Life Insurance Not the Solution for All Needs
I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.
Question:
Dear Ray,
My husband and I are both retired. At this point in our life, we receive a modest pension, are able to save regularly, and are essentially debt free. We are conservative by nature, and have a little pot of money in CD's. We have never invested, nor are we interested in doing so.
After checking the rate of interest on the CD's, we realized that we are essentially not earning any money on our savings. We are not necessarily looking at building our funds for the future, but at protecting what we have saved at the best rate possible.
We also are considering changing our long term care insurance company, as we are hearing ours is becoming more difficult to work with.
We have been working with a Financial Representative from an insurance company. He is encouraging us to buy Single Premium Whole Life Insurance, with a Chronic Care Rider. We like the fact that it offers a tax deferred growth, the proceeds avoid probate costs, and has income tax free death benefits. Our money would be safe from any possible legal issues. There would be no premiums to pay for long term care insurance, and we would have access to our money, if needed. The company is offering us 4.25 interest on $100,000 single premium.
Any comments from you?
Thank you for your time and consideration.
Sincerely,
Cheryll K
Ray Answers
Dear Cheryll,
I see essentially two financial objectives that are important to you:
1). Protecting what you have saved while getting the best interest rate consistent with this objective, and
2). Replace your long-term care insurance policies.
These are two very different financial objectives.
Before I comment specifically, let me share a few rules in regards to financial products that have served me and my clients well over the years:
- NEVER buy a financial product that is positioned as the single solution to all of your financial objectives...especially when those objectives are very different.
- NEVER over insure. Avoid buying unneeded coverage with expensive add-ons.
- NEVER buy insurance for emotional reasons.
- The initial costs of whole life insurance are very high: it's likely that over 20% of the first year's premium would be deducted to pay for "distribution and underwriting costs". This is a fancy way of describing the costs to pay commissions to the selling agent. So you could pay and your agent could make $20,000 if he sold this policy to you!
- The ongoing costs of the policy you are considering are also high: these will include the cost of the life insurance and the cost of the "chronic care" rider. I'll bet that net rate this policy will actually credit to your lump sum will be somewhere south of 2 percent after these costs are deducted.
- Do you really need to pay for any additional life insurance? You are retired, have pension and social security income and no one financially dependent on you. Is there a need for additional life insurance?
- Investing all of your savings into a single premium whole life policy with an insurance company is not necessarily diversified. All of your savings will be subject risk of the insurance company becoming insolvent.
- Don't be fooled by the "high interest rate". While the initial interest rate proposed seems higher than average, it may be subject to change after the first contract year.
It is true that by designating a beneficiary on a life insurance policy the death benefit can avoid probate. But you can accomplish the same thing by making a Transfer on Death Designation on non-retirement accounts at most banks. Here is a TOD Plan Kit used by one major investment firm. The point is that you do not need to buy a life insurance policy to avoid probate.
Also, life insurance products by themselves do not provide legal protection. To protect your assets from probate or provide legal protection from creditors, you need to set up an estate plan that uses a trust. Get advice on this from your attorney.
The correct approach to your situation should include a discussion of where you can find the highest rates on your savings. It is likely that certificates of deposit from FDIC insured banks or similarly protected credit unions are a suitable solution to your first objective. Check out sources such as Ally Bank for this, and compare to rates on similar CDs at banks and credit unions in your local area.
As for replacing your long term care insurance, I am not totally convinced by your reason of "hearing ours is becoming more difficult to work with..." that you should switch. If you want to compare long term care insurance policies, then I'd suggest looking into the long term care insurance AARP offers to their members. Just remember, you should apply for and be approved for a new policy before you cancel any existing coverage. If you purchased your current policies a long time ago, the new policies, issued at your current age, could cost more for lesser benefits.
I hope this is helpful and thanks for contacting me.
Ray
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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