Our financial advisor is telling us to get permanent life insurance, is this a good idea?

Question

My husband and I are 24/26 and in great health. The payout is $250K each if we die and there is a cash balance that we can pull out after 10 years. It will cost $63/month for me and $78/month for him. Our advisor is insisting we get it while we’re young but we don't know too much about it and are hesitant be locked into paying this amount our entire life. The company is RiverSource. We plan on having two kids in three years. Any advise?

Answer 1

For that amount of premium, it sounds like Universal Life policies to me. If it is a UL, and you pull money out in 10 years, it will affect your policy negatively. If it is UL, if you don't pay enough premium, or keep enough cash accumulation in the policy, it could lapse, leaving you without insurance. It IS permanent insurance, as long as you pay enough, and leave enough cash in it to keep it inforce.

If it's Variable Life, there are some other risks involved.

Without doing a Financial Need Analysis (FNA), I would say that $250,000 isn't enough coverage to pay for the following:

Funeral expenses, outstanding debts, car loans, educational loans if any, mortgage or rent payment fund, educational fund for children when they come, emergency fund, income fund for the surviving spouse.

The FNA will also help you determine if you need Disabilty Income protection, to provide an income if you are sick or injured and can't work.

Using a rule of thumb, a person should have about 10 times their annual income in life insurance. ($25,000 X 10 = $250,000). If your income is more than that, you more than likely don't have enough coverage.

Did your "Financial Advisor" do a Financial Need Analysis to determine your total insurance need, or just sell you a couple of policies? There is a difference.

Is your "Financial Advisor" a Certified Financial Planner, or an insurance agent. In my state you can't call yourself a financial advisor, unless you have the training and credentials (license) to back it up, and to do actual financial planning using optional securities as part of the financial plan.

If he/she is a life insurance agent, or a licensed financial advisor, I would not have bought one penney's worth of insurance unless he/she did a Financial Need Analysis, to determine my total insurance need.

It's true, permanent insurance, (whole life, or participating whole life (pays dividends) is good. But if one can't afford all WL, a combination of WL and term work great. You have your need met, and accumulate cash or loan value, reduced paid up insurance, or extended term.

We call those non-forfeiture values. Term alone does not have non-forfeiture values. UL non-forfeiture values are limited, based on premium payments and cash accumulation.

Your agent can explain.

Best wishes, and God bless

Answer 2

INSURANCE IS BEST TAKEN FOR LONG TERM AT A YOUNG AGE. AS YOU HAVE NARRATED, YOU SHOULD ARE AT THE RIGHT AGE TO GO FOR INSURANCE. YOU  CAN PLAN FOR A LIMITED PAYMENT WHOLE LIFE POLICY WHICH WILL LEAVE ENOUGH MONEY AT A LATER STAGE OF YOUR LIFE, WHILE ENSURING ENOUGH COVER ON YOUR LIFE. YOU CAN ALSO TAKE TERM INSURANCE COVER SIMULTANEOUSLY, INCREASING THE COVERAGE WITH A NEGLIGIBLE PREMIUM TO PAY FOR IT. BELIEVE ME YOU HAVE GOT A GOOD ADVISOR. DISCUSS IN DETAIL ALL OPTIONS. GOOD LUCK.

Answer 3

I belive I would wait a few years.  You get a large policy on yourself.  Your husband might decide he wants a new wife.

Answer 4

ONE OF THE OLDEST SALES PITCHES IN THAT BUSINESS 'IS BUY TERM AND INVEST THE DIFFERENCE/SAVINGS '. RARELY HAVE I EVER SEEN ANYONE DO THAT. ASK ANY INSURANCE  AGENT ABOUT BUYING INSURANCE ONE AND BUYING A RIDER FOR THE SECOND AND PERHAPS AND CHILDREN THAT YOU MAY HAVE.

Answer 5

So a RiverSource agent is showing you a River source product?  Surprise...surprise.  I can tell right away that the product isn't set up right.  If you're going to pay that little then you should have a much lower death benefit.  It's not a bad idea to have a permanent product in place, but it depends on your income.  Ms. Is Usually Wrong will tell you to buy term, but that's necessarily the right answer.  

From what you've provided..

1---look at other companies because of course the RS agent is going to show you RS products.  A broker can show you that same product and dozens of others....because what are the odds that this agent just so happens to work for the company that is most competitive for you...slim...

2---Also, if you buy it for the amount you're putting in you should be buying $100k of coverage.  The agent makes more when you buy a higher face value and fund it with minimal funds.  Put it this way...I fund my $100k policy with $150/month and I've had it since I was  your age which means all things being equal I'll build more cash since a $250k policy will have more going to insurance costs.

3---Finally, if your income doesn't substantiate the reason to get permanent coverage consider a return of premium term policy.  However at your age, if you can swing it some permanent coverage isn't a bad idea...just get the right policy with the right company....AND get a financial advisor that doesn't represent 'his/her' company.  Get one that's independent and represents you.

Answer 6

Well the term "advisor" is unregulated.  Anybody can use that term as long as they give advice.  However, there is a clear conflict of interest when someone's advice is to buy something they sell.  Have you ever heard of a "mattress advisor" or "used car advisor"?  I didn't think so.

For a more independent opinion, you should consult a "fee-only financial planner".  This is a regulated term, and these folks cannot collect commissions of any sort.

Knowing that you probably already paid for the plan the RS guy handed you, you might want to take the cheaper route of just talking with at least two independent life insurance brokers.  A little friendly competition usually results in a better deal for you.

Answer 7

My advice - establish the goal, and run the numbers.  At your age, you should be able to buy term insurance, 20 year term, for $250,000 each, for about $200 a year, each.   So you're looking at $33 a month, vs. $141 a month.  

Now, let's say that the goal is to build wealth, and pay out if you die with young children.  Buying the term policy, and investing the difference, after 20 years, if you don't die, you'll have $109,000 or more, in that investment account (the stock market has averaged 12% per year, since it's inception).  

Now, at this point, the cash value (check your schedule) is probably around $5,000.  

So now you're in your 40's, and decide that maybe you want to keep that life nsurance 20 more years (and you bought a guaranteed renewable policy).  So, the premium's probably higher - maybe $70 a month now.  If you still invest the $70 difference, by the time you're ready to retire, that investment account will be worth $1,258,000.   Not only do you not need to renew the insurance again, but you've got a tidy little nest egg which will go far, towards your retirement money.

Permanent insurance makes a LOT of commission for agents, and is extremely profitable for insurance companies.  It is NOT a good wealth building tool.  Most of the time, it's NOT the best tool to get the job done - you can find other ways to do better, for less money.

Always, always, define the goal, and run the numbers.

***'Robert's right, though - most people don't "invest the difference".  But MOST people don't keep a life insurance policy more than five years.  ESPECIALLY the whole life policies.  They run the numbers . . . . and decide it's a bad deal.**