no" approach isn't a good one. For some people, under some circumstances, traditional life insurance can be a valuable product for tax minimization and estate planning.
However, you are not likely to be among those people, given that your income is low enough that you are are apparently still eligible for a Roth IRA.
Moreover, the commissions for whole life insurance are so high that they inevitably color the advice you receive. As small_ruminant says, there are many commission-based advisers who are excellent and many individuals who are best served by using them, but you must never rely upon the advice of one when buying whole life. Only begin to consider it on the advice of an accountant, lawyer or money manager who is strictly compensated by the hour or by a percentage of your assets.
posted by MattD at 10:22 PM on August 11, 2008 [1 favorite]
However, you are not likely to be among those people, given that your income is low enough that you are are apparently still eligible for a Roth IRA.
Moreover, the commissions for whole life insurance are so high that they inevitably color the advice you receive. As small_ruminant says, there are many commission-based advisers who are excellent and many individuals who are best served by using them, but you must never rely upon the advice of one when buying whole life. Only begin to consider it on the advice of an accountant, lawyer or money manager who is strictly compensated by the hour or by a percentage of your assets.
posted by MattD at 10:22 PM on August 11, 2008 [1 favorite]
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Many financial advisors push cash value and whole life insurance because they make a hefty commission on them.
posted by bradly at 2:50 PM on August 11, 2008 [1 favorite]