Don't Leave an Estate With Life Insurance

Steve's mom is 71 and debt-free. She's investing $600 a month in a universal life insurance policy worth $250,000. What could she invest that money in instead of this life insurance to leave an estate?

QUESTION: Steve in Minneapolis says his mom is 71 and debt-free. She’s investing $600 a month in a universal life insurance policy worth $250,000. She wants to leave something behind when she dies. What could she invest that money in instead of this life insurance to leave an estate? Dave offers some ideas.

ANSWER: You don’t use life insurance to leave an estate. It’s a bad investment in that regard. You leave an estate by saving and investing. The only people that tell you to do that are life insurance people.

Unless she’s ill, I wouldn’t keep this policy. I would instead do some long-term investing here. It won’t take long to get to $250,000 at $7,000 a year. That sounds like it takes forever, but you’ve got all the growth involved there too. It doesn’t matter. I’m not going to put money into a life insurance policy at 72 years old unless there’s someone being left behind that counts on this money, and I don’t think there is.

If she’s healthy, she would be in her 80s, obviously—it would probably take about 13 years for this money to turn into $250,000. I would rather her do that and bet on her living. That leaves an estate, and you’ve not got the expense and the rip-off part of the universal life policy and everything else.

Believe me: Insurance companies base their premiums on the payout with the average death rate. They know what they’re up against. No one writes insurance to lose money. It covers the probability of the event happening, which is called an actuarial table, and if it’s homeowner’s insurance, it’s your house burning. If it’s life insurance, it’s you dying. They’ve got really good, detailed statistical analysis on that, so they know if they insure an average 1,000 people in this exact situation, on average, they’re going to make money on this.

If she’s diagnosed with cancer and they’ve given her three months to live, we keep the policy. Six hundred bucks a month is a good trade for $250,000. That’s not the case here. She’s just trying to leave an estate. Let me guess: The person who sold her this policy is someone that she thinks a lot of. That’s usually how this kind of stuff happens and why someone becomes defensive about it. Otherwise, it’s a mathematical transaction that you look at, and why would I be defensive about it?

Real estate will usually pay better than mutual funds will if you buy a property at a good price in a good neighborhood that’s rental. The good side is you’re going to make more cash on cash rate of return and overall rate of return owning real estate than you will on mutual funds. But it’s 20 times the hassle factor. You buy a mutual fund, you just forget it. You get a statement in the mail or a statement online. You buy a rental property . . . let the drama begin. I’ve got both. I love real estate, but just don’t do it because it’s a good investment. If it’s something your family doesn’t want to fool with on her behalf or she doesn’t want to fool with, then for goodness’ sakes, don’t buy it and don’t buy real estate unless you’re going to pay cash for it, which I think is what you were describing.

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