Question: Kelly in Batavia: Just wondering what your thoughts are on permanent life insurance as an investment. I’m 60, about to retire, and my term policy is about to lapse.
A: Generally speaking, we do not recommend life insurance as an ‘investment.’ For one thing, it’s expensive. Compared to a term policy (in which you’re covered for a set duration of time), a permanent policy can cost upwards of ten times more on an annual basis. For example, a 2022 NerdWallet analysis found that while a 20-year term policy (with a $500,000 death benefit) for a healthy 50-year-old woman would cost $654 a year, a whole life policy for the same death benefit would cost that same person $8,347 a year.
And yes, proponents of permanent life insurance will tout its ‘forced savings’ advantage or its tax-deferred growth benefits. But remember, retirement accounts like a 401(k) offer these very same benefits – but with more investment options for a wider range of risk tolerances.
In all honesty, for most people close to retirement (or in retirement), life insurance – in any form – is typically no longer needed. Why? Because life insurance, in its truest form, is meant to protect against the risk that there will no longer be a stream of income to pay the bills if you’re not around. So, look at your current situation: Is anyone else, such as a child, still dependent upon your income? If there is, then consider another term policy. But if there isn’t, take the next step and assess the state of your finances. Because if you’ve saved well, have no (or little) debt, and your retirement income will come mostly from retirement accounts, then you likely can forego a life insurance policy. But of course, there are always exceptions to this rule since there are legitimate times when a permanent policy makes sense.
Here’s The Allworth Advice: This is one of those cases when working with a fiduciary financial advisor can be really helpful. He or she is legally obligated to present you with the best life insurance options for your particular situation – which could be no life insurance at all.
Q: G.C. in Hamilton County: How do you feel about store credit cards? Like if I shop somewhere frequently, would it make sense to get one?
A: First, let’s reiterate our standard line of thinking about credit cards: They are not inherently evil. As long as you use them responsibly – which means paying your bills on time and in full every single month – they can actually be a very valuable financial tool. You can even reap rewards, such as cash, travel points, or, in the case of retail cards, discounts at your favorite store.
But being responsible is the key, especially with retail cards. Because while ‘regular’ credit card interest rates are now hovering around 19% (the highest since 1985, according to Bankrate.com), the average retail credit card is even higher – near 26%. Some are even inching close to 30%! Just think about that. Buy a coat for $100 and don’t pay it off right away? Once you factor in the interest payment, it’s actually costing you closer to $130 (or more if you keep paying interest)!
Similarly, how many times were you asked over the holidays if you wanted to open a retail card for 10 or 15% off your purchase? With a 26% APR, those interest payments likely negate any ‘savings’ you were trying to get in the first place if you don’t pay your bill in-full. And ‘deferred interest’ can blindside you as well – if a special, introductory rate expires and you have an unpaid balance of any amount, you would get charged all the accumulated interest you would have owed.
Here’s the Allworth Advice: If you’re a regular shopper at a certain store, it could make sense to get their store-branded card depending on the rewards offered. But please only do so if you can trust yourself to use it responsibly and pay it off each month.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call 513-469-7500.
This article originally appeared on Cincinnati Enquirer: Allworth Advice: Is permanent life insurance really an ‘investment?’
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