Right Type of Life Insurance For Healthy 25 Year Old - Planning For Retirement - LinkedIn Answers

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Randy J. Stark
Department Manager, Project Coordinator at The Commonwealth Medical College
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Right type of life insurance for healthy 25 year old & planning for retirement
Hello everyone! Recently I have taken steps to secure my financial future through funding my employers retirement account (with 8% company match) in addition to maxing out my Roth IRA in 2010. As I move forward, I plan to still make contributions to my employers 401 3b plan in addition to maxing out the IRA every year. However, I also would like to diversify my portfolio with some other type of investment and/or life insurance (probably whole life). As of right now, I have term insurance through my employer which would cover all of my current debt (student loans and my mortgage) so I was looking at some whole life policies that would help me save for retirement. What interests me in whole life is the fact that I can take disbursements in retirement completely tax fee. Being that I have no kids right now and do not plan on having any for at least 5 years, I wanted to get started building wealth for retirement (in addition to what I am already working on). Does anyone have any recommendations as to what I should do, or information that may help me make a decision as I move forward? Right now I am working with a representative of Guardian whole life and just wanted to get some different perspectives before committing to anything. Just an FYI - I had received the highest health status rating for the exam! Looking forward to some great responses, Randy
Clarification added 5 months ago:
Thank you all for your responses and suggestions - the information you all provided is very helpful to me. I know the commissions on these whole life products are so high, but everyone I spoke with was adamant that this was a good strategy for me (that is buying into a whole life policy). I have to admit, that I am apprehensive, because on paper it would take nearly 10-11 years before the cash value equals the premiums I put into the policy - and that is based on purely predictions! That's a ton of cash gone over the course of 10 years, with hardly any return on investment... Being that I am so young, 10-11 years can reap HUGE benefits if I were to invest the same amount of money somewhere else - can someone correct me if I am wrong? Being that I do have some time, I am not going to rush into this decision. I was, however, offered a million dollar term policy for 15yrs at $441 per year premium with the same company that (I believe) can be converted to a whole life policy within 15 years if I wanted too (a Guardian policy). - Again, I have term insurance through my employer which is enough to cover all of my current debts and obligations, so do I really need a term policy? I guess that is a question I have to answer myself... I suppose the best thing for me to do at this point is to perhaps get a NAPFA financial advisor who can look at my whole situation and recommend products based on my whole picture. I have done a lot of my own homework, and have made and followed a personal budget, put together a savings plan, have quite substantial investments in my retirement /IRA accounts, and have started an emergency fund. I also have an investment in my home which is nearly halfway paid off - I currently owe about 60% of what my home is worth (first mortgage). Although I feel that all of this is not enough, everyone I spoke with said I am ahead of the game for being 25 years old. I just want to make sure I am setting myself up the right way and that I make smart decisions that will allow me to be financially stable, but also to live a comfortable life through retirement. If anyone has any additional insights or suggestions I would appreciate the input as I proceed!
Thank you all so much for the information and clarifications - after meeting with the gentleman who was trying to sell this policy to me, I kindly declined (both term and whole life) and said I would re-evaluate after another 6 months. In the meantime, I will definitely be looking into other options as I continue to grow my emergency fund and look into other avenues of investing my money. I aim at investing 20-25% of my total yearly income toward a combination of my retirement 403 (b) plan, Roth IRA, Personal savings and emergency funds.
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I just read an article in the WSJ about ETFs and how they have reshaped investing (seen in Monday's paper). I will be looking at hiring a paid NAPFA financial advisor to look at my entire situation and offer recommendations to me based on where I am right now and what I wish to accomplish in the future. I feel that this is the only way to truly get unbiased advice. With this said, I am hoping that doing so will allow me to take a more active role in managing my own portfolio outside of my employers plan - through Vanguard or other ETF companies - which will help me cut costly commission fees and such... Theres so much information out there that it often feels overwhelming, especially since I am one of those people who tend to research everything to death before making a decision. Looking forward to using this question feature more often, as I am pleasantly surprised by the amount of advice and recommendations that have been provided by all. Again, thank you.... Randy
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Mark Adelsberger Senior Software Developer / IT Professional

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I recently went through a life insurance exercise. It's an individual decision; you'll have to weigh your circumstances and decide on an answer that makes you comfortable. That said, here are some things to think about; I'll tell you up front I found it didn't suit me. If you have a range of funds in your retirement accounts you may already be well diversified (or, if not, managing your fund mix may be a more straightforward way to get there). The investment aspect of a permanent life insurance policy is based on the insurance company making investments, which could overlap investments in your other funds; it's not automatically a separate class of investment unto itself. You should look at how they invest, just as you ought to look at the underlying investments of any mutual fund. Understand the insurance illustration. Ask what assumptions are used in the projections. The broker may imply that the projected value is how to plan, but the guaranteed value is also within the range of possible outcomes. Also, the broker may point out how neat it is that the "guaranteed" value isn't zero, whereas a stock or mutual fund could drop to $0 value. If the insurance company falls on hard times comparable to those that would drive a mutual fund to $0, though, who will be left to underwrite the "guaranteed value" of your policy? As with any investment, you can look at historical performance (realizing that future results may vary), and your broker should provide an illustration based on parameters you're willing to assume going forward; from that you can work backwards to calculate a practical return on investment (taking the cost of the whole policy, less the amount for comparable term insurance, as investment principle each year.) Permanent life insurance can produce tax-free value, but there are limits to this. Basically you're paying a certain amount for insurance, then bundling in additional payments for investment purposes. If the amount that's for investment becomes too big a piece of the puzzle, then the IRS's treatment of the policy changes and some of the tax benefits disappear. Generally your insurance company will manage their products to avoid that scenario, but just be aware that the ability to use insurance for investment is not unlimited. Since you pay your premiums with after-tax dollars, the tax benefits of insurance are very similar to the tax benefits of a Roth IRA. There may be some difference if the money is paid to an heir after you pass away; not sure on that. It sound like you're talking more about managing your retirement than your estate, though. Insurance tends to work at the conservative end of your investment pool, and arguably this might allow you to shift your other investments toward more aggressive funds. Buying a term policy and using the money you would've paid for a more expensive whole policy to invest in bond funds may have the same effect while offering you more investment flexibility, though. Consider the premiums (less the premiums you would pay for term insurance that meets your needs) as part of your overall savings strategy. Does that fraction of savings going into that particualr type of investment match your strategy, and are you comfortable tying your insurance to your ability to sustain that saving strategy?
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10/9/2011 11:34 AM
(To be fair, a whole life policy may come with options that let you pay less if your economic conditions change; but make sure you understand those provisions rather than just assuming that they'll give you the flexibility you need.) I looked at all of this, and concluded that I would rather let insurance be insurance and let investments be investment. If I were wealthy enough then I can see reasons why a permanent life policy would become more attractive to me, and I certainly can't tell you how to weigh those factors in your circumstances whether you're wealthy or not, but for me in my circumstances I found that 30-year term was the way to go.
Insurance agents are quite skilled at telling each of us why our particular circumstnaces call for a whole life policy. Sometimes it may even be true, but remember it's their job to sell. On the issue of work-provided coverage vs. individually-purchased term coverage: Until I had a child, the work-provided coverage was the only coverage I carried. The things to remember about employer-provided coverage are, (1) it is tied to your job, so there are some limiting parameters on the security it provides; (2) normally it is essentailly 1-year term insurance reissued each year; for the base amount it's quite affordable, but if you want more coverage (such as to protect dependents from loss of your income) then after age 30 it may start to get very expensive. Also remember that individual coverage you might buy (whether term or permanent) will get more expsneive if you wait until you're too old before buying it. Relying on work coverage until you need more and then buying term can make sense, but you might want to consider buying something in your early 30's if, at that point, you think you might need it later. I bought 30-year term insurance when I was 33, and it was still very affordable; but then I was able to qualfiy in the top health tier, and another risk is that you could develop a health problem between now and when you decide to buy. For a person in the mid-20's who decides to buy term coverage, 15-year term may be too short-term. It would run out about the tmie you're 40, when your need for insurance would be the same or higher as it is now and your ability to buy new coverage affordably may have diminished. I decided on 30 years because I figured this would cover me until my child is an adult. (Actually, 20 would've done that for my current child; 30 was to allow for the possibility of another child, on the assumption I won't have more children any later than 10 years down the road.) Just the fact that you're thinking of these things puts you ahead of most 25-year-olds; but then this isn't like running from a bear - don't worry about if you're ahead of the next guy, just make sure you're where you need to be.
posted 5 months ago | Report answer as...
Robert Geurden Partner at Brier & Geurden LLP

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Randy, With the caveat that I am not a Licensed Insurance Adviser, I agree with Robert Melzer's comments that life insurance is not an investment. So-called "cash-value" policies (e.g. whole life, universal life, variable universal life) have an investment component to them, but at the end of the day, all life insurance policies have to include a charge that reflects the so-called mortality cost of the insurance (which, not surprisingly, increase with the age of the insured), and those charges create a drag on the investment performance of the funds within the policy usually make it unattractive to use life insurance as an investment vehicle. It is true that the build-up of the funds within the policy (after deducting the annual morality charges and other policy expenses) is not currently subject to federal income tax. However, it is misleading to say that you can take out distributions from a life insurance policy insuring your own life on a completely tax-free basis. The distributions from policy that represent a loan from the policy or a return of principal are not subject to tax (because you've already paid the tax on those amounts), but any distributions that represent gain are taxable. Furthermore, if you are not careful, and withdraw or borrow too much from the policy, you can cause the policy to lapse, at which point, you would recognize taxable income to the extent that your aggregate withdrawals exceeded your basis in the policy. Distributions from a life insurance policy that represent the death benefit are not currently subject to federal income tax (although they may be included in your estate for estate tax purposes), but of course, you will never be able to personally enjoy the benefits of those amounts. There are good reasons to use "cash value" life insurance policies when one needs to make sure that the policy will be in force when the person who is insured passes away (remember that "term" policies either terminate or become prohibitively expensive at a certain point - traditionally age 70 or 75). Common examples of when cash value policies are useful include funding buy-sell agreements between co-owners of a business or funding a trust for a disabled child. But as Mark points out, there is no "one size fits all" answer to how much and what type of insurance any particular person should have.
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If you want to have someone go over this with you, you would be well advised to speak with a financial planner - possibly a "fee only" planner who gets paid only on the basis of advise given, rather than receiving a commission upon the sale of products. I see from your profile that you're in the Philadelphia area. Steve Pollock, whose office is in Collingswood, NJ, and I have shared a client for about 10 years, and I can highly recommend him. Tel 856-854-3319; e-mail: steve@pollockplanning.com. If you decide to contact him, please feel free to use my name. Best of luck, Robert I.R.S. Cir. 230 requires that I inform you that no portion of this message constitutes a "covered opinion" and that it may not be relied upon by any person to avoid U.S. tax penalties or for promotional purposes. This message is not intended to create an attorney-client relationship.
More Answers (13)

Christine Hueber Get Clients with Social Media Marketing ... find out more @ChristineHueber.com | LinkedIn #3 All Time Top Expert
Suggest retirement planning expert Randy Taylor, Randy.

Christine Hueber also suggests this expert on this topic: Randy Taylor
Randy Taylor Life Insurance and IRA Specialist/ Broker, "Safe Money Master"
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I am going to probably give you a 360 degree different response. If you do a cash value policy of any type; you must fund it to the legal maximum which would enhance the cash value. Even with that in mind; I believe that all cash value life insurance policies are so heavily filled with fees and "front loads". that the tax free income is still not as high as the after tax income of traditional investments. Also please note that if you take several years of tax free income from loans etc. and then in the future the policy lapses; this creates a taxable event which could be significant depending on the policy type and amount of the loans. In summary, the industry is currently over projecting yields, while not disclosing the fact that traditional investments even annuities would be better due to the fact that the fees can be as low as .4 of 1 % and the after tax yields will be life insurance.: Buy the cheapest no lapse universal life for permanent insurance ( stripped of all cash values in order to give the lowest lifetime cost) and find an honest advisor to hep you with your retirement planning.
A further note to consider: While most insurance agents are honest; keep in mind that insurance agents are paid based on the amount of premium you submit and that in general the commissions ar as follows from the highest comp to the lowest: Whole Life , highest, Universal Life, No lapse universal life, return of premium term, and than straight term; or temporary insurance. There is often a bias towards whole life since the company and the agent are paid the highest commissions on these products versus other alternatives for you. Also note that dividends are not guaranteed; and therefore they can be higher or lower than the projections you receive.
AiRung Liu, CFP Providing comprehensive financial planning and investment advice customized for your goals and circumstances
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Randy, cash value of a permanent insurance policy (note, not necessarily Whole Life) could be used as supplemental retirement savings or even education savings if you have children later. However, when you use this strategy, the insurance design is completely different from the usual protection purpose. First you should start with a monthly amount that you are able to put away. Next the insurance agent can run an illustration based on your monthly savings amount, with a number of years you want to save for (say until age 50), then solve for minimum death benefit (not to trigger MEC - Modified Endowment Contract). This will allow you to maximize cash value. Then you want the illustration to show withdrawals later (through return of premium, then policy loan). This is to ensure that your withdrawals won't cause the policy to lapse or trigger taxable event. Pay attention to the interest rate and cost assumption. Always look at the "Guaranteed Interest Rte and Maximum cost" column. You are better off with an agent that is a "broker" that can shop for different insurance carriers rather than a captive agent to only one company. Whole Life policy in general require highest premium since it is meant to endow the death benefit at age 100. Variable Universal Life policy is more likely used for retirement savings strategy since the death benefit and premium can be adjusted later. But then you need to get it from an agent that is also a well-rounded investment advisor that can deign and adjust the underline investment portfolio for you - consistently. And finally, after you get the policy, review with your financial advisor annually to see how it differs from the original illustration.
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10/9/2011 11:34 AM
Robert Melzer President at ICPC Investments

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Life insurance is not an investment. It is to replace income for those that depend on you when you die My feeling is that if you dig into a life insurance product that is to be an investment you will find the fees eat up any savings as long as you assume you will live a long life. Their is no free lunch. Pay taxes or the investment fees. Skip the "investment" insuarnce.
You updated you question with a reference to term insurance. A good idea would be to get a small term policy that guarantees that you can get additional insurance at a latter date. You could become mensurable. You definitely want to have a disability income policy. Sounds like you are doing ok on savings so I would think in terms of a 6 month waiting period before you can collect.
Marla Barch Senior Mortgage Planner at Prospect Mortgage, LLC

see all my answers Best Answers in: Personal Real Estate (3)... see more
I personally like term policies. I invest my money elsewhere. However, i make sure my term policy is convertible in case my health declines.
James C Brandon JCBCapital.com, JCB Capital Performance - Personal Wealth Management, Asset Manager, Financial Planner, Wealth Adviser
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Hi Randy, Generally, you may want to separate your investment portfolio from your life insurance - though there is a place for WL insurance. However, "What interests me in whole life is the fact that I can take disbursements in retirement completely tax fee." is not correct. You may take loans which you must pay back with interest to yourself. Or, distributions will be taxed at "ordinary income rates" for the "gain" in the cash value. The reason for life insurance is if you have a "beneficiary" - and/or LTC/ADB rider needs. JC Brandon
Links: http://www.JCBCapital.com
Jason Lampa, MBA It Never Hurts to Ask

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I would strongly recommend avoiding the 401(k) trap where your choices for investments are limited to those chosen by investment advisor to the plan or could be the actual partners in the firm. In my professional opinion, I suggest taking six months and research companies on the OTC.BB. Call up the CFO's in each firm, schedule a visit to your final four choices and when you select one, place 1% of your paycheck per month into that particular firm. Make sure you put strict protocol on earnings growth and their ability to capture market share. If they do not hit the targets you set, sell. It is important that you find a firm that has consistent volume. Next, I would max out a self directed Roth IRA, then buy the insurance policy.
Jim Parker Senior Manager at AT&T

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Buy term, not whole life. Invest the difference!

Mike Sheeran Employee Benefits/Account Executive at Glenn Insurance, Inc.

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Randy, it sounds like you have done a great job so far. I think the more important question now is, do you even need life insurance??? With no one depending on you financially, the answer is probably no unless you want to lock in your insurability. In that case, get a convertible term policy for whatever amount you feel comfortable with. If your advisor hasn't recommended it yet, you should have a good disability insurance policy on yourself so that even if you can't work, you will be able to pay your bills and
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10/9/2011 11:34 AM
continue contributing towards your retirement.

Mark van der Hoek Technology Development Engineer at Clearwire

1. NEVER take financial advice from people who are tryhing to sell you life insurance. 2. Unless you are married and have children who depend on your income, you don't have any reason to buy life insurance. 3. Whole life is probably the worst "investment" you could make. Your mattress will provide a better ROI. Do the math. Don't take the salesman's word for it. Do the math for yourself. Whole life, in all its scamming disguises, is one of the biggest rip-offs out there.
Christine Wilton Greifendorff Law Offices, PC

see all my answers Best Answers in: Occupational Training (1)... see more
DON'T BUY WHOLE LIFE!!!! Find other ways to invest to diversify your portfolio and consult with a financial planner. Buy some disability insurance, if you don't have it; real estate can be wise, if you stay conservative. Here's what happens on those whole life policies: the premiums are huge and if/when you die, the cash value is gone and only the death benefit is paid the any beneficiary you may have. Set up your estate now by living trust too.
Links: http://www.daveramsey.com
Bob Waddell Senior Technical Recruiter at Raytheon Intelligence and Information Systems
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I see that you have already gotten a ton of responses on this. American mentality is that when you buy 2 things together that you MUST be getting a better deal, but this is just not the case when it comes to Whole Life. You are buying an investment and Life insurance bundled together and you do NOT get a good deal on it. The best comparison for you is to look at what you would pay for the Whole life compared to buying Term Life and then add an investment to that with the remaining difference between the cost of the 2 products. So, for example if Whole Life costs $300 per month vs. Term @ $50 per month. How much investment could you get in a Roth IRA for $250 per month? The answer is usually much more! Hope that helps! I would also recommend looking for a Dave Ramsey financial counselor in your area that you can sit down with to go over your finances. They typically do not sell insurance products, so they will be an unbiased source of information. I would love to meet with you, but Scranton is a bit far of a drive. Although my wife and I drove though there last weekend on the way back from upstate New York.
Links: http://www.waddellfinancialcoaching.com/
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Right Type of Life Insurance For Healthy 25 Year Old - Planning For Retirement - LinkedIn Answers

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Mark Adelsberger Senior Software Developer / IT Professional

Robert Geurden Partner at Brier & Geurden LLP

More Answers (13)

Suggest retirement planning expert Randy Taylor, Randy.

posted 5 months ago | Report answer as...

Robert Melzer President at ICPC Investments

Marla Barch Senior Mortgage Planner at Prospect Mortgage, LLC

Jason Lampa, MBA It Never Hurts to Ask

Jim Parker Senior Manager at AT&T

Buy term, not whole life. Invest the difference!

Mike Sheeran Employee Benefits/Account Executive at Glenn Insurance, Inc.

continue contributing towards your retirement.

Mark van der Hoek Technology Development Engineer at Clearwire

Christine Wilton Greifendorff Law Offices, PC

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LinkedIn Corporation 2011

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