Tax Free Life Insurance investment – Free Life Insurance

Related questions

is over funding an investment grade life insurance policy really tax free when you decide to retire?

OK, I won’t go on a tirade like Scolo.

Life insurance policy cash values are not tax free. The net earnings are tax deferred. They can be removed tax free from a policy by taking out a policy loan of the cash and still paying the premiums on the policy until death. The policy will then pay out the death benefit minus the loan, and life death benefits are income tax free.

Scolo is correct when she says that there are better retirement vehicles out there. A lot of people do use life insurance for estate planning purposes. Especially those that have fully funded there other retirement funds. For others, sometimes the life policy is a forced savings for them. They spend their entire pay checks but when they pay that insurance bill, they’re forcing themselves to save money for themselves.

Am I better off putting $300 a month into a tax free savings account or a $1M life insurance policy?
I have heard that permanent life insurance is not a good investment but I am having trouble doing the math to compare it to something like a tax free savings account.

For me (a 33 year-old healthy male) it would cost me $300 a month for a $1M policy.

I likely have about 60 years to live. $300 a month would work out to around $215,000 in premiums over the the 60 years, for a $1M payout when I die.

Would putting $300 a month into another investment like a tax free savings account for 60 years be a better investment (i.e would it earn me more than $1M)? What would this work out to – I don’t know how to figure this out (I don’t know what the return is on a tax free savings account and I don’t know how to calculate the compounded interest).

(BTW, I do realize that the benefit of a permanent life insurance plan over an investment is that the life insurance pays out the $1M if a die early, but I am going to get a term 20 life insurance plan to cover me in case I die early, plus I don’t plan on not getting permanent life insurance – I’m just thinking that if it’s a bad investment, I will get something like a $200,000 policy for like $75 a month instead of a $1M policy for $300 a month).

Thanks for any info.

Here, this will help you:

http://www.msfinancialsavvy.com/calculators/monthly_deposit_savings_calculator.php

Investing $100 a month for 60 years, at the end of the day, at a VERY modest 6%, you have $2,137,747.57. At 10%, what the stock market has averaged since inception, you’d have $14,366,620.34

That’s a HUGE difference.

Now, the time when life insurance comes in handy for most people, is at the early stages of that savings. Because heck, if you’ve got $14 mil of investments, you can set up a trust, pay the lawyers and accountants, pay for your funeral out of pocket, and set your kids up for life.

But it’s going to take 60 years to grow to that amount. That’s why, for most people, it makes sense to buy super cheap TERM life insurance – to protect your family if you die, in those early years. Term is a FRACTION of the cost of permanent insurance, at your age you can probably buy a million dollars of 20 year term, for around $700 A YEAR. Investing the difference, still leaves you $240? a month, which will STILL accumulate pretty quickly.

Any time you’re thinking about insurance as an INVESTMENT tool, you’ve probably got the wrong tool.

Is permanent life insurance a bad investment?
I have heard that permanent life insurance is a bad investment because the benefit (e.g. a million dollar benefit) and any savings portion in the plan would not be worth as much as you could make by putting the monthly premiums (e.g. $300 a month) into something like a tax free savings account.

Would I be better off getting something like a 20 year term policy to cover me for now as I have a lot of liabilities (I’m 33 and have a baby, a wife and a $250,000 mortgage) and then putting the premium that I would normally put to a permanent life insurance policy into a tax free savings account?

Any opinions on this?

Not only is it a bad investment, its not even considered to be an investment. Go and ask FINRA or SEC if you don’t believe me. Insurance is a contract in which you agree to pay the premiums and the insurance company will pay the claims.

You should only get life insurance at a time when you need it the most, which is a time when you have very little savings, lots of debts, and have family members dependent on your income. That time is now base on your situation. I don’t know how long you will be paying for your mortgage, but people typically pay 30 years on their mortgage. Maybe you should consider refinancing it to a 15 year mortgage. So you should get either a 20 year or 30 year term. $250,000 coverage is just enough to pay off the mortgage. Perhaps you should get a customized term policy in which you can also add a 20 year term of $50,000 coverage to pay for your child’s education. So its a 20 year term within a 20 year term policy. I only know one company that has customized term policies and thats Primerica. All other companies sell one policy that fits one goal for one person. Primerica’s policies allows you to add a spouse rider to the policy in which your policy can also be covered. Instead of having multiple policies, you have one policy that covers everything.

As for your savings, yes you should consider opening a tax-free savings account. You should open a Roth IRA and invest in mutual funds. You can also open a Roth IRA for your wife if your wife is not working.

Does it make sense to have a universal variable life insurance policy inside an irrevocable insurance trust?
I thought advantage to irrevocable trust was to pass money tax free upon death. What advantage does the investment side of vul insurance provide?

Not really unless you’re just hoping to grow the death benefit with potential gains. Otherwise cash value in a life insurance policy inside a trust is worthless. You’re looking for death benefit.

A commission has nothing to do with it. The guy selling a Mercedes makes more than the guy selling a KIA, but that doesn’t make the KIA better.

Is whole life insurance a good investment vehicle and estate planning tool? Or are Mutual Funds better?
I am a Male 29 putting money in 401K upto company match.Ineligible for Roth.Cud max IRA,401K but is tht advised? What about further after tax dollars? These are points I have read on WLI as investment vehicle-
Pros:
1)Builds cash value and insures survivors
2)Earnings are tax free
3)Don’t have to pay 50% estate tax when transferring proceeds to heirs
4)Can borrow/take loans against built up cash value
5)Gains advertised on products such as Mutual Funds don’t include taxes on gains and fees.
6)If you get divorced don’t lose half your wealth unlike MFs
7)IRAs are taxed on withdrawal

Criticisms:
1)Unused cash value is lost when the investor passes away
2)Fees and costs are prohibitively expensive and eat into gains
3)Loans against LI policy are a nightmare
4)Term LI and investing balance in tax-advantaged funds or MFs is better
5)Advisors suggesting LI as investment are greedy for commissions

This selection is a nightmare.Someone honest to god (no salesppl!) plz help!

Life insurance is NOT an investment or estate planning tool! I have friends who fell for that sales pitch and paid a lot of money into it for more than 20 years. They retired and couldn’t make those payments anymore so they didn’t renew and opted to cash out. All they got was about $3K.

Buy cheap term life insurance to cover survivors. Max out that 401K for retirement investment. And if you want to invest more, look into mutual funds.

Is there a low risk type of investment that can outpace an ROP life insurance’s rate of return?
Hi, I’m 34, f, non-smoker/healthy. Before hearing about ROP life insurance I was sold on a simple 30 year term life. But, however morbid as this may sound, I feel that all those premiums would seem wasted if I live beyond the 30 yrs. If the premium on a simple term life is $50/mo x 12mo x 30 yrs = that’s $18,000 of money just given away. Now, say I pay $100/mo for ROP life, I’m going to get the whole $36K back. I’d love to go straight term and just invest the $50/mo myself, IF I just knew a type of investment that is mostly or all of the following:
1. It is low risk or risk-free
2. Low cost – about $50/mo
3. Will outpace ROP’s rate of return (which, if my calculation is right, is $36K tax free if I outlive the policy and if I do not cancel before the term is up)
So what do you guys and gals think? To me, since I currently do not have an investment plan, and only have a few months before I turn 35 and the premium tier’s increase, the Math makes sense. Unless I’m missing something.
Thanks everyone for your generous input. I have the discipline to set aside the $50 every month to invest (will just do a monthly “autopay” to the investment account). So I do have to ask – what is the minimum amount any of these mutual funds/ IRA / bonds that you’ve mentioned require to open? Will there be any fees to maintain and/or fees to add to it every month? Will I be tied to a certain term? Any fees to close prematurely? Sorry for so many questions, I still do not have an insurance / investment person. Thanks!

You’ve done some good analysis and neither will be a bad choice, but just let me give you a few more things to consider:

1) Most ROP policies have very, very low cash values prior to the end of the term. In other words, you are going to have to pay the premiums the full 30 years or else you will not come even close to the rate of return you are calculating. Most other investments you can get to the money and realize a substantial return without having to wait 30 years. I’m not saying that you can’t do it, but just note the commitment you will be making.

2) Remember that you are not throwing your term insurance premiums away. That $50 per month is providing you protection and security. You are trading a relatively small amount of money per month in exchange for not leaving those who depend on you financially destitute. The only scenario where you would be wasting that $50 is if you didn’t need life insurance in the first place and in that case you would be wasting $50 per month either way.