From: acheng@ncsa.uiuc.edu (Albert Cheng)
Subject: Re: Mutual Life Insurance
Originator: acheng@shalom.ncsa.uiuc.edu
Organization: Nat'l Ctr for Supercomp App (NCSA) @ University of Illinois
Distribution: usa
Date: Fri, 24 Jul 1992 05:44:41 GMT

In article <BruuuI.EqF@hsi.com> siperas@hsi.com (Steve Siperas) writes:
>Hi
>
>I have been approached to buy life insurance from Minnesota Mutual.
>The deal is you are to get a set price for the life insurance then
>you get part of the premium into the MIMLIC mutual fund family. Also
>you can add extra money directly to the fund. The selling point is
>that the money is tax-free as long as the policy is active and you can
>borrow against the policy. I'm trying to start saving for my kids
>education and this is one option.
>
>The other option is to invest in mutual funds and get taxed yearly
>and have term insurance which increases every year or 5 years.
>
>Any thoughts or experiences with this would be appreciated


Sounds like whole-life or universal life insurance to me.  Before you
jump into this, couple points you need to know to differentiate life
insurance from others.

1) everyone dies; So, insurance company has to calculate in profit on
top of must-pay benefit.  So, one does not use mere premium for
investment purpose.

2) Life insurance is for the coverage of people you care and
responsible, such as your spouse and the young kids, and maybe your
parents.  When you are young, you don't have much asset.  So you need
big life insurance coverage to make sure the spouse can continue to
raise the kids with the benefit, and the kids can finish college (if
you so desire).  But as you grow old, you cummulate more asset and the
kids may have finished college and out the nest, you have less need for
life insurance coverage.  Therefore, it is rational to have about 13
times of your annual income as your coverage when you are young.  But
when you get old, your life saving gradually takes over the coverage
and you don't need life insurance.

The whole-life and universal-life combine life-insurance coverage
together with investment and get things rather muddy up.  They run you
all these fancy tables of comparisons you show you the big bucks you
are culmulating.  But if you look closer, you will realize you "lose"
the first year of premium, i.e. your policy-value at the end of year 1
could be about zero.  That is a lot of bucks upfront.  With some
average investment effort, you can do better than their return.

About the Tax-free part, it delays tax on the dividend earned.  You
still have to pay tax on the premium you put in this year.  You would
be better off to contribute to a 401(k) or 403(b) or IRA if you can.
You see, whole-life provides tax-defer benefit on the interest earned
(maybe 8% of the premium), but 401/403/IRA defer tax on the "premium"
(equal to your tax bracket which could be 28%) and the dividend.  That
is much better.

In a nutshell, most people should go shop a good term-insurance when
young, invest the difference between term-premium and whole-life
premium.  But we know no one is perfect.  Many people don't have the
discipline or interest to invest regularly.  (Which would you read, the
Wall Street Journal or the Sports Illustrated?)  And then some people
will spend every single penny he has (why save when Uncle Sam has got
each of us into $16,000 debt already?)  So, whole-life could be a good
saving plan.

This is just my opinion.  My final suggestion would be "go buy some
term insurance for now " to get your loved ones covered.  Then check
out some books about insurance from your local library to get more
information.  (Can someone suggest couple good ones?)  It is quite a
big amount of investment (is the agent asking you to sign a check of
$600 a month?)  Good luck.
Newsgroups: misc.invest