[Editor's Note: “Should you buy whole life insurance”? The short answer is, “Probably not.” If you're interested in the long answer, keep reading!]
In this post, I'm going to present an easy to use checklist you can go down when considering the purchase of any type of “permanent” or “cash-value” life insurance such as whole life, index universal life, or variable universal life insurance. Each of these types of insurance combines a death benefit that pays out whenever you die with an investment account of some type that acquires cash value. You can borrow the cash value tax-free but not interest-free throughout your life, and then when you die, whatever death benefit wasn't already borrowed out goes to your heirs.
These policies tend to be plagued with high fees, commissions, and insurance costs which reduce the return to investors. They are also dramatically oversold. For instance, ~80% of those who purchase whole life insurance policies surrender them prior to death. This is mostly because agents are highly motivated by big commissions to sell these policies inappropriately based on a number of myths.
Any time I talk about whole life insurance policies, I'm always very careful to qualify my statements, using terms such as “probably,” “almost surely,” “most people including doctors,” and similar. The careful reader notices that wiggle room, and then wonders if he may be one of the exceptions who might benefit from one of these policies. This checklist demonstrates those rare exceptions.
Questions to Ask Yourself Before Purchasing a Whole Life Policy
#1 Do You Have a NEED for a Permanent Death Benefit?
One example of this need is a particularly illiquid estate where a large percentage of the estate is tied up in small businesses, a family farm, or real estate that cannot be readily liquidated at death to pay any estate taxes due (be sure they're actually due, most doctors won't owe any federal estate taxes) or to be split up amongst the heirs.
Another example might be somebody who will never be financially independent but has a special needs child depending on his income. There are also a few business uses where it makes sense, such as insuring the lives of partners so that the other partners have the money to buy out their heirs upon the death of a partner.
Basically, you are asking yourself if you have some insurance need that can be covered with term life insurance at a reasonable cost. If so, you have no need for a permanent death benefit, and ought to really think twice before buying a permanent insurance policy.
#2 Do You Prefer Leaving Heirs a Guaranteed Amount Rather Than What Will Probably Be a Larger, But Not Guaranteed Amount?
As a general rule, and especially with whole life insurance and index universal life, there will be more money left to heirs simply by investing the money in tax-efficient stock index funds and real estate. Thanks to the step-up in basis at death, these investments are passed income tax-free to heirs just like life insurance. But if you die well before your life expectancy, the heirs would have received more with the life insurance. There is also the possibility that your investments will underperform the life insurance, but over long periods of time, this is very unlikely unless you die early.
#3 Do You Place a High Value on One of the “Side-Benefits” of Life Insurance?
Just like the death benefit isn't a free lunch, neither are any of the side benefits of cash value life insurance. These include pretty good asset protection in many states and the ability to “bank on yourself” (borrowing frequently from the policy to buy consumer items or investments.) But if you highly value them, it may be worth accepting the high costs and low returns of permanent life insurance.
#4 Can You Pay the Premium Annually?
Usually, you get a discount for purchasing a whole life insurance policy on an annual, rather than a monthly basis. However, even if you don't, this is still a good question to ask yourself. If coming up with the money to pay the premium annually is a big deal to you, then you are probably buying too large of a policy and ought to rethink it. For a typical doctor in mid-career who has decided he likes whole life insurance, coming up with a $10K annual premium should not be a big deal. However, coming up with a $100K annual premium is. That should be a tip-off that you're buying too much of this product.
#5 Do You Have Any Doubt Whatsoever That You Will Be Able to Make the Required Premiums?
Premium payments are due every year for decades, and sometimes until the day you die. Agents will often show rosy projections where the dividends from the policy may cover those payments after just a decade or two, but those dividends aren't free. If you're using dividends to pay premiums, the cash value and death benefit aren't growing as quickly as they otherwise would. Too many doctors discover after just a few years of making large premium payments that they no longer can or want to pay them. Then they are stuck with a difficult decision about what to do with the policy.
#6 Have You Consulted with a Professional Who Does Not Sell Insurance About Whether or Not You Should Buy This Policy?
Most of the purchasers of whole life insurance never talk to anyone about it other than the guy selling the insurance. A second opinion seems prudent before purchasing something that will cost you hundreds of thousands of dollars, no? Be sure there is no financial relationship between the two people advising you on this purchase.
#7 Have You Reviewed at Least 5 Policies of the Type You Are Interested in Purchasing?
How many houses did you look at before purchasing your residence? You will likely spend more on this policy than that house, so why are you only looking at one policy? Looking at multiple policies (preferably from multiple agents) will help you to see the downsides of each policy. They'll be very quick to point out the problems with “the other guy's policy.”
#8 If Purchasing Variable Universal Life Insurance, Are You Able to Purchase the Same Investments You Would Purchase Without the VUL?
Variable Universal Life insurance (VUL) policies basically put mutual funds inside a life insurance wrapper. If you would not purchase the equivalent of those funds outside the wrapper, don't purchase them inside the wrapper. Most VULs are filled with lousy investments. Combine that with the costs and commissions of insurance, and most of these policies end up being serious losers.
#9 If Purchasing Variable Universal Life Insurance, Are You Confident That Your Tax Savings Will Be More Than the Insurance Costs?
The reason most docs purchase VULs is as another retirement account. If they can get a VUL with solid investments, the real question to ask prior to purchase is whether the insurance costs or the tax costs will be higher. If you are not sophisticated enough to run the numbers on this decision yourself (or at the very least with the assistance of a trusted advisor with no financial conflict of interest,) you probably should not be purchasing the policy. Taxable accounts are a reasonable or even superior alternative most of the time.
#10 Have You Read the Entire Debunking the Myths of Whole Life Insurance Series?
The insurance agents who sell whole life are master salesmen. They receive a lot of training in sales and surprisingly little in finance. When considering a life insurance purchase, you should have a very different mindset from when you sit down with your CPA to review your taxes. It should be a bit more like the mindset you have when you are going to purchase a car at a dealership. The “Myths” series will demonstrate the arguments the agent will use to try to sell this policy to you. Understanding why they are myths will ensure that if you choose to buy a policy, you will buy the right policy for the right reason.
#11 Have You Maxed Out Your Tax-Advantaged Accounts?
Purchasing permanent life insurance prior to maximizing all of your tax-advantaged savings accounts is almost always a mistake. Most doctors (and even their advisors) aren't even aware of some of these accounts. It is idiotic to fund a VUL (and pay the associated insurance costs) as an extra “tax-free” retirement account when you haven't even maxed out a personal and spousal Roth IRA (which has no insurance costs.) These accounts definitely include the following:
- 401(k)
- 403(b)
- Profit-sharing plans
- Individual 401(k)
- Backdoor Roth IRAs
- HSA
- 457 Plans
- Defined Benefit/Cash Balance Plans
- 529 Plans or Education Savings Accounts
- UTMA/UGMA Accounts
If your insurance agent is suggesting you should purchase whole life insurance INSTEAD of using most or all of these accounts, that should raise a huge red flag in your mind.
#12 Is the Whole Life Insurance Policy Set Up in the Best Way to Reach Your Goals for the Policy?
These policies can be set up in many different ways. Policies set up to maximize the death benefit, to maximize the return on the cash value, or to facilitate frequent borrowing from the policy are all designed differently. While you can use any policy for all of these needs, it is going to be less than ideal unless used for its intended purpose. Unfortunately, most policies are set up to maximize the commission to the agent, rather than to maximize ANY benefit to you.
I decided to put together a flow chart to help you with your decision. It ended up being pretty complicated, just like these policies. Click on it to enlarge.
What do you think? Do you think this decision is this complicated? Agree with my reasoning? Disagree? Did you buy a whole life insurance policy? Are you happy you did? Sound off in the comments section!
Awesome Flowchart!
yes thanks for that, great for us visual learners.
Great article and flow chart! People don’t realize that purchasing a whole life policy is a significant commitment financially and it isn’t very forgiving if circumstances change. Thank you for bringing this important issue to the forefront. I can’t tell you how many clients come to me after meeting with a whole life salesperson for a second opinion and are dumbfounded when I recommend term. Some of the recommendations I have seen are nothing short of egregious. I have seen medical residents with $300k of student loans being recommended $2mil of whole life with $20,000/year premiums.
I think something important to note is that if someone regrettably purchased a whole life policy wants to make a change, they can reduce their death benefit thereby reducing their premium. This is not often disclosed but can help someone get out of paying such large premiums without incurring significant penalties.
Jamie Fleischner
whole life makes sense in some circumstances. Some of your term clients may NEED Whole life to leave next generation wealth. No more efficient way than whole life. I am sorry Jamie Fleischner but if a client has significant assets and household income north of $280k. They are most likely great candidates.
Totally disagree with you. Why in the world do you think whole life is “the most efficient” way to leave wealth? If you just leave equities or real estate you’re likely to leave far more and it gets the exact same tax treatment (i.e. passed tax-free) at death. I know of nothing special about $280K that changes that, and I’ve been on both sides of that.
Sr. Steve you are correct. The article totally flipped the Whole Life with Variable Life. Those are apples and oranges. And if you want some reads: “Becoming Your Own Banker” and “The Power of Zero.” WL used correctly by someone knowledgeable with it should be a part of any physicians portfolio.
I disagree, but don’t expect those who sell whole life to ever agree with me. For anyone interested on my thoughts on The Power of Zero read this post:
https://www.whitecoatinvestor.com/is-a-zero-percent-tax-bracket-in-retirement-a-good-idea/
The author was so upset by the fact that I didn’t agree with him that he threatened legal action over a tag on the article.
do not walk, but run from these life insurance salesmen
if estate taxes are an issue, second to die life insurance is suitable at times, a mix of whole and term
Another fundamental question for any married person condiering life insurannce of eithter term or permanent type:
Will your spouse eventually remarry? Most will. How far into the future are you responsible for your remarried spouses’ financial welfare.
JZ, I apologize but there is no way on this earth that I would ever let someone else take care of my wife or make it her responsibility to remarry to financially provide…… If that is your question then I must ask how much you love your wife and how much does she love you. Financial responsible people who care about their loved ones don’t push there potential liabilities on to others.
The flow chart is amazing. Nice work. Given the cost of my 30 year 2 million dollar policy (133 a month) why on earth would anybody need one of these? By the time my 30 years expires on the policy, I will have easily surpassed 2 million in assets (even using conservative numbers) and thus wouldn’t need insurance past that age. The cost of a term life is so much cheaper. This makes no sense even in many of the possible exceptions you provide.
The life insurance industry invented and promotes the use of “financial needs analysis” to determine the appropriate amount of life insurance because the majority (65%) of new life insurance agents fail within their first two years, 85% fail within four years.
Need analysis is a poor substitute for training but it gives new agents an oversimplified sales track that gets them in the field (in front of you) faster, sadly with predictable results. But don’t shoot the messenger.
Needs analysis calculators and online term quoters have proliferated on the web as the ranks of new life insurance agents have predictably dwindled; so now you don’t even need to meet with that rookie agent, who will likely not be around in a year or two, if he/she lasts that long.
But with that goes the loss of objectivity to challenge your preconceived notions about need.
This string and others are filled with justifications about much or how little is needed; one poster asserted that a widowed spouse will likely remarry anyway, so even less is needed.
I am not a physician so I can’t know what’s like to pronounce someone’s death after a valiant fight to save it, and I can’t know what it’s like to save someone’s life either.
But I do know what it’s like to be in a conversation with a deceased person’s dependents or with a person whose life was saved but his/her insurability was lost. This blog is filled with desperate posts by uninsurable physicians seeking coverage.
Never once when delivering the proceeds of a life insurance policy, has a beneficiary said to me, I don’t need that much, take some back. More often than not, I hear, “Is that all there is?” And worse yet, sometimes there is nothing at all; no need, I was told; sadly, the surviving dependents get the news from me.
True story: A 40-year husband of a stay-at-home mother, and father of two children under two years old, died unexpectedly of an aortic dissection; his stated plan for his family’s income continuation was an oral agreement among his best friends that if anything happened to anyone of them, the others would take care of deceased friend’s family. So there was no need for life insurance. Their plan was their own mutual insurance company; except no one was expected to die prematurely, until he did. The online needs calculator didn’t argue back.
Term life insurance is insurance for a “term” of years. Now you can design your own term; if want a 26-year guaranteed level term policy, it’s out there. So why be constrained by pre-packaged terms? So you can compare on-line, of course. Improving medical technology is extending lives, so term insurance continues its steady decline in price.
But what happens when your forecast is wrong? Consider this, when I started in business, as many of you can attest, there was no email, no internet (let alone internet commerce), no smart phones, and a fax machine was an indulgence; that was only 27 years ago.
What will your world look like in 10, 20, or 30 years (when your term life expires, but you haven’t; but your insurability has)?
I am not advocating the merits of one product over another; the product choices you make today, may be the last products choices you get to make (if your insurability is compromised sometime in the next 30 years).
True story (happens all too frequently): Term insurance is in-force but only a year remains before it expires, the policyholder is terminally ill, the conversion feature to permanent insurance was not purchased, saving a few bucks, no need, since the policyholder was philosophically opposed to permanent insurance.
“For want of a nail . . .” the beneficiary/dependents lose.
Data is not the pleural of anecdote. Obviously nobody here is advocating a deal with your pals when term insurance is needed. But the point of term life insurance is to purchase a bunch of it that lasts until you are financially independent. If I die a year after my term policy expires, my family will have millions to live on-those same millions I was planning to live on from that time forward.
Now, if you aren’t ever going to be financially independent, then sure, buy a permanent policy instead of going out to eat so much.
This is one of the best answers. If you know you will not be financially dependent at retirement due to your profession, you should be purchasing permanent policy at a young age to take advantage of low premiums. Therefore, money is not wasted on term policies.
What profession would keep someone from becoming financially independent at retirement but still provide enough money to buy a whole life policy that was sufficiently large to do any good?
Very important insights the “Talking Heads” don’t give to you on the values/hidden values of Life Insurance…
Please consider NOT listening to the folks who tell you “ONLY buy term”. I have studied this issue very hard, became licensed to sell Life Insurance in 2010, but found it hard to learn from reliable sources. Turn over is massively high in the life insurance industry. The company’s promise of rewards which “may” come as agents are trained – become too hard to obtain quickly and many quit. Others become enamored with the bigger incomes to earn (such as selling you stocks and bonds) and yawn at learning too much more about life insurance – after all – it’s pretty basic right? Boring right? you can just buy cheaply on line right?
NO!
HERE are insights on the tremendous hidden within value of the RIGHT Life Insurance from the RIGHT company and the RIGHT agent (someone who really cares about what is best for you and is not in it just for the commission they want to make by month’s end).
FIRSTLY, and this is so so critically important I want you to take this in and memorize: You are NEVER as insurable as AFFORDABLY as when you are young. Things happen. People become uninsurable to the point where no amount of money will buy you life or long term care insurance! “Please” heed this message.
SECONDLY, now that you realize the truism of the above, let’s look at the value. I will continue on with the concept of “long term care insurance”, since I invoked that terminology in the critical message stated in FIRSTLY.
Say you buy a type of permanent whole life insurance while you are young and raising a family (note there are many to choose from, choose wisely from someone with a passion for this). You want your spouse to say be able to stay home with the children and raise them rather than having to outsource to baby sitters…perhaps you want enough for your spouse to be able to go to college part time and learn a career of higher caliber and income rather than cleaning motel rooms, so you could budget for that hopefully never to come expense as well. You want, perhaps, enough life insurance so that your family can stay in the same home/city/and school system with out having to move due to living expenses. As you calculate these amounts, keep in mind an insurance company will not insure you for more than you are worth in “human value” – a good agent can explain this to you, as well as present in the right way to the insurer to get this through for you.
Now, you came out of child rearing alive! Gratefully!!! (: So, now you are aging, and after seeing your parents move into assisted living and their expenses go up month to month…you BEGIN to comprehend the value of a good long term care protection policy.
You don’t really feel you need that million dollar life insurance policy now – there is an allowable IRS tax exchange code which can let you exchange that existing Life Insurance for an annuity or Long Term Care Insurance! SO by buying Life insurance EARLY for your children/family/spouse….you have now guaranteed the opportunity to provide for your FUTURE self in different ways. There is a saying I love: “Do something today your future self will thank you for” – this could be one of those most significant life choices.
THIRDLY – the Life Insurance policy you decide on (with the help of an experienced advisor “please”) CAN grow cash value within the policy for your future borrowing needs “ahem” –> TAX FREE. You can literally “become your own banker” in that as life needs come up, you will/may have the ability (with the right policy) to dip into liquid cash to fund that college, that business expansion, RETIREMENT without asking any one’s permission nor filling out credit history forms….AND you can a) pay your self back with interest if a business and write it off on your business expenses -quintessential classic win win…b) choose to NOT pay yourself back and on your passing, the cash you took is merely deducted from the death benefit (and with children grown these needs have diminished!)
At the time of writing this, I have been licensed to sell life insurance for 6 years, but only sold 3 policies for I just was not ready. My primary passion was long term care insurance (and I won awards from a major company for being a top advisor.) This morning, while studying my material for the RICP (The American College of Financial Professionals Retirement Income Certified Planner), I finally realized I am glad and ready to help others….
Do something today their future self will thank them for!
Carole B Starr MBA
Retirement Planner
Please see my Linked In profile.
Thanks for including #12. May I also encourage readers to ask their agent & study up on MEC line tax laws for the policy as well as the Break Even Point (BEP) of the policy. If the whole life policy is being utilized for cash/financing and the BEP isn’t sooner than 4-8 years something isn’t right.
Nice flowchart! This is a top ten of all time post
That is an awesome flowchart, Jim!! I was going to do one on the nonsense of the financial services industry but gave up on it. It was too much. This one inspires to try it again. Flowcharts like this are really effective.
I was a little disappointed as I was reading the post, because it seemed recycled content. But the flow chart is pretty good. Both funny and actually of use to someone who is trying to make a decision.
I occasionally worry about “recycling content” but I think it is worth doing for several reasons. First, only a very small percentage of my readers have read every single one of my posts. Second, I can usually put a new spin or perhaps an updated look at a topic when I write about it again. Third, if I’m hitting something again, it is because a large number of readers are asking about it/dealing with it (like refinancing student loans.) All that said, I didn’t think this post was really recycled at all, but I suppose it was similar to this post:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
But I like eating out and when I’m buyin’, my pals usually show up. But I’m not so sure about after my funeral.
Anecdotes reinforced by data:
In the spring of 1993, Penn State University completed a study regarding the fate of term life insurance policies. The study includes over 20,000 term policies with an aggregate face amount of $4,000,000,000. It includes 1-5 year, 10 year, 20 year, and term to age to age 65 contracts which contained renewal and/or conversion features.
Here are some interesting results of the study:
1. More than 90% of all policies are terminated or converted.
2. 45% of all policies are terminated or converted in the first year.
3. 72% of all policies are terminated or converted within the first 3 years.
4. The average duration before termination or conversion is 2 years.
5. Less than 1 policy in 10 survives the period for which it was written.
6. After 15-20 years exposure, less than 1% of all term life policies are still in force.
7. Only 1% of all term insurance resulted in death claims.
I can not attest to veracity of the data above (but if it’s on the internet, it must be true) but it appears good intentions are not very durable.
The savings rates for average Americans is dismal; hopefully your readers are more disciplined.
My point about dying a year after the term expires, is for term buyers to be less absolute about their aversion to permanent insurance and buy long conversion options to preserve their flexibility across a long time horizon. It could be a multi-million dollar decision. Rich or not, few say no to extra dough. And insurability can be fleeting.
While obviously disconcerting to see how many don’t last more than a few years, I’m not impressed that very few result in death claims nor that most are terminated prior to their end. I plan to terminate mine prior to the end of the term and don’t expect them to pay out.
The data on whole life policies, of course, isn’t much better, as discussed here:
https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/
I have been reading the posts on this site for sometime now. What I have come to realize is that for anyone wanting to share your views on why whole life or any cash value products are valuable, it is better to save your time and energy and focus elsewhere. This is the wrong site to bring up any discussion on merits of life insurance. When it comes to the topic of insurance, the only metric used to determine whether or not something is worth is rate of return. The equivalent analogy for this is I have a hammer (hammer = rate of return) and everything I see is a nail. So I am going to hammer everything (Or in physician parlance this is equivalent to saying all health issues can be resolved with one tool – surgical knife). Rate of return is a necessary but not a sufficient metric when it comes to evaluating whether or not a product or an option is worth considering when looking at things from a wealth management perspective, not wealth accumulation. I am going to save my time and energy from
giving a contrarian perspective as I see that any such perspective is met with stiff resistance instead of an open mind by the founder. Perhaps there is too much influence of Dave Ramsey and Suze Orman here. Evidently, a lot of negativity has been created around cash value insurance from the get go, and so it is difficult to retract anything that has been said against insurance products for the last ten years. The reputation and brand is obviously at stake here.
Anyone reading this post is advised to look at both sides of the coin – merits and demerits of whole life. I would say that this applies not just to whole life but any investment or strategy you are looking at. People are usually in camps – real estate or market, cash value or term life, cash value or market, etc. Figure out your goals, your personality and beliefs and select what makes sense to you. Wealth can be accumulated in any number of ways as long as you know what you are doing and not blindly following the herd. This site will lay out all the demerits of cash value insurance. So it is a great place to look for the negative side. If you want to look for merits, look elsewhere and do your due diligence with selecting agents and policy design. Preferably work with someone who knows the stuff well. Somewhere in the thread it mentioned ask for a second opinion from someone who doesnt sell insurance. Seriously? There are agents who sell insurance who dont understand the stuff and one is expected tp believe that someone who doesnt sell insurance will understand it to give an unbiased view? I wonder if any physician would tell their patient to get a second opinion from a another professional who is not a physician.
Bear in mind life and wealth building is a journey and not a destination. Ups and downs can happen and locking your money away in the market or real estate alone may not be a prudent approach, especially if you are the only/main person managing the finances in your family for your family.
Thanks for stopping by and typing all that. I agree buyers of whole life insurance should really understand what they are buying BEFORE they buy it. I would submit that most who do no longer buy, but if you understand and still want it, go for it.
Great post and flowchart. I followed the flowchart and it turns out that I do get to buy a policy but your caveat is well placed. I’m done funding my policy and my regret about it probably wouldn’t be present if equities hadn’t been on such a tear since 2009. It was mainly another way of diversifying and of course it was also life insurance. Keep up the great work.
I bought both (Term and Whole Life) a few years ago after getting married and full-time placement. I did it based on a ton of research, reviews, talking to advisers (insurance and non-insurance focused) before I made my purchase. I do like the idea of shopping around- many of these agents are captive and can only sell their company. They may say it’s the best, but is it really?? I believe whole life is a good place for guaranteed savings, growth, etc. and most importantly options in the future (if you don’t pay for term, you lose it). BUT- I maxed out all possible retirement accounts prior to buying this.
I would add if anyone is buying a whole life product, to buy exclusively from a Mutual Company (Mass, NY Life, Northwestern Mutual, Guardian); in lieu of a stock company. The dividends are always higher due to not splitting profits with shareholders, and the company’s general expenses are much lower.
Another point not mentioned is health- this was a big consideration for me. Diabetes and strokes are prevalent in my family and I was concerned about buying a 30-year term and it expiring, and still wanting/needing life insurance. Remember we never have a crystal ball of what our future will look like- I have co-workers who are 62 and buying more life insurance because they are remarried and had a kid late, etc. Or they buy into a practice, and have a huge loan, etc.
To continue- if you’re in poor health, and do not qualify for a “Preferred” rating on your policy- whole life IS NOT a good savings vehicle. You will usually have an IRR of less than 2% long-term. Whole Life is truly investing in your health.
The guaranteed growth is pathetic in WL. Even the guaranteed death benefit at non premature death is below inflation. Even if you are using the non guaranteed, illustrated from a highly rated mutual using a current illustration, a policy purchased today would take about 16 years just to break even (not considering inflation at which point it still wouldnt be even). Im not sure what was meant by if you dont pay for term you lose it but if you dont pay the premium on whole life then it crashes (fast if in the early years like immediately and slower later on). Maxing out all retirement accounts is a great idea, just doesnt make WL a good idea after that unless you want a permanent death benefit and then thats what you have purchased. In regards to the Mutuals, historically they have performed better but if you look at some of the insurance sites who review this stuff, you will notice it isnt exactly the case that mutuals will perform better currently. The truth is these companies compete for dollars and while the idea of mutual sounds great, it doesnt guarantee anything. Mutuals typically also have the highest price term so they arent always looking out for their “owners”.
Anyone who needs insurance after 30 years of term would have failed with WL bc they would have lapsed the policy. WL doesnt change human behavior. If you dont save then you dont save. Its well shown that WL is surrendered/lapsed most of the time. All the examples you mentioned wouldnt need insurance after 30 years bc all the money saved from NOT buying WL could be used and it would be more money after 30 years. WL is a permanent death benefit. If you want that then go for it. If you want to invest in your health then invest the money properly since you likely will need the better return that gets compounded over decades. One should also keep in mind the direction of dividends with WL and it isnt pretty.
Rex,
“Its well shown that WL is surrendered/lapsed most of the time.”
So is term insurance. That doesn’t really say anything on either side of the isle though. See my comment below on non-forfeiture options RE: whole life.
“One should also keep in mind the direction of dividends with WL and it isnt pretty.”
You mean the fact that they’ve declined, then flattened out among the major mutuals, and are trending up now? The dividends on stocks show similar declines over the years, as a whole. You’re describing the effect of lowered inflation, which applies to returns from all sectors, including the insurance industry, but not *just* the insurance industry.
“Maxing out all retirement accounts is a great idea”
It’s not always a great idea. Part of what I do for a living is financial analysis and calculating the returns from saving monthly, even with modest ERs, a balanced portfolio (or heck, even an unbalanced portfolio of substantially all stocks) and a generous employer match, isn’t always enough to overcome the effect of taxes, even at progressive rates. Part of this comes from the effect of taxes on Social Security benefits, which drags down the IRR on the strategy. You might say, “well, give up the SS benefits and coast on your savings,” but then you’re at a serious disadvantage because the whole life customer now has $10K-$20K or more of benefits that you don’t, tax free and the longer you hold off the higher your SS benefits and thus the higher your taxes as SS fills in the bottom “buckets.”
Term insurance is designed to be dropped when no longer needed. Whole life is designed to be held for your entire life. Its surrender prior to death indicates to me that it probably shouldn’t have been bought in the first place.
NML’s dividend was 5.6% for 2015. In 2005 it was 7.5%. In 1995 it was 8.5%. In 1985 it was 11%. I think that’s the trend Rex is alluding to. Obviously future interest rates are tough to predict.
I’ll be really disappointed if a career long reader of this website isn’t maximally taxed on his SS earnings. That won’t apply to most high income professionals.
I purchased a whole life policy years ago and made 5 very high premium payments and no policy payments after that. The pitch was that since i had a C corp, the premiums were tax deductible under my corporate rate and vail and it used a not well know section of the tax code called code section 79, which allowed the tax deduction. It has a death benefit and a cash value that gaurateed a 5% return and also the cash value could be borrowed at no interest. Seemed like a great deal, ie corporate deduction and fair returns and a growing cash value, not sure if anybody has heard of this code section 79 of the IRS tax code that allows this, no one has ever heard of this and wonder if anyone else has?
https://www.whitecoatinvestor.com/the-6-catches-of-section-79-plans/
I guess I don’t see a huge reason why a doc can’t become financially independent within 30 years, even with a surprise child or another marriage. I guess if you lose tons of assets in a divorce that would be an issue, but I’m not sure I’d buy whole life instead of term for that reason unless my marriage was really on the rocks. Why not just make sure you’ll be financially independent by the time your term expires?
WCI- of course you’d want to be financially independent in 30 years, but the point is life happens. Sometimes for the better or worse. I save 20% in stock equivalent investments- and pay only 1.5% of my income into whole life. I don’t need my whole life to return 8-10% every year; I’ve got those assets being funded.
Rex- of course the guaranteed rate isn’t amazing. But what’s your guaranteed on your money market account? Mine is 0.0%. So let’s be sure to compare apples to apples. This is a safe, conservative, savings vehicle- not an investment. And I’m only 32, I do not care what the balance of my cash value is in year 13 or year 16. It’s about the end result, and every year my net worth is increasing…Do you think the S&P 500 is going to be flat for the next 20 years? What about 10? You don’t- because historically it never has, and with any ‘investment’ with speculative growth or loss, we can only use historical performance as an indicator of future success. Many of these mutual companies have paid dividends for 130+ years. Every single year, through 1929, 2001, 2008, etc. And you’re concerned about the direction of dividends? DUDE, they have been coming down since the mid 80’s. That’s 30 years! Wake up, the interest rate yield curve (which WL dividends are heavily derived from) will be going up, over the long-term. It has been near 0 for six years. I would much rather buy a yield-based investment at 5% today, than at 11.5% in 1985.
For me, I want a permanent death benefit, which is why I bought it. This policy will be paid-up at age 60 (I pay annually, purchase PUA’s, and overfund additional premium). It will not lapse- it is guaranteed to grow, every year. You must be thinking of UL. Paid-Up whole life provides options, my wife will not need the money in traditional income replacement (that is why I own a boat load of term, today). But the tax-favorable accessibility of cash value from a non-correlated asset is appealing as well.
Like you said life happens which is why people surrender these things over 80% of the time. They need the money now while alive and not a permanent death benefit. If you like it, then as I mentioned great, you purchased it. Life happens is exactly why you don’t want to waste money on WL. You might need the money. You seem comfortable making less off your money, good for you.
Yes lets compare apples to apples. This is money you must invest over your entire life to get any sort of return. In that case, yea the stock market is going to demolish your return and is the appropriate comparison. If you want to pretend WL is as safe as FDIC then that just isn’t true and you are not guaranteed 5% even at death. Of course they have been paying dividends, the guarantees are just so weak its pathetic. It would be criminal not to. You know in Japan the insurance companies thought that the interest rate would improve. Guess what? Didn’t happen quick enough for many strong insurance companies. So hopefully you are correct that it will improve here in the US. While with WL, we don’t get to see the inner workings of the black box, with ULs you get a glimpse at how bad its getting for these companies. If im not mistaken, both Banner and William Penn, just raised the cost of insurance within their in force ULs (even though obviously mortality is not increasing). I guess they couldn’t reduce the investment piece any further bc of contract guarantees. A guarantee is only as good as the company’s ability to pay. The tax advantage of accessing money from WL is also poor. EVERY loan in the US is tax free. Doesn’t have to be from an insurance company. Glad you are happy with your purchase. Its a permanent death benefit and its fine for that but not as an investment.
FDIC, safe? It scares me how our country has convinced the majority that its banking system is “safe”. Legally, the U.S. banking system is required to reserve a mere 10% of your deposit. “But FDIC backs it!”….Currently there is 10 TRILLION dollars of deposits in American banks. The FDIC currently has that backed up with 1.8 BILLION in reserves. Those numbers are huge and even WCI may not be smart enough to regurgitate them. Broken down, that is $100,000 in deposits with $18 in reserves. Safe?
Compare this to that of mutual insurance companies. Legally, these companies cannot “create money” to lend like our banking system can. If $1 goes in $1 goes out. Part of the reason these companies are able to stick around for such lengths of time is because they “overcharge” on premium (hence where dividends are paid). They are conservative. Banks are not. Benjamin Franklin created one of the earliest mutual insurance companies in America. Why? So that We The People wouldn’t need to depend on the state when “life happens”. It’s tough to compare the two (banks vs. mutual insurance companies), in some ways.
However, the root of the problem is much deeper than whole life policies vs. money market accounts. Economist Murray Rothbard wrote a book, The Mystery of Banking, that explains how central banking made inflation possibl. It also discusses the Federal Reserve System & Fractional Reserve Banking in detail. Give it a read.
WCI if you don’t mind I am going to link a blog on How Fractional Reserve Banking works. Some images or explanations may help with the understanding of the concept.
[I do mind. Avoid the commercial links please.]
Actually Life Insurance is protected by the States, if a company defaults or is seized due to financial instability. The guarantees in my State are $300,000 of death benefit and up to $200,000 of cash value. That sounds pretty similar to FDIC…
You can see the inner workings of a UL because nothing within a UL is guaranteed; premiums, cash value, death benefit are NOT guaranteed. UL was a horrible product to begin with, giving clients a “target premium”- of course 99% are going to pay the bare minimum, which is based on an “assumed” investment return by the insurance company. I even see the GUL market blowing up one day.
It’s no surprise Banner Life is increasing premium, when you price your crap so low only to gain market share- that’s a horrible business model. The company I bought from has the highest financial ratings from every rating agency (S&P, Moody’s, etc.), has over $180 billion in assets and no debt. I have a feeling they would be the last to fail behind a long list of others. I did thorough homework before I bought, and not just from the agent’s mouth.
I agree people surrender policies, do to their own fault. The goal is to not surrender the policy- which is way I didn’t dump 10% of my income into it, as one agent suggested. I’m smarter than that. I have adequate cash savings and accessible stock investments (which I’m funding at a much greater rate) if I get in a pinch. The premium I fund is very doable and will only get easier as I make more income.
No the state doesn’t back these. There is no federal or state dollars behind these (a fact im sure you know but chose to present differently). The state insurance guaranty assoc are run by the state and facilitate transfer of polices to solvent companies or tax/fine/collect from solvent companies in state to try to make one whole. It hasn’t worked out all the time. The stats are that when a company goes under they have made people whole 94% of the time for annuities and 96% for insurance. Funny how you happen to be in a s state with 200k of cash value when in most states its 100k (although there are a few greater than 200k).
That’s also not true for ULs. They have guaranteed maximums for cost of insurance (along with guaranteed minimum interest rates) and with such have guaranteed values for death benefits and cash value. ULs behave very very similar to WL if you are talking about a generic UL and generic WL if you fund the UL at WL premiums. The horribleness of UL is thus very very similar for WL. The main difference is in the end for generic ULs and generic WL that WL typically has stronger guarantees but at a higher cost. Its not just Banner with trouble with the ULs, its mutuals as well.
As mentioned several times, glad you are happy with your purchase. You have purchased a permanent death benefit. Its a bad investment/savings vehicle etc.
It’s technically not the state, but the state guaranty corp, which is basically the remaining insurance companies in the state as I understand it. And the guarantees value quite a bit state to state. $200K isn’t much protection if you’re got $800K in cash value. So you have to go buy another small policy from another company, whereas it is very easy to keep savings accounts, CDs etc at different institutions to ensure FDIC insurance.
https://www.nylifega.org/faq.cfm
I guess I’d prefer to be backed by an organization with the power to tax, than an industry group.
State Guaranty Corp-sorry for my laziness in specifying the ‘States’ protect this. I do understand the concerns with minimums of amounts insured, etc. But again- I think it takes considerable understanding and selection of a company by an individual in purchasing insurance. It’s not as easy as picking the cheapest term possible from any company. Regardless of the type of coverage, you want to know who you’re buying, and I think consumers should do adequate research.
Term life insurance is pretty much a commodity that can be bought on price. If you’re unhealthy or have dangerous hobbies, your agent will have to do a bit more footwork to figure out what the prices really are, but in the end, I see little reason to pay twice as much for an A++ company over an A- company.
If you want to argue differently, we’ll have to look at the facts of what happened to people who bought a policy from a decent company (let’s say A- or better.) What percentage of those companies went out of business over the next 30 years and what happened with those who owned a policy from them. I don’t have the data, but I bet the percentage that went out of business was very low and that the percentage of policy holders who were significantly affected by that was microscopic. I mean, it’s simple multiplication. Take the tiny percent that went out of business, multiply it by the small percent who died during the term, and multiply it by the percent whose policies weren’t bought up by another company or covered by the state guaranty corp etc. It’s just a really, really small number, and a risk I feel very comfortable running when the benefit is paying half as much for life insurance.
I can understand that, but I never found value in a company that then sells it’s book of business to another company. For example- Jefferson Pilot and Lincoln Financial, don’t you think the Jefferson Pilot policyholders get horrible service, and claims support? I don’t know about you, but I have $3 million of total coverage- and I want a company that will pay that out quick. Not that my wife doesn’t need the money that fast, but truly I wouldn’t want to leave her calling a 1-800 number and pressing 2 for English for months at a time waiting for a claim. You have to remember how many company’s could stroke a check for that amount of money quickly? All of us are physician’s and probably have well north of $1 million of term. That’s a big chunk of change to have a lower-quality carrier with. Maybe I’m just paranoid, but that’s worth paying an extra $8/month for higher financial ratings, IMO. Some things are worth going cheap on- a bottle of ketchup is one of them.
Are there actually large numbers of people having a major hassle getting paid? I would submit there probably aren’t. It just isn’t that hard to scan and email a death certificate once or twice. If it’s worth $8 a month to you, great. But I keep seeing docs paying 2-3 times what they ought to be for term insurance because they didn’t shop around using the list easily generated by term4sale or insuringincome.com.
Drew, I am impressed. You are the most informed consumer I have ever seen in regards to whole life. Your knowledge of the inner workings of all the insurance companies is impressive. Did you buy your whole life insurance and term insurance from yourself?
Why would you buy and over-fund a WL policy that you claim to have purchased for the permanent death benefit? Would’t a GUL have been a better route to get guaranteed coverage at a lower cost?
Rex:
“While with WL, we don’t get to see the inner workings of the black box”
Actually, you can see the inner workings of the black box. Well, you can’t, but I can. This is the benefit of doing business with a professional.
WL is designed differently from a UL, even though the underlying mortality charges are based on the same mortality tables. The way they are paid differs significantly.
If major whole life insurers collapse, they will take your stocks with them, which won’t be much of a comfort for you because there aren’t any contractual guarantees on your strategy either.
Specifically, when bond yields compress, it means that income is being choked off and all one has left is capital appreciation. And when you eat your capital, you literally have nothing left for the future. This inevitably bleeds over into stocks. Companies will gladly borrow at lower rates to improve profits, but profit margins actually decrease, resulting in profit margin compression, which hurts yields, which hurts dividends, which ultimately hurts stocks.
But, at low rates, if that credit ever stops flowing, it will crash companies like it did in 2008. Boom, there go 10 years of your life. Capital AND yield.
The black box referred to is where the dividend yield is decided. It is simply declared. It is whatever the company wants it to be. No guarantees.
except for that once it is declared it becomes guaranteed. Also, every major carrier has a piece that tells you exactly how the dividends are constructed
Please post a link to where several companies explain how the dividend is constructed and how an unrelated party might calculate the dividend prior to the company declaring it. If you can’t do that, I think you’ll have to agree with me that the dividend is just what the company decides it is.
And of course it’s guaranteed once declared. But that’s not much different than saying it’s guaranteed once it’s paid.
http://www.hagedornfinancial.com/life-insurance-dividends.html
Michael, Seems like you haven’t really read / understood the document you posted. The article didn’t explain how the “non-loan dividend interest rate” of 6.05% was arrived at and that’s the black box!
Investment return, mortality experience, expense management, reads like net profit from operations to me.
Any business may seem like a black box to the uninformed, hence the reason for GAAP accounting, balance sheets, and profit & loss statements, available upon request.
I’m looking at Term Life companies as a family physician. What companies are recommended by those of you out there? Is there a huge difference? Thanks in advance!
There is not a huge difference. You need a company stable enough to be around when you need a payout, but beyond that, it’s a commodity bought on price. More details on purchasing term life here:
https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
Amber, your specialty is not a concern when it comes to buying term life insurance. In fact, this is your time to save as term life is cheaper for females than it is for males. Buying term life will be the opposite of buying disability insurance for you. You should be able to have a few high quality (financially secure) insurance providers within a few dollars per year for your coverage needs.
Wade Pfau has some interesting research maximizing retirement income using a single life SPIA and whole life insurance. One of the couple gets the SPIA and the whole life insurance so if that one dies, the surviving spouse can use the money from the whole life insurance to buy another SPIA. You can google his name to get specifics from his website.
I’ve criticized that “research” elsewhere. It is important when mentioning it that he was paid by an insurance company to do the “research” and that you may or may not agree with his assumptions, like the use of high ER mutual funds in his “study.”
As a general rule, you’re usually better off buying a SPIA on both lives than a SPIA on one life plus life insurance, but you have to run the numbers to be sure.
Industry sponsored and not peer reviewed…
Some of the other “assumptions” for this work discussed here
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=165864
Brilliant piece! I’m in the financial services industry and here’s the flowchart from our perspective:
1) Do I want to make a lot of money quickly?
2) If yes – can I convince myself that the insurance company has a magical way of juicing returns enough to overcome the high commissions, overheads, and profits of the insurance company so I truly believe in what I’m selling?
3)If yes, do I know a lot of physicians and other high income earners?
IF YES, SELL WHOLE LIFE
Good to see you on the site Allan. I enjoy your writing as well.
Fairly certain the real Allan Roth knows that a blog post can be seen as advice and wouldn’t be posting here
He certainly does post here. Feel free to call him up and ask him. Or listen to him on the podcast.
Your flowchart is misleading. The so-called analysis is the BTID equivalent of a slick whole life salesman’s pitch.
Example: You mention your “analysis” of whole life lapse rates. You leave out the lapse rates for term, which are higher over the lifetime of the policy. You also leave out the fact that not all permanent policies are lapsed for the same reason. You also leave out the fact that nearly every whole life policy, when lapsed, is offered as extended term insurance (or some other option, like reduced paid up insurance, depending on the year lapsed), meaning that the policyholder wouldn’t technically lose anything, except the whole life policy. And, lapse rates aren’t the same as policies left “in full force,” which can (and is) done when other options are available. So, even if the policy becomes unaffordable, it’s not as though the policy has to be dropped with a net loss.
Another piece of “analysis” is the “pay premiums annually” bit. Have you done the calculations on paying annually vs monthly, taking into account the loss of interest for 1 year? I have. Regardless of whether you save annually in a stock fund or pay premiums annually on a whole life policy, you always lose one year that you can never get back, compounded for x number of years. You always come out behind using that advice. Always. It doesn’t matter what the interest or savings rate is. Another way to look at this is if you saved up the money and paid annually, you would always be better off dumping the lump sum in and then paying monthly on top of that (because you have the money to do so after all), even if the insurer charges a financing charge for paying premiums.
But this isn’t unique to life insurance. It’s math that applies equally to any investment. Saving up and paying annually for mutual funds is worse, financially, than paying the lump sum and making regular monthly contributions on top of that, even when your CAGR/IRR takes a hit (which it does in a significant way). I’m surprised you haven’t realize this.
You say: Do you prefer leaving heirs a guaranteed amount rather than what will probably be a larger, but not guaranteed amount?”
This isn’t a statement you can back up with any reasonable evidence. Aftcasting, and forecasting, are not reliable predictors of the future. If they were, you would never lose money. Saying “probably” implies something that’s probable. But, having a larger savings isn’t probable. It’s only possible, and depends a lot on what the person uses to save (IRAs, 401(k)s, etc), and where the market is at the time of death – which you can’t predict. What you should have said is: Do you want to leave a known amount of money or shoot for the possibility or potentiality of higher returns which can’t be accurately predicted?
Potential is something a lot of people rationally choose. But, it’s misleading to use “probable” when “possible” is the more accurate word.
There’s more, but you get my drift (hopefully).
Here’s a question which I think is legitimate for readers, and would help them assess accuracy of information, which is actually applicable in all industries, not just finance: “should you take professional advice from a non-professional?”
David, I am a physician in my 60’s. Lived through many up/down in the markets. Bought all the hot funds, and this and that. The best financial decision was to buy multiple whole life insurances while in my 20 – 40’s. Hands down the best asset class. Old reliable, money in the bank, with great living benefits (I have taped the cash in these policies so often and for so many projects that it would take too long to document it all) So, whole life is not appropriate for all. But for those who have enough money left over after maximizing retirement accounts and pay for premiums on TERM LIFE insurance, whole life is great financial instrument to help you above ground as well as when you are six feet under. Let [others] argue. People in the know, know how good they have it with whole life. Why do you think government regulars it so heavily
Perhaps the government regulates it so heavily for the same reason it regulates reverse mortgages so heavily?
Perhaps you do not know the reason
Well they regulated the contributions to retirement plans very heavily as well, so a blanket statement is not a response
Term lapse rates have no meaning in this discussion. There isnt a lost cash value. While level premiums would result in some overpayment it is trivial compared to whole life.
Yes the fractional costs of premiums has been discussed. Here is an article from another insurance agent on it.
http://glenndaily.com/glenndailyblog3.htm
All of those options instead of surrendering/lapsing are based on the current CSV at the time the option is chosen. They are typically bad options. Term is always more expensive from WL companies (so dont pick that unless your health has changed), reduced paid up option greatly reduces the death benefit bc its based on current csv.
I dont mena to be rude but ive delt with insurance professionals many many times and you are sales people not fiduciaries. Most actually know less about WL than i do and you know it.
As I’ve told you on at least a half-dozen other whole life-related posts on this site, if you feel my analysis is faulty, feel free to start your own website showing how whole life insurance is the best thing for doctors since sliced bread.
There are two reasons for using the ability to pay annually criteria- the first is lower premiums, the second is it limits the amount put into a policy.
I disagree with your probable vs possible discussion. Investing intelligently in stocks and/or real estate is probably going to result in more money going to heirs than investing intelligently in life insurance.
“As I’ve told you on at least a half-dozen other whole life-related posts on this site, if you feel my analysis is faulty, feel free to start your own website showing how whole life insurance is the best thing for doctors since sliced bread.”
I realize this. And, it’s not that I feel it’s faulty, it *is* faulty, which I think I’ve demonstrated. Your response is to ignore or disagree (with not much of a rebuttal). I’m not trying to win a competition with you. I am trying to honestly point out inconsistencies and inaccuracies with the idea that perhaps you would consider updating or revising your blog for your readers. I think the more good finance blogs out there, the better. You have some good ideas. You have some bad ones. You have *some* inaccurate information.
But, since you keep bringing it up over and over, and not in a very nice way, I’ll just say I’ve already published pieces on life insurance on my blog and other high-traffic sites. I don’t need to publish 20 posts on life insurance, because 2 of my pieces contain more accurate, detailed and useable information that all of your posts on life insurance combined.
With that being said, you’re probably right in the implication that this conversation isn’t going anywhere. I’m fine leaving it at an “agree to disagree” status.
“I disagree with your probable vs possible discussion.”
What do you disagree with? That you can’t foretell the future? It’s inconsistent to say in one breath that life insurance dividends are hard to predict but that stock returns are easy or easy enough that it is “probable.” I just don’t think that’s a defensible position. At most, you might say that the stock market has a higher potential than an insurance policy. I’d agree with that.
“Investing intelligently in stocks and/or real estate is probably going to result in more money going to heirs than investing intelligently in life insurance.”
You can’t predict that. You don’t know when your readers will retire, when they will die, how they will arrange their affairs post retirement. Even if they follow all of your advice, you don’t have iron-grip control on the future. That’s why some people do buy permanent life insurance. I’m not saying it’s a right or wrong move. I’m just saying that’s one reason why they do it.
So weird. Someone who benefits from the sale of whole life insurance that thinks I’m wrong about it. I’ve never run into that before. Maybe I should take back all those “mean things” I say about it so insurance agents can go on selling it inappropriately to physicians again and again and again.
Your opinions about whole life are not facts. I’m not going to change what I’ve written to suit your opinions. Nor am I going to spend any more time arguing with you. It’s clear to everyone except you that neither of us are going to change our opinion or recommendations about whole life insurance. Wasting time on pointless activities is just that.
Have a nice life. I wouldn’t bother posting any further comments on this site if I were you. You will find it to be a waste of your time.
Rex, I disagree that term lapse rates aren’t relevant in the discussion. It provides context.
You completely missed the point about fractional premiums. Daily’s post doen’t address the issue.
Re: lapse: my point wasn’t that these are the *best* options. Rather, that there *are* options. You seem to be confusing the two.
The best option is to not lapse the policy if you own one.
I think there’s a lot that needs to be done in terms of education. But, I also wouldn’t say your knowledge, from what you’ve demonstrated so far, would qualify you as a professional.
And let me correct you about a mistake you and WCI keep making:
I am not primarily an insurance salesman. My license is in force to make recommendations about, and give advice on, insurance matters and this is due to a legal requirement because of how I am paid.
And, fiduciaries can (and often do) provide a false sense of security. Most of the time, the title gives people the illusion that they know more than they actually do. A professional is a professional regardless of what title you give him or her.
Your insurance salesman….Dont kid yourself. You asked if specifically if one has done the calculations on paying annually. I showed you them. Since this doesnt put WL in good light, you pretend it missed the point. Typical of an insurance agent to try that tactic. I also didnt confuse anything about the “options”. As opposed to you who pretended that great options exist. I clarified what really happens with those options.
I noticed you never linked to any of this research you have done. Since whole life has been around for over 100 years, surely there is non biased research to confirm the sales pitch you keep on making. So surprising that there isnt….
Good luck with your sales.
Are you seriously arguing against a fiduciary standard?
“Are you seriously arguing against a fiduciary standard?”
As a regulatory measure, yes. It’s impossible to legislate morality. The fiduciary standard didn’t stop someone like Bernie Madoff (and the many other smaller versions of him). It only gave him cover.
In the past, I’ve advised clients to do a number of different things (some insurance related, some not) that an RIA probably wouldn’t have given the scope of 99% of RIAs’ businesses, but which saved or made the client money and was the best option for them over the long-term. Did it matter that I wasn’t a fiduciary?
Sam,
I don’t disagree that term life can be the primary insurance people have or that some people might find benefit in saving money inside a tax-sheltered retirement account.
I’ve also done enough analysis comparing the two different strategies to figure out that:
1) Retirement plans aren’t always good, even with the employer match, and the complexity of them more often than not confuses people. I’ve found numerous cases where it should have worked (I honestly thought it was the better choice) and it didn’t.
2) Most people can’t beat the insurer at their own game, on a risk-adjusted return. Most people are rank amateurs going up against professionals who eat, sleep, and live risk management. If a person thinks they can consistently beat a professional at their own game, they are usually deluding themselves unless they have similar training at that particular thing.
3) In most situations, looking at costs in isolation is not helpful and will cause you to make poor financial decisions. That’s true for both investments and insurance. Oddly enough, one usually comes out ahead financially when *some* of the costs within the strategy are higher, not lower, and it’s largely due to the effect of timing on deposits along with how fees are charged. Had I not run the calculations on this multiple times, I wouldn’t have believed it myself.
4) Buying whole life and investing aren’t mutually exclusive and it’s weird that this is often how the argument is framed. This idea of “need” is also bizzare. People need a lot of things, if only for psychological reasons, based on their values and goals.
When WCI says doctors don’t “need” whole life, he’s wrong. Some doctors do. Some don’t. The thing is confirmation bias will cause him to see only the people who are happy following his advice.
People who lose out 30 years from now will never be heard from. And, people who aren’t financial professionals, who have good bedside manners, who have been burned by BTID tend not to speak up.
2) There are costs to insurance (including profit.) That’s how you beat insurers at their own game- you don’t play. You only insure against financial catastrophes. I don’t insure my iPhone (but maybe I should have, as I’m buying a new one tomorrow after dunking this one) nor do I insure my life after financial independence.
I’ll keep waiting on those who were burned by BTID but wouldn’t have been burned by whole life to show up. Amazing how in 400K hits a month for 5 years none have yet arrived.
For the life of me I can’t figure out why Mr white coat is so against whole life insurance. It is a great saving and yes, I said it Mr. white coat, investing tool. Why do you think IRS limits it use by coming up with bogus MEC nonsense. Why do many high net worth people have WLI? In fact many companies purchase WLI for valuable employees as part of compensation package (tax saving for business as well as employer)
Stocks, bonds, annuities, CD’s, annuities and savings accounts, all of them have a place, and i believe WLI embodies most beneficial aspects of just mentioned instrument and gourds agains there shortcomings.
Sam,
I think WCI mentioned this somewhere before on the blog/site, but he claims he was burned (apparently quite badly) by a life insurance salesman selling him permanent insurance. This is the beginning of his argument against permanent insurance.
“That’s how you beat insurers at their own game- you don’t play. ”
Do you own term insurance? Then you’re “playing.” You calculate the costs of term + mutual funds with *similar risk profiles* and then compare it to the insurer’s portfolio. You won’t win.
You could do better playing a different game (take more risk), but that doesn’t prove anything because that’s not the insurer’s “game.”
Fairly certain there are costs, including profit, to every stock, bond, index fund trade
Rex,
Re: the derogatory implication of being “just” a salesman comment. You’re entitled to your wrong opinion. Don’t expect me to respond to it beyond this point though.
The calculations you linked to look at costs in isolation. The calculations I’ve done are “in-house,” but there’s nothing magical or proprietary about them.
Here’s what that post essentially says: when you pay annually, you save money on your premium. That’s true.
But, if you saved up the premium for the year (or used savings to fund the first year), you’re putting yourself behind by a year because your current cash flow allows you to keep paying premiums on top of the lump sum. But, if you pay annually, you don’t do that. Instead you save up for the next year, effectively reducing the premium being paid to the policy that year.
This is a more advanced compound interest calculation where you start with a compound a lump sum annually and add monthly payments which compound annually.
Compare that with just annual lump sums. It puts the annual lump sum calc behind by a year and over 30+ years, that’s a lot of lost interest, despite the added cost of paying premiums monthly.
But it doesn’t apply to just insurance. It would happen if you invested in mutual funds that way too.
Except if you invest in mutual funds, you don’t get charged a high financing charge by paying monthly or whatever which doesn’t go towards CSV or death benefit by the way. You know normally agents like to come here and blame suszie or dave or wci for the lapse rates being astronomical for WL (almost everyone bails). I typically kindly tell them no its just that WL does NOT change human behavior and thus people bail when they see the return just like with a bad mutual fund (only worse for WL). Ive always felt that was the truth. Now I know its worse than that. Agents actually try to convince clients that its a good thing to pay fractionally… Of course they don’t mention that it doesn’t go to CSV or death benefit or that those who pay fractionally have the highest lapse rates so they are practically being setup for failure. I guess we should hope their cash flow continues to allow them to pay those monthly since if it doesnt it means loans until the policy lapses (assuming there is enough csv even for a loan)… How fiduciary of you to propose this in house research. There is a good reason that “research” is kept in house. I bet its going to stay in house.
Rex,
That’s just a distraction. Do you know what saving monthly nets a client in a low load mutual fund inside a low fee 401(k) (0.2% ER)? More than $150,000 in savings vs saving annually, depending on the interest rate assumed. Higher interest rates widen the spread in favor of saving monthly. No, you don’t pay a policy fee saving monthly in a mutual fund but it drags down the IRR significantly. It’s the exact same story if paying premiums monthly on whole life, even with the fee for fractional premiums.
If you or I pay a $12,000 lump sum premium every year on Jan 1, we will always do better by paying $12,000 + $1,000 = $13,000 on Jan 1, plus $1,000 monthly for the next 11 months. Even when there’s a policy fee, the cost is worth the benefit one gets because we can’t go back in time and recapture that lost year by saving up for the next year’s lump sum. This isn’t that hard to understand for someone who knows what they’re doing.
So, yes, while I am not technically required to adhere to the fiduciary “standard,” my advice would result in the client having more money over the long-term. I guess if being a fiduciary means I’d have to recommend the client accept less savings and a lower standard of living in the future, without taking any more risk for more frequent saving or premiums, you can keep the fiduciary standard because it’s literally worth less.
I consider your advice horrible. You have taken a situation and added MORE RISK. You like to pretend thats it okay to pay the fee bc you HOPE they will be able to put more into WL over time. Normally over 80% surrender WL. With your advice it will be even higher. Low risk for you as long as they pay for the first year or two. Not low risk for them. You like to define risk in ways that suit you. You seem to like to pretend that most people actually will complete a WL plan. WL illustrations REQUIRE over 80% to lapse in order to get the illustrated results (among other assumptions).
“I consider your advice horrible. You have taken a situation and added MORE RISK. You like to pretend thats it okay to pay the fee bc you HOPE they will be able to put more into WL over time. Normally over 80% surrender WL. With your advice it will be even higher. Low risk for you as long as they pay for the first year or two. Not low risk for them. You like to define risk in ways that suit you. You seem to like to pretend that most people actually will complete a WL plan. WL illustrations REQUIRE over 80% to lapse in order to get the illustrated results (among other assumptions).”
How is contributing or paying into a financial product or investment on a monthly basis more risky? That doesn’t make any sense. Annual or monthly, you still have to come up with the money. The only difference is you miss out on interest by holding back. That’s not controversial except in this thread.
As for lapse-supported pricing, nothing you’re saying here is true. Lapse supported products are almost always term and No-Lapse ULs. Whole life wouldn’t work very well using lapse-supported pricing. If you don’t believe me, ask an actuary.
The difference is WL crashes without payments and will have a lower return
http://www.glenndaily.com/lapsesupport.htm
You aren’t here to provide correct information. Stop kidding yourself again.
WTI,
My father in law had a whole life insurance which he stopped paying into many years ago. Cash value is 140K. His adviser recommended doing a 1035 into a new policy from a different insurance carrier. He was given a guaranteed of 415K to his beneficiary with no additional payments that need to be paid until the day he dies. First, does that sound like a legitimate policy? One concern I have is that he pays the 140K lump sump and then years later is told he needs to pay more into the policy. Secondly, if this does sound legitimate, does the face value of 415K sound like a decent amount for a 140K lump sump payment? He is 65 years old, in great health. The way that I looked at it is that 415K for a 140K investment over a 25 year period time (if he lived till 90 years old) is a compounded annual return of 4.44% which isnt horrible. Thanks for your time.
That’s a reasonable choice assuming it meets his goals for the policy. The new policy will be a MEC, so he won’t be able to use the cash value himself; it will need to go to his heirs.
I’d at least compare it to just stopping making the payments on the current policy and paying future premiums with cash value/dividends.
He can use the cash value himself, it is just taxed like an IRA, which apparently is a very good product on its own.
An IRA gives you a tax break in the year you make a contribution. A whole life insurance premium does not. That’s a big difference and explains why a retirement account gets far better tax treatment than a whole life policy.
I could use some help. Please prepare for a long post. I had been concerned about my whole life policy in the past and reading your articles and these threads I went from concerned to alarmed. We have been contributing to our policies for 3 years now and I decided to send an email to my insurance agent regarding our policies (my wife is a physician as well). I asked him if he could get me the most up to date information regarding our total premiums paid to date and the cash value. Here is his initial response:
Will get you that info however that would be the worst thing you can do. The insurance policy is the only thing that you have that has a guarantee to it. Based on what is going on in the market your insurance policy is performing the best at times like this. If you remember from our discussion the most important decision to make in positioning where to invest cash flow, asset allocation is the primary focus. That is how much goes to stocks and how much goes to bonds. For people with normal risk tolerance the usual recommendation is 100- your age equals how much should be invested in stocks. The rest should go to bonds or safe assets. The reason we used the life insurance policy was as a bond alternative. The historical 25 year rate of return for a 40 year old male is 4%. Since you are both younger that return would have been higher. So if you used bonds instead of the insurance and you are in a 43 % tax bracket then the bonds would have to earn 7.01% taxable to net 4% after tax. That’s also not including a 1% fee for investing in bonds. As you can tell this would not be a easy return to earn. Personally I pay $40,000 a year into whole life insurance for these same reasons. Let’s schedule a time so the 4 of us can review on a conference call.
I then asked him to please answer the following 10 questions and here are his responses:
1. How much have we paid in premiums to date?
Wife’s whole life $21,922.10 – $7,102.93/yr or $609.41/mth.
Wife’s term life $3,129.12
Your term life $3,129.12
Your whole life $21,919.94 $7,102.23/yr or $609.35/mth.
2. What is the current cash value of each of our whole life policies?
Term policies have 0 cash value
Your whole life $3,628.77
Wife’s whole life $3,435.10
3. What is the breakdown of the amount that is going in to whole life versus term on a monthly basis
see Q 1
4. What is the coverage for the term policy?
$1,400,000 each
5. What is the coverage for the whole life policy?
Wife’s $621,284
Yours $557,290
6. Why did we never discuss the option of making an annual payment versus monthly payments?
Was a cash flow decision, did not want to take a large percentage of liquidity away in the event of a unexpected life event.
7. How is the best way for us to follow the above information on-line so that I don’t have to bug you with looking the information up for us?
thelivingbalancesheet.com (we do this better than anyone else)
8. If we were to suspend our monthly premium payments without surrendering the policy at this time would it affect the coverage that we have?
No with the whole life policies as their is cash value to make payments for 6 months. The term yes, you would lose the coverage.
9. Why is it a better idea for us to be focusing on investing in a whole life policy at this time instead of maxing our out roth-TSPs and utilizing a back-door Roth IRA?
We are trying to bring balance to your overall asset allocation. We discussed using bonds vs life insurance in our analysis (meetings we had) and you agreed with us that life insurance is a valid bond alternative over the long term. Not saying that one is necessarily better than the other, as we also discussed in the future as income rose then we would likely go back and fund the Roth back door approach.
10. If we decided to surrender the policy, would you have any suggestions on how best to handle the loss (I’m assuming it would be a loss at this point) for tax purposes?
Non-deductible loss. Surrendering it at this point would be the worst decision to make. The first 3 years are the worst in a whole life policy. You are past those and now is when the cash value starts to take off. We will show this to you when we have our web meeting.
I’m sorry you’ve made the all too common error of mistaking an insurance agent for a financial advisor. In my view, for the vast majority of people and in the vast majority of circumstances, buying a whole life insurance prior to maxing out your 401(k)/TSP and your backdoor Roth IRA is the equivalent of malpractice except that you are unlikely to prevail in court. Feel free to post your advisor’s name and the name of his business however, so other physicians can avoid the same issue/ “advice.”
I am NOT a fan of The Living Balance Sheet (all roads lead to whole life) and disagree that whole life is a good “bond alternative.” I covered that in my “Myths” series here: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
Read this to determine if and how you want to dump this policy. Sorry about your $37K financial lesson.
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
I understand your frustration and probably contempt for financial advisors. I am in the insurance business and was sold the same story a long time ago. I created a business that believes that I can do right by people and make a living at the same time rather than get rich off of my clients. I just ran some quotes for 40 y/o male and female for $3,000,000 of coverage. A 40 y/o male can get $3 Million of 20yr coverage for $1,800 per year and 30yr coverage for $3,400. A 40 y/o female can get $3 million of 20 yr coverage for around $1,420 per year and 30 yr coverage for around $2,700 per year. This assumes great health history and the best rates which many of my physician clients obtain. The carriers I quoted are top carriers.
If you would like to look at your options just go to my website and request a life insurance quote. Assuming the living balance sheet was mentioned I would assume that I know who your advisor works for and while their disability insurance is strong it isn’t always the best product so you may want to get that reviewed as well.
I can’t really add too much to what has been said on this site but when whole is structured in the best possible terms then it is still probably not the right recommendation. When it isn’t structured to the clients advantage then it is probably a very bad investment. It does sound like the latter for you.
I have owned a Guardian Whole Life policy for almost 15 years (6/1/2001-present); I purchased the policy when I was 35 years old and was issued Preferred rates (lowest rates). The policy’s internal rate of return has been 2.02% tax-free. The 6 month LIBOR over the same period averaged 1.96%.
So as an alternative to other short-term cash equivalents (bank CDs, money market accounts, short-term bonds), my whole life insurance policy was a better choice, historically. Additionally, the policy’s benefit amount has increased, and the coverage will not expire until I do, and I don’t pay term insurance premiums.
As a counterpoint to the buy term and invest the difference absolutism mantra, unless someone has zero short-term cash equivalents, and everything is invested in equities, whole life insurance is an multi-purpose alternative worth consideration affording protection, cash accumulation and insurability guarantees.