Whole life insurance has been a pillar of income to life insurance salesmen for years. It is often recommended, particularly to high earners, as a guaranteed investment with some wonderful tax benefits. Alas, its flaws generally outweigh its advantages. Here's why:
Cons of Whole Life Insurance:
1) Whole Life Insurance Costs Too Much.
When a whole life insurance policy is sold (and they're always sold, never bought), the buyer and seller generally focus on the investment portion of the policy, not the insurance policy. The silly buyer just naturally assumes he's getting the insurance portion at the going rate (such as what he would pay for term insurance.) Fool. Like any business, they charge what they can get away with. If you're not paying attention, you'd better believe the price gets jacked up. A bigger problem is that young people can't afford enough whole life insurance to cover their actual need for insurance, so they end up buying a separate term policy anyway, or worse, they don't and walk around under-insured.
2) The Fees are Too High.
You don't pay the fees directly, but you do pay them with lower returns. For example, the commission on a whole life insurance policy is generally 100% of the first year's premiums then 6% of premiums every year after that. That's money that doesn't get invested on your behalf. By comparison, the commission on a term policy is about 50% of the first year's premiums, then 4% of premiums after that. It's pretty easy to see what the financial incentive is. Sell whole life instead of term, and upgrade the policy at every opportunity. 100% of a new policy is far better than 6% of an old one. “But you don't pay the commissions, the company does” argues the salesman. Where do you suppose the company gets the money from?
3) You Don't Need a Middleman for Your Investments.
Consider what the insurance company does. It takes your premium each month, pockets its profit, puts a certain percentage of the premium into a pool to pay the benefits of those who die, and then invests the rest in a relatively conservative portfolio, such as bonds. You can invest in bonds directly. Which return do you expect to be higher- the one where they shave off some profit before investing, or the one where you invest your entire lump sum? It's like buying a load mutual fund. In fact, some cash value life insurance policies actually DO HAVE A LOAD. Can you imagine? Not only do you have to pay for an expensive insurance portion, you then have to pay just for the privilege of investing your money with them.
4) Complexity Favors the Issuer.
After a while, people figured out that whole life insurance was a rip-off. So to disguise that fact, the companies just made the products so complex that only their actuaries could figure them out. Even those who have spent a great deal of time trying to figure these policies out don't understand them. Even the guys selling them don't completely understand them, but you better believe they understand the commission structure. Suffice to say, the more complex it gets, the worse a deal it is for you.
5) Even When it Works Out Okay, it Takes a Long, Long Time to do So.
Most whole life policies, if you hold them long enough, actually have an okay return. The returns often even beat inflation. Unfortunately, that usually doesn't happen for a while. Take a look at this chart of the actual returns of a policy:
This chart, from the Visible Policy (great site by the way) illustrates 4 lines demonstrating the actual performance of the site author's whole life policy. The solid green line is the cash value of the policy. The thin line is the total of the premiums paid into the policy. The reddish-orange dashed line is the effect of inflation on out of pocket dollars, or the real total of the premiums paid into the policy. The blue dotted line is the total cash value of an investor who bought a cheap term policy, and then invested the difference between the whole life insurance and term life insurance into a good bond fund. The left axis is in dollars, the bottom indicates the policy holder's age.
There are several things to notice. First, it took this particular policy owner 8 years just to break even, 12 if you actually consider inflation. 12 years is a long time to have a negative return. This was particularly true for me. The policy I once owned was still in the red after 7 years when I cashed it out after realizing the error of my ways. It should be noted that this policy owner has done all he could to minimize the effects of the fees. He bought a good size policy ($100K), he pays annually instead of monthly, and he bought it from a mutual life insurance company. And still, after 14 years in the policy, he is barely beating the total of the inflation-adjusted premiums and cannot even keep up with the guy who bought term and invested the difference in lowly bonds. I'm a pretty patient guy, but that's a long time.
Now, these policies eventually do give you an okay return after 30-40 years, especially when considering that the proceeds are tax-free. Unfortunately, almost no one sticks with them that long. But if you've had one for many years (say, more than 10), think twice before cashing it in.
6) Your Return Will be Much Closer to the Guaranteed Amount Than the Projected Amount.
When you are shown an illustration, they always show you the projected amount, but you don't ever get that. There may or may not be a chart of the guaranteed amount, which will be significantly lower. But you ought to pay far more attention to that, since the company has just about zero incentive to pay you any more than the guaranteed amount. In my limited experience, I barely made more than the guaranteed amount and didn't get anywhere close to the projected amount.
7) You are Not Adequately Paid for the Loss of Liquidity.
Stocks, bonds, and mutual funds can generally be cashed out any day the market is open. You can change investments or use the money for living expenses without much hassle. There are only two ways to get money out of a whole life insurance policy. The first is to surrender the policy. Since your returns don't even start becoming decent until after the first decade or so, it doesn't make sense to be surrendering policies frequently. That just enriches the salesman and the company at your expense. The second way to get to your money is to borrow it from the policy. This has a few issues. First, borrowed money is no longer available to your heirs as part of your death benefit. Second, just because it's your money you're borrowing doesn't mean the interest you're paying on that money goes to you like with a 401K. Some of it usually does, but not all of it. Lastly, in some complex cash-value policies, borrowing too much can actually require you to have to put more in each year to keep the policy in force. Heaven forbid the policy collapses on you and then you have to pay back all the money you've borrowed. Not a good thing when you're obviously short of cash (or else why would you be borrowing the cash value in the first place.) The buyer of a whole life insurance policy should be well paid for giving up this liquidity. Unfortunately, he is not. In fact, he won't even perform as well as an all-bond portfolio.
8) You Probably Don't Need the Income Tax or Estate Tax Benefits.
Insurance salesmen are quick to point out that since loans from your insurance policy are tax-free they're somehow better than 401K or IRA money. Never mind that you paid all those premiums with after-tax dollars. The proceeds should be free! The death benefit is also tax-free, which provides a way to avoid estate taxes for wealthy people. Of course, under current law, a couple doesn't even start paying estate taxes until $10 Million, a sum most doctors won't reach. And if you start getting close, there are other things that can be done, such as trusts and gifts to reduce the size of the estate. You could even, heaven forbid, spend the money on something fun or give it away to charity.
Pros of Whole Life Insurance
Now, I can think of a few reasons why whole life may be beneficial to you. Here are four:
1) You Don't Have the Discipline to Save Enough Money.
The idea behind buying term and investing the difference is that you actually invest the difference and then at a certain point are wealthy enough to self-insure against your death. If you can't do that, or don't want to, then you might be better off buying whole life insurance. Like a mortgage forces you to accumulate equity, a whole life insurance policy forces you to accumulate cash value. It might not be at a very good rate, but at least it accumulates. Many people don't save any money. Many of those who do bounce around from investment to investment, trying to time the market unsuccessfully. You're better off slightly under-performing a bond portfolio long term than dramatically under-performing a bond portfolio by being a crappy investor.
2) You Like Guarantees.
A whole life insurance product has a guaranteed return, no matter what happens in the markets. That guarantee is worth something. Probably not as much as you're paying for it, but it's worth something. If the next 30 years looks like the 2000s in the markets, those who bought a big fat life insurance policy instead of investing in stocks and bonds might have the last laugh.
3) You Have Already Been in a Policy for a Long Time.
As mentioned previously, after a decade or two, remaining in a whole life policy can actually be a good idea. The commissions and fees are water under the bridge now, so you might as well take what you can get. Especially in an era of low interest rates like now.
4) You Have a Need for Permanent Insurance, Especially as Part of an Estate or Business Plan.
Many undersavers have a need for permanent life insurance because they never become financially independent and have someone depending on them, such as a disabled child, even in their later years. If your child or spouse is dependent on your social security or pension payments, you'd better have a policy in place to protect that income stream. Most of the time, your spouse will get at least 50% of your benefits, so that doesn't become a big issue. If you save adequately, you can provide for a disabled child's future using your savings instead of life insurance proceeds.
More commonly, a wealthy person might have an illiquid asset, such as a farm, some rental properties, or a business. When that person dies, the asset may have to be liquidated rapidly at an unfavorable price to pay out the will proceeds or perhaps even pay the estate taxes. The death benefit of a whole life insurance policy can cover those costs. A partnership might also buy a whole life insurance policy on each of the partners so that in the event of death, the proceeds of the policy can be used to buy out the heirs of the deceased, avoiding turbulence in or even failure of the business. A term life insurance policy can often be used for these purposes, but not always.
There you go, 8 reasons to avoid it, and 4 to consider it. Try to resist the urge to leave yet another comment on this post. I know it's hard, but you can do it.
[A Note From The Author: This is the most visited post on this blog. If this is your first time here, welcome! This post has generated more hate mail and hate comments than all of my other ones combined. There are over 850 comments on it, which may take you over 4 hours to read. However, after two years of arguing with whole life insurance salesmen in the comments section of this post, I did a series of posts called Debunking The Myths Of Whole Life Insurance that quite frankly is better written than this post. I suggest you read that series instead of this post as it includes all the useful information in this post as well as in the lengthy comments below it. Since there are already 850 comments on this post, if you sell whole life insurance, don't bother leaving a comment on this post. Just send me an email telling me how big of an idiot I am. Please put “Whole Life Insurance is Awesome!” in the title so I'll know to delete it without opening it. ]
Excellent and well balanced post. Having recently married an ER doc, I have been busy extracting her from the clutches of the financial industry. Northwestern Mutual had its claws in her pretty good. Upon first blush, I thought for sure I was going to jettison the 500K Whole Life policy ASAP. Instead I concentrated on getting rid of the crappy fund of funds investment she had and the accompanying front end load and high expenses. I’m keeping the whole life policy for now because of how I weigh a few of the factors you list plus one you miss. I believe most of these policies are secure from personal injury judgments. Moreover, for those who are lucky enough to have higher assets, there is something to be said for the Guarantee. For you Interventional Radiologists and the like, you only need to get rich once. I don’t think it hurts to have a portion of the portfolio in a good policy like this and know it is rock solid (I am assuming a policy with a very good company). The long and short of it in my mind is that they are most well suited (though certainly not a necessity) for the well-heeled…
Matt P,
Congrats on your your recent wedding. Northwest Mutual is a good company in the Insurance industry. The 500k WL policy is good to have, if you request an In-forced Illustration from the company they will send you an updated Illustration showing how the 500k Death benefit portion has grown through the years and how it will continue to grow. That being said your premiums are based on the 500k not what the death benefit is today. So like a house you are paying less then what it is worth down the road.
You are right the cash value is creditor protected. Most Larger Mutual Life Insurance companies have a modest return of about 4% Based on dividends. The cash value can be withdrawn tax free and grows tax deferred. You don’t get a 1099 at the end of the year for the growth in these policies. You have the ability to fund more the the premium which allows your cash value to increase and to protect more of your money.
A 401k has a 10% early withdraw penalty, is 100% taxable, and is tied to the market. In 2008 people with $$$$ money in their 401k took a huge hit. but people with Whole Life Insurance did not.
Bill (Voss)-
It’s inappropriate to use two different names on a thread on the internet. Please pick one and stick with it.
A 4% return is reasonable for a cash value policy, but a policy bought today will require decades before the annualized return gets up to 4% due to the very poor returns in the first decade from commission and insurance costs.
J. it is a pleasure to meet you 🙂 I loved your about it was interesting. I would like to stick with Bill if you wouldn’t mind? I understand where you are coming from in a sense I am not a doctor as you know. But I was in concrete for over 20 years. Financial guys don’t go knocking on concrete works doors all that much. I left that job to pursue more knowledge about the financial world that was a mystery to me, like you did. You are helping your fellow doctors and I am trying to help my fellow construction workers. I am still learning but it seems as things change we all have to keep learning or the world passes us by. I don’t claim to be an expert, but a student.
I loved reading through your blog and the banter seems to be interesting. I love learning all sides of things. For me I didn’t get in it for the money but for the know how. I love learning about new things, medicine has always facinated me. I do have a few personal friends that are in the medical field, They know what I do these days for a career and if they have questions I’m more then happy to help.
I did specify that there really isn’t a % return its a dividend. But like any financial product you purchases there are always some expenses wouldn’t you agree? The wl is not an investment by any means.
This is a silly argument. Yes, in 1 particular year (2008), the second worst year for the stock market, people TEMPORARILY lost, but 10 years later, (2018) investments were clearly better staying in the market compared to term life insurance.
The stock market goes up and down year to year. You just hand selected a bad year, which is very misleading.
This post just proves how slimy and manipulative insurance salesmen can be.
If 50% of your article had true facts you would be praised, unfortunately a lot of your information is very misleading.
agreed.
8 reasons to avoid Whole Life
1- Insurance cost too much.
Since you are analyzing this policy based on economic efficiency then the problem is most of them are poorly designed, concentrated in highest debt benefit at the lowest premium.
That is why insurance cost too much, a well design policy concentrates on CV growth, the insurance coverage is reduced to allow efficiency on the growth of CV.
2 The fees are too high.
Fees are determined by amount of base death benefit, the lower the base debt benefit, the lower the fees.
3-You do not need a middle man for your investments.
A company promises interest and pays non guaranteed dividends as earned.
On a policy designed for banking, the investments are up to you. One of the safest ways to grow your policy is financing your own needs: Pay that car loan to your policy at 8%, pay that credit card balance to your policy at 16%, You pay that to the bank, don’t you?
4- Complexity favors the issuer.
I give you this one, but learn to borrow from your policy to pay for what you were going to buy anyway and pay it in the same terms you would pay the banks and you will do great.
I do not think that is too complex.
5-Even when it works out OK it takes too long to do so.
Want quick profits? go buy the lotto. Nothing great in the world has ever been achieved without put in the time and effort. A well design policy will give you liquidity and protection so you can engage in your own projects and profit overtime.
6- Your return will be much closer to the guaranteed amount than the projected amount.
That goes for most products out there from stocks to mutual funds, why singling on whole life insurance? Plus with a whole life designed for banking the returns are up to you not up to a glorified manager that makes money when you win and when you lose.
7- You are not adequately paid for the loss of liquidity.
I do not know what you are talking about here since in a well design policy for banking you have access to at least 90% of your deposits within 30 days of the policy being funded and approved.
8-You probably do not need the income tax or the estate tax benefit.
How do you know that? You do not know who is reading your article and badmouthing a great tool can prevent many families to benefit from it.
Your pros are OK except the first one so I go along with those. But there are many more pros:
Liquidity, use and control
Legal protection in many states
Collateral for a bank loan
Tax free withdrawal
High contribution limits
Disability protection
Educational end economic legacy
Works as a check mechanism for inflation
Protection for your loved ones.
Documentation: “Becoming your own Banker” by Nelson Nash
“How Privatized Banking Really Works” Carlos Lara & Robert P.Murphy Ph. D.
“Pirates of Manhattan” Bary J. Dyke
Well written reply, but I would have not given him #4 either. Just because he doesnt understand how participating life insurance works and its to complex for him, he is calling it a rip-off and worse for clients. So I wont go into detail about ADO’s ( Additional Deposit Options) because its to complex for him.
I would go on and on, but to keep it simple how much dividends in a participating life insurance were paid out in 2008? Its part of your diversified portfolio!! What a poor and misleading blog and I never reply to these things.
Yes, it’s quite clear that you never reply to these things. That’s why you’re down here at comment # 890 replying on a post that specifically instructed you not to bother leaving a reply.
Jorge-
Thank you for your long and extended comment. I note to readers that Jorge (based on his link) is some type of a promoter of the concept of “bank on yourself” which has been discredited many times and in too many places and most likely makes his living selling insurance policies. I limit my comments to his criticisms of the article, rather than the whole bank on yourself concept.
1,2) I agree most of them are poorly designed. Yes, it seems pretty clear that when you get less insurance, the fees should go down.
3) This involves the bank on yourself idea. I have a better idea than borrowing from a whole life policy to finance stuff you want to buy. It’s called “Saved Money.” It’s not like it’s a free loan. There are fees on loans from most whole life policies. Plus, any borrowed money is simply subtracted from the death benefit at your death, reducing its value as an insurance policy. Readers need to think about what an insurance company does. It takes the money, pays its profits, puts some money toward insurance, then invests in the same stuff you and I can invest in. That’s called a middle man. Cut him out and your expected profits rise.
4) Same terms I’d pay to a bank? Show me the policy loaning money at 2% after-tax. That’s what I get from the bank for my mortgage. I don’t borrow from banks for other stuff.
5) Few would argue 12 years just to break even is a good investment. Pretty gutsy. Nice try though. I don’t think anyone is going to buy that one.
6) I’m not sure you understand how stocks and bonds work. There isn’t a guaranteed return.
7) A “well-designed policy for banking” isn’t a typical whole life policy as I understand it. It’s much more of a universal life policy (which isn’t usually a good idea either). The article is about whole life. And certainly 90% of the first month’s premium IS NOT AVAILABLE to the investor within 30 days. It’s in the salesman’s pocket.
8) I’m confident I know my readers better than you do. I’m not worried I’ve badmouthed a good tool.
As far as your pros:
Liquidity, use and control–Not liquid, much harder to use and control than similar investments.
Legal protection in many states–True as noted by previous commenter, but so are 401Ks, IRAs, and sometimes even home equity. This is a much smaller issue than most docs believe, especially those with a malpractice and umbrella policy.
Collateral for a bank loan– Avoiding bank loans is probably a good idea anyway.
Tax free withdrawal- Borrowing is not the same as withdrawal. I’m concerned you seem to not be aware of the difference. There are some tax benefits to cash value insurance, just usually not enough to make up for the downsides. The withdrawal might be tax free, but they usually aren’t fee free. So basically, you pay money to borrow your own money. Doesn’t seem so smart to me.
High contribution limits- Yup. You’ll sell us as much as you can.
Disability protection- Uhhhhh…….I’m confident there are better ways to cover this important need. Again, complexity favors the issuer.
Educational and economic legacy- there are lots of ways to leave a legacy. Cold hard cash works fine.
Works as a check mechanism for inflation- Better ways to do this.
Protection for your loved ones- Better ways to do this (such as term life)
All in all, you’re entitled to your opinion that a whole life or other cash value policy is a great idea. But I have yet to meet someone who doesn’t directly profit from selling life insurance that thinks these are good investments. A wise reader needs to ask himself, “Why is that? Is everyone else just too dumb to realize how good these things are?” Then he’ll realize how unlikely that is.
This is the most irresponsible faux attempt at finance writing I have seen. Compound that with the hubris of the writer and its downright dangerous to those who are uninitiated.
Have you done any real research? Do you have any idea what a modified endowment contract is? How executive bonus plans structure these contracts? The difference in expense ratios from one carrier to another? How insurance planners can strip out comission and insurance cost to increase the IRR? The billions that corporate America plows into these plans you say are worthless? Not to mention banks for their tier 1 capital reserves? The difference between portfolio based policies versus variable? How a dividend works? The difference between public and mutuals? Do you have any working knowledge of the tax code or it’s impact? Can you explain the difference between Universal and Whole life? Do you understand their different expense structures?
Not knowing the answers to these concepts is not a crime, but purporting to be the final arbiter for every physician who reads with respect to the viability of this asset class is insane and reckless.
Do you realize that it is a matter of public record that Ben Bernanke, Chairmen of the Fed invests the vast majority of his own personal retirement dollars in fixed annuities, an instrument that gains him access to the very same general accounts that you are claiming are so poorly performing. Maybe you can offer him your counsel.
You actually suggest a single investor can easily achieve a superior performance and asset diversity by buying bonds compared to a carrier spreading out 150 billion dollar portfolio worldwide across myriad asset classes – public and private equity, real estate, preffered stock, income producing assets, fixed income, etc.
Have you spent ANY time looking at the investment reports of these companies to see how their portfolios are allocated?
How can you tell investors you have never met what they should or should not be investing in? Do you realize that we’re you securities licensed or a fiduciary you could be sued and or criminally charged for throwing out such reckless and uninformed “advice”? but since you are simply a blogger you a free to throw out this egregious junk and physicians may take your lead because you both carry and MD.
The article describes the author performing the research, and describing the methods including Visible Policy reference.
I do not believe anywhere in the article that the author establishes a fiduciary relationship with the reader. Under free speech he is entitled to his own opinion just as much as yourself.
And for the record, the article was about life insurance, not generalized fixed annuities which is a different investment category. So the Ben Bernanke statement is as appropriate to the conversation as me noting that there are many galaxies in the universe. While there may be a bunch of book smart, dumb as brick doctors out there, does not make all stupid. Regarding the jargon that you throw out, who cares, it is useless not knowing the totality of the terms and conditions. Are you aware that oxygen saturation, pH urine and cardiac output? Well, those jargons bring the same utility to the conversation “executive bonus, expense ratios…” since the terms by themselves are worthless.
im so glad the insurance sales people have come to the party since they show how desperate they are to sell whole life to us physicians. By the way, i personally understand all those terms. While i agree that the blog has some errors, if one buys permanent life insurance and the primary reason isnt a permanent death benefit then they have made a mistake. If you want to take some loans out then buy whole life overfunding it with maxing out PUAs just below MEC level from a non direct recognition company possibly with a limited like 10 pay option or blending it with term. Sadly most agents dont present policies that way bc they dont want to reduce their commission. If you dont want any loan possibilities but want to pass wealth then buy a no lapse gUL but realize you have less flexibility. Too bad insurance agents arent held to a fiduciary standard. The biggest scam they try on physicians are 412i and 412e plans with whole life insurance within the plan. Avoid insurance agents at all costs for your investing advice and make sure you research insurance before purchasing it since so many shouldnt be trusted.
I’m an accountant.
That either also sells whole life or unfortunately recommends it to clients as an investment. Did your favorite agents send you a nice Xmas gift?
Welcome Ray. Thank you for your comment. The MOST irresponsible financial writing you’ve ever seen? Really? I’m honored to be considered tops among all the financial porn out there.
I don’t recall calling any plans worthless my friend. Nor do I recall discussing fixed annuities (which I think can be great) or MECs. My assertion is that they are inappropriate for the vast majority of physicians.
My audience is also not a bunch of corporate executives earning millions per year for whom these policies may be quite beneficial.
It’s noteworthy that I have yet to meet a doc who didn’t regret buying a cash value life insurance policy, and I know a lot of doctors. Why do you suppose that is? Surely some ought to be happy with their polices, no?
Luckily for a lot of the guys selling this stuff, they’re not fiduciaries either. Those pesky bloggers, shining lights where they shouldn’t be shined…
Wow, Ray. Your comments really crystallize why so many us that read this blog are distrustful of people like you. You didn’t explain or refute anything. You basically threw out a bunch of terminology you probably learned once and now struggle to understand yourself. Please feel free to explain. All I see is a baseless attack with words like “insane” and “reckless” without any justification. And why is it at all relevant to physicians how Ben Bernancke invests his retirement savings? Presumably he has the background to make educated decisions regarding his investments without having to rely on a self-serving financial adviser or insurance salesman to make recommendations.
Distrust? Northwestern Mutual has averaged a 8% return on investment since 1929(don’t quote me on that exact year) while the stock market over that same period averaged just over 10%. What’s the difference? The taxes! What were people doing in 2008 cause they had no guaranteed income? They were working when they were suppose to be retiring!
Dividends are NOT returns. This is a key point to understand with cash value life insurance. Even the dividend rate isn’t 8% on average. Take a look at this chart:
http://media.nmfn.com/contentassets/pdfs/NM_Dividend_Interest_Scale.pdf
1872-2006 there were only 22 years with 8% or higher dividends. I don’t see how you get an 8% average out of that. I don’t have time to add it all up and divide by 134, but I’m confident it’s well less than 8%. At any rate, the likely “return” on cash value for a policy held until your life expectancy going forward today is ~2% guaranteed and under 5% projected.
Where else in the world can you get 2% guaranteed? (and I mean truly guaranteed?)
If 2% guaranteed is your goal, and you’re willing to hold for decades to get that, then I think WL is a great way to meet that goal. Chances are decent that you’ll even do a little better.
Whit coat, you are right there is not rate of return on WL policies it is based on a dividend from the Mutual Life insurance company, when they make a profit you receive a dividend based on the amount of Death Benefit that year. But In WL policies the death benefit also increases when the cash value does. Lay-mans terms people use the words Percentage. But it is not. In percentages 2.5% is the low guarantee up to about 4.5% max. You do have to remember a Dividend is not Guaranteed, so the strength of the company is important to look into if you are basing things of dividends.
the reason your cash value is lower then what you paid in is more based on the cost of the actual insurance, in the first year the commission plays a part. The owner of a company doesn’t receive the full amount of a product they sell since the have to pay expenses first.
Would you agree all people are different?
That being said, there isn’t one type of policy that fits everyone. Each person should take the time to see what is in their best interest and how much Death Benefit they will need for the years to come. Whether that is a term policy or permanent. Also based on their budget.
No, the dividend is NOT based on the death benefit. It is based on the cash value. Look at an illustration. Let’s say you have $50K cash value on a policy with a $1M death benefit. The company pays a dividend of 6%. Are you suggesting your cash value increases by $60K? Of course not. It increases by $3K.
WCI,
The dividend is base both on the cash value and the death benefit.
For instance if 2 people bout stock in the same company but one bought 50 shares and the other bought 100 shares at the end of the year which of the 2 will get more back? (if all things equal) The one with more skin in the game will. They will get the same % but based on the one with more shares, he will get more of a return.
Same goes with Permanent life Insurance(PLI). The more DB you have the more skin you have in the game from the jump (both being equal)
But you are right when using a % its based on the CV. If you have more DB then you will get a bigger dividend then the one with less DB
Wow I think White Coat Investor touched a nerve! Keep up the good work, I plan on staying far away from whole life.
The bottom line on whole life is always that you shouldnt buy it unless having a permanent death benefit is the primary reason. A small percentage of people actually need a permanent death benefit and some want it even if that means they have to skimp for themselves. Since these groups arent too many people, agents and the like need to come up with all sorts of twists and bogus logic to make you think you still need or want it. Most of these people get 100% of their “education” from the insurance companies and that “education” is just what angles to push it on you. They arent required to understand the policies in much detail. Those guys above likely wont come back since those of us who really know the topic could just put them to shame.
Rex,
If I may ask you a question with out offending, You said you really know the topic, how did you come by this information? I am interested in learning more.
People shouldn’t have to skimp on themselves you are right. But what twists and bogus logic do they say to get people to think they need it?
I’m surprised a life insurance agent feels a need to learn more about whole life insurance from some guy on the internet. Don’t they teach you anything about this stuff before you start selling it?
WCI,
I was just asking a simple question it seems he is an expert(without saying expert) but what I have read was more generalities then facts. So just a Question.
To answer your question, yes. We go through extensive training and education before we get to the selling point. As I said before I am not an expert. If questions do arise that I can not answer I go back to my office and research before I answer them at a later date.
Something you should know: I got into the Infinite Banking Concept as a consumer.
All I have learned was done on my own research. No insurance company teaches the IBC or Bank on Yourself (The IBC is a financing concept). They teach and sell life insurance.
On the other hand Insurance companies promote and teach solutions to owners of companies and businesses that use permanent life insurance as means of promoting business stability, liquidity enhancement and removing uncertainty from the business future with protection and access to capital.
Insurance Companies make more money on Term life insurance. What is wrong with receiving low premiums with 97% probabilities of having to give nothing in return like University studies document.
A little bit of a challenge here: I read Pamela’s Yellen book a while ago and I know how famous Dave Ramsey and Suze Orman are condemning whole life insurance and pushing people to gamble in stocks and mutual funds.
Well, Dave and Suze still haven answered the challenge that Pamela threw at them in her book and openly on the internet.
Pamela challenged Dave and Suze to debate and prove that buying term life and invest the rest was superior to growing wealth by using the IBC concept (bank on yourself).
The bet is $100,000.00 dollars.
You guys can accept that challenge also.
I would like to learn from somebody with real proof that I have been deceived and should embrace a different way to protect my wealth and loved ones.
Go ahead and make some money; You do not have to fork any money if you do not succeed.
Wait, so I can purchase a minimal 10K term life insurance, and a 10K whole life insurance, take the savings from the term life insurance and place them in US bond for 1 year and then at the end of the year when I surrender both policies Pamela Yellen will give me 100 grand if the option with term life yielded more than that of the whole life insurance? Where do you have that in writing or at least a web site? I am fairly certain I just lost a lot of money, but I would be making a lot more from the 100K!!! Please reply, I am not allergic to money!
We are prayed on by the insurance industry! “Easy Doctor money” as we are known to them. Enough!
I have read that book in addition to several others on the same darn concept. Just to clear something up that is different than what WCI posted, typical BOY strategies at the moment use whole life although the concept doesnt preclude using other insurance products.
Sadly that book doesnt tell you the full truth. There is nothing special about BOY. It uses the concepts i mentioned above. They prefer Lafayette and then NYL if memory serves me correctly. They have reasons for this beyond their own concept.
Nobody here is promoting dr or so for investing. They stink at that. They are good motivators to get the poor out of debt. Using them here is ridiculous.
Finally nobody can actually prove which is better bc the actual return on whole life is never know ahead of time. That being said, it doesnt make any sense for it to provide better returns. Why not have them prove the opposite? They cant.
Rex,
You are right you can do better in the market then in WL, The difference is the market is riskier the a WL Policy. Permanent life insurance is for safe money. It gives a better percent then the banks offer, it has a death benefit attached to it. In case you don’t make it home tonight your family with be able to keep their same life style in most cases. It has a waiver attached with it that says if you get disabled the insurance company will pay your premiums, so the death benefit stays in force. You mentioned NYL they are the biggest and strongest Mutual life insurance company in America. I have been doing my research because I am looking into the best for my family. But I do like this blog.
You should mention you’re a New York Life insurance agent when making statements like that. You really lose a lot of credibility when you don’t do that.
I agree that whole life insurance is pretty safe, but I disagree that it provides a better return (I assume that’s what you mean when you say percent) than banks offer for at least 10-15 years when it breaks even.
You can protect your family’s life style just fine with term insurance.
WCI,
Credibility or not I was speaking the truth about that LI. If looked up you would find that as well.
What is the % return right now from a bank..? maybe 1/2%
When what breaks even? The wl both term and perm can protect your family, the difference is that as you pay in to the term for 20-30 years all the money you put in you never get back (unless you die then your family gets the $) say you pay $50 a month for 30 years and you didn’t die, you paid in $18,000. With wl you will pay more up front because the DB will pay off (the company understands that risk so that is why it costs more) but say the same amount of insurance DB costs you $50 a month and you pay in 30 years and you don’t die you have paid in $18,000. But as you stated you break even in 10-15 years and you will have accumulated more then you put in by the 30th year. You are allowed to pull out the $18,000(get it all back) you put in and use it for anything you would like. But there is still more $$ in the policy.
The DB of the term stays level for the 30 years but the DB of the wl increases during the 30 years. In which case you are actually paying less premiums in then the amount of DB you have. Kind of like building equity in your home.
When the cash value becomes equal to premiums paid, even if you subtract out the cost of an equivalent term policy.
The problem with term is that it will expire! My term will expire in 10 years, but I do want to leave DB to my kids. It’s like using a smaller amount of money (1/3 or less of DB) to earn a bigger amount. Also my DB increases when cash value increases. Isn’t that a nice gift to kids? I’ve also bought WL for my kids. Since they’re young it’s much cheaper than mine. I’ve tried the stock market for many years and not doing well. Plus my 401K is in stock market so WL is a diversification.
Yes, it’s a nice gift. But which would you rather leave to them? $1M in tax-free whole life death benefit or $3M in tax-free mutual funds?
I’m sorry you’re not doing well in the stock market. I would suggest this post: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
You can diversify into horse manure too, but the goal is to find something not correlated with your other investments that also has an attractive return. Whole life only gives you one of those things in my opinion.
Couple points.
First, Bernanke’s personal investments are irrelevant for two reasons. One, he has more limited options for investment in his position. He can not simply put money or take money out of a bond fund or equity fund for instance without at least the appearance of a potential conflict of interest. It is common for individuals who are in such positions (ultimate insiders) to put their money into a blind trust. It could be that an insurance policy might be a better option for him in such a scenario. Second, he is presumably in the late accumulation phase vs distribution phase of investing and thus his investments would not be relevant for a physician in the accumulation phase, which is I think the target audience of this website.
Second, I have looked at the dividends profile for a major insurance carrier going over 100 years back. If you look at the dividend rates, their increases and decreases have generally trailed the bond market peaks and troughs by at least a couple years (and provide sig. lower yields overall, not considering the other fees). This makes sense. It would take time for a portfolio of bonds from the 1950s/1960s/1970s to be replaced with bonds paying double digit interest rates in the early 1980s. Today, as the insurance company has to replace their higher yielding bonds from the 1980s/1990s/early 2000s with today’s government bonds yielding in the 2%-3% range, they will have to a) increase the risk of their portfolio (equities, real estate, high yield bonds, etc); b) offer lower dividend yields going forward and/or c) increase insurance rates (which could take the form of stricter underwriting) going forward. There is no free lunch.
Above is my personal opinion only–not to be construed as investment or insurance advice. Usual disclaimers, etc.
Jorge-
Thanks for sticking around for a conversation. I’d be interested in reading the “university studies” on the bank on yourself concept. My impression after reading Yellen’s book was awfully similar to Rex’s.
The problem with “proving” anything, one way or the other, is you can’t know in advance. By the time you’ve proved it, it’s too late to go back and choose the other path. So you have to evaluate the merits a priori.
The truth is most people are better off “not banking at all” than “banking on themselves.”
mark is exactly correct.
In particular with regards to BOY and Lafayette…They also reduced their dividend scale yet again. To help the BOY crowd that focuses on their product, they also reduced the loan rate to 5%. I would anticipate the trend to continue for multiple years (Id guess around 6). There is a multiple year lag and given the low interest rate environment, this could have major impact on that strategy. Now they might continue to just reduce the loan rate but that isnt necessarily going to work. Imagine those people who took out a large loan (bc they were given the idea that it was safe to do so), now have some issues bc of the economy themselves, and then find out their policy goes bust. They could get an additional slap in the face tax burden to boot.
Now with that said, one shouldnt necessarily surrender a whole life contract even though it was a bad purchase initially. Strangely enough its even worse to surrender a policy as a financial move.
I see that you guys did not post my last comment with information on the Pennsylvania University study on term life insurance.
Thanks for the exchange of communication. I got to keep using my whole life policies as the most efficient way to park and grow my money and being able to sleep at ease while the markets tumble all around. I see that you guys engage in evaluation of processes and products without enough investigation so I do not feel encouraged to follow your recommendations.
Jorge, I assume you did not have your policies with AIG a few years ago. I doubt their policyholders were sleeping soundly prior to the government bailout. Your insurance company could be in a similar situation 30 or 40 years from now when you need the money and not be bailed out. Unless you have policies with multiple different insurance companies, you have got a lot of eggs in one basket–the opposite of diversification. I will take a well diversified portfolio that I have control over and can adapt to my changing investment objectives (as I go from early accumulator to late accumulator to retirement) any day.
BTW, I hate to break it to you, if all the markets are falling in value (bonds, equities and real estate), your insurance “investments” are going to get hit too.
While this is not my site, I’m not aware of any attempts to hinder information here ever. I hope people are happy with their purchases even if they are poor choices.
Rex,
Im interested in You thoughts of what to put your money in to?
I don’t know if Rex will see this but he’s generally a fan of index fund investing.
Jorge- I have not deleted nor even edited any comments on this thread. Please post your link to studies again as it apparently didn’t post. I’m very curious to read them.
Here is something interesting:
SPECIAL REPORT
Tax-Saving Ideas
for Doctors
Carole Foos, CPA
Kim Renners, CPA, MBA
David B. Mandell, JD, MBA
Christopher R. Jarvis, MBA
CASH VALUE LIFE INSURANCE: THE TAXFAVORED
VEHICLE THAT CAN OUTPERFORM
MUTUAL FUNDS
If you Google the phrase “buy term and invest the difference” you
get 20,500 results. What this “common sense” adage means is that, when
considering buying cash value life insurance, you will be better off buying
the cheaper term life insurance product and investing the difference into the
market. The difference is determined by subtracting the cash value
insurance premium the minus term insurance premium. Though not
explicitly stated, this generally means that you should invest the difference
in mutual funds.
Yet, investments within a life insurance policy grow tax-free. As
you saw above, eliminating the tax drag on investments makes a huge
difference over time.
Here, we will prove that life insurance is a wiser investment for
building wealth in a tax-advantaged manner than buying term and investing
the difference in mutual funds.
These guys present a comprehensive study on financial planning that it is too long to post it here.
Also here is information on the Pennsylvania University Study on Term Life that I quickly googled:
Life & Health Insurance/Whole Life 1/3/2004
Advertisement
Expert: Dave Bowman – 7/26/2006
Question
Dave,
I read your 1/3/2004 response on the subject of Whole Life Insurance. I have heard before the statistic you mentined where only 4% of death claims were paid by Term Life and I was curious of the source for this statistic. I appreciate your help. Thanks!
Kerry Kisslinger
(417) 3540-0956
Answer
Kerry: Here’s the story on that:
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 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.
Considering the above findings, the odds are 100 to 1 against term insurance ever being a death claim!
As you can see, my statistic of 4% was actually too high. Please let me correct the record on that account.
Yours truly,
David S. Bowman, CLU
I don’t think the point of term insurance is to have it pay out. When I buy term I am not hoping to die and ‘beat’ the insurance company! I am hoping that my policy never pays out but it protects my family if I were to die in the period before I have accumulated enough to provide for their needs. So it goes without saying that most term policies do not pay out! During the average users lifetime they might have several term policies between age 25 and 60 before they no longer feel the need for life insurance. For the vast majority, there will be no payout. That is not to say that one doesn’t ‘get anything from the policies’.
Where’s a true reference to the “Spring 1993, Penn State University” study. Who authored it? Who paid for it? Can we read it?
I’m not surprised to see that a very small percentage of term insurance is kept in force to the end of the term, nor that an even smaller percentage ever pays out. The point of a term policy, unlike a permanent policy, isn’t to keep it to the end of the term. The point is to keep it as long as its needed. But a whole life policy, by definition, should be kept your whole life. The fact that is isn’t kept by 80%+ of those who purchase it should be a big red flag to anyone contemplating purchasing one.
I don’t plan to keep my term policies to the end of their term. I plan to surrender them when I am financially independent. By design I chose a term a few years longer than that just in case my projections were a little off.
Also, some of the surrendered/cancelled policies are simply people who were sold an expensive or inappropriate term policy. I had a 5 year level term policy I was once sold. When I realized that was stupid, I bought what I should have been sold in the first place, and surrendered that one.
Still….45% of people surrendering the first year is awfully high. Hard to explain that one.
i assume this is a cut and paste and not your actual thoughts so ill try not to insult you personally although that is so poor an attempt i really dont know what to say.
The fact that term doesnt pay off is meaninngless. It isnt supposed to. All that info on term policies is garbage to this discussion. It has nothing to do with proving buying a permanent policy is a smart decision. My car insurance, home insurance, and everything but my health insurance hasnt paid anything yet in my life. Additionally only a small percentage of permanent policies are kept until death which some how they dont mention. Frankly if you do things correctly, what you do is obtain 20 or 30 year term with the idea of cancelling it early if projections on investment/work do as well as you hope and keep it for the full term if they dont since you should have some fudge factor in your calculations on how long you need term.
The cut and paste says the money grows tax free. That isnt true. It is tax deferred and the death benefit is tax free. Accessing your money within a policy costs money with the typical best way as loans but again there is a cost. We could discuss that if desired but sadly this “expert” article actually has a glaring error in the part you pasted.
Where is the actualy study and not this cut and past? You didnt post a single link. If the insurance industry could actually prove this, they would plaster it all over the planet. They cant and anyone who actually understands whole life, knows this to be the case.
Rex,
I have heard that only 1% of term pays out, but in your post you bases alot on HOPE, hope that your investments pay out in the long run. Hope is a good thing to have but not something you can count on. Especialy if you are planning on retiring at 65. Hope wont pay your bills.
You are right though there is an expense on borrowing money from a permanent policy just like borrowing from the bank, but the difference is you dont have to qualify to get the money, nor have to pay it back. As long as you are paying your premiums the money you borrowed will be taken off your death benefit. If you do pay it back it wont.
Some insurance companies have a none direct look on your borrowing, which means they dont recognize the fact you took money out and your cash value so to speak still grows based on the money you had in before you took it out. Wouldn’t that be a good option to have??
I’ve held off whole life despite constant emails and calls from our term insurance company. I was skeptical due to the pressure from northwestern. These agents are bombarding upper level residents. I’m planning on sending an email about this website to my residency program. Great site!!
wm77,
If you dont have a need for Whole life then you should tell them put you on the do not call list. But may I ask, if they were not bombarding you so much what would be your reason to hold off from the whole life or your reasons to get whole life?
Thanks 🙂
Here’s the link Jorge is apparently pasting from: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Fwww.docworthy.com%2Febooks%2Fload.php%3Fformat%3Dpdf%26id%3D3&ei=Z-EUT6P2JYmOiALHu4iEAg&usg=AFQjCNGSiZTXjHyCv6LvE5sdm3unJrhOTg
Thank you for posting this publication. It gives me a lot of ideas for future posts.
There is some misleading information in this private publication (not a study in any sense of the word doctors are used to.) For example, a graph that suggests 50% of a physician’s IRA is going to go to estate taxes. More likely, NONE of it is going to go to estate taxes under current law.
The relevant section of the publication to this discussion starts on page 23. This is a comparison the authors made comparing an investment in an equity-indexed life insurance product to an investment in an S&P 500 index fund. The careful reader will note this isn’t a comparison of whole life to index investing. The careful reader will also note the primary problem with the study- the mutual fund investor apparently has no 401K, 403B, 457, IRA, Roth IRA etc. For some bizarre reason, 100% of his portfolio is completely taxable. Eliminate that strange assumption and the conclusions are all thrown out. 1.2% extra return is huge over the 30-50 years of the comparison. The mutual fund investor wins in a landslide.
Equity-indexed life insurance has a lot of problems, probably best described by Larry Swedroe in his Only Guide to Alternative Investments You’ll Ever Need
Another important issue with the published comparison is that there is no discussion of the cash value for those who cash out of their life insurance policy in the first 30 years. It simple isn’t put on the chart. I submit the reason why is that it wouldn’t be flattering to the insurance option.
But if you’re going to submit a study about whole life insurance, please do so. You haven’t yet.
White coat,
The main reason the Indexed life insurance cant show a return when cashed out is they are basing there info on hunches. they say they can give you 7% or more but thats almost impossible and the indexed life insurance is relatively new in comparison to standard whole life which can be traced back to the late 1800’s
I agree it’s almost impossible for a cash value life insurance plan to provide a 7% return going forward from here. I include standard whole life in that assessment as discussed here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
WCI,
I will definitely read through that link, thank you. Have you looked into VUL at all? I would love to get your thoughts on that 🙂 It is way past my bed time and I still have work to do. But I thank you for your responses, I wasn’t sure if you would notice me since these are dated 2012. I hope we can chat more!
I see all the new comments, as does anyone who subscribes to the comments on this post (quite a few actually.) Here’s a piece on VULs:
https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/