mingster

i've been looking at whole life insurance for a while now, and i've gotten advice from family friends who're insurance agents (didn't buy, but asked the questions), and i've even gotten a few quotes here and there. so here's something i don't get at all: suppose i got a quote for a $500K life insurance for my son. the annual premium, let's call it $2000 since he is still a little child, seems fine, and i was given this "predicted payment period" of which after that supposedly the premiums have accumulated to a point where they start earning enough interest to pay for the annual premium, and in my son's case it looks like 18 years. let's call it a 20-year period, so for what's essentially $40K out of my pocket my son gets a $500K whole life insurance policy? how does that work?

the same goes for me. let's say my premium was $10K a year for a $1M policy, the predicted payment period looks to be about 20 years, $200K total out of pocket. so if i die in 20 years, won't the insurance company be out of 800K cash? am i missing something?

sahtt

They invest your money. You aren't giving them 10,000 a year, you are giving them 10,000 plus the opportunity cost of not being able to earn interest off of that sum of money.

You made up the numbers so it won't be perfect, but using your example at 8%-

starting with no balance, 10k a year, for 20 years, you are at a little under half a million. But if you live for 35 years, even if you stop paying premiums after 20 years, it's worth a little under 1.5 million. If you are in your 40's that's probably a more realistic out look. 8% might be a little aggressive but if your figures are off slightly it can make a large difference.

brucek2

well explained.

mingster

thanks for the explanation. so, if they suck at investing and really doesn't get good returns from my money, does that mean i have to pay the premiums LONGER?

sounds like a bad investment to me. but then again my own portfolio has been pretty crappy lately

sahtt

No, it means they lose money. But trust me, life insurance agencies know exactly what they are doing and have had everything down to a science for the last 50 years. Obviously there are 'outliers' but in general this is true. Rates are actually very competitive right now which is probably why you had an initial shock as to how it was profitable for them.

I prefer whole life vs term for a multitude of reasons if you are curious.

mingster

actually the numbers i used are fairly close to what i was quoted a while back...

anyway i've got term life through work but if i was to get supplemental stuff i'd prefer whole life as well.

by the way i was told that SUICIDE is covered after 5 years? how is THAT possible?

sahtt

It's actually pretty logical. Bottom line, you want to cover your family no matter what happens. However, there are a few conflicts with suicide. One you may not consider is the fact that insurance fraud is attempted regularly in this situation. Tell your wife to get the 2m, move to mexico and open up a Taquaria (sp) stand and live the high life drinking Corona's on the beach. If you have heavy debts, even better.

Your wife also can't kill you a week after you get the life insurance because if she makes it look like a suicide she's still screwed. After 5 years, any urge to kill you will probably already be resolved. It sounds crude, but it's statistically accurate [say divorce]. Most obviously, this keeps people in bad mental shape/depressed from getting life insurance and then killing themselves. Once again, after 5 years the problem will probably be resolved [already killed themselves or have since received help through medication etc.].

The main reason they include suicide is simply because someone else will. It makes them slightly less attractive as what if you fall off a bridge on accident and it's deemed suicide because the insurance company is a bunch of assholes? This keeps little 'fine print' issues from becoming factors. Plus, like I mentioned, if you make if 5 years it's 99.999% of the time a non-issue.

Pretty interesting stuff isn't it. I've considered becoming a Financial Advisor and have read up on a lot of the more common issues.

EvMan2345

I work for a reinsurer, and basically like Sahtt said, the company invests the money you pay for premiums. For most companies, the suicide exclusion is actually 2 years.

cthree

Whole life is a scam, you never make money at it. Do the math, you'll see.

sahtt

I never really saw it as something to make money at, I guess it depends what you are getting it for. I'll never make money on my car insurance either.