From: acheng@ncsa.uiuc.edu (Albert Cheng)
Newsgroups: misc.invest
Subject: Re: Questions about Whole Life Insurance from New York Life...
Date: 16 Nov 92 17:53:52 GMT
Article-I.D.: news.BxtLpv.5Go
Distribution: usa
Organization: Nat'l Ctr for Supercomp App (NCSA) @ University of Illinois
Originator: acheng@shalom.ncsa.uiuc.edu


[Is there an FAQ for life insurance?  We have discussed this every
half a year and I think many valuable articles should have been saved.]

In article <1992Nov14.031038.26642@alw.nih.gov>, vos@helix.nih.gov (Peter Vos) writes:
>Hello Netters,
> Here are some questions for those savvy in the ways of insurance.
> Recently, my wife and I began to consider the possibility of
> buying life insurance.  We spent several hours with an independent
> agent who was pushing New York Life.

My first personal opinion: STOP jumping into Whole Life (or Univeral
Life another poster suggested).  It is a very long term commitment and
you must educate yourself of most, if not all, options in life
insurance.  Just buy a term life to get your loved ones covered for now
and START reading more material yourself instead hearing sales pitch
from an agent.  Do you really think the agent has your best interest
over his commission?  Don't kid yourself.

> We had settled on whole life insurance for each of us.  My wife has
> greater earning potential than I do, and my debt burden is nil.  Our
> concerns were 1) to provide money to cover kids college costs (assume
> two-although none exist as yet); 2) to cover any mortgage costs on
> a house (as yet not purchased); and 3) to provide a form of retirement
> income as we are not invested in any pension plans.
> 	We discounted term life insurance since we have the
> means to pay the premiums on whole life, and because of the interest
> in providing some source of income for our dotage.

The reason to have life insurance is to help your loved ones to be
supported in case YOU turn yourself in *UNEXPECTEDLY*.  Assuming you
are the tradional bread winner of the family, your life insurance
should provide:

1) ALL living cost support for your loved ones (wife, parents, other
dependants (excluding kids for now)...) throughout their life expectancy.
Some people have reduced this a bit to provide the wife enough support
to adjust due to your sudden departure.  E.g., enough financial support
for living cost, tuition, child care,... for 2 to 4 years so that the
wife may attend college or such to get training for a marketable job
skill.

2) All living cost for the children till age 18 (or 21 depends on your
choice) and college cost (if you prefer.)

3) Balance of the house mortage.  This ensures the family does not
need to uproot immediately due to the lack of income.

In a nutshell, think about those who depend on your income and arrange
a life insurance payoff such that the family income continues as if
you are still bringing home the checks after you are GONE.

The whole-life or Universal life are insurance schemes (some call
them scams but that is different opinion) that combine TERM life
insurance and investment.  The benefit is that you have a package
deal, the bad part and this is really bad, is that you pay dearly
for that convenience.  If you look closer, you will realize your
first year, i.e. the first 12 months contributions go
to the agent.  Your policy value at the end of the first year
is basically zero.  Mixing up life insurance with investment
is CONVINENT, but not WISE investment.

Remember one important fact of life insurance that distinguishes it
from all others: everyone must die, so the insurance companies expect
to pay back sooner or later.  Another one is: your life insurance
needs decrease as you grow older: the children are older, so less
years to cover till they are adults; home mortage balance is less;
the wife has less years remain before life-expectancy.  And 
you have culmulated a bigger nest eggs of retirement to cover any
needs left.  So, you need big life insurance when your kids are
young, house not paid.  But when you hit the fifties, the kids
are out of the nest, house all pay for.  Nothing to worry.

The only reason I can accept to go whole-life is "forced saving".
It is a good saving plan though poor investment return.  If you
opt for the invest-the-difference route, it is so easy to say, "Hm...
things are a bit tight this month, I will skip this month."  Or, "let
me pull some money for that great European tour I deserve."

The most prudent way is to buy TERM life according to your need
and invest the difference (between term life and whole/universal
life) in some simple investment such as mutual funds.  (For mutual
funds choice, read the MONEY magazine for advice.)

Oh, yes, you mention you have no retirement plans yet.  You should
immediately check about 401k or 403b options your company (or your
wife's company) may offer.  These are much better than whole-life
investment.  For example, contributions to 401k/403b are pre-tax
money.  You don't need to pay income tax for them now.  But
contributions to whole-life are after tax.  (Only interest earned are
tax deferred.)  Say, you are in 28% tax bracket, if you invest
$5000 in 401k this year, you don't need to pay that $1400 federal
tax this year.  The tax will be due when you withdraw it after
retirement age.  But if you invest $5000 into whole-life, you still
need to come up with that $1400 next April 15.

> Some questions:
> 	Can the premium be changed after the start of the
>policy even if I don't change the value of the policy.

From what I heard, you can skip/stop paying premium after it is
big enough to maintain the life-insurance part.  But if you try
change companies, you receives quite a penalty.

>How does one
>determine the viability of an insurance company through easily 
>available information in the the public domain?

Check "Best rating" which rates most insurance companies.  You should
avoid companies with grades lower than B+.

>	  What is a reasonable internal rate of return?  How
>does one calculate internal rate of return?  The agent calculated
>about 7%+ over twenty years.  That looked like about 4.3% if the
>whole amount had been invested as a lump sum with simple interest.

I have not heard of internal rate.  7% is rather low.  But remember,
this is guesstimate from past experience.  The company is NOT guranteeing
this for the next 20 years.  They set the rate once a year.  It could
end up lower or higher.

>What good are the quarantees that New York Life will be able
>to meet the projected dividend payments?  What happens if they fail
>to meet these projected levels?

It is as good as the paper it is written on, i.e. nothing.  That is
the part I don't like.  If I put my investment in a mutual fund
and it does not perform well, I could move the money to somewhere
else.  But you pay such a high commission to get into the whole-life,
it is expensive, if possible at all, to move it.

>What good is the guarantee that
>I will be able to borrow the equity from this account in the future
>without triggering a "taxable event"?

Don't know anything about this.

> Finally, what two other questions would you be asking an
>insurance agent before you signed on the dotted line?

"How much is your total commision out of this policy?"  You may
then decide if he really deserves that much.  And don't take that
crab that he will be around to help your wife if you turn in
early.  For one, that is not written on the policy.  For another,
that is the job of your estate trustee.  Which one do you trust
more, a trustee you have picked yourself or an insurance agent
who may be a bit too busy then?

===============================================
Disclaimer: The above are my personal opinions.
Newsgroups: misc.invest