Life Insurance Policies on our teenagers OPINIONS NEEDED

[lucy16076]

Ok, so here's the juice....my financial advisor sold me insurance policies as a "legacy" on my 2 teenage "children." I have struggled with this decision for 5 years now because when I speak to her about it, it makes sense. When I speak to others, they say it's a waste of money & I should be investing that same money elsewhere for a better return. My advisor sold it to me as a legacy to leave for my children as they get older to take over & continue with, or I could continue paying into it & gift it to them someday. It has a built in, investment account attached to it. She says this grows tax free with compounding interest.
What I'd like is opinions....I've held this for 5 years & each year I struggle with trying to understand the nuts & bolts of it to make an informed decision on whether to keep it or not. Of course I can afford to bury my children GOD FORBID anything should happen, so that's not the reason I bought it. I believed in my advisor, that she was working in my best interest when she sold it to me. Others say differently. HELP !!

[Natalka]

No, kids don't need insurance policies, which are meant usually as a vehicle for income replacement.
These days, there are many other places to invest money for savings.

[brunt]

Repeat after me, "insurance is insurance and investments are investments - they are two separate beasts".

These sorts of insurance policies are a good deal for the sellers, not the buyers. The "investment portion" typically has huge fees associated with them. You would be further ahead just depositing the cash in a high interest account instead.

Furthermore, there is only one reason to have life insurance - to protect from the financial fallout of a death. This means the loss of an income, or the loss of the services of someone who does not have an income, say a stay at home parent. Please forgive me if this comes across as insensitive, but the loss of one of your children, while undeniably tragic, will not have any long-term financial consequences for you, other than the fact that your expenses will actually go down. This means that you don't need insurance for them.

And as far as the standard "start young while you can lock in the lower rates" argument goes, that is nonsense. You pay a lower rate because 1) you are younger and are at lower risk of dying and are therefore paying for insurance that you are extremely unlikely to need, and 2) you pay the premiums for more years. It's a false argument, but it is one that is often put forward.

As far as leaving a "legacy", that too is baloney. The real need is to get term life insurance for those years where you have financial dependants who would suffer financially from your death. The goal of life is to get yourself into a position where you no longer need life insurance as your savings will tide your dependants over.

I would not only stop the insurance (no need to throw good money after bad), but seriously reconsider this particular financial planner who has sold you a plan that is so very not suited to your financial interests. I honestly believe that you would be better suited looking after you own money using "The Couch Potato Portfolio" than to trust someone who is obviously using you as an income source.

Rule number one for the path to financial independence is this - make no expense that is not worth it. And in my humble opinion, this one is not worth it. Rule number two is to trust the advice in financial matters from those who have proven to be worth it. Your current financial planner has greatly broken that trust in my opinion.

[sweet sparrow]

I would say that experienced salespeople are well versed in how to sell their products and anticipate good questions that come from their clients. Your "financial advisor" likely has a sell sheet with a list of convincing responses to your questions as most of them are common. Insurance seems to always be sold with guilting the parents into leaving something for the children.

It wasn't until after I turned 30 that I was finally able to convince my parents to drop my life insurance. Every time they mentioned it, I always felt that they were being swindled into the products they were buying. It's hard to explain that to a generation 40 years older.

My children won't have life insurance as they have no income to replace and our savings should be enough to put DH and I in a pine box. Our Couch Potato Portfolios we have for them will be more than what they would get from insurance, I'd expect.

[lucy16076]

Well I guess this reinforces my idea to discontinue this insurance policy. After reading more "Online" info, and trying to get away from reading info put out by London Life, it seems that it's a "what if" policy, the same as any other insurance we buy. What if your adult child develops issues where they can't be insured? They sell it as a policy where premiums never rise, with a tax shelter built in, & useful for the "Kids" to borrow against for school, a down payment for a house or whatever....at a lower rate so they say. It's all very convincing. But you are all saying the same thing (as well as those I've spoken to personally). Cancel & put the money elsewhere. Thank you for your responses!! Much appreciated!!!

[brunt]

You sound like you are already convince, but let's break this down point by point...

Well I guess this reinforces my idea to discontinue this insurance policy. After reading more "Online" info, and trying to get away from reading info put out by London Life, it seems that it's a "what if" policy, the same as any other insurance we buy.

What if your adult child develops issues where they can't be insured?

Life is a gamble. It always has been and always will be.

Your job as parent is not to shield your children from every conceivable outcome. You have to take into account what is likely to happen, and deal with that as best you can.

That having been said, it is the duty of your adult children to insure themselves. Your duty is to do your best to turn your children into adults.

They sell it as a policy where premiums never rise,

This may be true, but as I mentioned before, you pay it for more years. Insurance companies have legions of actuaries working for them, and this is the kind of work that they do. Statistically speaking, there is no "bargain" in getting insurance earlier at lower rates.

with a tax shelter built in,

What they don't tell you is that they take a huge portion of your the additional money that you pay for the "investment portion" in fees. I flabbergasted an agent once who was showing us our options, and I did the math on how much extra we would pay for a policy with an investment portion, and how much it would be worth after 40 years. It turns out that you would not even get the extra money back - zero percent return on your money for 40 years. Some investment!

There are plenty of tax shelters around that are far better tax shelters. If the cost of the premiums had just been deposited in a TFSA, even at a very low rate of return, then there would have been far more money available. Insurance policies may indeed have tax-advantaged components, but it is a truly horrible one.

& useful for the "Kids" to borrow against for school, a down payment for a house or whatever....at a lower rate so they say. It's all very convincing.

This one's a real kicker when you think about it. The insurance company is saying that you can pay interest to them to borrow your own money. Read that previous sentence again until it sinks in. And then they have the nerve to tell you that this is a good idea.

But you are all saying the same thing (as well as those I've spoken to personally). Cancel & put the money elsewhere. Thank you for your responses!! Much appreciated!!!

Offhand, I would say that your best idea may be to open TFSA or RESP accounts for them and contribute the same amount as the premiums toward those.

[beckie.c]

Well I guess this reinforces my idea to discontinue this insurance policy. After reading more "Online" info, and trying to get away from reading info put out by London Life, it seems that it's a "what if" policy, the same as any other insurance we buy. What if your adult child develops issues where they can't be insured? They sell it as a policy where premiums never rise, with a tax shelter built in, & useful for the "Kids" to borrow against for school, a down payment for a house or whatever....at a lower rate so they say. It's all very convincing. But you are all saying the same thing (as well as those I've spoken to personally). Cancel & put the money elsewhere. Thank you for your responses!! Much appreciated!!!

My two cents on "they may become un-insurable" is that it is mostly a scare tactic. DH (32) has been denied twice in the last 5 years from "normal" life insurance companies for health reasons (history of Colitis & Gastro problems, Depression & Anxiety). Our financial planner instead found us a company that offers guaranteed life insurance. It was $60/month for term insurance instead of the "healthy rate" of $30/month. So while it is a risk that a child could develop a life-threatening illness that makes them un-insurable, I think that it is also important to remember that there are often other options and other companies that are willing to insure high-risk people, the cost may just be more. Also, my employer provides insurance equal to 2x my salary regardless of medical history, DH's employer covers 1x salary. So I take that into consideration when making decisions about insurance needs as well.

Also, to support Brunt's point about premiums never increasing... I did the math and worked out the cost of group insurance through work using their rates that increase every 5 years, and compared it to the cost of the "premiums never increasing plan" that was offered by my financial planner and the total price paid on a 20-year term plan was within a few dollars for either option.

I always struggle with the advice from my financial planner on "insurance needs". I've always tried to analyze our actual needs like being able to cover mortgage and expenses on one income. I see more value in building a large emergency fund vs having something like Critical Illness Insurance (which is what my planner seems to be pushing lately). While you *may* end up with one of their listed illnesses, the Critical Illness plans won't cover emergencies like taking off work to care for a sick family member, having a major job loss or major home repair. So I guess what I'm trying to say is that I really don't "trust" that my financial planner is working towards my actual needs but I do appreciate their knowledge on the services that they offer.

[lucy16076]

I hear each & every response here. I contacted my fp & of course she sent me an article by John Girouard (FP) from 2008 to provide reasons NOT to cancel the life insurance. I do not NEED the insurance on them as my net worth should provide for them until they are able to create they own wealth of sorts. I guess the big selling point I had considered was the "investment tax shelter" that she toted but if the MER fee's are MORE than the investment portion, how does that even make sense!? .....her response was the article below...thought I'd throw it in here for discussion.
Just a side note, my "kids" are 17 & 19 passed the RESP stage (we did do that for them). This was to "round out" my portfolio apparently.

Jan. 28, 2008--Oil's up, home prices are down, the economy's weak, the dollar's sick, the stock market's sagging, bond yields are anemic, and the question on everyone’s lips is, “Where do I stash my extra money when nothing looks good?” I hear this question everywhere I go these days, and invariably people think the shelter of last resort is plain vanilla bank CDs or insured money market funds. This helps people sleep better but while they sleep, their buying power is steadily eroding thanks to the cost of taxes and the relentless effect of inflation. At current money market rates of about 4.25% (with interest rates expected to decline), you lose an average of 3% to inflation, and the rest to taxes. Not much of a choice. Government bonds are paying even less, and then you have the risk that if interest rates rise, the value of your bonds will fall. There is a way to have your cake and eat it, too, and has been since long before the Depression. It is the ultimate bomb shelter during scary financial times, and can even be a hedge against falling home prices. But few investment professionals know how it works, and even if they did, it isn’t a sexy sell like Wall Street’s latest investment product-du-jour, like hedge funds were, and ETFs and annuities are now. The perfect bomb shelter is your grandparents’ life insurance, the kind that, up until the late 1970s, dominated the industry. Until then, the majority of life insurance companies were mutually owned by the policyholders—if you bought a policy you automatically became an owner, much the way a credit union works. Famous names have included companies such as Northwestern Mutual and Mass Mutual. Everything changed in the early 1980s when the stock market boom began, financial deregulation came into fashion, and Wall Street’s investment bankers got the bright idea they could make a lot of money “demutualizing” those insurance companies by taking them public. Mutually-owned, or “participating” whole life insurance companies, dwindled in number and their policies fell out of favor as the newly constituted stockholder companies began to invent and market new “products” to make more money. But now, according to trade journal Investment News (Oct. 15, 2007), the mutuals are making a comeback, for all the right reasons, and especially for Gen Xers. When you buy a life policy from a mutual company, you become an “owner” instead of a customer of an enterprise that has to make enough profit on you to satisfy their shareholders. As an owner instead of a customer, your premiums earn you interest, the interest is untaxed, and you can borrow against the accumulated cash value to buy a car or invest in something more promising. Mutual whole life policies today earn around about 6 percent, tax free, on your accumulated cash value. For example, if you had a policy with a death benefit of $200,000 and you had accumulated a cash value of $100,000, you’d earn $6,000 a year, compounded annually. Because it’s an insurance policy, it carries an ironclad guarantee: your cash value and the death benefit will always be there. But unlike other types of insurance policies, you can also borrow your own cash value anytime, without a credit application. (The loan reduces the death benefit by an equal amount, since you are borrowing against the value of the policy.) People have used cash values for purposes as practical as a home down payment or the cost of invitro-fertilization. The mutual insurance company continues to credit you 6 percent on the total of your cash value, including what you borrowed. Then they send you a bill. You can ignore the bill, in which case the insurance company simply takes away the interest credit on your borrowings. But if you had invested the money you borrowed from yourself and earned more than 6 percent, you can pay the insurance company interest bill and deduct it from your realized investment profits as an expense, thereby reducing your taxes. If you borrowed $100,000 and made $12,000 in a mutual fund, you’d pay $6,000 back into your cash value (it’s your interest income), and only pay taxes on half the $12,000 gain. Thus you become your own bank. What few people know, and isn’t taught or talked about by many investment advisers, is that the insurance industry was one of the few sectors of the economy that survived the Great Depression essentially intact. It remained the one investment that kept its promises. One of the ways some people can use participating whole life policies today is as a hedge against the housing crisis. As prices crumble, people who paid off most or all of their mortgages might investigate whether they can protect their net worth by borrowing against their equity and putting that cash into a mutual whole life policy. It’s not only the safest, cheapest, most accessible, and most predictable place to escape uncertainty and get a good night’s sleep, but many such policies include long term care coverage. In my lectures and discussions about investing, I always enjoy the “Aha!” look on people’s faces when they understand how whole life works. It’s the one retreat where you can put your money with guarantees, no risk, no uncertainty, when you want to get out of the higher-risk investing game. It’s the bank you own, with all the benefits a real bank enjoys. Investing should not be about trying to make a big score in the market or real estate or any other asset class. It is a three legged stool where one leg is the money you need to live on, one leg is the money you invest for growth, and one leg is the bomb shelter you can go to every few years when the rest of the financial world seems to be falling apart and you’d like to be able to sleep at night.

[lucy16076]

Thank you Beckie...I don't know how to quote but thank you for this!
I always struggle with the advice from my financial planner on "insurance needs". I've always tried to analyze our actual needs like being able to cover mortgage and expenses on one income. I see more value in building a large emergency fund vs having something like Critical Illness Insurance (which is what my planner seems to be pushing lately). While you *may* end up with one of their listed illnesses, the Critical Illness plans won't cover emergencies like taking off work to care for a sick family member, having a major job loss or major home repair. So I guess what I'm trying to say is that I really don't "trust" that my financial planner is working towards my actual needs but I do appreciate their knowledge on the services that they offer.[/QUOTE]

My FP also pushed "Critical Illness" insurance....just in case. Must be the newest trend. I understand that things happen, but it's like anything else, buy "just in case" ...isn't that why we buy car, house & life insurance policies anyways?

(I don't know how to multi quote...so thank you BRUNT for this reminder) This is something that burns my butt even when I borrow the equity I'VE BUILT in my home to buy another property, and have to pay a "fee" to access that money. IT'S MINE TO START WITH! sheesh!
This one's a real kicker when you think about it. The insurance company is saying that you can pay interest to them to borrow your own money. Read that previous sentence again until it sinks in. And then they have the nerve to tell you that this is a good idea.

[super807]

You've had really good advice here.

I will repeat Brunt's advice about ditching this person as your financial planner. She is either far more interested in her commissions than matching your investments to your actual needs, or she doesn't understand the system and what it really does. In either case, not the person to have working for you.

[brunt]

I hear each & every response here. I contacted my fp & of course she sent me an article by John Girouard (FP) from 2008 to provide reasons NOT to cancel the life insurance. I do not NEED the insurance on them as my net worth should provide for them until they are able to create they own wealth of sorts. I guess the big selling point I had considered was the "investment tax shelter" that she toted but if the MER fee's are MORE than the investment portion, how does that even make sense!? .....her response was the article below...thought I'd throw it in here for discussion.
Just a side note, my "kids" are 17 & 19 passed the RESP stage (we did do that for them). This was to "round out" my portfolio apparently.

Jan. 28, 2008--Oil's up, home prices are down, the economy's weak, the dollar's sick, the stock market's sagging, bond yields are anemic, and the question on everyone’s lips is, “Where do I stash my extra money when nothing looks good?” ... Investing should not be about trying to make a big score in the market or real estate or any other asset class. It is a three legged stool where one leg is the money you need to live on, one leg is the money you invest for growth, and one leg is the bomb shelter you can go to every few years when the rest of the financial world seems to be falling apart and you’d like to be able to sleep at night.

Interesting that the article was talking about the 6% returns on the cash value. But how much of the cash contributed goes to cash value? That is the question to ask your FP. The problem is, of course, that most of your money is eaten up by fees before it even goes toward your cash value.

If she is worth her salt, then ask her to compare with numbers the difference between whole life versus term insurance (with assumed reasonable increases in premiums) with you simply banking the difference between the two premiums. And of course on the banked difference, assuming that you are getting a reasonable tax free 1.5% per year. If she can't do this, then she has no business being your planner. If she won't do this, then she doesn't deserve to be your planner. Check her numbers, don't bother reading provided fluff pieces written by who knows who, who was paid by who knows who.

Like everyone else, Financial Planners are beholden to those who pay them. This is why it is usually wisest to go with fee-only planners. For those who are "free", they are paid by the companies who offer the products that you buy. These planners are motivated to push the vehicles with the highest fees, not the best returns for you.

[lucy16076]

Just read this on tax changes by the Fed's in 2017:
"Several other changes at the federal level will affect life insurance, business owners selling their companies and some mutual funds.
Under changes enacted by the previous government, the tax treatment of universal life insurance policies will be less favourable starting Jan. 1. New policy holders will see a decrease in their ability to build up investment gains above death benefit premiums on a tax-free basis."


Another reason this type of insurance is not necessary.