[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!
A plain guardian policy purchased today will illustrate taking 15 years just to get back to even. It also isn’t tax free. It’s tax deferred with only tax free if kept until death. Stocks also get a step up in basis at death. Your contract likely also says they can take up to 6 months to give you a loan if requested so keep this in mind that it isn’t as easy as cash. Banks supposedly own lots of life insurance. A few years ago when they needed cash were they able to access it from their whole life polices or did they need a govt bail out?
WTI,
So I guess it would be best at this time to get out of the whole life policy. If we were to do the 1035 exchange would we transfer the $3,000 cash value into something like a VA as you suggested? Would that put the cost basis at the premiums paid thus far less the cash value (i.e. $22,000 – $3,000 for each of us)? If so, the benefit of this is that we would be using the money that we are putting into a premium for whole life into our roth-TSP and back-door Roth IRA instead of continuing to pay into a premium and waiting to get back to even on the whole life? What kind of time frame would we be looking at to get to the cost basis with a very conservative estimate? Thanks for your help on this. I feel like I am learning about stuff that I should have taken the time to learn three years ago…
The basis = the premiums paid.
You can exchange to a VA then do one of two things.
#1- Surrender the VA and claim the loss ($19K) on your taxes. There are various complications of doing this you can read about here, especially in the comments section: https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
#2- Keep the VA until the $3K grows to equal $22K. That is probably 30 years from now. Then surrender it. You get $19K of tax-free growth.
Under neither circumstance do you have to keep making premium payments. You can take that money and put it into the TSP and Roth IRAs where it should have gone in the first place.
What if you’re a Doc(OBGYN, MD) employed by a small private practice that offers no 401k, Simple IRA or any qualified plan for that matter? I can’t open up a SEP-IRA b/c I’m an employee of the practice and my husband is covered by his own plan.
The practice structure is an OBGYN husband and wife. They decided they wanted to grow so they hired me straight out of residency on a 4-yr contract, which I accepted. They offer no qualified plans to any of their employees. With 2 DOs(Owners), 1MD(Myself), 1PA , 1CNP, 3RNs, and office staff there are 16 of us. I’ve asked about the 401k before signing and they said they were working on it. When I brought it up again after a few months, they said they decided not to go forward with offering that benefit.
What I’m really worried about is, let’s throw the tax savings out the window, I’m concerned about asset protection b/c an OBGYN can be sued in my state(OHIO) up to 18-yrs after the birth. So a cash value life insurance plan may be my only option for now. Live and learn, I guess is my lesson here.
PS My husband and I both do the Backdoor ROTH IRA but that’s only $5500 each.
If you’re willing to trade lower investment returns (i.e. saving more and working longer) for additional asset protection and your state offers significant asset protection for whole life insurance, then whole life insurance may be a great choice for part of your portfolio. You’ll probably still need something in a taxable/non-qualified/non-asset protected account to reach your goals, however. You might also want to look at a GOOD VUL to try to partially overcome the low return issue with WL.
Personally, if I were in your situation, I would not reach for whole life insurance. I would do backdoor Roths, continue to lobby the employer to add a plan (they’ve got all the same asset protection issues you have, no?), invest in taxable knowing it is exceedingly rare for a physician, even an OB/GYN, to lose personal assets in a lawsuit, and perhaps do some real estate investing inside LLCs. But if you want to invest in whole life, just run the numbers so you understand what accepting those lower returns means for you personally as far as how much you need to save, how long you need to work, and how much you’ll be able to spend in retirement. For most people, that exercise is so sobering that they become much less worried about getting sued and much more worried about having their money grow fast enough to reach their goals.
Well I wouldn’t go the WL route, but I’m leaning more towards a product know as indexed universal life. I will have to look into the VUL. I do have a taxable account that I contribute $1500 per month, but that is for tail coverage should I choose to leave the practice b/c as you’ve guessed the employer will not cover it. They do however cover my malpractice.
Yes, the otherOwners/ Docs have the exact same issues but as I said before my request for a 401k or even a Simple IRA falls on deaf ears. My husband an attorney has explained the asset protection under ERISA to them. Maybe they know something I don’t, like as you said, “invest in taxable knowing it is exceedingly rare for a physician, even an OB/GYN, to lose personal assets in a lawsuit,” Hmmmm, do I really want to take that chance? Probably not, b/c peace of mind is indeed worth it’s weight in gold.
The problem with index universal life is they promise equity like returns but cannot deliver them. In order to provide the guarantees they do, they must offer significantly lower long-term returns. The products also tend to be really complicated, and that complexity doesn’t favor you. Just like whole life or VUL, it’s like getting married to this policy. Until death do you part or else it ends up being terrible financially. And you better know everything about it before marrying it because if not, it is highly likely you will regret this decision down the road.
That peace of mind better be worth its weight in gold, because you are going to spend a lot of gold on it in the form of lower returns, commissions, and insurance costs.
More on IUL here:
https://www.whitecoatinvestor.com/an-index-universal-life-insurance-illustration/
By the way, have you looked at your state asset protection laws? Is cash value life insurance even protected in your state? I was in Arkansas last week and they get zero protection for life insurance cash value. It would be really sad if you went down this route mostly for asset protection reasons and didn’t even get that in the end.
Your employer provides neither tail coverage nor a retirement plan? Are you really sure you want this to be your long-term job? I mean, this is a big enough deal for me that I would seriously consider changing jobs over it.
Yes, indeed at the end of my contract there will be much to talk about in 3.5 yrs. I wish now I let my husband negotiate my contract instead of telling him to mind his own business., But you know us MDs know everything coming out of residency, right? HA! 🙂
Yes, life insurance is protected in Ohio 100%. My husband texted a link to share with you: http://www.creditorexemption.com and it has the asset protection laws by state. I reached out today, to see if there are any other qualified plans I’m not think of.
My point about IUL and WL is that IUL may not be the best thing, but it will out preform WL, and it’s cash value is protected 100% in Ohio.
The product I’m looking into is 100% liquid after 3 yrs. The agent/agent said we will have the life insurance as the min as the IRS will allow, so the cash value has a chance to take off and isn’t bogged down by the cost of insurance. I will have my CPA review the policy before I accept it.
You should google unmet promises life insurance to get an idea of how unlikely the returns are to be what is illustrated.
Even worse though is that these things are really a liability for decades. Lets just say you do get sued and lose everything in the first 10 years of your career. Well the permanent life insurance requires ongoing premiums and if you dont pay those premiums then the policy can easily go bust and that is especially true early on.
To make matters worse is that several permanent life companies have decided to increase the cost of insurance on their old in force polices ULs so you cant count on that staying as projected either. Agents used to like to pretend that would never happen….
I understand what you’re saying but I’m more concerned about asset protection. Here is Ohio’s law regarding cash value life insurance:
Exemption for Tax-Qualified Retirement Plans, IRAs & Roth IRAs (Note 2): Limited to to the extent reasonably necessary for support. — Ohio Rev. Code Ann. § 2329.66(A)(10)(b) and (c). SEP-IRA not protected. In re Rayl, 299 B.R. 465.
Homestead Exemption (Note 3): $5,000 — Ohio Rev. Code Ann. § 2329.66(A)(1)
Exemption for Life Insurance Cash Value from Claims of Policyowner’s Creditors (Note 4): 100% for policies payable to spouse, children or dependent — Ohio Rev. Code Ann. §§ 2329.66(A)(6)(b), 3911.10
Exemption for (Non-IRA / Non-ERISA) Annuity Cash Value and Payments from Claims of Owner’s Creditors (Note 5): 100% for contracts payable to spouse, children or dependent. — Ohio Rev. Code Ann. §§ 2329.66(A)(6)(b), 3911.10
Ohio also protects VAs. You could buy a relatively inexpensive Vanguard or Jefferson National variable annuity and invest inside that if you like and get the same protection. The long-term drag on returns is quite small and over the decades, the lack of tax drag will overcome the fact that you’re converting capital gains/qualified dividends to regular income upon withdrawal. The great thing about a VA over life insurance is it is less complex and doesn’t require ongoing premiums. The jury is still out on which might be better if held until death, but there is certainly a lot more funding and exchanging flexibility with the VA as it isn’t attached to a life insurance policy.
Your assertion that IUL will outperform WL is also not necessarily true. It is likely that the returns will be similar, perhaps a little higher, perhaps a little lower. If you want significantly higher returns than WL, you’ll need to take more risk with a VUL policy. The agents who sell them believe and want you to believe that you’ll get higher returns from an IUL, but that’s not what people seem to be seeing.
You sound pretty set on buying this thing. I would caution you to get more than one “second opinion.” I’d not only talk to your CPA about it, but I’d see a fee-only financial planner and also another agent who sells cash value life insurance for more opinions. Remember this is a life long commitment to this thing that you’re making. I have no idea what the agent is referring to with “100% liquid” in 3 years. You are unlikely to have even broken even in 3 years. You probably won’t break even for 5-15 years even with a perfectly designed policy. It is very rare for someone to bail out of a life insurance policy in 3 years and come out better than if they had never bought it in the first place. In fact, I can’t think of anyone I’ve ever met in that situation. There’s almost always a huge loss in those situations as you’ll note in the comments section here:
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
I’m concerned most about asset protection and the IUL provides that for me, so I’ll take my chances. I’m not looking to debate which one is better b/c it’s mostly a matter of opinion. I called my agent and said we can go the VUL route if I want, so I will look more into it.
Why I reached out today is b/c I wanted to know, given my situation with no qualified plan, if there was a way for me to get a tax savings and/or assets protection.
What I’ve learned and what my agent/ adviser told me is that at the end of my contract, I should demand access to a qualified plan and not a non-qualified SERP, with a 10-yr vesting schedule. Which, BTW, is what the Owners are talking about now.
Also per your advice, demand the employer cover my tail insurance coverage, b/c really me having to save and someday pay for that is a reduction in my salary. If these things are met, then I could be putting $1500 per month into a qualified plan for the max of $18,000 for 2016. If not, I guess I need to find another job.
It has to be a GOOD VUL, one stocked with Vanguard and DFA funds. Most VULs, like most WL and IUL policies are terrible. All the information I’ve supplied is predicated on the assumption that you’re picking the best possible option for each of these types of policies. It also assumes the policies are well-designed to do what you want them to do. Most policies I see sold to docs do not meet those criteria. They are neither a good policy nor well designed. Take your time with this. There is no rush and it is a lifelong commitment.
Do you know a link I can view to see if I’m saving enough for my tail insurance? Or do you know how much it is for an OB/GYN in Ohio?
No, but I’m working on bringing on an advertiser who can help you with that. http://www.flagshipphysicians.com/
Great article and flowchart. I’m a big fan of Whole Life Insurance but it’s not for everyone. Bank of Yourself or A Family Bank as I put it is because the policy can be used as a family lending institution.
Yea, there’s a few of you out there who just love that idea. Almost a cult-like following.
https://www.kitces.com/blog/bank-on-yourself-review-a-personal-loan-from-a-life-insurance-company-and-not-infinite-banking/
Disappointingly superficial look at the concept I thought. Technically yes, he’s right that it’s a personal loan. But he’s leaving out important aspects of the whole bank on yourself concept discussed here:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
I don’t believe he intended to cover all aspects. Not sure which aspect you feel he should have covered.
It’s still a bad reason to purchase one.
There is nothing magical about a tax free loan.
I think discussing the merits of paid up additions and their role in decreasing commissions/boosting returns and the advantages of a non-direct recognition loan would have been useful. They are key parts of the concept. Instead of breaking even in 15 years, perhaps you do it in 4 or 5. These guys like to compare the rate of return on the life insurance to what you’d get in a bank account.
4-5 years is optimistic at this point. 8-10 is more realistic.
Companies that sell non direct give lower dividends so that becomes a much longer conversation.
My take away is that he correctly pointed out its just a personal loan. He wasn’t getting into the rest.
Buying WL just to take loans is a horrible idea. The fact that you can “more easily” get a loan is an okay provision but not a reason to purchase.
Dear WCI, I unfortunately purchased one of these whole life insurance policies (65 Life from Northwestern Mutual to be exact) from my financial advisor 3 years ago. Admittedly, I hadn’t done any research on insurance policies and hadn’t found your website then. I have two questions: 1) can I get out of this?, and 2) what do I stand to lose. Prior to finding your website, I have committed every single financial mistake that you warn against. I’m in my late 30’s so maybe I still have time to turn this around. Thanks for your time.
1.Yes
2. At most, everything you put into it, but probably less.
You have plenty of time. Congratulations on finding the site in your 30s instead of your 60s. If it makes you feel better, I’ve made most of them too. Thankfully, I turned things around at around age 30.
Read this page to learn more about how to get out of a whole life policy (and a discussion of whether or not you want to):
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
Great article. Life Insurance is based on how much “risk” the consumer is willing to take on themselves. You can obviously invest your money in other products like index funds, real estate, annuities, small business, etc. that may give you a higher return, but you take the risk of passing away earlier than expected, placing a financial burden on those you love OR losing your investment. Adding Life Insurance to ones portfolio along with investments can be financially sound for some people, but they must plan on how much they can afford, today, tomorrow, 10 years from now.
P.S. – i love the flow chart!
You don’t transfer investment risk with life insurance. You just buy their portfolio which is mostly bonds but add expenses. They just decrease dividends if investments under perform and as some companies have shown will even increase cost of insurance to make up for poor investments.
About 1/3 of people surrender WL early and they lose everything practically. Only less than 20% keep until death so you can lose a lot of money purchasing permanent insurance.
You are correct. When I say “risk”, I mean the chance of dying early, not investment risk. Like any insurance, a person has to be able to afford the amount of coverage they want, and is it reasonable for them.
Whole life insurance in general is not a good strategy, but in certain situations whole life policies can be used to increase your wealth tax free and cover your needs with the death benefit(referred to by some as the “Infinite Banking concept”). You have to fund a policy up front with high premiums to accomplish this. I am in the process of doing this now. You can google R. Nelson Nash if you want to find out more about “Infinite Banking.”
Or you can read more here for my take on it: https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
I have researched read studied pondered many opinions ALL helpful including this great web site! Thank you!
This morning, I finally came to my own conclusion and wrote these words for a pending “blog” ? I may or may not promote down the road. I hope someones on here find this helpful ? Here:
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.
Useful suggestions , BTW , if your business needs a IRS 3911 , my wife used a sample document here http://goo.gl/UgzpKN
And the endless debate rages on . . .
Fact: You will die (shocker), but no one knows when.
Term life insurance insures your life for a “term” of years, hence its name. Not surprisingly, shorter terms and younger ages, lowers the cost. Sadly, most disciples of “buy term and invest the difference” have great intentions but lack resolve and generally do not renew their term insurance nor invest the difference; the truth hurts (financially).
Whole life insurance is designed to insure you for your “whole life” (until you die, whenever that may be, there is no term), hence its name.
Neither is better or worse than the other. They are financial tools, designed to do different things. For example, if you need to haul a load of sand, you likely wouldn’t consider a luxury sedan, a pick-up truck would probably be a better choice.
Similarly, if you have a short-term need/obligation and someone (spouse, minor children, business partners, loan indemnification) depends on you and your cash flow, then term insurance is a cost-effective way to transfer the risk for pennies on the dollar.
So the real question isn’t which type of life insurance is better but how long is YOUR term of need (not your friends or colleagues, their needs are unique to their situations)? Who depends on you and for how long? If your term of coverage is less than that answer, you have the wrong coverage.
Don’t delude yourself that your (buy term and invest the difference) portfolio will cover the shortfall (math and markets are unforgiving). The only ones that will suffer financially are the ones you allegedly sought to protect.
I disagree. Whole life is worse than term. There should be no reason to “renew” term. Just buy it up front for the whole term you’ll need it, plus maybe a few more years just in case. If someone can’t stick with an investing scheme that will get them to financial independence by the end of a 30 year term, they won’t be able to stick with making payments into a whole life policy either. Buying a whole life policy isn’t a magic answer to a lack of discipline and a reasonable financial plan. There are a few legitimate reasons to buy a whole life policy, but this isn’t one of them.
I am not suggesting that whole life insurance is a panacea for the undisciplined or an alternative to a prudent, diversified, long-term investment strategy.
Term life insurance is the most cost-effective way to provide the amount of protection that most policyholders need (which is significantly higher than most buyers expect despite the simplicity of the math: the 4% rule; the average term life policy face amount hovers around $550k, less than one year’s income for some medical specialties).
Additionally, many buyers underestimate the durations of coverage, opting for shorter guarantee periods than the duration of their obligations/needs, hence the popularity of 10-20yr terms. Often times they fervently defend their decisions, to buy less coverage for shorter durations than needed, with unrealistic expectations/assertions of potential investment performance culminating in financial independence and no further need for insurance. They start with the end in mind, forgetting they actually need to travel an uncertain path to get there first.
Lack of resolve is the undoing of many well intended plans. Many adoptees of the “buy term and invest the difference” mantra don’t renew (lapse) their 10, 15, 20yr guaranteed period term life insurance policies well before their expiration, far short of the often touted 30 year investment horizon and the promise of financial independence; according to the Society of Actuaries, 1/3 of 10yr term life policies and 1/4 of 15 and 20yr policies have lapsed in 5 years. And presumably, they don’t invest as consistently either; DOL reports that 30% of eligible 401k participants don’t contribute.
Sadly, too many term life buyers lapse coverage leaving their beneficiaries exposed; counterintuitively (possibly for you and your readers) far fewer whole life policyholders lapse their coverage.
Noteworthy and contrastingly, individual disability insurance persistency hovers around 95%, higher than any persistency rate of any life insurance product. Evidently, disability insurance policyholders care more about themselves than their dependents, despite the certainty of death. Zinger.
If you have a longer-term need, term life insurance may not be the best/most appropriate product choice. If you can afford to self-insure (you actually have the money, not just an unrealized optimistic plan (market volatility can be punishing, remember 2008?) to have the money in the future), then you don’t need insurance, until then there is no better way to transfer the risk, presuming you remain committed, which may be the hardest decision of all.
Over 80% of WL polices lapse and almost all before 30 years so no WL doesn’t help that at all.
Certainty of death us actually one reason why permanent insurance is such a poor investment. Disability Insurance has nothing to do with it. I can’t but insurance in case I’m going to get hungry for dinner bc that’s going to happen. Doing so would just add a middle man whose mouth I’d now need to feed. Thus it doesn’t work out. Insurance companies are forced to invest conservatively (something they are having a lot of trouble with now a days). They have huge costs…insurance agents, Super Bowl commercials, big buildings, lobbying all which I would have to pay for them. The insurance within WL is also more expensive(all companies that sell “better” WL have high priced term and if they sell a UL and disclose the COI….wait for it….again higher.). WL is a bad combo of pricey insurance and pricey/poor investments. WL companies need the huge lapses just to stay in business. Dividends are ridiculously low considering how much money they make off the lapses. And when lapses aren’t where they want them well just look at the inforce UL industry, the LTCi industry, the VA with income riders….the list goes on and on. ZINGER….
I agree that many people buy term improperly (not enough, too short of terms) and “buy term and invest the rest” improperly. But whole life insurance isn’t a solution to that. The lapse rate for term is less concerning for me. I expect my term policies to lapse early for instance because I hit FI.
Rex and WTC,
The best policy is the one that is in-force when something bad happens. A policy must be in-force for a benefit to be payable.
Lapsing prematurely because you’ve hit FI, means your financial plan came to fruition, hooray and cudos to you. Lapsing because you lack resolve and commitment to your plan is obviously a losing strategy but that isn’t the fault of the insurance company, regardless of your opinions about Super Bowl ads and low dividends (which are disclosed and illustrated at the outset). The decision to lapse coverage is the policyholder’s.
What is your excuse for lapsing low-cost, guaranteed level term in years two or three? You didn’t like the Super Bowl ad?
So when you buy life insurance (whatever type it may be), keep it until it has served its purpose (presuming that purpose was thoughtfully planned), to do otherwise is a waste of money and exposes the people you purportedly love to financial peril.
Never in my career (and I am getting long in the tooth) has a beneficiary declined to accept a life insurance benefit check; I’ve never heard a beneficiary say, “I don’t need that much, take some back;” and never has a dependent beneficiary been thankful that a policy was lapsed before payment. Quite the contrary, beneficiaries are dumbfounded and outraged by the amounts payable, with a common lament, “is that all there is?” Followed by “that’s not enough.”
Good intentions don’t pay the bills, in-force policies do.
Good luck as you aspire to financial independence, be nimble as threats and opportunities present themselves, but be resolved and disciplined enough to do the thing no one wants to do, which is to contemplate and plan for the possibility of your untimely demise, and pay for life insurance for someone else’s benefit, because you care enough to do so. All the objections are just noise.
“Is that all there is?”
Let me be long in the tooth as well…..Many times in my career, ive seen a family come in after a loved one died prematurely. They don’t have enough money to live on. You know why? Because some agent sold them a permanent insurance policy instead of the term they should have been sold. They didnt have proper coverage. Happens all the time. So I’m very familiar with the comment that’s all there is. Its a reason NOT to buy permanent insurance. Those people put their family’s at risk by trusting the agent. So much for love.
In force polices at death are rare for both term and permanent. Might as well save the money and buy the cheaper term.
Money pays the bill. People who buy term and invest will have the money. They will have more money than those who buy permanent in the vast majority of cases. That’s the truth. Caring is about having that discipline and not falling for the insurance agent pitch.
Funny how already some people are being forced into surrendering their ULs by the INSURANCE COMPANY. Insurance companies decided to increase cost of insurance even though mortality is better just bc they don’t want to deal with the low interest rate environment. Those poor people trusted the agent and company to do the right thing. Now they need to cough up tons more money or lose the death benefit.
UL is fool’s gold. Non-guaranteed “flexibility” to adjust death benefits and premiums (by the policyholder and/or insurer) cuts both ways. But the attractiveness of perceived lower (initial) premiums attracts many consumers and agents. Similar to adjustable rate mortgages which exchange the benefit of lower initial rates for the risk of increases as rates rise.
If consumers stick with guarantees: Guaranteed level term life insurance and Whole Life which guarantees: premium, death benefit, cash value and endowment; there will be no surprises.
You could assert that stock options are high risk and investors lose money so they should always be avoided, unless they are part of a deliberate strategy to mitigate risk as a hedge to preserve wealth, in which case it is money well spent.
Buyers should be wary and do their research which has become much easier given blogs like WCI. But should be equally cautious of subscribing to generalized prescriptions from dubious anonymous sources could have equally disastrous financial consequences.
Not talking about ULs that were underfunded. Talking about fully funded ULs which had guarantees on the interest rate. Thing is the insurance company cant make that rate so what do they do? They “cheat” in my view and increase cost of insurance (which is also why class actions are starting). With WL they dont disclose the COI. So lets look at those guarantees with WL. You know one of those typical contract that says it guarantees 4%. What actually is the guaranteed return on the death benefit (since thats the higher number) assuming death based on their health rating and not some premature death age……..Guaranteed column will show less than 2%…..Yep thats likely less than inflation. So you lost purchasing power on even the death benefit… Look FOOLS GOLD again.
Buyers should do their research but be very cautious when confronted with agents. They may find the agents misrepresent things…
Guaranteed level term life insurance provides a guaranteed level death benefit for guaranteed term, as long 30 years, with no inflation adjustment either.
Presuming just a 1.7% inflation rate (the current CPI) over the entire term, a $1M benefit amount would only have the buying power of $600k, 30 years hence. Presuming inflation of 3% over the term, future value would fall to $412k. Longer guaranteed level terms offer significantly diminishing value.
Whole Life offers a guaranteed level premium, a guaranteed level death benefit, and guaranteed cash value. Presuming just the guarantees, IRR on guaranteed cash value would be an anemic .79%, guaranteed (presuming a 35 year Preferred male over 30 years), which is better than most cash investments (CDs, MMAs, Govt bonds) AND you get guaranteed level life insurance (subject to the same ravages of inflation as guaranteed level term).
Presuming the Whole Life policy performs half as well as currently illustrated (Non-Guaranteed Intermediate, alternative illustration, required in every proposal), IRR on cash value is 3.66%.
Guarantees matter. UL doesn’t offer the same set of guarantees; it’s like locking the front door and leaving the backdoor open.
Buyers should be wary.
In fairness to agents (or not), new agent retention in the industry is a woeful 15% over the first five years, 65% attrition by year two.
Misrepresentations that may occur are more likely the fault of inadequate training, lack of oversight, inexperience or ignorance, rather than willful fraudulent intent.
A lot of buyers buy from a friend or family member in career transition (“to help them out”) rather than an experienced agent.
It’s an unsettling fact, not an excuse.
Thing is if someone is investing over 30 years then they shouldn’t be investing in cash additionally there are plenty of times in history when the actual results from whole life were WORSE than Treasuries so no it isn’t necessarily going to always beat those things in either the guaranteed or illustrated column. For instance if you had purchased a 30 year treasury when they were double digit returns then you beat WL return over those 30 years.
UL isn’t all that different than WL. One can create a UL to behave very similar to WL and vice versa. There typically are slightly more guarantees with WL but that is only as good as a company’s ability to pay. For instance one could buy a gUL. It too would have guaranteed premium and guaranteed death benefit and guaranteed cash value (although almost none). Its standard agent practice to pretend their flavor of permanent insurance is some how better.
Those are an excuse and not JUST Facts. Almost always there is a senior agent on the case as well getting a cut of the action. That agent or the company if it wanted could correct the issues but they don’t. Instead they practically force the agent to give up their friends and family and if they cant come up with more business they give them the boot. Please its a purposefully designed tactic. The industry could easily correct all of it. They could easily teach agents to start with overfunded polices. They easily could come up with computer programs that allow people to make their own illustrations. They could include the IRR on the standard illustration instead of making people request it. They could highlight the breakeven point on the policy. The list goes on and on….They are never going to change the retention and that’s not an accident.
and oh mid points must not be required in all states by the way. I have a bunch of illustrations without them.
That’s my experience too. The agents simply don’t know what they’re talking about. They’re also desperately trying to get established, and to do that they need sales.
Rex, Treasuries have not seen double digits since the mid-1980s over 30 years ago.
Since 1900, Treasuries hit double digits in only 6 years, that’s 110 years in single digits, for those who are counting.
Yes approximately 30 years ago so we can compare actual results with WL and not illusion results. Again WL doesn’t necessarily beat treasuries and I’m not talking about the low guaranteed results.
You like to pretend that if we stay in this low interest rate environment and that WL will beat treasuries. Let’s see what happened in Japan with prolonged low interest rate environment….insurance companies didn’t meet their guarantees… There is no magic in this world. Insurance companies buy mostly bonds/treasuries and take a decent cut and pass some on to the small number keeping their policy in force.
If my wife says “Is that all there is?” to the total of our portfolio + life insurance I’ll come back from the grave and chew her out. It’s plenty.
I wouldn’t be surprised if some of the term lapse rate is from people who bought a more appropriate policy. Hard to say. Really not an issue with a policy that isn’t meant to be held to death anyway. The lapse rate of a permanent policy is far more interesting to talk about.
I hope your wife finds the notion of your returning from the grave comforting.
Given your affinity for the 4% rule, provided you total portfolio (life insurance and investments) is >$6M, she shouldn’t need to leave out any cookies and milk.
Whole life persistency is very different than term life, with an annual lapse rate of only 3% and overall persistency of 86%; older policies have the greater persistency for obvious reasons.
Overall over 80% ofWL polices lapse. Term doesn’t matter. LIMRA, society of Actuaries, heck even some of the no commission agents have studied showing in some cases only 6% are in force at death. About 1/3 of people lose most if not all of the money they put into WL.
Not sure how much you are assuming we spend to need a $6M portfolio.
Whole life lapse rates are way higher than 3%. That’s the annual lapse rate. Older policies should (and do) have lower lapse rates.
On July 1, 2011, you posted, “Let’s say as a partner in my emergency medicine group I generate income of about $225 an hour, and after working 1500 hours for the year, I have an annual income of $337,500.”
I presume your annual income was a hypothetical number.
So hypothetically, a $6M combined portfolio, using the 4% rule, would generate approximately the same net annual income to your dependents.
Why would my dependents need that much income to live on? We don’t live on that much now. Never have. Not even close.
My portfolio + my life insurance proceeds would provide a portfolio that is about 25X what we spend currently (including the 9 vacations in a 3 month period and the wood floors being installed as I write this) and about twice what we really need to have a nice middle class lifestyle.
Suffice to say, I don’t think I’m personally underinsured or terribly overinsured, but thank you for your concern.
Does your left hand know what your right hand is doing?
If you own disability insurance,, calculate your cumulative potential benefit payable (your monthly benefit x 12 x the duration of your benefit period, likely to age 65/67, likely indexed for inflation); this is how much could be payable to you if you become sick or hurt and unable to work.
For example, you’re 35 years old and you purchased an individual disability policy that pays $10k/mo to age 65, indexed for inflation by 3% compounded, your cumulative potential benefit could be as high as $5.7 million dollars ($3.6 million without indexing) payable to you to maintain your lifestyle during a period of disability, and those that depend on you.
But how much life insurance do you own and for how long is it renewable? If $5.7 million dollars is the amount you deemed necessary to maintain your lifestyle during disability, shouldn’t you have the same amount payable to dependents in the event of your premature death? If not, why not? Ask your dependents if they are willing to live on less.
Good thoughts, but you missed two major issues. First, disability is also meant to cover you- that’s one more mouth to feed/clothe/house/transport etc. Second, and more importantly, life insurance is paid out as a lump sum whereas disability insurance is paid out on a monthly basis. For example, a disability policy may pay out $10K a month. Using the 4% rule (which can be debated elsewhere), that’s the equivalent of a lump sum of $120K/year divided by 4% = $3M. So despite the fact that the disability policy will pay you $120K*30 years = $3.6M, a $3M lump sum from an insurance policy will probably provide the same amount of spending money with something likely to be left over at the end of 30 years.
I like the 4% rule (provided the beneficiaries are savvy enough and have the proclivity to invest rather than parking the proceeds in cash, which many do); it is simple to calculate and compelling.
My intention is to recharacterize life insurance as an income replacement product (converting life’s lump sum benefit into a monthly income stream) to quantify any disparity between the two potential monthly benefits (disability and life) and address any insufficiency in serving the needs of the beneficiaries.
A common refrain I hear from disability insurance prospects is, “I can’t live on that amount (monthly benefit).” But in many cases, they are asking/planning for their life insurance beneficiaries to live on even less.
In my experience, the disparity between to the two benefits is far too common with the life insurance benefit amount disproportionately low compared to the potential benefit payable by the disability insurance.
So I would ask your readers to their own math and determine the degree to which they are likely underinsured for life insurance and address the inequity while they can.
I just started 6 weeks ago and I’ve gotten 2 check for a total of $2,200…this is the best decision I made in a long time! “Thank you for giving me this extraordinary opportunity to make extra money from home. This extra cash has changed my life in so many ways, thank you!”
Visit this site….>>
I think it depends on the current situation for the individual. If an individual has exhausted all tax deferred vehicle, whole life might make sense. Check out the blog post here http://genwefinance.com/category/life-insurance/
I agree with two things you said, but I’m going to work it a little differently:
# 1 Whole life rarely makes sense for someone who hasn’t already maxed out all other tax-protected accounts.
# 2 Whole life MIGHT make sense if your have. But probably not. “Might” and “could” are pretty vague terms. They could represent a number like 60% or a number like 0.5%, the latter of which is a much more likely scenario for the percentage of even high earners for whom whole life insurance makes sense.
I think as you learn more about the product you have purchased that you will likely become less excited about it in your writing. It might be fun for readers to follow along with how your policy is going. For instance- how much is your premium and what’s the current face and cash value?
Thanks for the quick reply. Good point. I will post the progress of my Northwestern Mutual (NM) policy in a blog sometime this year and will be sure to keep you posted. I am just paying $300/month for ~$281k in insurance and $6,553 cash value. There are two policies. First policy was purchased in 2011 and currently has $93k life coverage with ~$5,165 cash value. Second policy was purchased in 2015 with $188k life coverage and $1,388 cash value. The biggest risk is the declining dividend rate from NM. However, my purpose is to leave a legacy for my kids or personal causes, which the life insurance component makes sense for me. The goal is to take a reduced paid up insurance at policy year 15 or 20 so I do not have to pay into it anymore with lower life coverage.
To your point, I agree that as an investment in terms of cash value, my money is better off somewhere else and the coverage/return is somewhat of a rip off due to declining dividend rates. Thus, I am better off with investing in the market via equities or bonds. However, I feel that I am already over exposed on those areas and wanted something extremely conservative and safe. The $300 a month if affordable and it is only a small percentage of the pie that will allow me to pay until I yield some decent return. I do cringe when I hear agents oversell these policies as a primary investment.
Overall, I will write a post with my policy’s performance in 2017 with an assumption of lower dividend rates at 3-4 precent.
-GenWeFinance
Paying monthly occurs as an additional finance charge that doesn’t increase CSV or DB. It’s practically paying on cc and paying that off every year.
Every WL company except one decreased dividends for 2017.
I wouldn’t make any assumptions. Just how it has performed. I’d put it in this format:
I mean, sounds like you want it, and you blog, so you might as well let people follow along with you about what your experience actually is, for better or for worse.
Am a 47 year old female just graduating from med school. I would have over 300,000 loan by the time I finished. I heard from a financial lecture is at I for the residents lecture that whole life insurance is one of the best way to protect your income. Problem is that my husband and I cancelled our life insurance some years back after paying for decades. I am not really worried about children college fees, but focus. Ow on retirement, repaying my loan, and helping family. What is a good way to invest in?
As above
The fact that you’re 47 gives you significant urgency as your career will be half the length of that of your colleagues- less room for errors.
The financial lecture was a sales presentation by an insurance agent and likely full of wrong information. Sorry.
Make sure you have any needed TERM LIFE and DISABILITY insurance.
Have a plan to have your student loans paid off in less than 5 years unless you will qualify for public service loan forgiveness.
Max out retirement accounts and invest the money in them in low cost index funds.
Live like a resident at least until the student loans are gone so you can dedicate a large portion of your attending salary to wealth building.
Thank you.
Hoping to get some crowd wisdom here. When I was about to leave residency I was sold a 10 year term policy and a guaranteed advantage universal life insurance policy, each for $1M. The latter is the one I have a question about. The former was canceled when our family grew and I got a larger term policy for 30 years. The basic details of the UL policy are that it guarantees $1M of life insurance whenever I die. The problem is that it’s $641 a month. This is annoying more than it is putting a squeeze on us. I am now 5 1/2 years out of residency, live a frugal life, put away a good amounts of money, max out my children’s 529s as well as the retirement funds. I don’t have concerns about our medium term or long-term financial independence or retirement savings. I do think estate tax limits will decrease by the time I die (hoping many years from now), and I know I can shelter life insurance from estate tax. The CAGR on the $641 per month payments to the point it’s fully paid off (I think around $150K) is fairly good for an assumed average life expectancy (especially once the tax advantaged status is taken into account). So if I’m not worried about retirement, have myself protected with other insurance, fully fund everything I can, and I’m getting a good return on these premium payments, is this really a bad thing? Can I really do better with the next best alternative option with the premium money I have yet to pay? Curious on everyone’s thoughts. Thanks!
Not enough details to know. You can get it evaluated by a professional as discussed in this post here:
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
Remember that universal life is not the same as whole life and brings in a whole ‘nother set of issues (like increasing cost of insurance as you age.)
These policies do always confuse me !!
Are these policies really worth taking !!
WOW!, I will have Limra get me the exact numbers for lapse ratios for confirmation, But I submit to you why, if Whole Life is so Bad do the top 50 largest banks in this country have no less than 10% and as high as 39% of their Tier 1 capital in”Trash” Value Life Insurance? Or Why do the top 1% of the countries wealthiest people own 21% of the Cash Value in this product? Or why do congressman and senators own this stuff, they write the laws around it.Why, because its good real good, and frankly it is the only and I mean only product in the Internal Revenue Code that mentions TAX EXEMPT!! 5, thats right! 5 times. The White Coat Investor Guys just Don’t Get It.
It seems interesting that this Web site has several advertisers for Term Insurance which is the Largest Cash Cow of Life Insurance companies.
Any doctor or anyone for that matter should not just read about Whole Life but study it, go back to your biology class and dissect it! Then and only then will you understand it and contrary to remarks about running from it you will want it and a lot of it! Trust me! It boils down to the Math and Taxes as in NO TAX PERIOD! EVER!!!
I’ve addressed that in “Myth #20, found here: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
and Myth # 21, same link.
I’ve spent plenty of time studying whole life insurance and I still don’t want it. It’s amazing that nearly everyone who thinks it’s great sells it for a living.
Oh, and if you’re interested in the LIMRA statistics, this should help:
https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/
[Ad hominem attack deleted.]
Great article and excellent discussion. I always accepted “buy term and invest the rest”. And then my wife and I started to plan for the future of our Special Needs child. He will need life long support. So after we retire and after we are gone. I am now convinced that Whole Life makes sense in certain scenarios. Harry
http://www.EasyMoneyRealty.com
Well, I am going to start by saying “Thank you” to the WCI for your book and website. Now that will seem ironic since I am a Financial services professional with an insurance company. Yes, I do indeed sell insurance as part of an overall financial portfolio plan tailored to the individual needs and goals of the client that I am working with. (That is my disclosure), now for all that have been reading and pondering all that has been dispensed here thus far, I think it only fair to share WCI’s disclosure, found in the lower left bottom of his page in small font: I am not a financial or investment advisor. I am not an accountant, an insurance agent, nor an attorney. I only have two licenses, one to drive and one to practice medicine, neither of which I do on this site.
“The information on this site is for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. By using this site you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this site.”
Note there is nothing that says you, the individual should take his information and balance it with other points of view, or speak with someone that is a qualified and competent financial planner, but it does say you should be “Entertained”. I for one, wouldn’t feel so good about told in a statement that I should be entertained, but that I should not consider what he is writing to be financial advice, cause, well, that’s the whole reason I came to this site to begin with, isn’t it??? After all, he is the guy that is providing the information to help me, and guide me so that I don’t get burned like he did, but, he just said clear as day that he isn’t advising me, so, now what?
Why do I do this, and at the same time start my comment by thanking this same individual you ask? Simple:
First, you are not here unless you are most likely considering your finances, and on this specific page if you are considering life insurance coverage. This prompts thought, and hopefully you will make a good, personal decision based on research that you did based on your needs. If anyone and this includes the WCI preaches one rule fits all to you, that’s a red flag. I posted his disclosure in part because it is really an indemnification statement that removes any liability from him on any of the “perceived advice” that he is selling you. Yes, He Is Selling You, make no mistake about it. It is perceived advise, in no small part because he has a back up indemnification statement that he makes at the beginning of this page where he underscores his use of language; using terms that are not absolutes in an effort to make sure that he is not quoted as saying anything that could be misconstrued as true advice, but there is the phrase, ” Your perception is your reality”, and after all, if after reading all of his statements you are influenced by them, well, then buyer beware. That brings me to the “selling” part. You see sales is a service, and it is at it’s core, meant to assist someone with facilitating a decision by means of understanding their wants and needs for a product or service after consideration of their overall situation. Sales gets a really bad rap in part because how can you be sure that the person you are working with has your best interests at heart, and what if they are compensated too much for what they are doing?( in you’re opinion) Can I get that same thing for less somewhere else, and if I can, then why shouldn’t it be that way everywhere? Sales is also done with both influence and persuasion, and many equate that with being taken advantage of, and it very well can be if the person you are dealing with is only looking out for themselves, and that sucks. No other way to say it. So, how is WCI selling then? Simple, he is using the art of influence and persuasion to effect your decision tree, not to mention he is getting paid indirectly by his book sales and the ads that run throughout his web page. (not sure if he does public speaking gigs) Notice his web page is a dot com, not a dot org. He is getting revenue from all of this, make no doubt about it, and he is selling it hard to anyone that will listen. He is also using a subtle, powerful type of influence both directly and indirectly aside from his direct statements of OPINION; ( go back to the disclosure statement, gotta have legal for CYA), and that influence is known as third party or sometimes disinterested third party validation. Sir I salute you.
I read every comment listed here so far, every single one and all responses. I found some to be entertaining, some to be misleading, and some to have valid points or counterpoints that when responded to, never got fully debated or addressed, which is unfortunate. Third party validation is when someone that doesn’t seem to have anything to gain, shares their experience, opinion or advice, based largely on their own experience, or even worse, the experience of another that they became aware of, which sets up a whole other problem of credibility and adequate truth, third degree of separation etc., kind of like the commercial “and she told two friends, and they told two friends, and so on, and so on,” …that somewhat dates me, but for you younger folks, consider viral threads on social media and fake news taken out of context getting re-spun to fit the cause they are trying to project, only to get shared and before long you have a false legend that takes on it’s own existence.
So, i also wanted to know why this book, then webpage was even written, what was the motivation for it? Well the WCI got burned, according to himself, several times by unscrupulous advisers and salesman that took advantage of him, and he was so upset by this, he decided to share his experience with others, and even tailor it to a specific demographic of physicians, dentists, and other high earning individuals. He’s looking out for you and your best interests, against the profit reaping financial advisers. Step back from this and you have an Us vs. Them line drawn in the sand, with him strategically placed on your side with your best interests at heart, and because you never paid him, and may have even been told about him and his enlightening information by a friend, who was told about him by a friend; ( weird how that sounds so familiar), well it must be true for you as well. Hopefully you have stayed with me on this so I can inform you of the Fiduciary Law from the Department of Labor, the SEC, FINRA as well as some other aspects that exist in individual states to protect all consumers, not just those that wear white coats at work or make a lot of money. The Fiduciary Law is, in effect the Hippocratic Oath that was devised to protect the consumer from unscrupulous purveyors of any of these financial protections or investment products. FINRA is the self regulatory body that over sees any complaints filed about your experience, and can impose fines, suspension, expulsion on any individual found to have caused harm as well as award damages and refunds, with the SEC taking it further to even allow for further punishment as determined. You, in the medical profession have malpractice insurance, we have errors and omission insurance, but it is there for the same purposes: You screw up, we cover you for the most part.
In conclusion, there is a need for investing, and there are many ways to do it. There is a need for insurance, all types, to cover all aspects, and they take many forms, and there are a lot of choices available to you. Each person has an individual need and circumstance that is used to put together their plan. No one’s is the same. Risk tolerance, net worth in relation to liquid net worth, timelines, debt to income ratios, goals, there are a number of facets involved. All of the statistical data quoted here, is shared to back up a point, but much of it isn’t giving you a complete picture. As you go forward, remember to ask questions, research asking the right questions as they relate to you, and make sure that the person who you are working with asks you a bunch of questions. The financial needs analysis that WCI so cavalierly dismisses, is in fact necessary information gathering that is needed to make informed fiduciarily responsible planning recommendations and is kept on record for compliance review, bet you didn’t think that from reading his OPINION on it, did you?
Again, I salute you, thanks for energizing the discussion. You did in fact, provide a service in that those less capable will not be able to speak intelligently and responsibly and will therefore be taken out of contention to provide services to those here that do need them.
Looking forward to the responses
TLDR. That must have taken like 2 hours to write. It might even be longer than the post itself.
WCI, I’ve always agreed with you on “buy Term, invest the rest” and was never going to consider perm life insurance. But this made me thinking – someone I know (age 55) got a quote for Guaranteed Universal Life, a $15k premium for 10 years gives him $500k guaranteed death benefit. If one really just want to leave something tax free to the heirs, wouldn’t this almost-risk-free return ($500k for $150k) look pretty decent?
Whole life insurance or better yet Guaranteed Universal Life insurance is a great way to leave behind a defined amount of money tax-free to heirs.
Of course, you are likely to leave more money behind (still tax free) to your heirs by investing in real estate or stock index funds in a taxable account. That all gets a step-up in basis at death, so passes tax-free. But there is no guaranteed. So if you die next year, they get much more with life insurance than the investments. But if you die at life expectancy or later, you’ll (they’ll) come out ahead with standard investments.
As to whether $150K now for $500K later is a good deal or not, it depends on how much later that later is. If it is next week, it’s a great return. If it is in 40 years, it’s not so great. You can run the numbers to take a look:
Die in 10 years =RATE(10,0,-150000,500000) = 12.79%
Die in 20 years =RATE(20,0,-150000,500000) = 6.20%
Die in 30 years =RATE(30,0,-150000,500000) = 4.09%
Die in 40 years =RATE(40,0,-150000,500000) = 3.06%
Die in 50 years =RATE(50,0,-150000,500000) = 2.44%
So the question is what is your life expectancy at age 55? It turns out it is about 25 years (28 female) on average according to the SSA.If you’re healthy with good genes, of course, it’s longer.
Die in 25 years =RATE(25,0,-150000,500000) = 4.93%
If the person you know is happy with that, then GUL is a great option. But personally, I think for money I’m going to commit for 25 years, I’d like to see a higher return.
Thanks for the fast and detailed response. That helped a lot! Love what you did with the RATE function. Is there a way to incorporate the fact that the $150k premium is paid in 10 years into the calculation?
That will improve the return. It’s easy to do that for the ten year example. It looks like this:
=RATE(10,-15000,0,500000,1) = 21.17%
But to pay for 10 years and then not pay for 10 more is a little more complicated. I’m sure some Excel whiz could you teach you how to do it easily and beautifully, but I usually play around until I get it about right. Let’s just do that for the 25 year scenario. We know it’s going to be something like 6%, so that’s where I would start playing around. And after changing the rate value a few times in the future value functions, I find it is 5.98%.
=FV(5.98%,10,-15000,0,1) = $209,338.40
=FV(5.98%,15,0,-209338.40) = $500,273.64
Terrible? No, especially when it comes with the guarantee that if you die early, you do even better.
But is it awesome for money you’re locking up for decades? Well, not really. It wasn’t that long ago that my money market fund was paying 5.25% and it’s really not all that hard to find an investment property that will make 9 or 10%.