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Life Insurance 401k Life Insurance Investment

I posted this message on another newsgroup and was refered to this one "for expert advice"....
Here it goes:

My husband works for a company that offers a 401k. It's not a very good one; the company only matches 25 cents for every dollar the employee puts in it, up to $2 (=if we put in $8, they will put in $2, everything over $8 they won't match). We also have two life insurance policies, one in my name and one is his. They both are the kind that build up cash value (whole life?).

We pay around $130 a month for the life insurance policies and right now pay 2% of my husband's weekly income into the 401k. We would like to up the 2% to 8% to take full advantage of the company match, however, this would increase our monthly expenses by quite a bit. So now we are thinking of maybe changing from whole life to term life to lower the cost of the life insurance to be able to pay more into our 401k. Our insurance agent (of course) said that we should look at the life insurance policies as something that builds cash value and is tax-free income in case of death. I, however, would think that putting money in the 401k is a better deal than investing it in life insurance.

What do you all think about this?

I also have to add that I don't know how long my husband will work for this company (but 100% of the company match are vested right away, no waiting period) and that we have a 8-year-old child. We owe about $90,000 on our house and about $20,000 on two vehicles, other than that no debt. My husband's income is $40,000 + a year, I work part-time and make about $10,000 a year; the life insurance policies are for $100,000 (mine) and $250,000 (his).

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I also have to add that I don't know how long my husband will work for thiscompany (but 100% of the company match are vested right away, no waitingperiod) and that we have a 8-year-old child. We owe about $90,000 on our houseand about $20,000 on two vehicles, other than that no debt. My husband's incomeis $40,000 + a year, I work part-time and make about $10,000 a year; the lifeinsurance policies are for $100,000 (mine) and $250,000 (his).


> We pay>around $130 a month for the life insurance policies and right now pay 2% of my>husband's weekly income into the 401k.

One key caveat--without a *LOT* more information about the lifeinsurance policy, it's going to be difficult for anyone to giveyou reasonable advice on whether or not it makes sense to keepthe policy in force.
One caveat I'd note, though, is that the decision to keep apolicy in force is a very different one from the decision to buyit in the first place--cash value life insurance tends to befront end weighted on expenses, so you have to evaluate thepolicy from this point forward and *NOT* from the perspective ofwhether it made sense to buy it in the first place.

Generally, it's expensive to change your mind about a cash valuelife insurance policy after the fact, since what you ended upbuying if you kill off the policy was simply an incrediblyexpensive term policy. You also will have a taxable event if thecash value of the policy exceeds your basis when you cash it out.

>We would like to up the 2% to 8% to take>full advantage of the company match, however, this would increase our monthly>expenses by quite a bit.

Probably a good idea to up the 401(k) contribution since you areotherwise leaving the 1.75% on the table--and it's tough to beatthat immediate rate of return . The problem is that youare creating an either/or situation that forces a straightcomparison of the 401(k) vs. a savings vehicle you previouslycommitted to.

>So now we are thinking of maybe changing from whole>life to term life to lower the cost of the life insurance to be able to pay>more into our 401k.

Actually, probably the *best* solution would be to see if you cansqueeze down your monthly expenses so that you net increase yoursavings. Then you can judge whether or not this policy makessense from a financial standpoint without having created aneither/or choice between it or the 401(k) plan.
But if it's truly an either/or choice, then you have to look intothe future and make some projections about what happens if...

For instance, it's virtually certain the 401(k) plus term willbeat the cash value policy if you happen to die a couple of yearsdown the road, especially if your policy is one that only paysthe death benefit (not the death benefit plus the accumulatedcash value).

Remember that if you die, the 401(k) proceeds will still betaxable income to whoever is the successor beneficiary. So onceyou've dropped the term life insurance, the 401(k) has to be farenough ahead to both provide the funds that the policy would haveprovided *AND* pay the tax on the distribution. Life insuranceproceeds would not be subject to income tax.

There may be an issue of whether there is a long term need forlife insurance in your case that might argue in favor of having acash value policy. One reason might be to provide for estatetaxes to be paid at the second death (but then we have to worryabout incidents of ownership and the like).

Also, you can borrow against the life insurance policy value,with the loan to be paid off when you die by a reduction inproceeds. So long as the policy stays in force (HUGE ISSUE), youwill not pay any income tax on those funds. However, you have tolimit your borrowings to insure that the policy does not collapseand create a huge tax bill with no cash to pay the tax (generallynot a good thing ).

One thing to be careful of--be aware that many of thejustifications offered for keeping the insurance policy aremutually exclusive. That is, if you have a need for the deathbenefit for your entire life, that argues against borrowingagainst the policy. If you want to borrow against the policy,that severely limits options for keeping it out of your estateand able to pay estate taxes. So the key is to be sure you havea *rational* and *consistent* justification for the insurancepolicy--not just a bunch of talking points about general reasonsto hold insurance. A good agent will have such a justificationready--a poor one will end up giving contradictory reasons tohold the policy and act as if you can have it all (which youcan't).
>Our insurance agent (of course) said that we should look at>the life insurance policies as something that builds cash value and is tax-free>income in case of death. I, however, would think that putting money in the 401k>is a better deal than investing it in life insurance.
Without seeing the specific policy and the specific 401k plan(and options) I don't think a rational answer can be given.

>What do you all think about this?
>I also have to add that I don't know how long my husband will work for this>company (but 100% of the company match are vested right away, no waiting>period) and that we have a 8-year-old child.

That will complicate matters, since you can't be sure how longthe 401(k) option will be there for you. It's possible that your husband could end up with an employer with a 401(k) with no match*OR* no plan at all.

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