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Buying life insurance at a young age - educate me

post #1 of 23
Thread Starter 
So here's the deal. I've been lurking around and stumbled into a post (I think by Globetrotter) that mentioned buying life insurance at a young age due to lower rates.

I'm soon to be a 21 and will be starting my first real job in a couple weeks. I've been spending time educating myself about budgeting properly, investing for retirement, etc... I feel that I have a solid foundation on the basics. However I don't understand too much about life insurance.

Been trying to read up as much as I can find on the internet, but with so many advertisements/spam it's a little frustrating. Right now I'm confused on:

* Term vs Permanent. As I understand it, term provides better premiums but it's set over a shorter period of time. Does this period of time, aside from the plan you choose, vary from provider or are you able to set your own? The reason I ask is, even with a 35 year plan, being young and healthy, I do plan on living past 56. Ultimately, with someone in my position, which should I look into more: Term or Permanent?

* "Asset protection" - I've heard this come up several times, mostly at sites selling their own plan so I should probably not read too much into it. However, is there any truth in it? Should life insurance really be considered as an investment (as opposed to a contract...)??

* Convince me. Basically aside from the concerns listed above, I still would like to be convinced. Is the idea of starting contributing at a young age to take advantage of lower premiums that won't increase (provided I remain healty)?

I realize that it's best to consult someone really knowledgeable or a financial planner, but any help would be appreciated.

In before tl;dr
post #2 of 23
Quote:
Originally Posted by Mandrake9072 View Post
So here's the deal. I've been lurking around and stumbled into a post (I think by Globetrotter) that mentioned buying life insurance at a young age due to lower rates. I'm soon to be a 21 and will be starting my first real job in a couple weeks. I've been spending time educating myself about budgeting properly, investing for retirement, etc... I feel that I have a solid foundation on the basics. However I don't understand too much about life insurance. Been trying to read up as much as I can find on the internet, but with so many advertisements/spam it's a little frustrating. Right now I'm confused on: * Term vs Permanent. As I understand it, term provides better premiums but it's set over a shorter period of time. Does this period of time, aside from the plan you choose, vary from provider or are you able to set your own? The reason I ask is, even with a 35 year plan, being young and healthy, I do plan on living past 56. Ultimately, with someone in my position, which should I look into more: Term or Permanent? * "Asset protection" - I've heard this come up several times, mostly at sites selling their own plan so I should probably not read too much into it. However, is there any truth in it? Should life insurance really be considered as an investment (as opposed to a contract...)?? * Convince me. Basically aside from the concerns listed above, I still would like to be convinced. Is the idea of starting contributing at a young age to take advantage of lower premiums that won't increase (provided I remain healty)? I realize that it's best to consult someone really knowledgeable or a financial planner, but any help would be appreciated. In before tl;dr
Financial Advisor here.My best suggestion is to ladder policies i.e. use a term policy for the death benefit and a permanent policy as additional retirement savings. Go for the most you can afford with term, because as you get older, it becomes more expensive. I assume you will have a family, expenses, etc in the future. The term policy will be for the death benefit for your heirs and helping your family pay burial expenses, bills, mortgage, kids college, etc etc. Be expectant of a large number. There are a lot of expenses most people dont consider. If you wife is a stay at home mom, would you like her to continue to do that should you pass? Or do you want her to begin working to help support your family? Theres not only a missing income, but there are debts, etc. Burial expenses I usually use $25,000. Then there are all of your bills until your kids are in college, then do you want your kids college paid for? All of these come into play. Expect the death benefit amount to be over $1,000,000. For permanent, look into Variable Universal Life. Get the lowest death benefit possible for this and then overfund it (meaning the premium may only be $1000/year, but pay $3000 year). This will work similar to a 401k, as everything above and beyond the cost of insurance will be invested into basically a brokerage account. As that grows, you will be able to withdrawal from this investment account AT ANY TIME with ABSOLUTELY NO TAX CONSEQUENCES. So should you put in $15,000 over 5 years and your account balance at that time is actually $25,000, you could withdrawal all $25,000 at any age without paying any taxes. This will be worth its weight in gold if (when) the govt raises the tax brackets and if (when) you begin to make much more money throughout your lifetime.
post #3 of 23
is it necessary if you are not married?
post #4 of 23
Don't buy insurance unless/until you have children.

When you do buy insurance, buy term life. Insurance isn't much of an investment vehicle. You can get better returns on other investments.
post #5 of 23
Quote:
Originally Posted by Kai View Post
Don't buy insurance unless/until you have children.

When you do buy insurance, buy term life. Insurance isn't much of an investment vehicle. You can get better returns on other investments.

Better gross returns, yes, but net after taxes, they dont look so good.
post #6 of 23
Do you have any dependants or do you want or anticipate having any in the future? That's the major question in my mind. If not, then term life insurance is a waste, although a whole life insurance policy may be worthwhile for the above-stated reason. And don't take out life insurance just to pay your debts/student loans upon death, unless you have cosigners or dependants who would be harmed by your house being foreclosed upon or your creditors attaching your estate.
post #7 of 23
Quote:
Originally Posted by worldrunner View Post
is it necessary if you are not married?

Quote:
Originally Posted by Kai View Post
Don't buy insurance unless/until you have children.

Quote:
Originally Posted by Grenadier View Post
Do you have any dependants or do you want or anticipate having any in the future? That's the major question in my mind. If not, then term life insurance is a waste, although a whole life insurance policy may be worthwhile for the above-stated reason.
Yep. Don't buy it unless you have dependents who will miss your income if you were to die suddenly.
post #8 of 23
I am going to take another approach - and let me start by saying that I am much better at making money than at taking care of my money, so I am not the best investment person around for advice. my take on it is that when you are young you can get insurance very cheaply, and then you usually will get plenty of offers to extend your term or upgrade your insurance as you age. if you get 30 year term at 22, you might pay 1/5 of what you would pay at age 35. so, you don't really need it, but it does get you in the door. although, if you are debating life insurance or a retirement fund, I'd first start the retirement fund.
post #9 of 23
Life insurance offers great returns if you die right away, however I agree with above poster about buying term only and investing outside of the insurance products. Ask yourself why you are taking this insurance? Paying back parents for college expenses? I would imagine at this point you don't have children or significant other, that you are worried about planning for, cause in the end when you die you ain't getting that money. Save for retirement, house and other shorter term goals, rather than worry about insurance.
post #10 of 23
Quote:
Originally Posted by i killed judas. View Post
Financial Advisor here.My best suggestion is to ladder policies i.e. use a term policy for the death benefit and a permanent policy as additional retirement savings.

Go for the most you can afford with term, because as you get older, it becomes more expensive. I assume you will have a family, expenses, etc in the future. The term policy will be for the death benefit for your heirs and helping your family pay burial expenses, bills, mortgage, kids college, etc etc. Be expectant of a large number. There are a lot of expenses most people dont consider. If you wife is a stay at home mom, would you like her to continue to do that should you pass? Or do you want her to begin working to help support your family? Theres not only a missing income, but there are debts, etc. Burial expenses I usually use $25,000. Then there are all of your bills until your kids are in college, then do you want your kids college paid for? All of these come into play. Expect the death benefit amount to be over $1,000,000.

For permanent, look into Variable Universal Life. Get the lowest death benefit possible for this and then overfund it (meaning the premium may only be $1000/year, but pay $3000 year). This will work similar to a 401k, as everything above and beyond the cost of insurance will be invested into basically a brokerage account. As that grows, you will be able to withdrawal from this investment account AT ANY TIME with ABSOLUTELY NO TAX CONSEQUENCES. So should you put in $15,000 over 5 years and your account balance at that time is actually $25,000, you could withdrawal all $25,000 at any age without paying any taxes. This will be worth its weight in gold if (when) the govt raises the tax brackets and if (when) you begin to make much more money throughout your lifetime.

Agreed though I do believe you will have to pay taxes on the growth of the money if I remember correctly. I'd create a ROTH IRA and max that every year for long term savings and flexibility though with every financial advisor you will get a slightly different methodology.
post #11 of 23
I get free life insurance from my employer. We have the option to purchase more. I don't because I am 26, unmarried and I definitely do not wnt children. I suspect that if I do get married whatever comes standard from my employer would be sufficient for my wife, but that is something to discuss with her down the road.
post #12 of 23
I will probably be hated by the financial advisors and life insurance people on this forum, but here goes

I have never been a fan of life insurance, and don't see why most people in the world would ever need it. (yes, there are some exceptions)

Here is my theory on buying insurance. Heard this many years ago and I have always lived by the rule: "Only buy insurance for things where you would not be able to recover from the critical problem that occurred"

So you need insurance on your house (if it burns down, you couldn't afford to buy another one), your car (a $2M accident settlement is not something most people could pay for), etc.

You do NOT need insurance on your life, your pet's medical bills, the big screen TV you bought (it's called an extended warranty in that case.....), etc.

In those cases, the insurance company is pocketing your premiums, making a profit, then paying out a percentage of premiums to people. Note that 100% paid in premiums results in less (sometimes far less) than 100% paid out. That's a bit of a raw deal you don't need to take!

So stop and think about this:
-When I am insuring my life, who am I trying to protect? Will my death really affect their life that much? Remember that wives don't need to pay the same bills on a 5 bedroom house when the husband dies, because they usually downsize. And an unemployed spouse would likely go start to work to support themselves if you died.

None of the above is "great", but it is bearable without insurance. People try to take the easy way out and say "hey, my spouse hits the jackpot if I die" but really it's the insurance co that hits the jackpot on your premiums.

It's like the lottery commercials that advertise the one person that won. Out of the millions that threw away money and didn't win. Hey, using that analogy McDonalds shouldn't show someone eating a cheeseburger - they should someone choking on one. Because that happened just once, so maybe they should promote THAT instead of a guy happily eating his cheeseburger

If you have nobody who will be left in a critically screwed up situation if you died, don't buy the insurance. That doesn't mean they'll have to go get a job or give up some luxuries of life, it means they'll be eating catfood out of a tin because they are dirt poor. If that isn't the case, don't buy the insurance.

Save up the premiums in good stocks and bonds, and you'll make out better in the end 99.9% of the time.
post #13 of 23
Thread Starter 
Thanks for the responses so far everyone (especially from both spectrums). Keep em coming!

I did want to add that I'm single, so no dependents. Also buying life insurance would come after maxing out 401k (atleast to employer contribution) and Roth IRA and contributing to emergency fund.
post #14 of 23
I'm going to vaguely and generally disagree with bha's sentiment. I agree with him, and others, that life insurance tends to offer a smaller rate of return than can be had elsewhere. But, life insurance, like all insurance, is about avoiding risk and calamity.

Attributing a value to this security is difficult, but it does have a value. Thus, it's not clear to me that a whole life insurance policy that pays, for example, 4% per annum is a less good investment than some investment that pays twice that or more.

Also, insurance companies, in any given year, generally pay out more than the premiums collected. They tend to make their money from investing the vast amount of cash they have on hand in high-yield investments that really aren't available unless you have hundreds of millions to invest.
post #15 of 23
Quote:
Originally Posted by bha View Post

I will probably be hated by the financial advisors and life insurance people on this forum, but here goes

I have never been a fan of life insurance, and don't see why most people in the world would ever need it. (yes, there are some exceptions)

Here is my theory on buying insurance. Heard this many years ago and I have always lived by the rule: "Only buy insurance for things where you would not be able to recover from the critical problem that occurred"

So you need insurance on your house (if it burns down, you couldn't afford to buy another one), your car (a $2M accident settlement is not something most people could pay for), etc.

You do NOT need insurance on your life, your pet's medical bills, the big screen TV you bought (it's called an extended warranty in that case.....), etc.

In those cases, the insurance company is pocketing your premiums, making a profit, then paying out a percentage of premiums to people. Note that 100% paid in premiums results in less (sometimes far less) than 100% paid out. That's a bit of a raw deal you don't need to take!

So stop and think about this:
-When I am insuring my life, who am I trying to protect? Will my death really affect their life that much? Remember that wives don't need to pay the same bills on a 5 bedroom house when the husband dies, because they usually downsize. And an unemployed spouse would likely go start to work to support themselves if you died.

None of the above is "great", but it is bearable without insurance. People try to take the easy way out and say "hey, my spouse hits the jackpot if I die" but really it's the insurance co that hits the jackpot on your premiums.

It's like the lottery commercials that advertise the one person that won. Out of the millions that threw away money and didn't win. Hey, using that analogy McDonalds shouldn't show someone eating a cheeseburger - they should someone choking on one. Because that happened just once, so maybe they should promote THAT instead of a guy happily eating his cheeseburger

If you have nobody who will be left in a critically screwed up situation if you died, don't buy the insurance. That doesn't mean they'll have to go get a job or give up some luxuries of life, it means they'll be eating catfood out of a tin because they are dirt poor. If that isn't the case, don't buy the insurance.

Save up the premiums in good stocks and bonds, and you'll make out better in the end 99.9% of the time.

That is the most unrealistic and ignorant statements on life insurance I have ever heard! You were right about pissing off the financial advisors! LOL! but seriously, he's asking questions about buying a policy to build cash value, and your remarks on the end of your rant "invest the rest you'll be better in the end 99.9% of the time" is ridiculous. Insurance comes with Guarantees!! interest crediting up to 12%! Income before 59.5 that comes to you tax free!!! he's already invested in his 401 and a maxed out Roth! this dude needs some conservative way of growing his wealth. And you are the last person who should be commenting on the subject.
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