ASK KIM


Life Insurance You Can Do Without

Kimberly Lankford

A couple of years ago, my wife and I purchased variable life insurance policies with the understanding they would serve as life insurance, as well as provide money to help pay for college or retirement. Is there a better way to invest our money to ac



A couple of years ago, my wife and I were looking for a good way to supplement our main retirement savings, start a college fund and get life insurance. When we started looking for ways to achieve these financial goals, we were steered in the direction of variable life insurance policies. It was my understanding that we were killing three birds with one stone by purchasing the policies because they serve as a life insurance policy and we can use the money to help pay for college or retirement.

I am 28 years old and my wife is 27. We are both healthy and in good shape. We do not have children yet but we plan on having them in the near future. We pay $155 a month for my $300,000 policy and $80 a month for my wife's $200,000 policy. (I was told that my policy is more expensive because I bungee jumped twice and sky dived once in my life.) Are we paying too much for these policies? Is there is a better way to invest our money to accomplish our goals?

First of all, congratulations on focusing on your goals at such a young age. Unfortunately, however, the variable life insurance policy is not the best way for you to do it.

The biggest problem is that you're paying for very expensive insurance that you don't need. You only need life insurance if someone is depending on you financially. Unless you have children or an expensive mortgage, then you don't need life insurance yet.

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And if you did need the insurance, you could get the same amount of coverage at a significantly lower cost. A healthy 28-year-old man can get a $300,000, 20-year term policy for as little as $184 per year. Right now, you're paying ten times that much each year -- $1,860 -- for the variable life insurance policy that provides exactly the same death benefit. Even if you bungee jumped or sky dove more often, you could still get a term policy for less than $290 per year.

The variable life insurance policy does provide an investment account as well as life insurance, but you have much better ways to save. First, you should max out your 401(k)s and Roth IRAs, if you qualify. Depending on your employer's rules, you and your wife may each be able to contribute up to $15,000 to your 401(k)s, which can lower your taxable income and may also earn you free money from an employer match. And if your joint income is less than $150,000, you can each contribute up to $4,000 per year to Roth IRAs (you can make a partial contribution if your joint income is between $150,000 and $160,000), which gives you totally tax-free income in retirement. When you're ready to save for college, you can invest in a 529 or Coverdell education savings account and build up tax-free income for college costs. You could even open up a 529 in your own name now then transfer the beneficiary to your kids after they're born.

If the agent you were dealing with didn't mention these options, it sounds like he or she was just trying to earn a big commission -- which can be quite high on variable life and other cash-value life insurance policies. Those policies can serve a purpose for some people who need insurance for more than 20 or 30 years -- if they're worried about a big estate-tax bill, own a business, or have special-needs children who will never be on their own, for example. But it's not the best choice for a young couple who has many other less-expensive savings options.

For more information about saving for retirement and advice for reaching your goals, see How Much is Enough?

Got a question? Ask Kim at askkim@kiplinger.com.




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