Life insurance question from a college senior: My buddy is trying to get me to consider purchasing whole life insurance as a vehicle to build cash value. Anyone have any experience with this? I’m heading into my last year in school, so i’m thinking about saving responsibly while i’m young…so i’ve already started a Roth IRA, and purchased term insurance that is worth $250,000.
Answers: Whole Life as an investment vehicle is a poor performer and usually not very liquid. If you’re looking to start saving money and being responsible, there are much better ways to do it.
If You Are Just Graduating School and do not have any dependents, avoid life insurance all together – you do not need it. When you start working, max out your 401k and if you have the resources, start putting money into a mutual fund. Once you obtain greater liquidity you can start doing more sophisticated investing.
Whole Life Insurance is a very expensive way to save with the most popular policy available being Northwest Mutual Life. They catch people by promising a minimum return of I think 4%ish. The also try to sell you on the cash surrender value. It only begins to make sense at very large dollars and as a supplemental savings plan.
Term insurance is not saving. It pays money to your beneficiary if you die during its term. Hence the name. Unless you are worried about your benficiary really needing the money, cancel it. Put the money you have saved into an index fund with a very low expense ratio.
Insurance is not an investment. At least its a lousy one. If you need insurance (do you??), then level term insurance is the way to go. You determine how long you expect to need coverage for – 10, 20, 30 years or whatever, and buy a level term policy of that length. You’re guarunteed a fixed price on the premium for that amount of time. For investing, stick with real investments (mutual funds, stocks, bonds). Max your 401K contributions if you can.
Does someone rely on you for financial needs right now? People often assume they need insurance. in many cases they do. But as a student, is someone depending on your income at the moment? the only thing your term insurance will do today… is provide a death benefit to your beneficiary. Putting your investment dollars into a Roth IRA is a great start as the growth you experience within your Roth will not be taxable at retirement. So putting money into this, the earlier the better is often wise. also, your investment choices in your Roth are important as well. of your overall portfolio, your more aggressive investment choices should be within your Roth, as they will benefit the most re: taxes.
keep in mind, while you are young, liquidity is often a concern as well. be aware of the costs associated with accessing monies you may put into a Roth (or any retirement type money) or insurances. Plus, I assume you’re in your 20s. Figure you get married in 3-5 years. Until then, you are wasting money on insurance you don’t need. Your 10 yearr term policy’s only going to be good from another 5-7 yrs then anyhow.
Some people also consider pet insurance to be a good investment; if you have a pet medical insurance plan you don’t have to worry about sudden emergencies since the pet insurance will cover it, so by going online to buy pet insurance you can make sure you can afford an emergency vet trip when needed.
My friends recently paid $6500 for a slipped disk in their 1-year-old dog. My 12-year-old recently cost me $1500 when he developed a bladder stone. You want to be prepared for these events if you’re a pet owner.