A question for financial gurus out there

[Alex Berkovsky]

My wife is a teacher and has a great retirement pension plan and also contributes to 403(b). After she retires, the maximum benefit (100% of her pension) provides the largest monthly payments to us for life, but provides no payment to a beneficiary (me) if she kicks the bucket before I do. There are options where she takes less that the max and I get a percentage of her pension for life. The link below explains it in more detail:
http://www.nystrs.org/main/library/max_option.html

AXA Financial advisor who works with teachers in the district offered us another option. He advised to take the max pension payout, lower your 403(b) contributions, and use the amount (which 403(b) was lowered by) to buy whole life insurance from AXA. His logic was that 403(b) is funded by pretax dollars now but will be taxed once you tap into it. If my wife buys life insurance with taxed dollars now, with 10% average annual growth in life insurance investments will give us a lot of cash.
I was always under the impression that to use whole life insurance for savings/investment is not the best choice for everyone. I was always skeptical about someone who is trying to sell you life insurance even though the guy is a financial advisor for the district. Are we getting solid advise?
BTW, he also advised me to do the same with my 401k.

[Art Mulder]

As a Canadian, I know nothing of 401k or 403(b)...

However, when it comes to insurance... Assuming that your kids are grown and gone (ie: through College, all financial apron strings/obligations gone), assuming you don't have any any big debt, then I have been advised that there really is no need at all for you to have ANY life insurance, except a small token amount (like $25k or so) to cover burial expenses.

So in your situation I would want to know what is the reason for getting life insurance versus just taking and investing/saving the difference in payouts.

Also missing from your discussion is any mention of your own pension or whatnot. Do you depend on your wife's pension?

...art (not a financial guru, but reasonably well read...)

[JohnT Fitzgerald]

I think Art has some valid points. I'd say find an advisor who is not looking at selling you 'products', but looks at the overall picture (much like art says - depending on the pension, age/status of the kids, etc etc).

[John Meyer]

When I looked at taking my pension, it was advised to take the option that would pay out the same to my wife after I died. There are some tax breaks I get that she won't, so this way her income won't go down much. The difference didn't seem that big as opposed to a single life. I have known people who took the 100% payout on one thinking that person would outlive the other and the person with the pension died in a few short years leaving no pension. I too would advise talking to someone who isn't trying to sell you something. Not that they would be dishonest, but they are often taught the best way to do something usually involves them selling you something. That happens a lot.
John

[Augusto Orosco]

If my wife buys life insurance with taxed dollars now, with 10% average annual growth in life insurance investments will give us a lot of cash.
I was always under the impression that to use whole life insurance for savings/investment is not the best choice for everyone. ... BTW, he also advised me to do the same with my 401k.

I am no expert by any means on life insurance, but when comparing term to whole, I usually estimate the difference in premiums and compare it to what I could be getting if I paid for term and invested the difference myself. Nevertheless, there are many small print issues with whole that makes things harder to compare (for instance, clauses that determine how much you really get if you want to surrender the policy before it expires). I personally avoid whole life and stick to term; and that's what most financial advisors who don't sell it recommend. But everyone’s situation is different and I will not generalize.

Also, if your wife has a great retirement plan, I can't see why you should reduce your 401(k) contribution in order to get whole life with her as a beneficiary. Contrary to your wife's plan, If something happens to you, your 401k funds still belong to your survivors.

In fact, something I would check is that you and your wife are weighting your contributions towards the plan that offers the most benefits. If your employee offers 100% matching for your 401(k) but your wife doesn't for the 403(b), you could reduce contributions to the 403(b) until the 401(k) is maxed out (of course, this only applies if you are not yet contributing the full amounts to your plan).


I guess I should add a disclaimer now; something to the extent that "this should not be considered as an offer to sell any financial products or a recommendation to invest”. I am certainly not a financial advisor. :D

Edit: I also forgot to ask what you meant by "10% average growth", because I don’t know enough about whole life and might be misunderstanding the issue: Is that the expected return on the policy investments? If that's the case, that sounds pretty high to me; and if your agent quoted you that number, I would be very suspicious of his assumptions. If they are "guaranteed"; I would be even more skeptical and take an even closer read at the fine print to see what you really would take home after everything is said and done and under realistic (vs. ideal) circumstances. Just as a reference, the long term return on the US stock market is around 7% - 10% (depending on what you what to consider “long-term”). Safer investments yield considerably less.

[Mike Henderson]

Take the lower benefit on the pension and don't look back. What the pension actually is is an annuity - that is, the employer purchases an annuity (probably fron an insurance company) when your wife retires. An annuity can be a single life - meaning it terminates when your wife dies - or a variety of two life contracts - meaning that you continue to get the full monthly amount when she dies, or you get some reduced monthly benefit when she dies (if she dies before you) - or even some other arrangement - it all depends on the contract.

If the employer is doing their job, they will look for the best deal on the annuity, no matter how it's structured. It's HIGHLY unlikely that you will be able to do better with some fancy financial arrangement, especially involving whole life insurance. That guy will get a big commission for selling that whole life policy.

Mike

[Alex Berkovsky]

I also forgot to ask what you meant by "10% average growth", because I don’t know enough about whole life and might be misunderstanding the issue: Is that the expected return on the policy investments?Yes, according to the advisor, that is the average expected return.


Take the lower benefit on the pension and don't look back...Mike,
What do you mean by lower benefit?

[Bob Rufener]

I am a retired teacher from Wisconsin. When I retired, we had a list of about 7 options that I could take. Taking any of the benefits is like a crap shoot. We don't know what the future will hold for the retiree or the spouse. I think you have to look at your age situation, your health history (including parents and siblings) and try to come up with the plan that covers the bases as best they can for your situation. When I retired, the state department of employee trust funds has advisors that I met with. They explained the benefits thoroughly but would not recommend one vs the other. A liability issue I am sure. Check with the NY state retirement system and see if there is someone you can talk to face to face. It may help you make a decision. I also would be reluctant to take somoeone's advice that is also selling insurance. Makes me skeptical. Good luck with your decision

[Augusto Orosco]

Yes, according to the advisor, that is the average expected return.


Hi Alex,

If you decide to consider whole insurance any further, I would at the very least ask your advisor how he arrived to such expected return and what his assumptions are. Then get a second opinion about them with someone who is not interested in selling you insurance.

[Eddie Watkins]

I'm not sure what kind of insurance it is but when I was looking into it, virtually every policy offered starts reducing at about 65 and goes away by 70 or so unless the premium goes way up.

[Mike Henderson]

Mike,
What do you mean by lower benefit?

On most pensions, the person retiring can take the pension without a post death benefit for the spouse - this requires the spouse to assent to that choice by providing a notarized signature.

The default choice (and the reduced benefit I was talking about) is that the spouse gets something from the pension when the covered person dies. Because the annuity is covering the expected life span of two people, the initial benefit will be lower than for the option described above (in the first paragraph). I suggest you take this second option.

Let me try to describe an annuity a bit more. You (or in this case, your wife's employer) give a lump sum of money to an insurance company and the insurance company agrees to pay you a certain amount per month for the rest of your life. For the insurance company, the question is "How long will you live?" They have statistics on average lifespan and base their payment (the size of that payment) on the average lifespan. If you die early, they make money on the deal. If you live long, they lose money but - on average - they make money.

When there are two people covered, the odds are that at least one of the people will live longer than "an average lifespan" so the payment per month has to reflect the fact that they will likely have to pay longer than if just one person was covered - so the monthly payment is less.

Annuities are a very competitive business so the insurance companies have really good lifespan data and invest the money you give them to earn as much as possible - and they're good at the investing. While it's possible that you could do better, the odds are against you.

So my advice is what I said earlier - take the reduced benefit and don't look back.

Mike

Mike

[Craig Kershaw]

This approach has been pointed out to me by a fairly shrewd insurance/financial planning guy. I know it sound too good to be true, but there is a way to access the cash value that has built up in a life insurance policy without paying taxes. Typically when you cash out of a life insurance policy, ie before the death of the named insured, you must pay income tax on the amount that is in excess of the premiums paid. However, if you borrow money on the policy you pay no tax at all. If you leave enough cash value in the policy to cover the interest you don't even have to pay the interest, which is usually at low rates anyway. When the named insured dies, the policy pays off, less the amunt of the loans. Since life insurance proceeds are not taxable, the tax man gets none of your money.

[Greg Funk]

Yes, according to the advisor, that is the average expected return.
10% sounds too high. Ask for a prospectus on the whole life policy and research what the historical growth was relative to the market. To get 10% would require relatively high-risk investments and insurance companies normally have fairly conservative investment models (along with high management fees).

Greg

[Randy Cohen]

I admit I haven't read all the posts. If the insurance guy will give you a guaranteed 10% in writing then go for it. You would be hard pressed to do better elsewhere these days. But I already know this ain't gonna happen. AXA wants to sell you insurance. They don't much care about your retirement situation. Does the place your wife works offer more than one place to invest with? If they have TIAA-CREF then thats the winner.

Theres nothing wrong with being taxed on your retirement income...most people will not have much other income and your personal tax rate will be less than what it is now.

As far as what the benefit will be and if you get some of it if your wife predeceases you, you should look at your family longevity history and your personal health. If you expect that you will live longer than she will than go for the reduced benefit. Yes it is a gamble.

How old are you (and she) anyway? Is there any vesting? Most people don't stay at the same job for their whole life.

[Tom Godley]

Alex;

you do not list the ages - so we do not know the number of years the policy will build before it could be used.

It is often ill advised for men to take the full pay out when they retire because the wife normally lives longer. Unless funds are saved for this, disaster can happen -- especially when heath insurance payments are included in the loss.

In your case -- your wife has a better chance of outliving you - using the norm. When one party has a health issue the whole things changes.

It looks like he may be suggesting that you buy a policy to cover the difference if your wife dies prematurely - with the ability to borrow against it at retirement. You only get the big pay-out if she dies - but you lose the pension. This way you can take the larger pay-out at retirement and still be covered incase she dies, You would have to compare the build amount between the 403 and the policy.

Often it come down to your comfort level -- it is all risk vs rewards. Many people just feel better knowing that x amount will be available.

You need to crunch the numbers at different points to see if the upside is worth the risk to you. If we knew when we were going to die -- life insurance is the best investment :))

[Alex Berkovsky]

you do not list the ages - so we do not know the number of years the policy will build before it could be used.
Tom,
I am 46 and my wife is 43. She is looking to retire by 55. When my wife retires, she is given 30 days to make a decission on the type of payout to take.
See, what drives me nuts is that we already have a whole life insurance with AXA (should have mentioned that before) for both of us for the amounts we could afford. Why is this guy trying to sell us both another policy? For some reason I always have this mistrust when it comes to insurance salesmen - even though this guy works with all the teachers in the school district and supposed to give good financila advise, he still needs to put food on his table.

[Steve Dewey]

Tom,
I am 46 and my wife is 43. She is looking to retire by 55. When my wife retires, she is given 30 days to make a decission on the type of payout to take.
See, what drives me nuts is that we already have a whole life insurance with AXA (should have mentioned that before) for both of us for the amounts we could afford. Why is this guy trying to sell us both another policy? For some reason I always have this mistrust when it comes to insurance salesmen - even though this guy works with all the teachers in the school district and supposed to give good financila advise, he still needs to put food on his table.

Trust your "mistrust" - Mike Henderson offered the best advice. Typically the benefit (payout) is discounted 10-15%. Use the funds in your 401k and 403b to make up the difference (or sell some of your workshop creations:)).

The best use of life insurance is as a risk mitigation tool. You want it while you are working to protect against the loss of a wage earner or child care provider (stay at home parent) that would be financially straining. Typically term insurance is the way to go (whole life does have some tax benefits, but generally only for the very wealthy related to estate taxes where the extra cost of whole life offsets the estate taxes). How much you need is a present value calculation based on expected future earnings or child care expenses.

Life insurance of any kind (whole or term) is NOT a retirement tool.

[David G Baker]

When I reached 50 I made up my mind that I was going to get educated enough to take care of my own financial affairs and not trust anyone else with my financial decisions. I spent 4 years doing research on the Internet through Motley Fools site, CBS's financial site and Vanguard's site. At first it was a little painful because what I knew about investing was almost zero. After doing all of that research I came up with a plan that served me well. I watched the market and moved my funds in my 410K between mutual funds and money funds. When the market peaked I moved my money into money funds. When the marked dipped quite low I rolled the funds back into stock funds. When I retired I rolled my 401K into an IRA with Vanguard that is made up of seven mutual funds. If you wish you can research the funds on the above mentioned sites under the name "Coffee House Portfolio". These seven funds have done very well for me since I retired at 55. I had quite a few dollars the were not tax deferred so I lived on that for the first 2 years and then started drawing on my IRA funds.
I do not like Insurance Companies, I will not invest in annuities and I will not use stock brokers. My pensions from my former employer are both annuities because I did not have a choice. I took the lower dollar amount so my wife would be covered if I died prior to her.

[Tom Godley]

Well -- one good thing is you have lots of time -- I hope since I am 48!

This is really not a great answer..... BUT -- You may need to go and get some other opinions -- even paying someone for the advise up front.

It may take a little time, but trust me you will feel better about it in the end.


Depending on the reason for the insurance - there can be very valid reasons for two policies or more. Especially when children are involved in the mix.

Two dogs and a dead cat could have made money in stocks over the last 15 years -- best not to make many decisions going forward based on the last period. I am not an insurance salesman, market timer, or financial expert. I am at 48 still a risk taker and thankful that I lived during a period in the market where that strategy worked. You made have a different comfort level and my strategy may not work for you.

With two incomes - depending on spending habits and children - after a lifetime of work you could have a sizable amount of money that will need to be directed differently than others.

[Al Wasser]

One thing to keep in mind about insurance is that it is NOT indexed to inflation. That means you are reducing your purchasing power as the yrs go by. Let's say you do buy life insurance and at 47 or so you say you need $500,000. That sounds good in todays dollars but in 20 years your purchasing power is closer to $250,000. You are now about 67 yrs old and have another 20 or so to go. If you really need the $ at age 75 it will not have much buying power. You can change the age you buy but the inflation still eats away. You are better off doing everything you can to max out your annual contributions to IRA, etc and learn good money management.

[Pat Germain]

Alex,

I'm going to be blunt here, so if I offend someone, I'm sorry, but this is my take and my personal experience.

My advice is to run, don't walk, away from that insurance guy. There's almost no chance a whole life policy will grow by 10%. That is an extremely optimistic outlook. The commissions on these policies are quite generous which is why the salesmen are quite motivated.

Example: In 1986 I bought my wife a whole life insurance policy. She was very young and the policy was quite inexpensive. I only wanted it in case something happened to her or our children in order to cover funeral/burial expenses.

The insurance salesman went on and on about what a great investment this policy was. He had all kinds of tables predicting the future value and told stories about how we could use it to pay for our kids' college, retirement, yada, yada, yada.

Well, here we are over twenty years later and that insurance policy isn't worth a damn thing. I tried calling the company and asking about this multiple times, but all I get is stonewalling. Apparently, I now have to make an appointment with an official, approved representative in Denver who can explain it all too me. Since all he's going to tell me is it's not worth anything, I won't bother.

The only thing we ever got out of that policy was some shares of stock as a result of a class action lawsuit against John Hancock. (Apparently, it wasn't just my wife's policy that was worthless.) My wife kept the stock awhile, then sold it. I think she got a couple of hundred dollars, then had to pay capital gains taxes on it. :rolleyes:

Almost any financial advisor will tell you life insurance is a very poor investment vehicle. Many people found out the hard way, which is why John Hancock got spanked with a class action lawsuit. Fortunately, I never counted on anything from our policy other than insurance.

[Alex Berkovsky]

Pat,
Listening to your story makes me want to cancel the whole life insurance he sold us 2 years ago and just purchase term life instead. I am so clueless when it comes down to finances, investing, etc. :o
My best course of action would probably be (as mentioned by other posters) to make an appointment with a financial advisor.

[Pat Germain]

Alex, purchasing term life insurance is what many financial planners advise. My wife still has that whole life policy because it's cheap. I have a term policy on me. Take a look at the cost of a term policy. If it's a lot less expensive than the whole life policy, you might be better off cancelling and putting that money into another investment, but I don't know.

Don't just take my advice. I do indeed think it would be a very good idea to seek help from a professional financial advisor. Ask around at work and of people you trust to recommend someone. It's often somewhat expensive: $500 or more. However, ponying up $500 now can easily gain you hundreds of thousands of dollars or more in the future. Be leary of "free financial counseling" services. Sometimes they are just fronts for selling you things like consolodation loans; or life insurance.

[Ken Garlock]

First, figure out if you really need to have life insurance. If you don't have any bills, own your home free and clear, and have some money in the bank, there is a good chance that you don't need life insurance. I cashed in all mine prior to my retirement.....

What I did when I retired was to take the cash payout on my company retirement and rolled it over into an IRA. Second I rolled over my 401K into an IRA. These funds, along with other savings are now being managed by a Certified Financial Planner, and has been for the past 7 years. With the investments the planner has set up, I have been able to maintain the total dollar amount originally invested, and at the same time take out a reasonable monthly withdrawal for our living expenses.

Your job is to find a good planner that will not 'churn' your account for his own benefit or that of the company for which he works.

Also be ware of insurance agents that want to move your coverage to different companies every couple years, that is also called churning, and only benefits the agent.

Just another option....