Want to ask a different question?
To the point: I'm 20 y/o and want to maximize my ROI. No debt whatsoever. I own my car and have no payments to make anywhere. Now, I have talked with a financial rep. from Northwestern Mutual Financial Network and he suggests a Roth IRA and bank CDs (for short term savings) and then something else and Term 80 Life Insurance from Northwestern.
Any advice?
Hey egmail,
Never be too quick to buy what commissioned salespeople are selling.
Insurance salespeople tend to be extremely nice, well-trained in the positives of what they sell, andignorant of the negatives. I'm not saying they are stupid. I'm saying their on-the-job training is selective.
Here are reasons to treat life insurance as a short-term solution:
1. It is a wasting asset, because inflation steadily decreases its value (at an average of 4% annually from 1945 until now).
2. It is not an investment.
3. A policy that includes cash surrender values carries a "premium" (cost) that's 10 times as much as a term policy even though it provides a benefit no greater than a term policy's.
4. Among its other negatives, a cash-value policy builds cash values, which you will be encouraged to borrow against -- and never to repay the loan.
Trouble is, the annual interest on the loan balance is deducted at the beginning of each passing year from the remaining cash values and added to the loan balance -- so the amount of your loan snowballs while the cash values melts, and the amount of interest grows ever larger, and is treated as taxable income by the IRS. The long-term tax implications are disastrous.
As David Hanson has said, you have no clear need for life insurance. And you won't until someone else is dependent on you for financial support -- a parent, a spouse, a child, or a friend.
Also, I agree that you ought to open a Roth IRA if you qualify or a traditional IRA if you don't. As its sponsor, choose a company that sells no-load mutual funds. Examples, in alphabetical order, include Fidelity, Rydex, T. Rowe Price, and Vanguard.
Just now, my indicators for both the economy and stocks (and bonds) are so negative that it's hard to choose an investment that makes good sense. Besides, that's a different subject for another time.
Egmail,
Just to follow-up on this thread...
I concur with Dave that your life insurance need appears to be questionable at this point. The purpose of life insurance is to help replace a financial loss that others would experience if you died. For example, if you had a spouse and/or children dependent on your income, your death would mean a significant financial loss for them, and thus insurance can help replace this loss. Note that this is VERY different than a Will. A Will distributes the property that you owned when you died. If you die and thus can no longer earn income in the future, that future financial value is lost; you can't bequeath it in your Will, because you hadn't earned it yet. That's what life insurance is meant to replace. The only reason you might even consider life insurance is to purchase it now while the rates are low (because you're young and healthy), but that's still a little bit of a stretch unless you anticipate marrying and/or having dependents very soon.
I concur with Dave's other comments as well... the Roth IRA seems quite appropriate, and although the CD is a fine vehicle for short-term savings you should be cautious about potential CD early withdrawal penalties if you really might need the money soon.
I hope that helps a little!
... If it makes a difference, I have my own business with myself as the only employee. No debt personally or as a business. This just means the 401(k) options are out of the loop ...
Indeed, I have no one to protect with life insurance.
Dave, you mentioned:
"Without a tangible such need, you would be better off using the funds spent on life insurance to invest in instruments promising a greater long-term rate of return."
This makes sense to me. Really, I probably need to either invest myself or obtain the services of a Financial Adviser, not a Financial Representative. Right? I am not certain what those longer term investments would be, although that's what I'll have to find with an adviser.
I just don't like the idea of life insurance. Neither does Dave Ramsey. Even when I do have a family, I do not see a great point to life insurance as one can create a 'will' or the like, which names all your belongings to your beneficiary. I'm also not sold on the "with the best company" line. No one can rely on one company, even if they have had a steady rate of 8% over the past 30 years. Say I end with 300k invested in life insurance. I just can't see it as an investment with a good return, and I'm looking for an investment with a good return.
I'm watching this topic. Thank you for the input thus far!
Hi egmail,
While Michael will no doubt offer you a well-conceived answer, let me offer a couple of quick reactions for him to work off of.
First, before purchasing life insurance, the first question should be for whom do I need my life insured for? If you are single with no dependents, as most 20 y/olds are, then its likely that the answer to this question is, "no one". Without a tangible such need, you would be better off using the funds spent on life insurance to invest in instruments promising a greater long-term rate of return.
More generally, one should ALWAYS be wary of purchasing a financial product from a party who makes their living by selling that product. Most reps are perfectly nice people, but their incomes are based predominantly on insurance policy commissions.
The Roth IRA is excellent advice, especially if it's invested in something designed to maximize your returns over the long haul, such as an equity index fund. The Bank CD advice is iffier. Some sort of short-term savings account is a good idea, but a CD would incur penalties if you needed to access the funds. I would look more towards a rewards checking account or high-yield savings account instead.
