Fatherly advice

I made a mistake in the last post. My calculations missed a couple very important factors. I forgot to subtract the interest paid and the principle paid. Oops! Hehe, well the real numbers come out to around $40,000 profit, which is still pretty good. $13,333 per year. Comes out to around 23% on investment. Regardless of my erroneous calculations, the investment beats most investments.

The reason I have been curious about numbers is because a friend of mine offered me a whole life insurance program. I have always assumed that life insurance is insurance for a loved one if I die. Hence, I am not married so I do not need life insurance. It pays off your debt so your loved one does not have to worry about how to pay a mortgage or pay for the kids' education or whatever. This is true, but not the whole picture.

There are 2 popular types of life insurance, term and whole. I described term above. It's only purpose is to protect your loved ones in the case of your death. Whole life insurance has an interesting twist to it. It covers your family in the case of your death, but it also has a part of it that acts as a savings account. Every monthly payment you make has a portion that goes into this account. You are then given a certain interest rate on this money which helps it grow. The numbers I saw were 6.15% now and the last ten years it was about 8% interest. This is a pretty good rate. The way most investments work is that you pay a lot now to receive a lot more later. This kind of account does not break even until about year 15-20. Keep in mind it is a "retirement account" yet you are free to access this money at any time you desire. It does not make sense to touch it for a long time because of the ROI, return on investment, and you are charged when you take this money out by the company you invest with. The kicker is, when you take this money out, there are no taxes on it! It is tax free. That is different than your 401k which is taxed upon withdrawl. When you are older and in a higher tax bracket, you do not want to pay the way higher taxes on your retirement funds.

It works similar to a Roth IRA. The problem is, there is a $5000 limit on a Roth IRA. And when you make too much, you are not allowed to take out an IRA. That is when this program comes in handy. When you are making a lot of money, and are limited on where to put retirement funds that are not taxed like crazy. The difficult part is making the high payments for this life insurance. For it to make the most return, you need to have a very expensive plan. I am talking over $250 per month. Term life insurance can be about $20 or so per month. Significantly different, but remember that term life insurance is just insurance, there are no additional accounts with it.

Going with whole life insurance is not a bad thing. Overall it is a respectable investment. I would promot it for someone it makes sense for. It is not for everyone however. The way I see it is , if I plan on being paid over $100,000 someday, with inflation this is not as big as it seems, and want a lot of money in retirement, then this is a good idea. The reason my salary matters is that it affects if I can put money in an IRA and it bumps up my tax bracket for when I withdrawl my other retirement funds. If I will be in a higher tax bracket, this will help me save because I am not taxed on the withdrawl of this money. I am taxed before I put it in. Having a lot of money in retirement I will address further down. There are a few difficulties I have with it. I don't like insurance. I will avoid insurance at all costs. If I had the choice, I would not buy car insurance. It seems to be more of a headache than it is worth. Could I invest in something else and come out ahead?

When you google whole life insurace, you will quickly become aware of the debate between whole life insurance and term life insurance. The argument for term life insurance is you can make out better by investing in mutual funds. You will not have the large monthly payments that you are tied down to with whole life insurance. Now mutual funds are taxed at every point possible. Before, during, and after. However, the dividend can be higher than whole life insurance. If you subtract taxes, they come out very close to one another.

A few questions I need to ask are, how much it costs to take money out of the account and what the stipulations are on that? How much is the insurance aspect actually costing me? What happens if I drop the coverage? If I lose my job, one of the first things to go will be life insurance.

The last difficulty is the monthly payment. I talked to my dad about this topic for a while last night. He made some very good points.

1. If I max out my Roth IRA and 401k each year, I will have plenty to live off of in retirement based on my lifestyle. I don't live in luxury and don't expect to ever. I want to have nicer things and recreational things, but I can't justify expensive jewlery a luxury car, huge house and all that jazz. Not in my desires. My liquid assets, IRA's, and 401k should sustain me in retirement.

2. I will not need life insurance my whole life. It is good to have life insurance when you have debt or liabilities. For instance, a mortgage, credit card debt, car payments, and especially kids. If you have kids, you need life insurance for your loved ones. Just in case. However, there is no reason to leave your family with more money than you have ever lived with. It can get to people's head and they can lose their work ethic. I want my kids to earn what they receive, not free load off of my success. They will be much stronger people in such a case.

3. "Enjoy your money now." My dad said the mistake he made was that he was so tight when he was young that he didn't enjoy what he had. Granted he is financially successful now, but that could have been achieved had he loosened the reins a little and enjoyed life too. (This being in the context that my dad knows that I am very conservative and do not find it hard to save and sacrifice some things in order to save) This for me is a big point. I don't know if I want to be tied down to a large monthly payment so I can be wealthy in retirement. There are other ways to save for retirement that aren't as large of a committment and can receive similar payouts. Whole life insurance may be the best move financially, but in my case I would pay more for freedom than I would to avoid paying more in taxes later on in my life.

I will repeat. Purchasing whole life insurance is not a bad move financially. Actually, it can be a good move financially if you get started young enough. At 23 it is still worth it for me to get it. If I were 40, there is no way I would even consider this. But in my case, I think I can make other financial decisions that will allow me freedom in retirement and allow me freedom at 23. When I have a family with kids, I will buy term life insurance. Until then, I will make investments in mutual funds, real estate, IRA's, 401k, and other possible investments that come my way. Retirement should be on my mind, but it shouldn't dictate all of my financial decisions. I think I need freedom to buy things for my pleasure, such as a boat, cabin, etc. and allow me freedom to be more generous with my money to tithe for certain ministries. If I buy whole life insurance, I will be tied down when right now I need freedom.

Hope this helped someone. I don't mean to promot one way or the other. I hope I didn't paint a bad picutre of whole life insurance because it is a good thing. I decided that it is not for me. Perhaps it fits better in your situation. You need to research it for yourself.

One Love,
Danger