Question: Hi. I am a 30-year-old without debt. I have saved diligently and have a Roth IRA, an emergency savings and a market investment account -- all of which I manage myself. I just got married and my husband has school loan debt and no savings. I went to a financial advisor in hopes someone else could do more with my money. He suggested that I take full advantage of my employer's 401(k) when I am eligible (next year), but since I have been a good saver and expect an increase in income, I should consider using life insurance as a vehicle for tax-free retirement savings.
I have mixed feelings about this. Can I invest more into the market or even open a retirement account for my husband and contribute to it instead of tying up my money in life insurance? Also, should I just continue to manage my own funds? Christina, Atlanta, GA
Answer: When it comes to managing money, the key is being a good saver. Everything else flows from that. You have that nailed so you're in a good position. I agree that you should take full advantage of your employer's 401(k) plan as soon as you're eligible. But invest through life insurance? I wouldn't. There are more cost-effective ways to save for the long-haul -- including retirement -- than through saving through life insurance. You can save in a mix of investments depending on your goals, including government insured savings accounts, U.S. Treasury securities, broad-based equity index mutual funds, low-cost bond mutual funds, and so on.
Yes, "permanent" or "cash value" life insurance comes with a tax-sheltered savings component as well as life insurance. The savings can go into a variety of investments, including stocks, bonds, and money market-type instruments. The two big attractions of this kind of insurance are that you can borrow against the buildup in cash value and it's a forced savings plan. The main policy types are whole life, universal life, and variable life. In general, these policies are expensive, with steep fees and commissions that reduce returns. Cash value insurance makes sense for some people. It's particularly appropriate for anyone with sophisticated estate planning needs and for folks with a need to financially protect loved ones even late in life.
So, a critical question for you (or anyone else, for that matter) is why will you need life insurance when you're older, aside from the savings component? Life insurance is an expensive way to save and, far too often, the investing side of the product is opaque to the average policyholder. You can always create your own forced savings regimen by having money automatically removed from your checking account and placed into savings accounts, mutual funds and the like. It's easy to keep fees down this way and to know what rate of return you've earned on your money. I prefer keeping investing and insurance separate. (I'm also not a fan of younger people saving through annuities offered by insurance companies. Again, there are better alternatives.)
Even more important: Before you do anything, I would recommend that you and your husband talk about money, managing money, money values and life goals. Most of the insight over how best to save will come out of such conversations.
The two of you can learn more about the basics of savings and investing with straight-forward books like The Random Walk Guide to Investing by Burton Malkiel, Jane Bryant Quinn’s Smart and Simple Financial Strategies for Busy People, and my own book, The New Frugality: How to Consume Less, Save More, and Live Better. In the meantime, just keep on saving.