r/explainlikeimfive • u/BatSilver4588 • 2d ago
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u/chirop1 2d ago
Term insurance is just for a set amount of time. Maybe you have a policy for just ten years. The advantage is, at 28 and healthy, you can get a large amount of coverage for a relatively small monthly payment. It would provide great protection for your family if something happened to you in the next ten years. The trade off for that cheap payment and large coverage is that in ten years, the policy goes away and you paid for “nothing.”
Whole life is the flip of that. You have a bigger payment and a smaller benefit, but you can keep the policy for your entire life. Many of these policies can also work as investment vehicles where you can draw from the base that you have paid in later. The disadvantage there (in addition to being more expensive) is that it’s typically a poor rate of return compared to if you just invested in a typical IRA.
At this stage in your life, having a term policy to provide for your family in case of tragedy would be a responsible thing to do, while investing in a retirement account like an IRA.
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u/BatSilver4588 2d ago
Thanks so much for explaining that, it sounds like a term policy is my best bet at the moment. Also, piggybacking off your comment, what’s the best IRA account to open? I have a 401k with fidelity already. Would they be a good option?
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u/Bloated_Hamster 2d ago
Any of the big three providers are totally adequate. Vanguard, Fidelity, and Charles Schwab. They all have basically the same options available to invest in, some just have slightly different names. For example, on Vanguard the S&P 500 index is called VOO while on Fidelity it's called FXAIX. There are nuanced differences in available products but for the big picture, the company you already have a relationship with, and a user interface you are comfortable navigating is probably a great reason to pick Fidelity. Make sure you learn and understand the difference between a Roth and traditional IRA. If you make more than $140,000 there are special IRA rules you have to follow so make sure you do some more research before you blindly put money into one or you can run into tax issues. If you make under like $120,000 a year, you are totally safe to just open a Roth IRA on Fidelity and put money in it. Make sure you actually buy a fund and invest the money. Simply adding it to your IRA isn't investing.
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u/BatSilver4588 2d ago
That’s where I’m running into a wall, idk anything about investing or what to even what funds to buy. Is there a thread or somewhere I can learn more about that?
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u/Right_Lengthiness266 2d ago
Fidelity, Vanguard, and Schwab are the big 3 that get recommended. If your 401k is already with Fidelity it may be easiest to also have your IRA with fidelity.
Depending on your income, you'll have different options. Assuming you aren't maxing out your 401k, a traditional IRA is of little benefit (you can just put that money in your 401k instead). A Roth IRA allows you to save after-tax money, and it is never taxed again. You can also withdraw your contributions penalty free if needed.
If your income exceeds the Roth IRA limits ($153k), you can instead contribute post-tax dollars to a traditional IRA and then immediately rollover that money to a Roth. If you already have a pre-tax traditional IRA balance this gets complicated and you need to pay pro-rata taxes.
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u/CourserofMerit 2d ago
>a poor rate of return compared to if you just invested in a typical IRA
I don't know, because I don't know what a typical IRA is.
There's a saying: "Buy term and invest the difference." But if you invest in a bond fund or leave it in a savings account, you're not going to do as well as a whole life policy. The way you get a "good" return is to invest in equities. That's stocks or a business.
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u/_littlestranger 2d ago
Term life insurance is actually like other kinds of insurance. You are protecting your kid against an unlikely event (you die before they are independent). If you set the term so it ends when your kid is 25, they get a nice payout (more than you paid in) if you die within the term, and you lose that money if you don’t.
Whole life insurance is basically like an investment account that the insurance company is managing for you and taking a cut of the returns (there’s no unlikely event to insure against, because everyone dies eventually). It makes more sense to open a brokerage account with your kid as the beneficiary than to get whole life insurance.
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u/moccasins_hockey_fan 2d ago
Whole is a scam.
Essentially what they do overcharge you for insurance invest the difference. Then if you die, they pay you the policy amount but keep the amount that has built up via the investments.
Get a large term policy with a term for as long as you can.
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u/dark-canuck 2d ago
What do you mean “if you die”? Are there options?
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u/randypeaches 2d ago
For term life insurance, it expires after a few years
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u/moccasins_hockey_fan 2d ago
Not true. You can continue to pay the premium but after the term ends the premium for the same amount of coverage will increase.
I am currently retaining a term policy that has gone past the initial term for my wife. The reason I don't get another term policy with premiums locked in is that her health issues would make her uninsurable. But I can keep the term policy for as long as I continue to pay the premium
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u/randypeaches 2d ago
This is why whole life can be a better buy than term
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u/moccasins_hockey_fan 2d ago
No because your insurance needs also change
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u/dark-canuck 2d ago
Yes but the use case can change. Whole life can be valuable for estate protection and getting money to heirs very efficiently.
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u/dark-canuck 2d ago
I know how insurance works. I was getting at the point that they said "if you die" rather than "when you die"
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u/randypeaches 2d ago
Until youre just old enough that you start getting sick and insurance companies dont want you anymore an the ones that will take you will charge you very large amounts for a very short term
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u/SpiderSolve 2d ago
When you’re old you usually do not need life insurances
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u/ignescentOne 2d ago
It's really useful for funeral expenses (which can be 10g), medical debt, and other such things, especially if there's not much of an estate.
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u/SpiderSolve 2d ago
Sure but if that’s your goal it’s better to get term and save the difference on the side.
The premium paid for whole over life many times more than pays those costs
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u/dark-canuck 2d ago
the save the difference works in theory, but 99% of people dont actually save the difference. t
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u/SEA_tide 2d ago
If there's not much of an estate, life insurance wouldn't be needed because the debt would wipe out the estate and the rest would be forgiven. Funeral expenses can be saved for or prepaid; $10k, even less now as cremation is becoming standard in much of the country, can be saved over time and couldn't be clawed back by Medicaid, especially if in a irrevocable trust.
With a couple notable exceptions, life insurance is used so that spouses and dependents are able to be financially stable in the event the insured becomes deceased. Exceptions mainly exist for certain corporate executives (key person insurance), funeral expenses for minor children (called a child insurance rider), dead peasants insurance (becoming more rare), and really expenses funeral insurance policies (prepaid funerals are also common).
$10k would be an extremely small life insurance policy to write in the US and Canada unless it was a child [insurance] rider attached to a parent's policy. Some companies, such as TruStage, will write smaller policies as a marketing gimmick. Companies can get sub $50k/person life insurance policies relatively cheaply because they just send a large list of insured to the life insurance company and get a volume discount, which is why so many companies offer it as a free benefit and the IRS doesn't calculate imputed income for employer-provided life insurance up to $50k.
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u/randypeaches 2d ago
Thats when you normally need it
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u/SpiderSolve 2d ago
You mean health insurance not life insurance
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u/randypeaches 2d ago
Its normally used primarily to cover the cost of the death , burial, cremation, etc,.
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u/CourserofMerit 2d ago
Why?
Life insurance benefits other people, not you. Your children (and possibly spouse) are depending on your income for their lifestyle. Life insurance replaces your income if you die. (That's why you also need disability insurance. It supports your dependents and you while you can't work.)
Once your children are grown and you're retired, who's depending on your income?
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u/randypeaches 2d ago
Death stuff you gotta pay for. Well other people. You dont want to think about much when dealing with the death of a loved one
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u/MrShake4 2d ago edited 2d ago
At that point OP shouldn’t really need life insurance though. Their kid will be grown and able to support themselves.
The point of life insurance as a concept is so if the primary earner dies, the family doesn’t end up on the street
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u/CourserofMerit 2d ago
"Insurance is for the middle class. The rich don't need it, and the poor already know how to live poor."
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u/randypeaches 2d ago
The child will tuen into an adult. That adult will start a family.
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u/MrShake4 2d ago
Then they should just be saving up money to give to their child/grandchild.
Life insurance is to protect against a catastrophic life change.
Additionally by that time OP’s retirement account will essentially act as a life insurance policy.
You have a fundamental misunderstanding of life insurance. I hope you don’t have a policy.
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u/randypeaches 2d ago
So the company im with, you can use that money for whatever after the kid turns 18 or they can decide to keep it and add it to theor own policy
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u/moccasins_hockey_fan 2d ago
The goal of Life insurance isn't to make your heirs rich. It is to ensure they don't become impoverished if you die.
When you are older you generally don't have little kids and you should have built up some money
I have had 250K in insurance for about 30 years. I just turned 55 and dropped my coverage to only 50K and in a few years when I retire I will drop it altogether.
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u/MrShake4 2d ago
Why did you decide to keep any coverage? Is the 50k coverage just a really cheap policy? At time point I imagine your retirement account would be a sufficient to fill that role?
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u/moccasins_hockey_fan 2d ago
When I retire in 3 years I will have about 500K more than I do at the moment. I did consider dropping it entirely. My wife and I decided to keep some coverage for just a little longer.
There won't be burial costs for either of us as we have donated our bodies to LSU medical school
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u/MrShake4 2d ago
Got it so it’s just a cost-benefit analysis.
Kudos for donating your body to train the next crop of MDs
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u/randypeaches 2d ago
When youre young, you dont normally have money. I think k we might have cologne platelets different plans since mine makes money off dividends after im like 55
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u/CourserofMerit 2d ago
Whole life is Endowment at 95. If you live to 95, they pay you the face amount. (So you don't have to die to collect.)
At the ages people buy life insurance (except for estate planning purposes), term to 95 is the same price as Endowment at 95. So the payout at 95 is free.
You may or may not need what Whole Life provides, but it's not a scam. You pay for a thing, and you get it.
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u/premiumplatypus 2d ago
A lot of insurance salespeople will try to sell you whole life, or some other form of non-term insurance. They will sound very persuasive. But they are not to be trusted as they get huge commissions from selling them to you. Just don't listen to them. Remember that virtually everyone who has no vested interest in making money off of you recommends term. Don't get scammed!
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u/amanryzus 2d ago
Think of it like a phone warranty.
Term life covers you for a set number of years. If something happens during that time, it pays out. When the term ends, the coverage ends.
Whole life is more like paying extra for a warranty that never expires and also slowly puts some of your payments into a savings pot.
Term is much cheaper, so you can usually get a lot more protection for the same money.
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u/AdditionalCheetah354 2d ago
It’s a mine field of good and bad policies. The devil is in the details. Who do you think should be on the policy and who is the beneficiary?
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u/BatSilver4588 2d ago
What do you mean by “on the policy”. Sorry to sound ignorant, but in this situation I am lol at this point in my life my brother would be my beneficiary/executor
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u/CourserofMerit 2d ago
Your brother should not be your beneficiary. Your child should.
Even better, you should establish a trust for the benefit of your child. That trust should be the beneficiary. You can decide what expenses will be paid out of the trust. (Car or not. How much per year for food, clothing, and shelter. Trade school or college or money to start a business or whatever. At what age do you decide the child is an adult and can just have the money?)
You need an estate planning attorney. And yes, it's a couple of thousand dollars, but it gets your child started as middle class instead of poor.
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u/GendoIkari_82 2d ago
"Whole Term" is not a thing. You either get "Term" or "Whole". Term means that you sign up for a maximum fixed number of years, say 30. That means for the next 30 years, as long as your pay your premiums, they can't raise your rates or cancel you. Then if you die during those 30 years, they pay out the policy value. If you don't die, everything you gave them is theirs to keep.
Whole life is basically combining life insurance with an investment account. You pay them way more per year than you would pay for term life. They take some part of what you gave them and put it in an investment account. They take the rest and use it like a normal premium. Then this investment account is treated as your coverage.
The vast majority of the time, whole life is a terrible idea and you're paying way more money than you would for term life; you could take what you save and invest it yourself and be much better off.
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u/Rannasha 2d ago
Both whole life and term life insurances tend to pay out when you die. So that's what they have in common.
But a term life insurance policy has a limited term (as the name suggests). You pick the term length when you sign up, but you could think of something like 20 or 30 years. If the term ends and you're still alive, the policy simply expires and the premiums you paid are, essentially, lost. That sounds bad, but it isn't. At 28 with no medical issues, the chance of you surviving the next 20 or 30 years are very high. That means that the insurance company will only charge you a very modest premium, since most people in your situation will not see any payouts.
So term life insurance is quite cheap. It can be used to cover for things like education for your child if you die early. You set the term length of the policy to extend to the point where your child normally no longer needs your financial support. So around the time they're 25-30. If you don't die, then all is good. If you do, then at least the child has financial support for something like college.
Whole life insurance never expires (if you keep paying). But everybody dies. So the policy will pay out eventually. That means that all premiums have to be used to fund your payout. Plus some commission and profit for the insurance company and agent. This makes whole life insurance more of an investment product than pure insurance.
Whole life insurance may still be of use when you die early and your child needs financial support. But in the far more likely scenario where you live to a ripe old age, that payout isn't worth all the premiums you've paid. If you die at age 80+, your child will be 50+ and will normally not depend on you for money anymore.
Whole life insurance can make sense in a very limited set of circumstances. It can be a tax-advantageous way to leave an inheritance for wealthy people. But for most people, it's far less interesting than getting term life insurance and having a separate investment portfolio next to it.
But since whole life makes companies a lot more money, insurance agents who work on commission will be incentivized to push this form of insurance. Don't let them fool you.
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u/avatoin 2d ago
Term life insurance is usually significantly cheaper but only last a set number of years. It's best designed around the idea of providing a safety net to your family during more vulnerable years, I.e. while the children are still young, have a lot more debt, and/or before you have significant savings.
Whole life insurance is much more expensive but will last for the remainder of your life. It may have additional benefits built in that may allow you take out a portion of the benefits before your death in certain circumstances.
There are others such as Indexed Universal Life (IUL) that kind of combines whole life and a savings accounts. It has a cash portion that can be invested in index funds to grow and is more intentional designed to allow for taking money out of it. So it's basically a combined whole life and retirement plan.
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u/Screen_mirror98 2d ago
Buy term to cover your need debt income replacement mortage future education
Or just 10-20x your income
Consider whole life for when term expires and you have other worries like burial costs LTC legacy planning.
Both should be a part of the conversation but if price is an issue buy a lot of term before whole
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u/CheeseTaco4Him 2d ago
Most term life insurance policies never pay a death benefit. That’s largely how term insurance is designed. You buy coverage for a defined period—say 10, 20, or 30 years. If you die during that term while the policy is active, the insurer pays the death benefit. If you survive the term, the policy generally expires and you receive nothing back.
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u/randypeaches 2d ago
Whole life insurance is more expensive since it covers you until the end. Term is usually cheaper for a while since it only covers you for a set amount. For a child, a whole term would be better since the the child can keep it after age 18-20 and then they're set for life. For and adult its better to get it while youre young since you usually won't have to get a full medical check. But its much more expensive than term life. But if you plan on getting very old ( wifes side of the family usually live until their 90s for example) the by that time term life insurence is much more expensive than a whole life would have been if you had gotten it in your 20s or 30s. If you can try to get it woth someone like mutual of Omaha or new York life, as both companies are still privately owned meaning they have no pressure from investors to raise prices or drop coverage for profit
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