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. ]
So people taking loans out early is the products fault? I’ll give you this the insurance industry is full of unscrupulous ass hats, but that doesn’t make the product bad.
Whole life should be kept your entire life if your plan is setup correctly, again the planner/agent/assholes fault not the policy itself.
Why do we always talk about Insurance as an investment? It isn’t one and it wouldn’t have a terrible reputation if the Insurance industry didn’t tinker with the only two types of insurance worth a damn, term and whole life(estate planning excluded second to die etc;. It was UL and VUL that promised the world and delivered a lapse that pissed everyone off and ruined the industries reputation.
If you want to absorb the risk throughout your entire plan have at it, but we live one time and I’m not making that bet with my money.
I largely agree with you that the two major products one should consider are either WL or term. I think underfunded ULs, and over-promised IULs and VULs have soured many people. UL with a Secondary No-lapse Guarantee is very useful for estate-planning.
But I would disagree that you shouldn’t consider it an investment and a very flexible one at that when properly constructed, especially when you look at its inherent tax efficiencies. It is an Asset Class and when combined with other asset classes has the effect of granting you permission to spend. Most investment advisors only focus on the first and second quarters. WL allows you to focus on efficiencies in the second half, the distribution phase.
Look I own a 400,000 Whole Life contract, but I don’t consider it to be part of my investment portfolio. It doesn’t constitute the bond portion of my portfolio by any imagination. I understand I can amortize, annuitize, or spend down as I see fit depending on what the investment environment looks like, but that doesn’t make it an investment. That devalues what the insurance does inside of my plan.
I understand your reading your Living Balance Sheet script and that is fine, but don’t be brainwashed. Buy term and investing the difference CAN and OFTEN DOES work. If you want to guarantee income over two lives you can use a joint and survivor annuity just as effectively with a higher asset number, but I generally feel owning the insurance contract positively affects any sort of monte-carlo distribution simulations. I think this website has Boglehead passive preachers and hardcore insurance people with very little in between.
Who cares what you consider it. Your strategy is your strategy. But, someone who is investing in bond mutual funds over the next thirty years is absolutely likely to end up with around the same if not worse return than the 4.22 mentioned above, and If you think differently, you are an idiot.
What does the return in a bond mutual fund have to do with insurance being an investment?
It has bond-like returns but you don’t think of it as similar to a bond portfolio. Hmmmm.
If you think Buying Term and Investing the Difference is the way to go, why do you own the WL? My major gripes with those who advocate BTID is that, 1) they don’t know whst “difference” is” 2) they don’t invest the difference (something always comes up), and 3)they don’t take into account the drag the cost of the term insurance has on their investment “difference.”
The points I will make over and over is this: don’t have all your eggs in one basket. Having permanent paid-up life insurance at retirement will give you the permission slip to more freely spend down other assets.
I’m familiar with the Living Balance Sheet and, while I don’t use it, I like it. It’s a lab where you can test all your hypotheses. Numbers don’t have emotions. You should find someone in your area who’s good with the software and challenge him or her.
The living balance came out of the LEAP program, also known as “all roads lead to whole life.” No thanks.
I doubt we’re going to agree on this subject. You’re welcome to your opinion of course.
Like I said, numbers are numbers, and software is software. LBS was developed by those who were LEAP knowledgeable, but the software platform was based on EMoney.
Everyone’s entitled to their own opinion, but not their own facts. Here’s a challenge you likely won’t take, you reckless doc: accept a GoToMeeting with a guy from Dallas. His background is electrical engineering (he holds 37 patents), and changed from engineering to helping people financially about 5 years ago. His clientele is primarily indo-Asian in the tech field, not exactly a subset that is easily manipulated. If after a hour with Ashvin you feel the same way about whole life, I will publicly denounce this nefarious product.
I don’t really care about whether you publicly espouse whole life or publicly denounce it. I’m certainly not going to spend an hour of uncompensated time meeting with a engineer/advisor from Dallas to discuss whole life. Thank you for the offer. If any reader contacts me and would like to meet with your colleague, I’ll pass along your email address.
I think your compensation would be a no-charge consultation with one of the smartest guys I’ve ever worked with. You’re a bright guy–he’s not going to manipulate you. You get to choose the scenarios, allocations, investment returns, and tax burdens. All those must be considered in tandem, wouldn’t you agree?
If your friend would like to submit a guest post I’ll consider it for publication, likely as a “Pro/Con” post. Here are the guidelines:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
I agree that no one should buy a whole life policy unless they’re planning to keep it their whole life.
Whole Life is much more comparable to a bond portfolio than to most any stock portfolio over a long term time horizon. If you can consider WL part of your bond portfolio it is much more attractive, especially moving forward, and especially for someone who only invests in mutual funds.
And Rex, Myopic makes an unbelievably great point. In no way does morons listening to dumbass insurance agents make the product bad. They surrendered the policy early probably because it did what it was supposed to do and they realized they didn’t need the death benefit anymore and took the cash value.
I’m not sure the product is necessarily “bad.” It’s simply inappropriate for the vast majority of people, including physicians. It’s not bad. If you want what it offers, then that’s great. The problem is that people buy it (or really, are sold it) without understanding its rather severe limitations. If you understand those, and still like it, then great, buy as much as you like.
You walk in your in financial milieu. You and I have no idea if its appropriate for anyone else because we aren’t looking at their picture.
You are correct that people walk into it thinking its something that its not, but again that’s the industries fault not the products.
Its pretty much inappropriate over 80% of the time. You want to pretend there are a few bad apples or whatever you want to call those folks who sell all those lapsing polices and avoid labeling the product as bad bc you are afraid it will make you look bad. Its just misdirection. I don’t care if you label the product or the agent bad. It rarely works out at all for the client and that is important. If a medicine only works 20% of the time, we label it as bad. We understand that sure it can work 20% of the time but overall its bad. There could be rare times we prescribe it but not often. Frankly you folks should thank all those agents who sell the lapsing polices (since it obviously isn’t any of you) since if there wasn’t such a high lapse rate then at best case scenario there would be ZERO dividends (and that’s best case). The product has been around forever but it hardly ever works out. The industry and agents seem to make no effort to curb lapse rates (since if they did then the return would be even lower and they would either get less commission or fail to sell the product). Ive already mentioned where it is fine but unfortunately for those who sell the product, that’s very few people. Interesting that nobody was able to show any independent studies, sites, with real evidence. Im of course not surprised.
Then you understand nothing. Its interesting that independent study is a myth everyone has a bias, or lobbyist. Who do you think pays for money magazine?
[Off-topic comment deleted.]
What is the lapse rate on term? Whats the success rate on investing the difference?
oh I think people who read this thread know how much I understand and how much some people just want to sell a product.
I didn’t say it needed to be money magazine. I gave you free reign to pick any legit independent group. There are plenty of people who do academic research not associated with any one industry. Why cant you point to some of this type of research? Again the product isn’t exactly new. Surely by now at least someone has done such research and shown whole life to be a great investment?
The lapse rate on term is very high as well. But then you didn’t pay for an overly inflated rated non transparent rate meant to cover your entire life. Term isn’t meant to pay off, whole life is.
The success rate on invest the difference is higher than whole life bottom line meaning people have more money which is what people need. They rarely need a death benefit. Whole life never changes behavior so if you cant invest the difference, you cant pay your whole life premium and it lapses.
[Reply to off-topic comment deleted.]
And that is where you are making universal statements where it is completely unnecessary. It is appropriate for anyone who thinks it is appropriate for their portfolio. Absolutley it should be explained in full, as should every investment product, but they are not. I agree with literally almost every comment you have made but [remainder of comment deleted due to excessive use of profanity.]
I think the best way to consider whole life is accepting that you have high start up costs in the first few years, then you achieve cash flow, not unlike investing in an income-producing property. For example, looking at just the guaranteed values of a WL99 policy, a 35-year old male buying $1 mil of death benefit will spend $12,230 a year. By the eighth year his guaranteed increase in cash value–$12,570–is greater than his premium payment.
This assumes no dividend is paid although the Guardian has never failed to pay dividends for 155 consecutive years. In year ten, premium is still $12,230 and the increase in guaranteed cash value is $13,320. That represents an 8.18% increase. At 20 years, the premium is still $12,230 and the increase is $17,180 or 40.47%. All guaranteed by contract.
The only “lever” the WL policy holds is its dividend. If I had used the returns projected with current dividend the increases in net cash value at years 10 and 20 would have been $19,335 and $31,984 respectively. Our illustrations show guaranteed, mid-point, and current assumptions, by the way.
So, would you like a vehicle that, for every $12,230 you contributed, your cash value increased two-fold or better? One where the internal values will eventually pay your premiums and the internal cash values and death benefit keep increasing?
Finally, I’ve asked this question but not had it answered: If, at age 65 and facing spend down of assets for retirement, would your outlook be different if you knew that you had $1 mil in Death Benefit and $436,000 in cash values? Those are the guaranteed numbers assuming your paid from age 35 to 64. Is $12,300 too much to spend on WL? If I were a physician making $250,000 and I dedicated myself to saving and investing 20% of my gross income, them $12,230 is $24% of that total. (Of course I probably would have overfunded the crap out of the policy with PUA and offset earlier so the respective percentage would be smaller). If I had bought 30-year term my outlay would have been somewhere between $35K and $45K so I should take that into account. Would it be fair to subtract that from my start up costs for my WL? Why not?
To answer my own question, at 65 I’m not going to be 80% equities and 20% fixed or bonds. I could not possibly afford a 2008 stock market. It’s the variation in returns during the sequence of distributions that kills you, not the variation of sequence of returns in accumulation. Permanent, paid-up WL gives you the permission to spend down in retirement without fear of out-living your assets. I would much rather be the guy with $2 mil in my retirement accounts and $1 mil in paid-up WL than the guy who bought term, invested the difference and has $2.5 mil as a result.
An amusing side note–at least to me–is that the Dave Ramseys, Suze Ormans, and other financial entertainers will all tell you that you can easily achieve 8 to 12% in your investing years, but that you should only take 4% in retirement. What happened to the 8 to 12%? See comment above about sequence of returns vs distributions.
I could transfer assets to annuities and provide lifetime income but most don’t account for inflation and those that do have poorer payouts initially. Also, if married, I would take the lesser payout for a joint annuity because I love my wife. But I love my kids and grandkids too, and the annuity play just cut them out of any legacy. Or I could do period certain and take a lesser payout. Foiled again.
Straw man argument- The real question is whether you’d rather have $3M in retirement accounts or $1 Million in retirement accounts and $1 Million in whole life.
I’ve written before about the issues with Dave Ramsey.
https://www.whitecoatinvestor.com/how-dave-ramsey-may-be-leading-you-astray/
How did you arrive at those numbers?
Since the return on cash value for whole life insurance is lower than a typical portfolio you’ll end up with less money by using whole life insurance. So let’s use some numbers:
Let’s say you get to choose between investing $25K a year into a regular portfolio returning 8% for 30 years, or you can invest $12.5K a year into a regular portfolio returning 8% and $12.5K a year into a whole life policy whose return works out to be say 3% a year over those 30 years. After 30 years, the first guy ends up with $3.06M and the second guy ends up with $2.14M.
A typical vanilla guardian contract purchased today wont have csv greater than premiums paid until after 15-16 years. Im unfortunately very familiar with it. At that point my money could have doubled twice over. Who cares if in year 10 its an 8% increase guaranteed. Its still a loss of money overall and most polices do lapse/surrender. Why do you point out this “great increase” you cherry picked but fail to mention its still an overall loss? One of my big problems with discussions with insurance folks is they just wont present the whole truth.
Buying whole life isnt diversifying. It is still the same basket of eggs. Its primarily bonds/treasuries but now with super high fees/costs (i think it was like 72%). Heck on the most recent statement from your favorite insurance company their next highest source of revenue was like policy loans (around 10-11%). Nothing like paying to get to your money. If the underlying investments go belly up then they cant make good on the guarantees. Fortunately that is unlikely to happen but one might want to read what James Hunt recently published on this.
http://www.consumerfed.org/pdfs/Evaluate-June-2013.pdf
If you want a guaranteed income stream then buy a SPIA. Im sorry they dont provide you a lot of commission but they do a much better job. I plan to purchase one around age 80 (non inflation protected).
I’m looking at an in force that I was asked to run this morning. Issue date was 12/01/2004. Base premium is $14,940.55 and Waiver of Premium adds $200. No additional PUA, scheduled or unscheduled.
At end of policy year 9, cash value is $125,439, total outlay is $136,269. Cash value will exceed outlay in the 11th year.
If I had designed this policy, I would have suggested 25 to 40% of the premium be scheduled PUA, which would result in greater cash value.
The point I tried to get across is there are two factors to consider, 1) IRR and 2) incremental ROR. I didn’t cherry pick anything. Your focus is solely on IRR.
Your sweeping statement that “insurance folks just won’t present the whole truth” is interesting. I’ll tell and show you everything about this product that you’d like to know. The commission paid on WL is regulated by NY law for the Guardian to be 91% max, and the agent usually receives about 75% of the 91. That’s a one-time fee, no annual management expenses, 12b-1 fee, etc. PUA has a much smaller commission, 3% (remember that I advocate 25 to 40% PUA? Gee, that makes my commission smaller but benefits the client).
If you design a policy correctly and according to the client’s needs, it won’t lapse. Heck, you can even skip a year’s premium and it will stay in force.
I think SPIAs are great for insuring income. However, the payouts have dropped about 30% over the last five years. What economic environment will you be in when you’re 80? Will you choose a lifetime payout to get more money, or period certain for less? A well-designed WL policy could provide you with the supplemental income you desire but it still has death benefit.
You can design a policy where I can skip the second year’s premium? What about the third through tenth?
i dont need to know anything more about guardian whole life. My policy wont have csv equal to premiums until year 15. Its interesting that just today someone asked for a 2004 since that was the year dividends started to increase for guardian for a few years until 2010 and while nobody knows for sure, it doesnt seem likely dividends are going to bump up again in the next few years but again nobody knows for sure. Interesting that just today you happened to have that exact year come across your desk. You didnt mention these additional details. Of course you didnt cherry pick this. What about the standard policy purchased today since most people dont have a time machine? Is it still 11 years? You know the one that usually gets sold to clients (zero PUAs and zero csv for a few years like mine). I completely agree that a client should have PUAs (frankly right up to MEC) IF purchasing. Thing is that unless you know WL better than the agent, its hard to find one that will present you with such an option especially fully up to MEC limits. You have no data to support the idea that a properly designed policy wont lapse. Again most lapse or surrender period. That much is known. I imagine if the client really understood it all and wanted it after understanding the product that it would be less likely for a lapse/surrender but how often is that the case?
Incrememental ROR only means one shouldnt necessarily surrender WL without looking at that part of the picture. It doesnt mean purchase it.
The only reason for me to consider a SPIA is for lifetime benefits otherwise it isnt a lifetime guaranteed stream of income. Interest rates at the time will correlate with payments. Sure WL can provide some living and some death benefit although taking a bunch out of WL can be risky especially in a decreasing dividend environment and if you live longer than you thought. Its just very likely less money than properly investing and it isnt diversifying. You do get the insurance just in case you die to young to complete your plan. If one wants a death benefit and understands the costs then go for it.
20 Year Guardian Dividend History
1993–9.75%
1994–9.00%
1995–8.5%
1996–8.00%
1997–8.5%
1998–8.75%
1999–8.75
2000–8.5%
2001–8.5%
2002–8.00%
2003–7.00%
2004–6.60%
2005–6.75%
2006–6.5%
2007–6.75%
2008–7.25%
2009–7.30%
2010–7.00%
2011–6.85%
2012–6.95%
2012–6.625%
You didn’t mention what policy you own. WL99 has the best IRR long term, WL95 has highest early CV, and WL121 has the worst IRR but lowest cost of insurance. Each has its purpose. I love 10-pays. Guaranteed paid-up, highest cash values–you can even overfund them and pay them off in 6 years without MECing if you design them right.
Not everyone will get a good doctor and not everyone will find a good insurance agent, but I still like medicine and life insurance.
By the way, if your insurance class has not changed, you can add a PUA rider to your policy–you just have to be underwritten. You could even lower the death benefit and add the PUA so your outlay won’t change and thereby increase CV and offset earlier.
The point of making the observation about having the option to skip the 2nd year premium (or any year, for that matter), is that you have flexibility in your policy.
If someone came into an inheritance or some other windfall, I might even suggest pre-paying a 10-pay. Our side account fund currently pays 2.75% which effectively boost the IRR when taken into consideration.
Universal Life with a Secondary Guarantee is the lowest cost “term for life” product, but you cannot skip a single premium or it lapses.
maybe you didnt notice but the link above gives all the dividend numbers for like 20 years for pretty much most of the companies in consideration so im not sure why you re-listed them.
There is a big difference between trying to find a good doctor and finding an insurance agent who will completely over fund a policy. Its not a valid comparison in the least.
The ideas of skipping a payment are again misleading. The way you have written it, seems like there arent any negative effects of doing so. Those loans can get very expensive and crush a policy. If there is even the slightest chance you need to “skip” a payment in the 2nd year then WL is a horrible choice. You should easily be able to make the payments (yearly i might add to reduce finance charges) into the indefinite future. If you might miss payment 2 then you might miss payment 3 or 4 and then where are we? The comment that gUL is the lowest cost of “term for life” isnt necessarily true. Again it all depends on dividends. Given current pricing and current dividends, yes. I dont think dividends are going up substantially in the near future but if they did then gUL wouldnt be the cheapest. Also VUL from a low cost provider could be cheaper although with no guarantees on it being cheaper and many VUL polices have high costs for insurance and investments and dont have the guarantees on the downside.
If you want to provide information then how about sharing some examples of the maximum over funding below mec one can perform for the company you represent. That way people have an idea of when they have found someone who is properly over funding a policy. Lets say age 40 male, non smoker, best rate class.
“Its interesting that just today someone asked for a 2004 since that was the year dividends started to increase for guardian for a few years until 2010 and while nobody knows for sure, it doesnt seem likely dividends are going to bump up again in the next few years but again nobody knows for sure.”
1) I entered the dividend returns because it refutes your statement above. There is a strong, demonstrable, correlation to Investment Grade Bond Yields. If yields increase, so will dividends.
2) Of course there are effects. The point is that there is flexibility. What happens when you miss one payment on your term insurance? It lapses. We all assume life has no surprises, then we’re surprised.
3) I’m working on a case right now, 10-pay for estate planning purposes. Current Assumption UL guarantees it will not lapse for 30 years, the UL with a Secondary Guarantee will not lapse. This is for 5 million in DB. CAUL is $80K a year, ULSG is 95K. Which would you choose? I’m recommending the ULSG because wife could easily live past age 86. VUL has so many moving parts that all I can guarantee is you’re likely to get screwed. I have exchanged many of these into WL products. And, if insurance companies think it’s so great for you to be in the equity market, why don’t they use that for their capital accounts? Can’t afford the risk.
5) Male, age 40, preferred non-tobacco. One million DB, pay to age 65. Base prem is $15,080. Level non-MEC PUA is $15,208, total prem is $30,288. At age 65, projected cash value is $1,500,302 and DB is $2,925,807.
If you wished to offset as early as possible, then the base is the same, $15,080 but PUA increases to $25,596 and the policy offsets in 5 years.
A word about MECs for those not familiar with them. Simply put, the IRS requires a corridor between Death Benefit and Cash Value. If it MECs–becomes a Modified Endowment Contract–you lose many of the beneficial tax favored features, like taking policy loans or distributions on a tax-free basis.
If you don’t want to create a MEC but do want to maximize your cash value, you can add term so you have a higher death benefit and you can stuff more cash into the policy. Just depends on how long your want to fund the policy.
that doesn’t refute my statement at all. It shows exactly that dividends starting to increase temporarily for the company/year that you just happened to pick which oh my gosh makes your numbers look better than a policy purchased today for some reason. In fact there probably isnt a better near current year to have picked from for some strange reason.
No kidding the correlation is with bonds (lower I might add) since that is the majority of what they invest in bonds/treasuries. They don’t invest in equities to any large extent likely bc it isn’t as predictable in the short run and they haven’t had to either. They have tons of up front costs for these products and their model doesn’t likely support the variations that would occur with mostly stocks. What are insurance companies going to do if we stay in a low interest rate environment long term? We already know they have re-priced many gUL polices and LTCi with part of the reason being the low interest rate environment. By your logic, its better to invest in bonds then stocks for the long run since that is what insurance companies do.
I don’t like VULs (just look at the VUL thread). Its just that your statement wasn’t completely accurate. VULs typically have high costs for both the insurance and the investment. I imagine you don’t sell any which are worth considering but represent companies that have high costs. In the end it doesn’t matter since Im not trying to defend VULs.
I agree life is full of surprises which is why most people need cash during life and not an expensive permanent death benefit.
I am of course not an agent. I never spoke to those people so im not sure insurance is necessary/best idea etc. If for some reason it was and they knew they wouldn’t ever miss a payment and didn’t need the cash at all then yes id pick the gUL.
Ill give you credit for posting the other numbers. I think people would appreciate knowing the max percentage of csv to premiums paid after year one.
Years 1993 through 2003 show higher dividends than 2004, so the fact the policy is dated 2004 doesn’t “help” my case.
By the way, you never gave the details on your policy except to mention that cash value won’t equal outlay until year 15. It would be interesting to know what company, what policy, what rating you received to cause that to happen.
I rather enjoy the back and forth discussion on these pages. I do roll my eyes when I see sweeping statements, like “whole life is bad.” I think that certain insurance companies are better for the consumer–mutual vs stock companies, for example–and I think that there are good insurance agents and bad ones. Our role as consumers is to educate ourselves and to find trusted advisers to help us. No different than medicine, where a patient seeking treatment should know his or her options and the reputation of the doctor recommending a course of action.
Another sweeping statement is that the stock market returns 8% per year and that should be an investing benchmark. If an investment returns 50% one year and loses 50% the next year, then your average return is 0%, but if you started with $1000, you now have $750. The cash value in WL only increases, it never declines (underfunded ULs, that’s a different issue).
yes but then you wouldn’t be able to give the idea that it was recent or something someone could do today. Bottom line is a policy purchased TODAY wont illustrate as well and will take longer for CSV to be equal to premiums paid. You chose the best of what might appear to be recent years.
I haven’t listed my policy details bc it isn’t actually relevant any only paints agents in an even worse light. Unfortunately it is from a company you know all too well. Sadly at the time I wasn’t as well educated financially and didn’t realize people would purposefully provide such non fiduciary advice. I was placed into a 412i or now known as 412e plan. One of the problems with insurance companies is they have all these wholly owned subsidiaries with names that don’t imply that they will push insurance so you might not realize the advice you are getting is so biased. The worst place one can probably purchase whole life is within a qualified plan. Again this isn’t relevant to this conversation and my story is much worse but to help others, this link gives some ideas on why its a horrible idea to be purchased within a defined benefit plan. It doesn’t go through the additional horrible part of getting it out which can be extremely expensive.
http://www.executivebenefitsgroup.com/images/EBGwp4.pdf
yes some “advisors” use avg to also confuse folks but your point on whole life is meaningless. The fact that it keeps going up is because it starts at zero and currently will typically take 15 years or more for csv to equal premiums and that is hoping dividends don’t go down further. The idea that it doesn’t decline is misleading. It is a loss for 15 years. That’s a decline in value to what you have invested. You just don’t want to look at it that way.
White collar investor,
My grandparents purchased a whole life policy for me in 1987. I am now 39 and it has a cash value of around 42K. I can’t get a straight answer as to whether cashing it in is a good plan for me so I can use it to buy real estate investments or leave it alone. I have 2 children that have pretty secure financial futures from their father’s side of the family. I have used it as collateral for securing a home loan before so I am thinking maybe keeping it and using it in the future for collateral may be the way to go? Then I read that term insurance is the way to go so I have no idea since most blogs assume the owner of the policy is the one that invested the money.
The answer is: it depends. Your grandparents purchased it for you when you were about 13. What was the face amount and what is the current death benefit? What company issued the policy? What was the premium and are you, or your grandparents, still paying premium? Are you the owner of the policy and who is the beneficiary?
If your basis–the amount of premium paid into the policy–is less than the cash value, then you will owe taxes on the gain.
Depending on what your insurance needs are, you might considering a 1035 exchange into a new policy. For example, dumping the $42,000 into a WL99 policy would result in about $300,000 of initial death benefit and an annual premium of $1,269 or $109 a month. By age 65, that benefit is projected to grow to $455,000 of death benefit and $209,000 of cash value. Your first year cash value is $41,313 and you can borrow 95% of the cash value of your policy.
A 30 year term policy with a $400,000 death benefit would run about $650 a year.
After 30+ years there’s a very good chance you’re better off keeping the policy. You can get some objective advice from this guy:
http://www.evaluatelifeinsurance.org/
as you may know from reading this thread, several of us arent in the insurance industry but are physicians (myself included so keep that in mind). You really have two questions. The first is do you need insurance. By what you have written you might not. If your children already have secure financial futures then you could easily not need any insurance. If you did, it is highly likely that you would want term and if would be unlikely to need it for 30 years so dont compare any permanent insurance idea to 30 year term unless you need 30 years of insurance. The second question is what to do with your WL policy. It was likely a mistake to purchase but you cant change that. If you surrender you get the CSV and any gains are taxed as income. If you think you want to give money at your death and you really dont need access to this money (at least in the near future) then id keep it. If you are paying premiums, make sure you are paying yearly to avoid finance charges. Change dividends to PUAs to increase the death benefit if it isnt currently set to PUAs realizing the cost difference between this and whatever your current option is on dividends. Keeping a whole life policy is different then purchasing it. You are at the point where all the commissions are gone and the return going forward is much better. You cant change the past and while purchasing is very commonly mistake, a surrender can be a second mistake. If you dont want to give any money at death and this is just an investment for your use then either surrender understanding the tax situation and invest in whatever you want or 1035 exchange into a low cost annuity like through vanguard. what this does is keeps your cost basis and defers taxes to later. Keep in mind money taken out later on will still be taxed as income. Its unlikely in my opinion that you would want to 1035 into another permanent insurance policy as an investment. You would incur new commission charges. If you are purchasing new insurance like term then never surrender any existing policy until after the new one is in force.
[Personal insult deleted.]
[You haven’t] provided one ounce of evidence to provide a substantial argument against the sound argument why there are [at least] 8 Reasons to Avoid Whole Life Insurance.
The truth is there is ample evidence and sound arguments against whole life insurance for the masses while there is little to no credible arguments for it.
[Unbiased individuals can clearly] see whole life (for nearly all individuals) is a very bad financial investment.
I understand if you missed as there are so many posts, but I’ve made my point numerous times, and provided numbers above, way above. [Personal insults again deleted.]
Here it is again just for your benefit. First, comparing a whole life product to a stock portfolio over a 30 or 40 year period is not helping anyone. Since the s&p index itself has never produced less than around a 3.5% yearly return over any given 30 year period. So we can use that as our ULTRA conservative estimate. With Whole Life illustrations estimating around a 4.5% return over a 30 year period, and that’s not the guaranteed rate. Purchased from a solid company whom has never missed a dividend payment it is fairly safe, probably a little less baring a surge in interest rates. So at worst case for as simple stock investing as it gets, buying and holding a s&p index fund, you are almost getting the same return. The maximum the s&p index has returned over any given 30 year period is 10.2 yearly return, which if someone doesn’t know how much of a difference avg return of 10.2 vs 3.5 makes, it is about 6.5 times your money. So instead of 1,000,000, you would 6,500,000. Obviously it is unlikely to get the max but it is safe to say there is much more upside there. But any hack can tell you a diversified portfolio is much more likely to get you a higher return while lowering volatility over a 30 or 40 year period than all stocks or all bonds.
Bonds mutual funds have performed very well over the past 30 years, in a falling interest rate environment. I think most anyone reading this can tell you rates are sure to rise in the coming years, which is going to have the opposite effect on bond values. If you use a bond ladder and hold individual bonds until maturity, then it will probably be better in the long run than whole life as well. But, for those of you who hold bond mutual funds which are naught and sold at net asset value, as the value of the bonds held in the fund fall due to rising rates, the value of your fund will fall as well. Hopefully the yield can counter the fall in value, but don’t kid yourself. And everyone reading this, doctors or not, can read it and say, ok so I just need to do a bond ladder. But you probably won’t because people like the author of this article and Rex, like to put sour tastes in your mouth about someone, including financial professionals, selling you on an idea, which is what will have to be done for you to buy an individual bond as well. And if your a doctor with a family as my father was/is, then are you really going to have time to do that yourself? If so more power to you. But for the vast majority of everyone they are going to be in bond mutual funds to be diversified. I’m not saying your whole bond portion should be whole life, but I think it would be very very beneficial to have a good chunk of it in some whole life.
Say you are a 35 yr old male and get the best health rating. If you are maxing out your 401k, which will be 17500 this year, in a 70/30 portfolio. 30% of 17500 is 5250. The product I ran, if at the best health rating, has a minimum of 250k death benefit requirement. Cost is 2575 per year for 250k for a 35 yr old at best health rating, Paying premiums until age 65. 65 is what I used for retirement age but can be adjusted obviously. 2575 is just under 50% that would be going towards your bond portfolio. This is probably a little high of an allocation to whole life, but for the purpose of accurate numbers I am sticking with it. @ age 65 you have a cash value of $154,349. A death benefit of 347,742. Getting a dividend of 4,558. Avg return on just the cash value is 4.4%, which is going to be very comparable to bond funds moving forward. If you passed away that year, the avg return on death benefit is 8.95%. So you can take the cash and be done with it, which you wouldn’t do, or you can take an annual dividend of 4550 while still having the cash value and death benefit mentioned above, which you probably will do, or leave it be and let the cash continue to grow throughout your life and leave everything as a death benefit, which you absolutely can do.
Anyone who wants a permanent death benefit down the line and listens to these people will probably not be able to afford one, whether its because you are not healthy enough to get the cost low enough, or because its just too expensive.
If everything was about total return though, then none of us should buy houses with a loan either. After interest is paid your return will be pitiful. But that’s not why we buy homes is it? Nor is total return the reason people buy whole life, but if you want a reason involving returns, I just laid it out for you.
[More insults deleted.] This is my last post, good luck to all. [At least my editing chores will be reduced. If you do decide to come back, please keep your posts focused on the topic at hand rather than making ad hominem attacks.]
I dispute many of the numbers you’ve used above. My discussion of the expected returns of a whole life policy purchased by a healthy person in his 30s can be found here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
Bottom line, after 5 decades your guaranteed return on your cash value is about 2% and the projected return is less than 5%. I’d expect 3-4%….after 5 decades. Annualized returns for the S&P 500 with dividends reinvested would be around 10%. Even if you adjusted that down to 8%, 8% vs 4% over 50 years is a difference of 6.6 times. The lower returns available in a whole life insurance policy really do matter over the long run.
I like the CAGR feature from MoneyChimp and I think you’ll find it supports many of your (White Coat) arguments.
http://www.moneychimp.com/features/market_cagr.htm
But…what happens when you began investing in 2000? Not so good. If you have a long enough time span (25 years plus), then the market looks pretty good as long as you are a disciplined investor who buys and holds except for periodic rebalancing. Are you investing in a taxable or tax-deferred account? You either pay money on the seed or the harvest. The returns in WL are tax-exempt, so a fair comparison would be to ascribe to them a taxable equivalent return (a marginal tax bracket of 30% would mean that 4.2% is the taxable equivalent of 6%, right?).
No. Few taxable investors are paying anywhere near an effective tax rate of 30%. That would be a ridiculously tax inefficient investment. The “returns” on whole life are only tax exempt if you take them as loans, in which case they are not interest free. If you surrender the policy, the gains are fully taxable. A taxable account’s step up in basis is essentially equivalent to the tax-free nature of the death benefit. Whole life isn’t a Roth IRA. (I’ve got a post coming up on that point in a week or two.)
As far as starting investing in 2000, that would have been awesome. The Fall of 2008 was also a great time to start investing. The investments I made in October 2008 have had fantastic returns. But since most investors add money each year, rather than some lump sum when they first start their investing career, it just doesn’t matter that much if year one is a bull market or a bear market. The last 5 years before retirement and the first 5 after are really the most critical.
You’re correct in that few taxable investors are paying an effective tax rate of 30% if they are investing in equities and holding them for more than a year.
If they’re maximizing IRAs, 401(k)s, or other tax-deferred vehicles, then they will likely pay anywhere from 25 to 40% on the distributions.
Distributions are taken to basis then borrow to avoid taxation, not borrowing from the outset (although that option could be chosen). The loan rate decreases from 8% to 5% after the later of 20 years or age 65 for WL99. This is significant if you use the policy values to supplement retirement. For a ten-pay the loan rate decreases from 8% to 4% at the later of age 60 or the 10th anniversary.
The annualized return of the S&P from January 1, 2000 thru December 31, 2012 was 1.61%.
I couldn’t agree with you more when you note the last 5 years before retirement and the first five years after are critical. What if you had a strategy where you only took distributions in up years? I can think of a vehicle that could fund the shortfall in down years.
Nice cherry-picked period. Why not use 1990 through 2000? Or even 2003-2013? Nah, wouldn’t want to do that.
He didn’t cherry pick that….it just happened to come across his desk today.
You can pick any series of years you wish historically. Some are good, some are bad. The only ones that matter to me are the ones where I’m invested. And, as I edge closer to retirement, I have to think twice about how much “correction” I can tolerate.
when using whole life you are investing over your entire lifetime. Thats a very long time for most people if you qualify for the better rates and one of the many reasons why whole life doesnt work out. Over that many decades you can take a large correction and still have more money then you would with whole life besides you arent diversifying as we have already discussed. You are just investing in primarily bonds/treasuries but using an expensive middle person and paying for insurance you dont need to boot.
I just looked at my policy and the Base Plan Death Benefit is 50K, Total Death Benefit is 274K, the Net Cash Value is 45K. The annual premium is 341.00 which is automatically covered with dividends and premiums are paid ahead about 1 year.
you should request an inforce illustration. it will give you an idea of how the policy might perform. It sounds like you are saying dividends are currently set to reduce premiums. Id also ask for an illustration with dividends set to PUAs. Once you have those, many folks can provide more insight. WCI also linked a service which is like 85 bucks and works off those illustrations.
Hi Rebecca:
If your premium is $341 annually and you’ve held it for 26 years, your basis is $8,866. As big of proponent of WL as I am, I still question that the cash value would have increased to $45,000 with that funding and the PUAs would have purchased an additional $224K of death benefit.
If you wish, I’ll review your policy for you and let you know your options. I’m completely ok with your sharing this experience on this blog. My email address is [email protected].
Enough with the term vs. whole life argument. If one wants life insurance and to treat it as an asset this is how it’s done. Buy a blended policy from a highly rated mutual company with sound financials and a history of good dividend payout. Start with about 10% whole life and 90% term. The paid up additions will gradually convert the policy to permanent with all the benefits of whole life at a greatly reduced cost. As far as the cash value build up it should have and IRR comparable to a bond.
Live Long and Prosper
That is not how it’s done. A 40 year old female, pref nt, 10% base, 90% term, one million death benefit, premium is $6,895. A 50% base and 50% term prem is $6,848.
The term takes 40 years to be bought out, but that number depends on dividends. The more term you have, the riskier the coverage, and as you see, the premium is actually less when you go 50/50. Cumulative net outlay at the 40th policy year is $273,936.
If you need coverage but don’t want to pay the full WL premium, I would suggest a 50/50 blend but I would overfund it with PUA so the term gets bought out more quickly. That number can vary with your circumstances–in good years fund more, in years with more financial obligations, fund the minimum.
An interesting blog that takes the insurance agent out of the scenario and just compares the companies that excel in Whole Life. Interesting how they feel about Northwestern.
http://theinsuranceproblog.com/top-whole-life-insurance-companies-for-building-cash-value/
Good site with good information. The Guardian 10-pay is a great product for cash value accumulation but, as the name suggests, it’s guaranteed paid-up in 10 years. Yes, you can blend term so that you can continue to add PUAs after the 10th year.
WL99 has the highest IRR of the three full-pay products (WL95, WL99, and WL121). That’s why Guardian agents like it.
He also mentions a lot of brokers don’t recommend Guardian…simple reason is that get more commission selling other products. And, regarding commissions, I don’t see anyone upset that their Realtor made a nice commission representing them as buyers of a home. By some of the logic I’ve read here, they should have simply accepted a small fee for helping them rent a home.
Interesting that you picked that site as a good one considering it has a long rant which is in my opinion a thinly veiled personal attack on WCI on it.
Agents should spend more time fixing other agents to improve the issues with WL. But you wont. I love how much misinformation is spread by agents but its rarely corrected. Take for instance the issue of surrendering a policy. Top goggle hit with responses by agents who have 18 years experience, 21 years and the other 35 years of experience in the insurance industry claiming gains are taxed at the better long term capital gains rate and not income. Do you see the insurance industry or agents correct such stuff when it puts insurance in a positive light? Nope.
http://answers.yahoo.com/question/index?qid=20080630044902AA6eWUk
In case you didn’t notice, this thread isn’t about realtors. Nice try with another distraction.
I assume you mean buy not rent in your last sentence. And by the way, I agree that realtor commissions are ridiculous. It shouldn’t cost twice as much to sell a $400K house as a $200K house.
In fairness, a lot of things are ridiculous… A lot of things shouldn’t be the way they are, but… special interests being what they are…
I meant rent. The point I was making is that some folks apparently think that the reason that insurance agents endorse WL is because the agent makes a larger commission as compared to recommending term insurance which pays the agent far less.
Most of the illustrations I do are the aforementioned policies overfunded with PUAs. This enhances the cash values for the policyholder. Besides helping me sell the value of the policy it also makes it really hard for another agent to come in and replace one of my policies unless the policyholder is gullible and the agent lies (yep, it can happen).
Rex, it isn’t my job to fix other agents. It’s my job to be the best agent I can be and to work in my clients best interests. I’m having dinner with my internist this evening. Shall I tell him it’s his job to correct all the bad medicine out there?
yes you should. I personally always inform physicians if something is done wrong (almost always they didnt realize it). I would want the same treatment as well. For the rare bad apple that is purposefully doing wrong things, they need to be reported and in many states physicians are required to do so depending on what issue one is talking about. Funny how nobody in the entire industry is willing to correct the top yahoo answer.
The question of “which whole life policy is the best for you” is different from the question “should you buy a whole life policy?”
That blog informally rated the top insurance companies. The knock on the Guardian was that their career agents liked a particular product, WL99, when other products had a higher IRR. It’s an incomplete story, though, without full context.
Obviously I like WL, and my efforts here have been to give the complete story as an advocate.
Some people have had bad experiences but most of those bad experiences were due to bad advice, not because permanent insurance is an intrinsically bad product. If I were a young physician, I would have the best and most complete Disability Insurance I could and the best and most complete permanent insurance I could and I would protect that with Waiver of Premium for the same reason I got DI.
Most people have bad experiences is more like it. Again the evidence shows most people surrender or lapse whole life. This isnt about a few bad cases here and there. No argument about getting good disability insurance although you arent going to find many non insurance folks promoting permanent insurance. I noticed you never came up with any independent academic work showing whole life as a good investment? Additionally the waiver of premium for permanent insurance isnt that special. Its a very poor definition of disability meaning it isnt going to cover most situations (which is also why it isnt as expensive). Funny how you can recommend a complete disability contract (which i agree with) but then in the same breath recommend something so incomplete. It isnt that much money so it isnt as big a deal but it isnt a requirement for sure.
There’s More to Some Life Insurance Policies . . . Than Just a Death Benefit
Although permanent life insurance is most often purchased to provide a death benefit, it can also provide living benefits.
The cash value of a permanent life insurance policy grows income-tax deferred. It can be used to provide:
•An income stream during retirement
•Help meet other long-term financial goals, such as funding a college education for a child or grandchild.
The guaranteed accessibility to the cash value makes permanent life insurance one of the most valuable assets people can own.
The impact of taxes can make some options more valuable than others. As a general rule, when policy values are surrendered, the amount received is not taxed until it exceeds the amount paid in premiums. Income tax is due on the gain.
Living Benefits
One of the benefits of owning a permanent life insurance policy is that there are ways you can use it while you are living.
As an example:
Take a policy that was purchased 40 years ago as a $100,000 permanent life insurance policy (JJ series) purchased in January 1969 to a healthy male, age 25.
•The policyowner paid the premium of $1,717 every year.
•He took advantage of all of Northwestern Mutual’s offers to amend the policy.
•Dividends were used to increase the policy’s value.
•No loans were taken on the policy.
In 2009, the policy values were:
•Total Death Benefit: $631,027
•Total Cash Value: $389,012
•Total Premiums Paid: $68,680
What options does the policyowner have?
Receive Income
Instead of a death benefit, the policyowner could receive a guaranteed income that would last the rest of his life, based on:
•Northwestern Mutual rates for 1/1/2009
•Male policyowner, age 65
•Lifetime Payment Plan selected
The policyowner would have paid $1,717 per year for 40 years. He would receive $27,593 per year for the rest of his life.
Take the Cash
Instead of a death benefit, the policy could be cashed in for $389,012 with the first $68,680 received income tax free.
Stop Paying
If the policyowner no longer wanted to make premium payments, the insurance coverage could be kept in force as “paid-up” with a face amount of $618,068. The policy would still participate in receiving dividends* which could be received in cash or used to increase policy values.
Keep the Insurance
The policyowner could also keep the policy and continue to pay premiums. This option would provide the largest death benefit and cash value overall. As an example, using the 2009 dividend scale* and applying dividends to increase the policy values, at age 80:
•Death benefit: $1,146,037
•Cash value: $919,497
If future dividends were taken in cash, or in the extreme case the policy never received any future dividends, at age 80:
•Death benefit: $631,027
•Cash value: $504,487
*The policy dividend is reviewed annually by the Company’s Board of Trustees. Dividends are not guaranteed.
Welcome to the blog Keith. Regular readers won’t be surprised to learn that Keith is a NML agent.
http://www.keithspengel.com/
I love how he picks a policy from over 40 years ago and doesnt use todays dividend scale. If you look at todays dividend scale and illustrate forward then the policy would perform a lot worse than your cherry picked numbers.
You should go over to a site like bogleheads.org and read some of the posts from people who used whole life to pay for college. The short story is that in this decreasing dividend environment, the polices are not performing as originally illustrated and are collapsing from the weight of those loans and these folks are now forced to find more money to keep these polices in force or surrender and tax a large tax hit. This doesnt even take into consideration that they would have likely had more money to pay for college if they hadnt used whole life as the investment.
There is no evidence that whole life is one of the most valuable assets one can own. Please stop typing from a script. Physicians on this board dont have trouble getting a loan.
Is it fair to consider a 40-year history of the stock market when considering the overall return it delivers, or should you only look at the last ten years? It is what it is, right? Or is that “cherry picking?”
And as far as your comment about loans…you can’t borrow any more from your policy (actually, the insurance company) than the cash value you have in the policy. And if you continue to pay premiums, it’s unlikely the policy will collapse, even with loans. But then again, it’s a ridiculous statement, like “I borrowed money from the bank and never paid the loan and now they want to repossess my car!”
A nicely written post with pros and cons of whole life insurance. Thank you for sharing. Whole life insurance, and other cash value life insurance policies are often misunderstood by individuals. Part of that comes from life insurance agents, who receive ‘sales training’, and are not provided with enough education on cash value life insurance; i.e. policy disclosures, performance, etc. Follow the money; a newly minted agent being mentored by a seasoned agent at a mutual life insurer is more than likely being groomed to sell whole life insurance. Whole life insurance provides the potential for large commissions. The seasoned agent is only looking out for his or her own best interest….and yes the young agent is rewarded handsomely as well….until they run out of prospects to deal with.
While not the majority there are some quality life insurance agents out there that will act in the best interest of clients. Looking forward to reading more posts on White Coat Investors.
Via email:
I have been watching the bantering on this board for quite some time now. I have posted on this board a while ago and figured I’d chime in. I hope to be in the same boat some day that Keith described. I took out two $100,000 whole life policies through Northwestern Mutual back in 1991. I will soon be approaching my 22nd anniversary. I have spent just under $30,000 on premiums over this time period. My two $100,000 polices have now become two $150,000 policies. The $30,000 I spent on premiums now has a cash value of about $95,000. I don’t get how many people feel this is some sort of scam. I think it’s great. EVERY dollar I put in now turns into two dollars, and my death benefit continues to increase as well. I plan on keeping this many more years. The flexibility and options available are nice to have. I also need the death benefit for many, many more years. It’s nice to have an ever increasing cash value and death benefit without increased premiums. I will also soon have the option to stop paying my premiums if I choose and continue to receive an increased death benefit and cash value.
I understand the argument against whole life and that most policies get cashed before they become worthwhile. But I really believe that if you hold on to it like I did, and need a long term death benefit, you will be rewarded in the end. I know everybody says it’s not an “investment” and that if somebody were to run the numbers they would say I only got a 3 or 4% return. But that doesn’t account for my ever increasing death benefit, and the fact that I am doubling every dollar I put in today. I am no insurance expert but I’m happy with my purchasing of this policy.
I’m not sure I would describe it as a scam. I would describe it as a low-return investment. I think you’re mistaken to say “every dollar you put in turns into two dollars” as if that happens instantaneously. It doesn’t. Part of that “two dollars” is the earnings on the money that’s been in that policy. There’s opportunity cost on that money. I’m glad you’re happy with your policy. It sounds as if you’re one of those rare people that needs/wants a permanent death benefit. It also sounds as if your returns have been particularly high for a whole life policy. In fact, they’re so high I’d double check your numbers if I were you. $30K invested over 22 years ($1364 a year) now worth $95K (I assume this your cash surrender value) works out to over a 9% annualized return. If more of that $30K were invested up front as paid up additions, that return would be lower of course, but likely still quite good. I have done a post in the past on another investor who was quite happy with his policy’s performance:
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
Readers should also recognize that 10-30 year treasury yields in the early 90s when this reader’s policy was purchased were 8%+. They are now < 2%. I certainly would not expect 9% returns from a policy bought today. I would expect returns between 2-5%.
Again, via email:
I apologize. You are correct. I just checked my numbers again. I have paid out $60K in premiums. My cash value is $95K. My death benefit has increased from $200,000 to $300,000 overall. Sorry about that. Like I said, I am no expert on life insurance. I realize that my increased cash value is tied into the money that’s already in the policy, but with today’s uncertain economic conditions, my return beats a CD, and they’re a lot safer than rolling the dice in the stock market. I just requested an in force policy illustration and the numbers really start accelerating as the years go by. I am still happy with my policy.
$60K/22= $2727 per year, which works out to a return of 3.98% a year, about what I would expect. Yes, it’s better than a CD is returning now and is certainly less volatile than the stock market. But buying a 30 year treasury with the premium each year would probably have done better, at least on a pre-tax basis.
My point is that these things aren’t some magic cash machine. Your policy’s performance is fairly typical for those I see. You tied up your money for 22 years (plus decades going forward) and earned 4% plus had some insurance benefits. If you’re happy with that, you bought the right thing. Certainly I wouldn’t sell it at this point. Whether or not buying it initially was a good decision, you should almost surely hold it going forward.
Thank you for sharing your experience.
$2727 per year is a relatively modest amount–my guess is has other investments, so he’s devoted a small portion of savings and investments to WL. Sounds reasonable.
The 4% gain is on a non-taxable basis as you note, so it’s equivalent to 5.3% gain if his marginal tax-rate was 25%. Maybe he would have done as well with treasuries from an IRR standpoint, but treasuries don’t have a death benefit.
Via email (please come to the blog post to post a new comment rather than emailing me by the way):
My EXACT thoughts…… “But Treasuries don’t have a death benefit.” Lost in all these arguments is the “value” of a death benefit. Anybody can run all kinds of numbers on actual percentage returns but what is the value of the hundreds of thousands of dollars in actual life insurance death benefits??
I really dont understand why you think the value of the death benefit isnt considered. It is the only real reason to purchase whole life to begin with. Its been mentioned countless times as well as who you can go to for an economic evaluation of that component. It of course only has value if you keep the policy inforce. You have to really value the death benefit. If you dont then you very likely will surrender or lapse. Thats the same for all permanent insurance. You must need or want a permanent death benefit and understand its cost. You also have made a math error similar to your initial thoughts on your return. If you are accessing this money tax free then if you are surrendering part of it then you dont get that assoc death benefit. If you loan it out then the loan and all outstounding interest is subtracted from the death benefit. This is one of the reasons why its typically better to take the money out later in life if necessary. The ability to get a loan is fine but it isnt magic. You must pay for the death benefit to get it. It is a better return then the cash value although it will still be a conservative investment. Glad you are happy with your purchase.
NO it isnt. It is tax deferred and if he accessed all of it to get the 4% he would need to surrender and pay taxes on all gains as income. The only way to avoid taxes and take out most of it would be loans and then you wouldnt even have 3.98% return. You would also be paying interest on that loan until you either pay it back, lapse, or die. That loan could really hurt over the following decades.
You dont get a death benefit unless you die with the policy in force. Lets not paint a situation where that is less likely to be the case since the death benefit is the major return.
If he wants to know his return via a 3rd party, i recommend james hunt. he will even include the cost of art as part of the analysis.
Rex, do you pay taxes on the cash value gains in WL? No. Do you pay taxes when you take distributions from basis to borrow? No. Do you have to surrender the policy to take distributions? No. Could a 35-year-old pay premiums for 30 years on million dollar death benefit and then have his basis returned to him, tax-free, and still have a million dollar death benefit? Yes.
Will there be a point where a whole life policy will sustain itself thru its cash values without further premium be paid? Yes. Can you shorten that period by adding Paid Up Additions? Yes. Are there WL products that are absolutely guaranteed to be paid up in ten years? Yes. Can a policy still have increases in Cash Value and Death Benefit when a policy loan is outstanding? Yes.
[Rude comment deleted.]
To access all 4% you would need to surrender period. [Rude comment deleted].
Hi – I have been looking at these whole life policies and come to a similar conclusion that the fees are very high and if you don’t need it for estate tax purposes or a permanent death benefit then a combination of term insurance and investment will likely offer a more optimal return. Do you feel differently about the returns if the policy will be over funded each year by about 1-2x the premium amount at a cost of 5% of the initial over funding. Assume a high tax bracket. I have been trying to make sense of whether this could serve as a good stable investment while covering the need to have some insurance over my life time. I can also hold it for 20+ years so assume it’s a long term investment.
If you’re going to use a whole life policy, it should be overfunded and paid on an annual basis to improve the returns. You also need to hold it to death. But no, I don’t think just doing those things turns it from a relatively poor investment to a good one.
The article’s entire premise is wrong. Whole Life insurance is not an investment. If you wanted to compare it to an investment from a rate of return perspective, you’d need to take a lot into consideration. The Internal Net Rate of Return on a Whole Life policy over time will be somewhere between 4-6%. Again, that’s NET. To compare to another investment vehicle, say a mutual fund, you’d need to add in taxes, losses, costs and fees, and lastly the cost of term insurance. When you add in a conservative tax rate of 20%, a conservative management fee of 2% and the cost of term insurance, you’re already at a 10% rate of return to match the IRR on Whole Life.
People like to compare GROSS rates of return in the market to NET rates of return in Whole Life. And that’s because they’re dishonest and have an agenda.
Whole Life is like your putter in golf. It won’t hit the furthest, but it’s deadly accurate and essential to win the game. The greatest benefit of this particular vehicle is that your compounding interest does not stop when you use the money. No other vehicle can match this. When you sell your stocks, you’ve reset your compound interest and must start over from scratch. When you take a 401k loan, they sell your positions and you’ve also reset compound interest. If you’ve ever looked at a compound interest curve, you see that the magic only happens after long periods of time and without interruption. When people reset their compounding, they never stand a chance at experiencing the magic.
I think that BTID can be a good strategy IF you find a vehicle that will return 8% or better over the subject period (say 30 years). There are those who will cite historical returns of the stock market and tell you that’s the way to go although, in my view, that’s like looking at a boat’s wake to tell you where you’re headed.
I don’t think many of the posters on this subject don’t like WL because they believe they can achieve superior results during their accumulation phase (saving and investing during their income-producing years). The puzzle is how to spend down that nest-egg in retirement and optimize income. If you’re overly cautious, you reduce potential income (to the delight of your heirs). If you’re overly optimistic, you run the risk of running out of money. If you have WL as PART of your strategy, you have the permission slip to spend more freely in the decumulation phase because 1) you’ve already addressed your desire for legacy, and 2) you can use distributions from your WL if needed to supplement retirement income (after a 15 or 20-year spend down of other assets).
Another strategy, with WL in place, is to take distributions from invested accounts only in up years, and to take distributions from your WL in down years.
I like two-engine planes more than single-engines, and I like four-engine planes more that two.
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Wow Will. That sounds like it came straight out of a Northwestern Mutual training manual. First, 2% is not a “conservative” management fee. It’s a rip off. Second, 20% isn’t a conservative tax rate. My investments in my Roth IRA are taxed at 0%. Those in a taxable account actually have a negative tax rate thanks to tax-loss harvesting and donation of appreciated shares as my annual charitable contributions. A tax-efficient index fund kicking off 2% in distributions a year taxed at 15% is only a 0.3% drag. Third, if you don’t need the life insurance, it doesn’t carry much value. Fourth, you say “over time” you get an IRR of 4-6%. It’s important to define time. If you define time as 53 years (the life expectancy of a 30 year old), then your guaranteed returns on the cash value are 2% with projected a little under 5%, slightly higher for the death benefit. Fifth, you don’t “reset compounding interest by selling stocks” as long as you move the money into another investment such as another stock. Sixth, as mentioned dozens of times above in the comments, whole life returns are only tax-free if you borrow out of the policy, and then they’re not interest free. Last, there are plenty of direct recognition policies still being sold out there, and obviously money pulled out of those is no longer generating dividends.
The only agenda I have with regards to whole life is that people understand what they’re buying BEFORE they buy it, and it seems that most of its salesmen provide only the positives.
I’m not sure that you understand what direct recognition is. When you borrow from your policy, you’re actually borrowing from the insurance company with the cash values in your policy collateralizing the loan. Therefore, there’s absolutely no chance of default to the insurance company. They like policy loans!
What direct recognition does–as far as the Guardian is concerned–is to “directly recognize” that borrowing at 8% (the contractually stated rate) is higher than prevailing market rates and your dividends are actually increased as a result, effectively reducing the interest rate to around 7%. (Conversely, if we were to enter the super high interest rates of the late ’80s, then the dividend would be diminished.)
For WL99 policies, the policy loan rate is 8% for the first 20 years and until age 65; thereafter it’s 5%. For 10-pay policies, it’s 7% for 10 years and until age 60, 4% thereafter. The importance of this is if you wish to use your WL policy to supplement your retirement income.
Taking tax-free distributions from your policy is accomplished by going to basis and then borrowing. Properly designed, this is a great strategy to help in retirement.
White Coat Investor, I would have no idea what’s in a Northwestern Mutual training manual. I know just enough about the company that I would never own a permanent life insurance policy with them. You and I are in more agreement than you can imagine. I do not do mutual funds for my clients because of the exorbitant fees associated with them. (I would guess you’re a Boglehead?) When I said 2% was a conservative management fee, I was talking about all the fees in mutual funds. Is 2% in a mutual fund a rip-off? Absolutely. But the masses have their money in government qualified plans and 90+% of the money in qualified plans are in mutual funds where the total fees are 2.5-4.5% per year. (Expense ratio, which includes 12B-1, turnover ratio, management fees, and any possible loads.)
I would argue that 20% is indeed a conservative tax rate on investments. Capital gains is at 15% for some, and 20% for higher wage earners, especially “white coats.”. And then there’s the 3.8% additional tax for higher wage earners. And don’t forget about state income tax! 20% is indeed conservative. Add bonds into the mix, which most people have in their portfolio, and we are talking ordinary income tax, and not capital gains.
I was pretty surprised to hear you mention a Roth. I, personally, do not qualify to contribute to a Roth and nor do the majority of my clients. My post to you was targeted at “white coats,” the majority of whom also do not qualify to contribute to a Roth. And even if someone can contribute to a Roth, it’s not much. Just $5,500/year.
Tax-loss harvesting doesn’t really help your case, it hurts it. There are no losses in whole life. Losses are much more detrimental than people imagine. Are you aware that the actual rate of return on an investment in the market is always less than the average rate of return? This is because of losses. If an investment loses 50% of its value (like the 2008 crash) and then has an increase of 80%, the average rate of return is 15%. But the actual rate of return is -10%. HUGE difference. When you lose money, you need a greater rate of return than your loss, just to get back the money you lost.
When I said “over time,” I meant less than 20 years. But again, all this focus on rate of return misses the whole point. This particular vehicle does not reset your compounding interest when you USE the money. The miracle of compound interest, Einstein’s 8th wonder of the world, ONLY works over long periods of time and without interruptions. When you sell stocks because you NEED the money, you’ve reset compound interest and must start all over. With whole life, you have the ability to use the money along the way and never reset compound interest. This cannot be matched by any other financial vehicle.
Rate of return is not the entire story. I just used my whole life policy to make an investment. I took a policy loan for $50k and gave it to a real estate developer who is paying 12% for private money to do fix and flips. (I don’t know why people have a dime in the stock market. High rates of return are available in alternative investments with a lot less risk.) Think about my investment. I’m earning 12% in my investment, paying the insurance company 4% for the loan, while earning 5.89% on my money inside the policy. My NCB (net cost to borrow) is -1.89%. I’ve increased my rate of return by 1.89% by utilizing this vehicle. Most people would save money at ~0% in a bank savings account until accumulating $50k, and then make the investment with their cash. Think of the lost opportunity cost taking the time to save in a 0% environment like a bank account. I not only increased my investment’s rate of return by 1.89%, I also earned more along the way.
There are other important factors you’re completely overlooking. What is the rate of return on the liquidity whole life provides? Liquidity helps my clients avoid paying interest to credit card companies in times of need. Liquidity puts my clients in a situation to take advantage of opportunities for investment. And the nature of whole life helps my clients make large purchases like cars, college and weddings without resetting compound interest. What’s the rate of return on all that?
Assets inside whole life insurance do not show up on the FAFSA form for obtaining gifting, grants and aid for college. This means the more assets one has inside their whole life policy, the greater the likelihood the cost to send their kids to college will be reduced. Other assets like stocks, bonds, mutual funds and even home equity could increase the cost of attendance. What’s the rate of return on that?
Lastly, the fact that whole life is only tax-free with loans is a moot point. It’s actually FIFO, as opposed to traditional LIFO, so your cost basis comes out first, before loans are taken. Taking loans are tax-free and it’s just strategic. It’s actually beneficial. The cash surrender value at age 65 is actually about half of what can be taken out of the account in retirement. Meaning you can take loans for twice that amount from 65-85 and still leave a death benefit for heirs.
P.S. You have also forgotten about the value of having PERMANENT life insurance, instead of temporary. What would you tell my 24-year-old client who went in for a routine check-up and had emergency heart surgery the next morning for an artificial heart valve? He’s no longer insurable. If he had a 10 or 20-year term policy, he has no options once his term expires.
And what about the guy who got cancer with 3 years left in his term policy? Does he fight for his life and risk outliving his term, only to lose the battle to cancer after his term expires and leave his family hung out to dry? Or does he intentionally let the cancer win so his family will survive after his death? Permanent life insurance has inherit value in the fact that it’s PERMANENT.
P.P.S. My whole life policy, into which I contribute $50k/year, has a Waiver of Premium rider. This means upon my disability, the life insurance company will make my contribution of $50k/year for me. It’s a self-continuing investment upon disability. What other investments offer that?
Will-
1) If your only alternative to whole life insurance is investing in mutual funds with a 2%+ total expenses, then whole life doesn’t look nearly so bad! I get sick paying 1%, much less 2%+. My portfolio ER is something under 20 basis points, including all 401K and advisory fees and commissions.
2) You really need to become familiar with the “Backdoor Roth IRA.” Yea, it’s only $5500 per year per spouse, but it’s better than a kick in the teeth. Here’s a link to my page about it: https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
3) Yes, I’m quite aware of the difference between average returns and annualized returns. Tax-loss harvesting can be used to reduce the effective tax rate on a taxable investing account, making it appear better in comparison to an insurance product.
4) Discussing rate of return is actually VERY important since the discussion as usually had is what to do with extra income someone wants to invest and doesn’t need to spend at this time. Should he invest it in a taxable account or buy a permanent life insurance product? Aside from various asset protection and estate planning issues, it really comes down to after-tax, after-fee rate of return.
5) FAFSA is a smoke-screen. The children of people who can afford to buy sizable whole life policies aren’t going to be getting any need based grants/scholarships.
6) While borrowing money at 4% and earning at 12% sounds great, there’s something better- not borrowing money that is earning at 12%.
7) If someone needs or wants permanent insurance, then buying a guaranteed universal life policy is far cheaper than a whole life policy. If you’re the very rare person diagnosed with a terminal illness near the end of his term life policy, those polices can generally be continued (although at quite a high rate) each year.
8) Waiver of premium riders aren’t free. You can get the same thing by purchasing a far better, and less expensive (relative to what you get) disability insurance policy.
I’m not sure why you think I’ve “forgotten” all this stuff. Anything not originally addressed in the post has surely been hit on in the 500 comments below it at least a half dozen times.
Comment about Rate of Return in your WL policy. I don’t think you are earning 5.89%–that might be the dividend rate but it’s not the IRR. It’s still a valid point that you can borrow from your policy and use it for investments or purchases, but it the scenario you cite, you would pay taxes on the 12% at your highest marginal rate. If that’s 33%, then your 12% became 8%. I’d still do it, but not quite as rosy as you suggest.
Who’s your insurance with? 4% is a low loan rate!
Meant to address that comment to Will.
Bob, my IRR is 5.89%. The dividend rate is much higher. As to taxes, I do some extremely strategic things as a business owner and my effective rate is under 20%.
Remember what Romney and Obama’s effective rates were? Romney’s was 14.1% in 2011 and Obama’s was 18.4% in 2012.
Hey Will, I would love to know more about your policy. I support a team of 14 producers showing Guardian and Mass Mutual and the most heavily overfunded non-MEC illustration I can show using a 10-pay has an IRR of right at 4.8% and that’s after 20-plus years. Therefore, I question a 5.89% rate. Please tell me more.
Dear White Coat Investor, I read your bio. That really helped me understand where you’re coming from. Unfortunately, it’s not fair to write an article against Whole Life insurance because you personally had a bad experience. Would it be fair for me to write an article putting down all stocks because I owned a bunch of Apple stock? Or would it be fair for me to write an article putting real estate down because I happened to own properties in Phoenix and Vegas?
All Whole Life insurance is not created equal. There are almost an infinite number of ways to design a policy. There is a book you might be interested in called The Wealthy Physician. It explains how you never want to buy an all-base Whole Life insurance policy. I tend to agree. But we must be careful in wanting to put down all Whole Life policies because we had a bad experience with an all-base policy. Key factors when it comes to Whole Life:
What type of Whole Life policy? (10-pay, 20-pay, Paid up at 65, Paid up at 100, Paid up at 121, etc.)
What type of life insurance company?
What are the loan provisions?
Company’s Comdex rating?
Riders on the policy?
Dividend history?
Financial strength via Vital Signs report?
These are all crucial to making a decision on a particular Whole Life policy. Just like you should do your homework before buying a stock or getting into a mutual fund, homework is essential before entering into permanent life insurance.
I know Rex is looking for an independent study regarding the value of whole life. Although this link is specific to one of the mutual life insurers (so it’s completely biased), but there is a reference to an “independent” study by Ibbotson: http://www.newyorklife.com/products/enhance-your-investment-portfolio
What is a super-conservative investor (one who cannot tolerate a loss of principal) do for Fixed Income?
I think whole life works great for the “super-conservative” investor as you define him. Although I would propose that someone who cannot tolerate any loss of principal is not an “investor” at all. What does a “super-conservative investor” do for the non-fixed income portion of the portfolio?
“Although I would propose that someone who cannot tolerate any loss of principal is not an “investor” at all.”
– Whether they qualify as an “investor” or not, I have clients who have this type of risk profile even though they are in their 40s, 50s or 60s. Even though you and I know that they’ll need some equity exposure in their portfolios to outpace the projected 25+ years of inflation during their lifetimes, it can be a challenge to educate clients with facts and historical trends that differ from their opinions and feelings.
“What does a “super-conservative investor” do for the non-fixed income portion of the portfolio?”
– You’ll love this answer: I’ve opened deferred variable annuities that come with guarantees that do not force annuitization. Keep in mind, it’s not a preferred option for my practice (I prefer to use other investment strategies with low-cost mutual funds and ETFs). I use the analogy of my 3-yr old son staring at the edge of the pool. He doesn’t know how to swim (yet), so we put those “floaty” things on his arms to keep him from drowning. If he wants to swim like Michael Phelps, those things are going to slow him down considerably. The obnoxious fees within a VA act just like those floaty devices in that the performance of a VA will most likely (if not guaranteed to) underperform a similar collection of straight mutual funds/ETFs. That said, the straight mutual funds/ETFs will not stop the inevitable losses that comes with equities, so the floaty device (fees) are there to keep the client invested (keep them afloat) even though they’re scared as hell and want to swim back to the edge (ie sell their entire equity position). If the market returns 8% over a 10 – 20yr time frame, these clients are ok getting 4.5% – 5% (after fees, of course).
I think it’s safe to say that if I was your advisor (and I firmly believe everyone – and I mean everyone – including financial advisors – should have an advocate who won’t have any personal feelings or emotions around your money), we would have agreed long ago that your risk tolerance, investment philosophy and overall financial strategy would not include a whole life product.
Instead, I would simply swindle you into buying long-term care, annuities, disability and every other insurance product I can sling your way because I’m just an ogre, after all.
Not crazy about VAs either, but the Guaranteed Withdrawal Benefit can be useful and provide a predictable source of income without annuitizing.
I might be the only one still getting the Shrek references, but since I think they’re aimed at me, that’s just fine! It’s tough to make financial plans that you know aren’t that good because the client can’t handle a good one. 🙂
“It’s tough to make financial plans that you know aren’t that good because the client can’t handle a good one.”
– “Good” is relative, isn’t it? What’s good for one client may not be good for another. I’m sure there is a similar scenario for your patients (although I’m not going to pretend I have any insight into the medical profession).
In spite of some of the kool-aid that’s been splashing about on this particular post from the life insurance agents, not all financial strategies start & end with a whole life product. It’s unfortunate that there are agents out there who are either misinformed or unethical because even though I’m a firm believer in the product, it has to be positioned correctly (if at all) within a well-defined plan that includes other solutions.
I like to think that I make GREAT financial plans – not just good ones, by the way.
A first step toward financial security is to think through what might happen in life – your dreams for the future as well as things that could get in their way. Whatever goals you set, if you expect to achieve them over the long haul you have to manage risk.
Life Insurance: Financial Fall-back and Opportunity
It’s a fact that unexpected things happen, and they can be expensive. Cars and homes need repairs, jobs can come and go, and health issues demand recovery and resources. Any of these situations – and more – can pose personal and financial challenges for families.
While you can’t always prevent the unexpected from happening, you can protect yourself financially. That’s why many people use life insurance as the risk-management foundation of their financial security plan.
Best known for paying a death benefit to beneficiaries, life insurance has many options that can also meet multiple needs during your life. Term life insurance provides coverage for a limited period of time (10-20 years) at a lower premium and offers an option to convert to permanent life insurance. Permanent life insurance can provide death benefit protection for a lifetime, and also accumulates cash value that can be tapped through disbursements or policy loans for other needs throughout life. Northwestern Mutual permanent life insurance policies are eligible for an annual dividend, which can be used in various ways, including paying premium, purchasing additional insurance, or distributing cash.
Your financial representative can explain the many ways life insurance can be used to help manage financial risk and seize opportunity. Here are some of them:
Coverage risk – When term insurance expires after a 10-to-20-year contract, you must apply for a new policy and approval usually is subject to underwriting. Getting permanent insurance at a younger age protects your insurability for life, helping you avoid the risk of being denied insurance due to health issues that may develop. If life insurance comes through your employer, having your own policy ensures you are protected even if you leave your job.
Debt or business risk – Once it is accumulated, the cash value of permanent life insurance can be used to fund home down-payments or improvements, start a business, pay for emergency expenses or address other debt. As a long-term financial vehicle, permanent life insurance offers great benefits once cash value has accumulated over time.
Education expense – If education is a priority for your family, life insurance can play a part in your college savings plan. Grandparents or other relatives may wish to leave a legacy of support for education through life insurance policies, and the cash value of permanent life insurance can be tapped to pay college expenses.
Health risks – Permanent life insurance cash value can pay medical expenses or address the cost of long-term care. Some people use cash value to pay long-term care insurance premiums. A disability waiver on your life insurance policy can protect against risk by confirming that Northwestern Mutual will pay your premiums should you become disabled.
Longevity – With the average American living past age 80, retirement can last 20 to 40 years, making ongoing income an important concern. Another option is to convert permanent life insurance cash value to supplement retirement income. Your financial representative can discuss your options.
Tax risk – Permanent life insurance cash value grows tax-deferred, a significant advantage over other financial products, and life insurance death benefit is tax free to the beneficiaries. That is one reason why life insurance is often used as an estate and business planning tool to pay for estate taxes or business liabilities.
Life insurance is the bedrock of any sound financial security plan and the critical foundation for controlling risks. It is also a tool that must be selected based on your individual circumstances. Your financial representative can provide the information and guidance to help you determine the policy or combination of policies that will best meet your needs.
Read more: Life Insurance as a Risk Management Foundation | Northwestern Mutual
Did you copy and paste that from a manual?
1) Even though you are paying only a 1% management fee in an index fund, and have an expense ratio of 0.2%, you’re still forgetting about turnover ratio. Turnover ratio arguably has the biggest impact on your account. Turnover indicates frequency of trades and if they trade often, gains are considered ordinary income on your 1099. If your solution is for everyone to get out of their mutual funds and brokerage accounts and move to an index fund, that actually has the potential to kill the market.
http://www.thinkadvisor.com/2013/04/29/will-indexing-kill-the-market
So again, when you factor in management fees (even 1%), expense ratio (even 20 basis points), turnover ratio, taxes, and the cost of term insurance, you’ll still need 8% year in and year out to keep up with 4-6% in a whole life contract. And since whole life returns are without loss, an average of 8% in your investment account will not end up with the same amount of money as the whole life policy. Due to losses in the investments, it will take a greater rate of return than the loss just to get back to even. So the average ROR will have to be more like 10% to net out 8%. And in all this discussion, we haven’t even talked about RISK. What will you tell someone who follows your advice and planned to retire right after a market crash? What about the millions who were ready to retire in 2008, only to see 50% of their retirement vanish? I see many people who are just now back to where they were in 2008 and some who are still not back.
2) Not interested in a Roth. The greatest rate of return in life is achieved through liquidity. Liquidity ensures I will never have to pay interest to others because I did not have access to my money. And liquidity ensures I am able to take advantage of opportunities for investment. I do not have one dime in a qualified plan. A 401k is even worse than a Roth because you are subjecting yourself to future tax rates that you have no control of and with the national debt at 17 trillion dollars, I’m not holding my breath for taxes to go down. And tax brackets are not adjusted for inflation.
4) You are looking at life insurance as an investment, and therein lies the problem. Whole life is not for “extra income someone wants to invest and doesn’t need to spend at this time.” It’s for the exact opposite. You should read Becoming Your Own Banker by, Nelson Nash. Whole life insurance is a place for wealth to reside. And it beats the pants off of a bank account. My whole life insurance is my emergency fund, my savings account for large purchases and my reserve where I get funds for investments. In a traditional plan, the emergency fund is in a bank savings account or under the mattress earning 0%. The fund for large purchases, such as cars, is in a bank savings account earning 0%. And investments are tied up with the hope to earn a good rate of return. Think about this: Since I have more money in my whole life insurance than I would following BTID, that also increases the rate of return you would need in the market to beat my whole life policy. I have more money constantly “invested” because I don’t need an emergency fund earning 0% and I don’t need a savings account earning 0%.
5)FAFSA is not a smoke screen and you are completely wrong. I know, I deal with these situations every day. Whole life is not something that is only affordable to some. You don’t solve for death benefit, you solve for what the client can afford and supplement with term to get the proper death benefit. A recent client with a daughter named Elizabeth was given $17,000 of grant money even though her EFC (Expected Family Contribution) was $70,000!
6) I’m sorry, but you clearly do not understand whole life insurance. I think it’s malpractice for you to be blogging on whole life without really understanding how it works. I’m not borrowing at 4% to earn 12%. Again, whole life insurance continues to grow, even when you use the money. No other financial vehicle can match this. When I took a $50k policy loan, my $50k is still earning in the policy! So even though I’m paying 4% to the insurance company on the $50k, I’m earning 5.89% on that $50k. (5.89% is my IRR, not the dividend crediting rate.) So I’ve increased my rate of return by 1.89%, simply by utilizing this financial vehicle. That is better than paying 0% and earning 12%.
7) I’m sorry, but you also do not understand universal life. Inside universal life is YRT. (Yearly Renewable Term) YRT is an ever-increasing cost of insurance. It gets to so high in later years, it eats the account up unless the account had incredible returns on the investment side. Ask anyone you know for an in-force illustration on their UL and you will see it blow up in their 60s and 70s. Universal life is new and will end up causing a black eye to the life insurance industry. Whole life is a dinosaur and has been around longer than the income tax. It’s stood the test of time and does what it promises to do, year in and year out.
Permanent life insurance has intrinsic value and I will not put my clients at risk by giving them temporary coverage.
8) Again, you do not understand whole life insurance. The Waiver of Premium rider is not designed to replace one’s income upon disability. That’s what a disability policy does. You need both. The disability policy replaces 60% of your income, but what about your investments? Where are you going to get the money to continue contributing to your investments? You just took a 40% haircut in your pay, you cannot work and your expenses increased. This is a HUGE benefit to whole life insurance. If you’re contributing $50k into a whole life insurance policy annually and you become disabled, the life insurance will continue to make your contribution of $50k for you. This is a self-continuing investment plan. What other investment offers this option?
Will-
What do you think the turnover ratio is for most index funds? On my largest holding, the Vanguard Total Stock Market Index Fund, it’s 3.2% a year. That’s not going to add much cost. Thanks for playing. And index funds killing the market? Uh…nice try. Do you tell your clients that as you sell them loaded actively managed mutual funds? “You should buy this so you don’t kill the market.” Wow. And you don’t need to “add in the cost of term insurance” if you don’t need said insurance. That’s a favorite one for insurance agents though, assuming you somehow need term insurance well into your 60s and 70s. I expect I won’t need it after 50, and it’s still awfully cheap then.
Not interested in a Roth because you like liquidity? Oh boy. Not one dime in a qualified plan? I’m not sure I need to respond to that. It’s pretty evident you’ve drunk the Koolaid on this subject. I submit you’re paying way more tax than you need to by investing without qualified plans.
I’m familiar with Nash’s writings. I don’t buy it. Sorry. Nor do I believe someone should buy as much life insurance as he can afford. Nor do I believe you’re making an IRR of 5.89% on your whole life policy. I guess we’ll have to agree to disagree on your stance on whole life as a wealth creating vehicle. You’re clearly a true believer in the Bank On Yourself philosophy. You also have an interesting definition of malpractice. I wish malpractice could be prosecuted against sellers of whole life, but unfortunately, they are not bound by such conventions.
What risk do you think you’re putting your clients at by selling them term life insurance? The risk that your commissions will be too low? Term life insurance is for covering a temporary risk, that of dying before the portfolio is large enough to support their loved ones if they die. Since the risk is temporary, the insurance should be temporary.
You can pay whole life insurance premiums just fine with cash obtained from disability insurance benefits. You just need enough disability insurance to both cover living expenses and investments.
There is a universal life product with level premiums called Guaranteed Universal Life. It builds no cash value, but provides a permanent death benefit. The total premiums paid are much less than a whole life policy with the same death benefit. I’m surprised you haven’t heard of it.
In a few weeks, you’ll move on and another agent will be here using the same old tired arguments. If you don’t believe me, read the 500 comments above yours.
I find the article interesting but confusing because you are including in your 8 reasons not to buy whole life…reasons not to buy Universal Life or Variable Whole Life. I can not change the price of our dividend participating whole life which over the last 20 years we had a net IRR of 4.81% per year. I’d be happy to show you the policies. If you put 100K with my company since 2000 in a single premium, you’d have 174K today…what would you have with the S&P 500?
I work for a fraternal life insurance company and we don’t make anywhere near 100% on whole life and many commercial companies pay higher commissions on term than whole life. I’d be happy to show you my commission structure. I think the comment above about putting clients at risk is less than 2% of term is collected. 100% of whole life is collected. I did a claim on a paid up 30 year 10K whole life policy this month that was $300 per year for 30 years. The death benefit was 90K…I think that was worth the 9K for the widow. Your number one reason for not buying whole life was cost….you should really say price because the price is more but the net cost is less. If you pay 10K for a term policy over 20 years and don’t die…your cost was 10K, if you pay 30K over the same 20 years and have 42K in cash value, you have a net gain of 12K. So, the price is more…the cost is less.
There is no 1 size fits all…saying everyone should buy term and no whole life or vice versa is not smart and most advisors look at individual situations and do what is best for their clients. Most of your reasons not to buy whole life really don’t apply to my fraternal organization, ie Don’t need a middleman…most of our members don’t understand life insurance and are happy to have a person they trust to explain it to them, Complexity…it’s not complex, it’s tax free and if you die we pay the death benefit, if you live and you want the cash value, we give you the cash value. Returns take too long…the tortuise beat the hare last time I checked, the 80s dot com boom of the stock market is gone and the volatility is here to stay…my company returned 4.81% on average per year for the last 20 years, be happy to show it to you. Not properly paid for loss of liquidity…I gave you a real life example earlier of a 30 year 10K for $300 per year that paid 90K, I think that was worth it to the widow I brought that too. Lastly, you probably don’t need it for taxes….you are right because you will be dead. The average home where I live is 300K, if your child inherits the home and other assets, they will have to pay 35% in taxes won’t they? If you would rather give the govt that and not your family….so be it but with a properly planned trust funded with life insurance you can do both!
I did want to comment on the “Guaranteed UL” you mentioned. The issue with this type of policy is the guarantee is through a no lapse guarantee rider. Most no lapse riders say that if you are late 1 day with a payment or miss a premium payment the guarantee is then null and void. I do think it is a good subject but injecting UL and variable whole life shoule be a different subject because these products are totally different animals from the whole life that Walt Disney used to start Walt Disney World…participating whole life.
Why would you pick 2000 as the starting date for an S&P 500 comparison? Oh yeah, I see. Cherry-picking. You’re definitely the first agent on this thread to do that….:)
100% of whole life isn’t collected because the vast majority of policies are surrendered early.
I also disagree that most “advisors” look at individual situations and do what is best for their clients. Most use the suitability standard, which is quite different from a fiduciary standard. I’m not sure what “average” you’re talking about with your company, but the whole life policies your company sold last year certainly did not have a return of 4.81%.
You might want to look up the estate tax exemption. It’s far more than $300K (by about $4.82M, more if married.) The child won’t have to pay any taxes. It really bothers me to see people who sell this stuff who don’t understand the basics of finance. How can the client get a square deal even if the agent wanted to give one?
Here is why we love Whole Life:
There is one long-term financial asset, permanent life insurance, which stands out from the rest in providing safe, steady and guaranteed growth. It is the only financial tool that includes life insurance, offering lifelong protection against the risk of a premature death while accumulating cash value that can be tapped throughout life. Designed for long-term value, it has several advantages that other vehicles don’t.
A performance engine – Permanent life insurance policies from some companies are eligible to receive annual dividends, which can be taken in cash or used to cover or reduce out-of-pocket premium payments. They also can be added to the policy for continued growth, in which case they provide additional growth. While annual dividends are not guaranteed, Northwestern Mutual has paid them every year since 18721 and is the only life insurance company that has paid more than $60 billion in dividends to its clients over the past 25 years.
Access to cash – On a permanent life insurance policy, cash value is guaranteed to grow over time and can be enhanced by the dividends paid on the policy. Over timeframes of 20 years or more, that growth can be significant. Once it accumulates, your cash value is guaranteed and can be accessed on a tax-favored basis2 for business opportunities, retirement income, emergencies, or to pay policy premiums.
Predictable growth – The long-term value of Northwestern Mutual permanent life insurance is that the cash value growth has been steady and consistently good when compared to other options. It is guaranteed to increase every year and can never go down in value. The interest rate credited on the cash value has been relatively stable and has not been impacted to the same extent to the ups and downs of the market as other financial assets.
Tax benefit – One particular advantage of permanent life insurance is that its cash value grows tax deferred, unlike assets in savings accounts, CDs or mutual funds. You can access the money on a tax-favored basis whenever you might need it, without incurring a 10% penalty for example for taking the money before a certain age. There are no required minimum distributions from cash value, unlike other tax-favored investments such as IRAs and 401k plans. In the event of your death, your beneficiaries would generally receive the policy proceeds income-tax free.
Life-long protection – Once you own permanent life insurance, coverage lasts for your lifetime. Permanent life insurance is a great option to protect the lifelong needs of your family and for accumulating assets as part of a retirement plan. Premiums can remain at a level rate from year to year and as long as they are paid, beneficiaries will receive the proceeds upon the death of the insured, generally income-tax free. Individuals and business owners choose permanent life insurance to protect their families and business interests, and to leave a legacy for future generations.
Long-term financial security for your family – When you reach retirement age and have built cash value over decades, you have multiple options for accessing those funds. These options range from cashing in the policy, converting it to a guaranteed lifetime income, keeping a portion of the death benefit and accessing some of the cash value, or continuing the policy to protect your family and leave a legacy.
Wow…that’s really offensive, Jeff. If you haven’t noticed, throwing up marketing puke doesn’t work on this site. Please stop doing that.
By the way, I have a lot of respect for Northwestern Mutual as a company, but you and many other NML agents need to learn how to have an honest conversation with clients and prospects.
WCI et al. – as you can see, not all ogres are alike.
Anyway, I learned something today that you might find interesting. One of the life insurance companies that I am affiliated with had to implement a cap of $10 million dollars for the optional paid-up additions rider that typically comes with a whole life contract. After the 2008 financial debacle, high net worth individuals discovered in 2009, 2010 and 2011 that one of the few places to put their safe money and get any kind of return was in whole life insurance. Apparently the amount of money received by the life insurance company in just paid-up additions (optional payments above the premium) over those three years was approximately $2 Billion.
As a financial adviser – excuse me – ogre, I would like to work with these type of high net worth individuals, but I don’t. That said, I can only imagine that these individuals would not only have a small army of advisers reviewing their investment portfolio, but that they would also have access to a number of unique opportunities or investments not available to the general public. And yet they chose boring ol’ whole life for some of their money and were actually upset when the life insurance company refused to take more of it (for obvious reasons – life insurance companies only have a relatively limited number of “safe” investment opportunities for their billions of dollars too).
So, if whole life is really that awful, why is it even an option for high net worth individuals?
its always funny that someone has to pretend that bc someone rich purchased whole life that it makes sense at all (even for that person). How many times is this fake reason going to be presented (like all the other ones that keep being brought up). In case you havent noticed many of the ultra rich invested with Madoff. The fact that some rich person did it is not even a shred of evidence why someone else might. Whole life isnt boring, it just doesnt work for most people. The great majority lapse/surrender.
I cant even believe someone tried to pass that link off as a valid study. Wow. It says so much. Again the product has been around for 150 years but there seems to be ZERO independent studies showing it as a good investment. This is unlikely to be by accident.
I also had to laugh at Jeff’s comments. I wish I had a “performance engine.” I would be much more interested in “predictable growth” if it were at a rate higher than 4%.
I also agree with Rex’s comments about high net worth individuals, but would add that high net worth individuals often have more interest in protecting principal than growth. Perhaps one of the other reasons that there are more PUAs are that the bank on yourself/infinite banking movements are becoming more popular. In general, PUAs are a better “investment” than the original policy, due to lower commissions.
actually this story is even funnier. Notice they didnt limit how much vanilla whole life they could purchase but only paid up additions. Id be super angry if i was that person expecting to be able to purchase PUAs but once purchased realizing that company was happy to take my money for the fully loaded product but not the discounted PUAs. Actually its a cautionary tale that you shouldnt purchase whole life with the expectation that you will automatically be able to overfund it with PUAs up to MEC limits. They can always make the limit even lower. It also confirms that there is no magic with investing. The company doesnt feel at this time that it can invest in a manner to guarantee all those PUAs.
Your comments don’t make much sense to me. You can purchase WL insurance and choose to pay just the base premium or you can purchase WL and fund it with scheduled and/or unscheduled PUAs. You just ask your agent to design it that way. What do you mean “they can always make the limit even lower”? “They” is the IRS and they determine what constitutes a MEC, not the insurance company. Roughly speaking, you can fund about 1 x the base premium into your contract without creating a MEC.
The “magic” with WL is that it offers a 4 to 5% IRR over time. If you think you can do better, fine. Just remember when calculating the return of your alternate investment to add back the cost of term insurance. My software calculates that you would have to make between 6 and 7% to beat Buy Term and Invest the Difference. Finally, not one person I know would suggest that anyone would EITHER buy WL OR Buy Term and Invest the Difference for the total of their investments. I think saving 15 to 20% of your income is a great idea and then putting 25% of those savings into WL is really great idea.
Interesting thread.
I’m sceptical of my Whole Life policy and so I got evaluated by a well known actuary. The policy has just started its 7th year. Anyway the upshot is that the non-guaranteed illustration shows a return of 4.71% and this is for a “3rd best” non smoker. He showed some interesting numbers comparing the alternative of buying Term and investing in a side fund i.e. if the side fund returned on average 4.71% then the ending $ numbers are the same. If my health class was 1st (Premium Plus) then advised the return would be about 1% higher.
Of course none of this factors in the high commissions we have paid up front in the first few years.
Also the actuary advised that the illustration is likely optimistic given the current low interest rate environment.
Regarding the original point 6 in the article above. I believe this is incorrect. The “Guaranteed” values are pessimistic and (quoting the actuary) “not meaningful, they assume that the insured will experience far higher mortality rates than now prevail.”
I reviewed an evaluation this week by a person who I suspect is your actuary (since your quote is verbatim.) Guaranteed returns are not pessimistic, they are guaranteed. As you’ll note if you carefully read your review, the illustrated returns are optimistic and are unlikely to persist. In reality, you’ll likely end up with a return somewhere between the guaranteed returns and the illustrated returns, probably in the 3-4% range. If that’s adequate to reach your financial goal (at least for this portion of your portfolio), then whole life may be for you. But keep in mind that with 3% inflation, a 4% return requires 72 years to double your money in real terms. I can’t meet my goals like that.
If you buy WL from a mutual insurance company, you will receive a dividend, most likely (the Guardian has not failed to pay a dividend for 155 consecutive years). The guarantees are, yes, guaranteed but they can fairly enough be called pessimistic in that they do not account for dividends. The software illustration system, per regulation, cannot illustrate any higher than the current year dividend (you can illustrate lower, however). I don’t think that’s a particularly optimistic scenario, especially over the last few years. Dividends have a strong correlation to investment grade bonds and we’ve seen yields diminish. If bond yields increase (and I think they will over the next year or two), then dividends will increase as well.
I agree, but there is a lag. Many of the bonds held by insurance companies were bought 10-20+ years ago. Those cannot be replaced by anything with anywhere near the same yield, even if rates go up 1-2%. I don’t think it is particularly pessimistic to expect dividends to be lower in the future than they have been in the past. How much lower can be argued in good faith.
And regarding your comment above about not knowing anyone who would suggest buying term and investing the difference and not investing in whole life at all, I think you now know at least a couple of people that would suggest that is a perfectly reasonable option, and in fact, probably optimal.
Absolutely. Dividends from a mutual insurance are a lagging indicator. In November of 2008, Guardian declared the highest dividend paid in its history. If the bond market rebounds over the next few years as I think it will, our dividends will not show that rebound immediately, but it will show in coming years. This is true of all peer companies. It’s also the reason that I can say that WL will return 4 to 5% IRR over a 20-plus year time period (and your contention that the equity market returns, on average, 8% can only be shown over at least that length of time).
I wouldn’t be surprised to see WL return less than 4%, but I’m willing to admit it COULD return 4-5% going forward, but more likely will be in the 2.5-4% range IMHO.
I’m not sure where you get the idea that I think equity market returns in the past have been 8%. The actual figure is closer to 10%, and that’s just for large cap stocks. Small and value stock returns have been higher. Consider the S&P 500 Index Fund from Vanguard. Over the last 38 years it’s average annual returns have been 10.75%. Even if you annualize those returns, they’re still around 10%. DFA Small Value Fund has returned 12.23% on average over the last 20 years.
I expect equity returns going forward to be a little lower, however, just as I expect WL returns going forward to be a little lower, but I still expect a very significant 5% or so gap between them, and that’s absolutely huge when it comes to compounding returns, especially when you consider inflation. For example, if inflation going forward is 3% per year, and WL returns 4%, then you’re looking at 72 years to double your money in after-inflation terms. That’s an awfully long time.
I’ve enjoyed reading these comments for several months now. Understanding the clientele, it appears that the whole argument comes down to numbers/percentages (applying math/science). Because the math of past stock-market performance can’t be argued, some stand behind that as rock-solid proof that WL does not compare to the returns you could get otherwise. The difference for me is that “a bird in the hand is worth two in the bush”. My 401k says it has returned 18% this year. That is great, but it isn’t slated to become retirement income for me for over 20 years. It really isn’t worth anything to me until I have it “in my hand”. The idea that I can make more in the stock-market is pretty solid, but it is only true based on the timing. And, I’ve always heard, and believe, that timing the market is not a good strategy. I can sit around the table telling all my buddies how much my 401k returns or is worth, but it really is a bunch of hot air for now (and to be perfectly honest, I don’t tell many people we even have a WL policy because I’m not sure the reaction). I do understand that my WL with PUAs isn’t worth worth anything more than the insurance portion now as well. So, I would say WL as a MAJOR investment is a bad idea…as part of the whole, it should be good for some people. For us, it makes up close to 20% of our monthly contribution to funding retirement. Maybe I could get some feedback on those kind of percentages…do any of you agree or find fault in this thinking?
I think 20% is too much, but it’s certainly more reasonable than 50-100%.
I think you have great strategy although I don’t know the particulars–I’m referring to allocating 20% of your retirement dollars going into WL. Lost in all the conversations about whether you should Buy Term and Invest the Difference is how owning permanent life insurance will allow you to spend down assets in retirement (the 3rd and 4th quarter of the game).
When you arrive at the point of having to take distributions after having funded in traditional 401(k) or IRAs, two things are clear: 1) the IRS has a lien in the form of taxes, and 2) your strategy has to take into account living an indefinite amount of time. On average a 65 year old male will live to age 84, and one out of four will live past age 95 (stats are from SS website). So which are you? Since you don’t know, your distributions have to allow for the possibility of living to 95 which means being more frugal than possibly necessary. Those nasty Monte Carlo simulations tell you taking more than 3.8% distributions will lead to a 95% chance of failure.
OR, if you have a fully funded permanent life insurance policy in place from a mutual insurance company where dividends are compounding each year, you can take your remaining retirement assets and spend them down in a finite period, say 20 years (or even annuitize them, period certain). Now your distributions are 6 or 7%, not 4% or less. If you die in the first 20 years, your spouse or beneficiary receives tax-free income from the life insurance. If you survive past the 20 years and/or wish to supplement your retirement income, you take tax-free distributions from your whole life policy.
OR, you just take distributions from your retirement accounts in up years in the market, and take distributions from your WL in the down years. Monte Carlo that and it works perfectly.
Having permanent, full funded dividend paying whole life insurance from a mutual insurance company gives you the permission slip to spend down in retirement.
I think there is a far better insurance solution to insure against the possibility of outliving your money – SPIAs. They’re more competitively priced than WL insurance and they’re actually designed for that purpose. You have to deal with (and pay for) WL’s other features if you’re trying to use it for something it isn’t designed for.
Aside from that is the implications of the lower returns. While it sounds great to have this “pot of money” in whole life, you’re not comparing it to not having that pot of money. You’re comparing it to having a LARGER pot of money in another vehicle, that even after-tax is larger. You need to ask yourself would you rather have $1 Million in a whole life policy you can borrow from tax-free, or $2 Million in a regular old portfolio that you could pay the taxes on, spend $1 Million on a SPIA, and still have $500K in your pocket?
The reason I think 20% is too much of a portfolio to dump into whole life, even for someone who accepts all the downsides, is that at a young age your portfolio is likely only 10-30% fixed income. Someone with 20% in WL basically has a fixed income portfolio that’s all tied up in a single insurance contract. That’s not much diversification. By the time you actually want more fixed income in your 50s and 60s, it probably isn’t the time to be buying whole life. I’d probably stick to 0-10% if I was convinced WL deserved a place in my portfolio at all.
Good stuff…your comments are good food for though. In our situation, the 20% just happened to be. We were more focused on a number we could do now and felt we could do long-term. As the years go by, it should actually decrease. With each passing year, as salaries increase, each percentage into Roth 401ks yields a higher number. We won’t be increasing our WL+PUA premium.
Would you mind sharing how much you devote to WL and what the split is between base premium and puas? And your age. Just curious to see what I would expect values to be at a certain age. It would be interesting to know which insurance company you’re using as well.
We went with Penn Mutual…$250 total; $175 base + $75 PUA. Gave us a little over $203k coverage to start on my wife, who is the “white coat” of the family. We both have term through NYL and group policies at work. She is 34, I am 37. The $250 as 20% of retirement savings does not include my teacher pension withholding…just 401k and 457 additions. I feel like I did a lot of checking on which company to go with…we live in South Dakota, so not much exposure to Penn Mutual. Our financial guy is an independent advisor (and a good friend); his recommendation was Penn. Another close friend is our NYL rep. He tried to get us to do WL with him, but it didn’t appear to be competitive…we could have found cheaper term, but wanted to give him business.
We went with Penn Mutual…$250 total; $175 base + $75 PUA. Gave us a little over $203k coverage to start on my wife, who is the “white coat” of the family. We both have term through NYL and group policies at work. She is 34, I am 37. The $250 as 20% of retirement savings does not include my teacher pension withholding…just 401k and 457 additions. I feel like I did a lot of checking on which company to go with…we live in South Dakota, so not much exposure to Penn Mutual. Our financial guy is an independent advisor (and a good friend); his recommendation was Penn. Another close friend is our NYL rep. He tried to get us to do WL with him, but it didn’t appear to be competitive…we could have found cheaper term, but wanted to give him business.
I am 30 years old and have a 20 pay WL policy for about 500,000 and another 1.5 of 20 year term. Based on my research of (not what I read online or heard on the radio) but of the actual numbers and projections.
Based on my cash and death benefit amounts At age 65 I will have an internal rate of return on the cash value of 5.16% and 7.45% on the death benefit.
The death benefit grows from $500,000 to above 1 million at age 65 and then over 2 million at age 85…
I might be able to average 7-8% maybe on my other investments… however there is no guarantee.
This is only a portion of my investments…but definitely the most secure.
Oh and make sure you buy with one of the top rated mutual companies for the best results…
It’s generally considered appropriate on this blog to mention your conflicts of interest, such as the fact that you sell insurance for a living.
While it is possible your IRR will be 5/7% at age 85, it wouldn’t surprise me to see it as low as 3%.