Dear Mr. Berko: As a single 40-year-old, I have been advised by a good friend and insurance, agent to purchase a $2 million whole life insurance policy. I have no health issues and the premiums are $21,100 a year. I can also purchase a 20-year, $2 million level term policy for $3,300 a year. The presentation (enclosed) my friend gave me is impressive, but on my earnings of $78,000, the premiums are a big chunk of my after-tax income, and I really don't understand all the benefits. My partner, a nurse practitioner who earns much more than I do, wants the whole life policy and will help me make half the premium payments. My agent also suggested that I purchase an annuity to protect my $107,000 IRA from a certain-to-be crash in the stock market. How can the market rise so much while the U.S. and world economies are in such bad shape? Which policy do you think I should purchase? And what do you think about protecting my IRA with an annuity?
ST: Indianapolis, Ind.
Dear ST: That's too sweet of your partner who “wants” to help you cover those huge premium payments; but why? Meanwhile what's so important about this $2 million magic number? Why not purchase a $1 million policy or a $500,000 policy? Another question: “Do you need $2 million in whole life insurance?” And another question: “Would your partner be the sole beneficiary on the $2 million policy?” However, unless you have some impressive, high-level connections, I doubt you'll be allowed to spend that money after you pass. I know there are gung-ho life insurance types who feel compelled to sell policies to preemies, newborns and kangaroos. But cheese and crackers got all muddy, unless you have an estate tax problem or are the sole supporter of a Jewish orphanage in Botswana, I can't imagine why you should purchase a $2 million whole life policy. Of course the salesman commissions are hugely higher than term!
The insurance industry makes the details of a life policy more complicated than pediatric brain surgery or completing a tax return for a small business owned by the Seven Dwarfs. I can't tell you how much life insurance you need or if you need insurance at all. In most cases though, the smarter choice is term. I read the 33-page presentation with its beautifully choreographed charts, color-coded graphs and numbing rows of statistical bloviation. Understanding a life policy shouldn't be difficult but this instance has the odor of a dead fish. It seems axiomatic that the quality and usefulness of many financial products is inversely related to the length and confusion the presentation. Tell your agent friend to stick this proposal in his ear. And providing you don't smoke, you can own a significantly less costly policy life from an honest agent. There are enthusiastic agents whom I may have offended, that would call my comments heretical and tell you I'm the Antichrist. But again ... do you need a $2 million policy?
Yes, there will be a correction in the Dow. But an annuity won't protect your IRA because its redemption value also crashes with the market. Keep your current IRA and continue making annual contributions. If you stay with good stuff (this IRA has good stuff) it's likely to be worth more when you retire than an annuity that socks you with an 8 percent commission and bleeds you with annual maintenance fees of 3.25 percent. Yeech! Yes, the world and the U.S. economies are in a bad way; still, share prices may continue to rise. The market's rise has less to do with strong revenues and earnings than the fact that Helicopter Ben and the European Central Bank are flooding their respective economies with trillions of dollars. Those trillions, intended to stimulate consumer demand, are being used by banks to goose trading profits and by corporations to repurchase their own common stock. This is capitalism of the few, for the few and by the few.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.