Cash Value Life Insurance vs Roth 401k w/ No Employer Matching

My company's stock purchase plan contribution limits are being reduced from 10% to 5% & they have just started offering a roth 401k through Fidelity. i have switched my normal contribution from a traditional 401k to the roth 401k. My recently acquired financial adviser (1st one) is offering a cash value life insurance policy (new to me, so i didn't know to ask if it's a VUL or whatever the different non-term life insurance policies are out there) as a viable option for investing my "extra" money. Which one of the following should i do:
1. original contribution into roth 401k + extra money into life insurance
2. all retirement investing into life insurance
3. original + extra into roth
4. something else?

my situation: I am 31. Husband is 33. Children are 1 & 2. We are all healthy/active non-smokers. All of us have a term life insurance policy through my employer. We are spenders, so a high yield savings account isn't enough to keep our hands off the money. Lastly, money will be tight until the kids are out of daycare. ~2K/mo will be freed up by 2013, and i'm sure we'll find a way to spend that quickly if i don't plan ahead.

thanks for reading.

Scratch #2 off your list right now

And if your fin adv recommended that - fire him

From your post, it sounds as though you have the potential to do very well

or squander it all

Would you say that you and your husband are "on the same page" with regard to money and finances? Do you have the same goals? Is one of you a spender while the other is a saver? Do you each know roughly how much you have in your checking account? What about debt - do you each know about how much debt you have?

If only one of you knows this, the other needs to be brought up to speed.

Whatever plan you come up with will only succeed if you both know
1) Where you are
2) Where you want to go
and
3) How you're going to get there

I'm going to assume you're like 99% of Americans: You don't really know what you spend your money on in a given month. And you don't have a budget.

If I'm right, fix both of those.

Keep track of every dime you spend in March. Then for April, try to come up with a budget using the March numbers. How much did you have left at the end of March? That's what you have to save and invest.

Take that amount and assume you invest it for the next 35 years at 3%, 6% and 8%. I did this for my family just the other day. The numbers are pretty sobering. Given our late start - I'm 38, she's 32 - and our meager $20K nest egg, we will need to put away $2,000 every month and then cross our fingers and hope that the market performs.

To your retirement questions...

Take advantage of Roth accounts in whatever form is available - 401k, IRA.

If your term ins has a big enough death benefit to support one of you and send the kids to college and pay off the house and all that good stuff, then I'd say you don't need more insurance.

Cash value insurance as a retirement plan is bad idea. Might not be so bad as a retirement supplement but that should not be the basket where all your eggs are. The growth rate of the dependable WL policies is very slow. The growth rate of VUL policies is very unpredictable.

I would stay away from VUL because I don't understand it enough to explain to someone else. If you don't understand it enough to explain to someone else, then you should stay away from it too.

Ask your agent what the phrase "policy implosion" or "policy collapse" means. Ask about HUGE surrender charges and possibly tax bills. Ask yourself "This sounds kind of dangerous - shouldn't life insurance be safe?"

And that's your A-ha moment.

Kbc:

As someone who works with insurance and investments, I would say this:

You are fortunate to have a Roth 401(k): invest wisely and happily in that. That money grows tax free and comes out tax free--a real boon.

As for the life insurance, let me offer you this:

First, find the death benefit you need (a rough estimate is a minimum of 10 times your income), and purchase that in individual policies. Group insurance is great to have because it is cheap, but should something happen to your job, it is not portable. Having your own policy usually ensures greater value in addition to portability.
Secondly, usually speaking, VUL's are not great products for most people. Without getting into details, VUL's are good if someone is putting a lot of time and attention into the product. Most people do not want to think about their life insurance that often. A fixed product like straight whole life insurance is a safer option for a conservative portion of your portfolio (again, not the entire portfolio, but a portion). The advantages are tax free growth, tax-free withdrawals, and no penalties for withdrawing prior to 59 1/2. However, if you do purchase a fixed product, I would recommend to purchase it from one of the three big mutual companies: New York Life, Mass Mutual, or my favorite, Northwestern Mutual. They have a history of performing better than most companies.

-Joe

thanks for all the advice. there's no need to fire the financial advisor. he offered the life insurance as a supplement. i just put that as an option because if it performs as great as it sounds, why not? i'm still torn between options 1 & 3 mainly because i feel that if i don't get into the life insurance game early, it won't serve as good of a purpose. i do need to understand a lot more wrt "policy implosion" & "something collapse." sounds bad, and i don't recall the advisor mentioning those terms. we meet with him again today to find out more.

another question: how do you feel about using life insurance as an alternative to 529 plans?

thanks again!
insurance rookie

another question: how do you feel about using life insurance as an alternative to 529 plans?

pros:
1) life insurance can be used for other reasons in case kids don't go to college (but same goes for Roth to a certain degree)

cons:
1) no possibility of state income tax deduction, if eligible on your state's 529
2) likelihood of more fees associated with insurance vs. low-cost 529 (need to do your research here, but many 529s have brought down their administrative/expense ratios to the realm of many reasonable actively-managed funds ie. <1% total)
3) in order to get exposure to equity you would have to invest in VUL which has it's own set of issues outlined in other threads.

i refer you back to price's post - first, determine your life insurance NEED. once that is taken care either through Term or perm insurance, i would suggest you stay with the more traditional tax-advantaged accounts like Roths and 529s. personally, i don't think life insurance has the growth capability to same degree as those accounts, but provides a nice alternative when income levels disqualify your eligibility for Roth/deductible IRAs and the like. you can always invest in 529s despite income levels, but they are restricted to education costs. just my take.