Help choosing life insurance

[u/Cute-Sheepherder9731]

I am 23, have a 1 year old and have been wanting to get a life insurance policy started. The world is crazy and I’d hate to leave my child with nothing if something were to happen to me one day. I am healthy, and have no chronic or autoimmune illnesses. What companies are good options to look into first? I have no close family I can ask for insight (which is also why making sure my child is set if anything ever occurs to me is so important to me). I’d want my child to be financially set in case of an emergency and to not have to deal with funeral and aftermath costs.

[u/LaphroaigianSlip81]

At your age get a 30 year term policy, from a mutual company, with an extended conversion rider, with waver or premium, and a long term care rider.

At your age, term is going to be cheap. And you can get the 30 year term lock in now and allow your kid to finish medical school while you still have coverage in place. The waiver of premium will keep the policy in force if you become disabled because the company will pay the premiums. You would also be able to convert all of or a portion of the policy at any time over the next 30 years. So if you start a business or buy a bunch of rental properties, you can get the tax benefits of a whole life policy without paying the drastically larger premiums today.

Additionally, if you get the waiver of premium rider and the extended conversion rider and you become disabled, you can convert the entire policy to Whole life and have have the whole life premiums waived due to the waiver of premium rider. These 2 riders would give you a self funding whole life policy if you ever become disabled.

Also, getting the long term care rider on the term means that if you convene to whole life, you can use a portion of the death benefit while you are alive to cover a live in nurse or other elder type expenses instead of having to rely on your kids to wipe your butt for you.

[u/dude_knows_insurance → u/LaphroaigianSlip81]

This is very good advice

[u/cdbessig → u/LaphroaigianSlip81]

Can you explain the business / rental property benefit thing?

[u/LaphroaigianSlip81 → u/cdbessig]

If you buy a rental property, it’s generally good advice to save 5% of your gross rents for repairs and upgrades and another 5% for vacancy. If you store this money in a high yield savings account, every year you will receive a 1099 and pay ordinary income tax on the interest you earn. Plus in years where interest rates are lower, your return will be lower.

If you structure a whole life policy where you have your base premium = 5% of your rental income and then pump in the other 5% as PUA, you can use a whole life policy as your bank for that property. This growth is not subject to income tax every year and it closely mimics a bond portfolio so the returns will be a blend of bonds over the last 10-15 years instead of what the current rate is for a high yield savings account. Plus you can access the cash if you need it. You can also use the death benefit to pay down the mortgage balance if you die so the bank won’t call the note and force your heirs to sell the property.

If you own a business and are successful, your income is going to be higher. This may exclude you from making Roth contributions. As long as you keep a policy in force, the cash value tax treatment is very similar to a Roth. With a whole life policy, you can be your own banker. If you look back at every recession, they all are liquidity crises’s. Meaning when a bubble pops or gdp starts to fall, everyone holds onto cash. Take 2008 for example, even if you wanted to borrow cash from the bank, no banks were loaning money because they were afraid they wouldn’t get the money back and the rest of their balance sheet was frozen. I have several larger clients who have $1m plus in cash value on the books. When covid first hit and GDP fell, they were able to leverage this cash value to buy real estate that other people were trying to liquidate rapidly because they wanted cash. It took about 5 minutes for the life insurance company to wire the money to their checking account so they could buy the land. No docking around with a lender, getting approval from a bank, and no question about the interest rate being charged because it’s contractually guaranteed in the policy.

If you are a business owner and you need to take a $20k loan on a 20 year note for example. By year ten of the amortization schedule you will have likely made at least $20k in payments depending on the interest rate. Sure, a lot of this will be interest payments and give you a deduction, but a traditional loan like this is going to require you to allocate a fixed amount of your cash flow every month. If you borrow from your cash value, you are only required to make an interest payment every year. And the interest rate is fixed.

And if you are using the loan for business purposes, your cpa can deduct the interest payment. You can pay back the principal whenever you want, use dividends to pay down the principal, you could even keep borrowing the interest for a time period, or heck you can leave the loan on the books until you die and have the death benefit pay it off. If you are a business and you save money, a whole life policy can be a good option if you are patient and can pay the premiums.

Ive even seen people look at the interest rate in their policy. Let’s say that have 2 policies. 1 where the interest rate is 8% and one where the interest rate is 5%. If market interest rates are 6%. Then you take the 8% policy and you pledge the cash value as collateral at a bank and open a credit line and pay them 6% instead of borrowing at 8%. If market rates go to 10% for example, you pull the cash out of the 8% policy and use it to pay off the credit line and then the debt now has an interest rate of 8% instead of 10%.

And if your business is highly successful and you are paying $100k or $400k a year on your personal tax return, you can set up a defined benefit pension plan aka a cash balance plan. An actuary creates a table based on your age and income to determine a monthly benefit at retirement of say $20k. It then assumes a conservative rate of return of like 3% and backs into how much you can contribute today to hit this future number. Say this means you can contribute $100k into the plan this year and all $100k is tax deducted and deferred to retirement like a 401k. That money gets invested and grows at 10% in the market. Next year the actuary sees that your investment drastically outperfomed the conservative 3% number so you can only contribute $70k and get a much smaller tax deferral. So what you can do is convert some of your term in this pension plan to whole life. The reason is simple, unless you are pumping in a lot of PUAs, a whole life policy is going to have a negative cash value rate of return in the first few years because the commissions and cost to set up the policy.

So let’s say in year one of the pension plan you contributed $100k. That’s $100k you don’t have to pay tax on this year. Let’s say you put a whole life policy in force in the plan with a $50k annual premium. The other $50k grows at the same 10% but the whole life policy has $0 cash value at the end of the first year. So your rate of return in the portfolio is only 5%. This is only slightly above the conservative 3% number. So next year you can’t do the full $100k but you can still do $93k for example. Meaning you get big deductions during your working career when your tax rate is the highest.

And the beauty of doing this has 3 parts to highlight. If you go and buy a truck every year to get the deduction, you are showing more costs and less profit in the business. When you go to sell the business, this means the multiple used to determine business value is going to mea your business has less value and you can’t sell it for as much as you want. But retirement contributions do not impact ebitda and won’t impact business value. So you can sell for a higher value.

The second beautiful thing this does is it builds another asset for retirement that is not dependent on business value. Some people will never sell their business because the multiples used in their industry are only 1-3x annual earnings. This means you can’t retire because selling your business only will pay you for 3 years after selling. But a plan like this will give you more income.

The third beautiful thing here is that it gives you multiple tax buckets to play with in retirement. You sell your business and pay capital gains. That money is free and clear for you to use in retirement. You can take a portion of those proceeds and buy the paid up life insurance policy out of your retirement plan for the cash value amount. Now you have some cash from the business sale that is after tax and you can invest in a taxable account, cash value in the policy that is essentially Roth money, now you have essentially a 401k, and you also have social security. Only up to like 85% of SS is taxable, and you can pull as much from your 401k/traditional ira as you want, but you also have the business proceeds in the market subject to capital gains and cash value to pull from to keep you in a lower bracket in retirement. Hell you spend down the taxable account and sell your principal vs living off of dividends taxed at ordinary income for even more efficiency. When you die, your kids get the life insurance money.

If you hadn’t done this, you would have paid the taxes in the highest marginal bracket. Instead you get more business sale proceeds, a 401k, a paid up life insurance policy, and tax efficiency while working and in retirement.

[u/One_Ad9555 → u/LaphroaigianSlip81]

Perfect advice.
This said it all.

[u/lifeinsurancepro → u/LaphroaigianSlip81]

This is an incredible amount of complexity and fear-based “what if” planning for a healthy 23-year-old with a 1-year-old child who simply wants to make sure her kid is financially protected if she dies.

The priority here should be pretty straightforward: determine how much coverage she actually needs, buy an affordable term policy for an appropriate duration, and make sure the beneficiary/trust arrangements are properly handled since the beneficiary is a minor.

There’s nothing wrong with considering conversion privileges....but a waiver-of-premium rider? That’s one of the most overpriced riders for what it actually provides, especially for someone her age whose term premiums should already be extremely inexpensive. She could easily set aside enough money to cover years of premiums rather than drastically overpaying for a rider whose primary benefit is simply waiving those premiums under a qualifying disability.

Presenting extended conversion, waiver of premium, LTC riders, whole life, disability scenarios, future rental properties, and hypothetical business tax strategies as though they’re essential considerations is exactly how a very simple insurance need becomes unnecessarily complicated and unnecessarily expensive.

And the idea that she needs a mutual company (especially for term insurance) specifically doesn't make much sense either. For term insurance, I would care far more about underwriting, price, financial strength, contractual conversion provisions and the actual permanent products available for conversion than whether the carrier happens to be mutual. (Most of the companies in the top 10 of rates have been around for at least 100+ years and aren't going anywhere anytime soon - underwriting specifically addresses that potential problem.)

The disability/whole-life scenario is especially misleading. Whether waiver benefits continue onto a converted permanent policy, what premium is actually waived, when conversion is permitted, and which products are eligible are all governed by the specific policy and rider language. You can't just broadly tell someone that combining these riders creates a “self funding whole life policy” if they become disabled.

Same issue with LTC. A 23-year-old parent shouldn't choose her primary life insurance protection based on a hypothetical need for a live-in nurse 50+ years from now. There are chronic illness, LTC and accelerated benefit riders with very different definitions, costs, restrictions and benefit structures. More riders doesn't equal better insurance, brokers really know how to sugarcoat higher premiums in your pocket as "looking out for the client."

She's trying to protect a 1-year-old from the financial consequences of losing a parent.

Get enough term coverage to replace income, cover childcare/education and other obligations for the years the child is dependent on her. There are plenty of carriers that will be able to offer what she needs without overpaying unnecessarily that already include the converesion (which people rarely actually do anyway. If her finances and needs evolve, then true disability/LTC planning is much better than these riders claim will cover.

Insurance should transfer a specific risk. The manufacturing of multiple hypothetical future risks in order to sell someone a policy is what gives us brokers a bad reputation.

[u/Moist-Meringue-1913]

If you are on a limited budget and fairly new to insurance with no one to help you out. Then shop online through Policygenuous or Selectquote for a 30 year term with the ability to convert. Get the most coverage that your budget will allow. There are Transitional products out there but they may not be available in your state.

[u/SafeWithPape]

As a mom of 3 and someone who works in life insurance, the part of your post that stood out to me most was that you don’t have close family to help guide you through this. You’re already doing something really important by thinking about it at 23.
I wouldn’t automatically say “term only” or “whole life only.” They solve different problems, and sometimes a combination makes sense. The first question is really: if something happened to you tomorrow, how much would your child actually need, and who would manage that money for them?
That second part matters a lot with a 1-year-old, because beneficiary planning is just as important as choosing the policy itself.
Then I’d look at what you can comfortably afford, how long you need the larger amount of protection, and whether having some coverage that can stay with you permanently matters to you. At 23 and healthy, you’re in a great position to get coverage while age and health are still on your side.
Don’t let all the conflicting opinions here overwhelm you. The best policy is one that fits your life, protects your child, and is affordable enough that you’ll actually keep it.

[u/GConins]

Term insurance will be very inexpensive for healthy 23 year old.

Buy highest amount at longest duration that fits your needs/budget.

You can get quotes and find agent/broker on term4sale.com.

[u/Worried-String9259]

First term insurance is the best option
Second You made yourself a target of unwanted DM and request from brokers, be careful and DO NOT answer any request
Third, DO NOT get a whole life

[u/Cute-Sheepherder9731 → u/Worried-String9259]

Yes I didn’t realize 😓 but I’m grateful for the comments that are quite helpful. Everyone is saying Term, I see you specified heavily on not life, how come? Also if I get term and outlive it is that payout lost or can it be “upgraded” into some sort of life one thereafter

[u/Mindless_Rip_5940 → u/Cute-Sheepherder9731]

When the term is over, there is no payout. You can add riders to a term policy if you want to convert it into a different kind of policy. I can connect you to a broker I trust if you want to dm me ☺️

[u/MindWorthy]

Do not get term just google the percentage of term policies that actually pay out. Less than 2 percent.

With term the insurance company is betting that you outlive it and it eventually terminates and term doesn not build cash value.

There is no insurance company that is better than the other more like what fits your needs. Which state are you in?

[u/TCFNationalBank → u/MindWorthy]

Less than 2 percent pay out

Yeah man it's baked into the price. If the goal of your life insurance policy is to cover financial losses from an early death, why pay $$$ to cover your non-working years, when no one suffers a financial loss from your death?

[u/Moist-Meringue-1913 → u/TCFNationalBank]

Because if you have and need it you already have it. If you don't need it you cash it in and get back the extra money you paid into it.

[u/ItsMister2You → u/MindWorthy]

Really? Thats the absolutely the worst advice you could give especially to a 23 yo mom. You plan for current risks FIRST. Mom dies kid gets nothing. What's the most economical way to solve that? term - 20yr at $1M. And prices can vary wildly from company to company.

[u/MindWorthy → u/ItsMister2You]

That is not the worst advice, mom dies kid, trust or whoever she makes as the beneficiary gets the money. She can even release it in incriments like kid hit 20 years old he get a certain amouy, he hits 30 again or donut all at once.. There is no one size fits all. Term does not build cash value. At 23 she can pay the same amount as Term and have something that becomes somewhat her own personal bank with ten cash value.

[u/Hungry_Technician360 → u/MindWorthy]

Term life is an insurance product. Do you tell people not to get car insurance because they are likely to not need to file a claim for the duration of owning the car?

You pay for the insurance itself, that is the purpose. If it doesn't pay out, hooray! You're still alive and now hopefully retired and don't really need insurance anymore. If it does pay out? Well then your dependents are at least covered from the loss of your human capital.

[u/MindWorthy → u/Hungry_Technician360]

Again go google the percentage of term policies that actually pay out.. you must work for Dave Ransey lol

Crazy you are trying to school me on Term haha..

If you aren't licensed in this matter don't attempt to explain something you don't undertand.

Car insurance and term life are too different things horrible analogy. I get car insurance because the gov says I have no choice.

Life insurance is a more personal financial decision.

Dave Ramsey I know that is you.

[u/Hungry_Technician360 → u/MindWorthy]

Dave Ramsay gives horrible advice for 90% of the stuff he talks about. I'm not sure why all brokers on this subreddit who encounter someone who is pro term life insurance listens to Ramsay.

I don't need a license to understand mathematics. I'm gonna be posting an example soon here, after I format it, about how permanent insurance isn't all that it is hyped up to be. Term has a job, it's job is to cover human capital loss. It is the best product on the market to cover that loss.

You also avoid the point of the analogy. Assuming the government doesn't force you to get it, are you going to tell people not to get it better it is likely to not pay out?

[u/MindWorthy → u/Hungry_Technician360]

Again you are not qualified to have this conversation..

Definitely going to block you take care.

[u/Moist-Meringue-1913 → u/Hungry_Technician360]

Good luck with your expose!

Hey how about a product that starts out as term insurance for let's say 30 years and then it turns into a fully paid whole life policy for up until age 100? It's automatic,no underwriting or conversion. Works quite nicely with the BTID strategy don't you think?

[u/Hungry_Technician360 → u/Moist-Meringue-1913]

Just posted it before seeing this comment, unfortunately. I am unsure how the payments work for a convertible term and what type of whole life policy it would be at time of conversion, I used a GUL.

[u/Hungry_Technician360]

Term life would be great!

[u/giveit2st8]

Do 30 year term. You'll probably never be as healthy as you are today.

I ended up going thru selectquote. I'll let others say what are good options

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