[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. ]
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.
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.
I’ve been selling life insurance for 5 years I was licensed at age 20 (currently pursuing designations) I don’t mind the condescending attitude from professionals in other fields heck in my early days I was discredited in front of prospects by their CPA and attorneys just for being new. Being able to personally deliver a family financial relief when no one else could really put things into context for me and all of a sudden the sneers were muffled out by the good being done. With that said I am not going to appeal to emotion with my following remarks or go over the talking points everyone loves hearing so much. What I can do is show you a 7-pay Whole Life (no more premiums after year 7) that breaks even in year 9 with the cash value growing at 5% every year thereafter without it becoming a modified endowment contract. In the overall context of a portfolio lets assume you have a complete change of heart and you carve out a percentage of the fixed income portion of the above mentioned portfolio to fund this, not all but some. Haven’t you just reduced some of your interest rate risk? Haven’t you just reduced volatility? Increased output? Added guarantees that didn’t exist before? Oh and by the way according to Ibbotson Associates you will have higher expected returns and a lower standard deviation than a portfolio without it. Here’s a joke for the buy term invest the difference crowd… You know whats worse than using life insurance as an investment? Using an investment as life insurance.
I guess if someone wants an investment that doesn’t break even for 9 years and then is projected to grow at 5%, then that would be a good idea.
I agree it is inappropriate to use an investment when you need life insurance. It is also inappropriate to buy life insurance for your whole life when you don’t need it for your whole life.
You know how Susie and Dave “hate” whole life? I would bet a dollar that EVERYONE on their executive boards uses whole life paid for by Susie and Dave’s companies. I would bet another dollar that both Susie and Dave’s personal living trusts are funded by whole life.
I’ll take your $2 bet if you can prove it one way or the other.
There is no other way to properly fund a variety of goals. If I have a trust that is obligatied to pay out a very high sum like $500 million, where else could you get that kind of money? What about executive bonus. Key man? They pay that in term? It is laughable.
They both have whole life funding significant amounts of their own goals. Whether they have it titled in their own name, a trust, their business… who knows? If you made their kind of money you would too. If you want to make their kind of money then you will.
A trust obligated to pay out $500 million? There’s a first world problem.
Seriously, this idea that because a CEO making $10 Million a year owns a whole life insurance policy you should too is silly. He certainly didn’t make that money by buying whole life insurance he didn’t need. Now that he has it, he has little need to take risk and can afford to only make 4-5% on his money. Other aspects of the policy, like some estate planning, asset protection and tax benefits, are also far more valuable to him than to a typical physician, and certainly to a middle class individual.
First I sell investments and I PREFER investments but sometimes, a patient presents with a nail and a board and asks the good doctor for help. Dr. He or Dr. Her is not going to hand him (or her) a platypus. That is exactly what an investment is like in many cases. Now could I get the nail into the board with by banging the platypus? Sure! But there is a better way.
I think you sell our nation’s doctor’s short. They practice medicine and they desire wealth and financial freedom. They didn’t go to (and OWE for) a decade of school to be broke their whole life. They intend to have what you call “first world problems.” I make a living just solving some of them and rocking the snot out of others.
Some things, MOST, things call for an investment. But you hate this product and I don’t understand that. Let’s stop calling it life insurance and call it the color red. Red is a useful and pretty color that, God knows, it can be overdone and doesn’t belong on some people at all. But YOU hate red and are teaching other people to hate red, too. Don’t you feel the least bit disingenuous? Hate the wanabe advisor using Life incorrectly don’t hate the product. It is just a tool that didn’t do anything to you.
When you hear about a CEO getting fired with a multi-million dollar para-shoot do you think that company wrote their fired CEO a check? No. That was the LIFE insurance policy that the board paid for over the years he or she was CEO then transferred ownership to him upon the CEO leaving the company without destroying it. This will make you mad but the big money transferred to them is tax free, sometimes, too. The CEO’s salary at a fortune 100 was only $70,000 but he was paid all of his bonuses and additional compensation to his life insurance. I just think it is funny to say, “Invest in the S&P 500 but don’t manage your personal money like their best paid individuals do!” lol
Most of our docs aren’t going to make $10 Million a year and most won’t leave their practice with a 100 million dollar severance. Some will and this is how it is done. But for the rest, what if this can be a microcosm for our doctor’s lives for the time they have spent serving us? Maybe they never earned $1 million per year, maybe they only cleared $350 a year and only that for the last few years of practice. They can get a scaled down version of what the CEO’s get. Don’t you think they deserve it?
I think your platypus analogy is a pretty good one for whole life. It’s a tool, but not one that most handymen are going to keep in their toolbox. It just isn’t quite the right tool for any of the problems doctors face with their finances. I find it interesting that you think some doctors will leave their practice with a $100 Million severance or make $10 Million a year. You seem really disconnected from actual physician incomes.
What might be right for someone with a $100 Million net worth and a $10 Million salary may not be useful at all to someone with a $2 Million net worth and a $200K salary.
I don’t hate whole life insurance. I do hate those who sell it to physicians inappropriately without the physician really understanding what he is buying.
Did you make it so that I couldn’t reply anymore? lol
No, why? Did you lose a post? Sometimes posts with multiple links go to the spam folder.
This idea that no one needs a death benefit after a certain age is not grounded in facts, the largest consumers of life insurance and related products are people 55 and over. Do you know something they don’t? The old mutual companies that offer these products have near perfect credit scores, some AAA mutuals were only down rated by the S & P 500 because a financial institution couldn’t have a higher credit rating than its sovereign. Compare that to the house of cards that was the financial sector during the great recession. A rising tide raises all ships, but its only when the tide is low when you see who’s been swimming naked. So the discussion turns to the agents and how bad they are for offering a product that not only fills a demand in the marketplace but also does so much social good. Permanent life insurance is like salt, it makes everything else taste better in retirement. It opens up an array of options. It gives you the peace of mind in knowing that you can spend down your assets and still leave a sizable legacy. If income in latter years is tight because you withdrew 6% from your portfolio and ran out of money earlier than anticipated you can take a reverse mortgage without disinheriting your children. You bear no interest rate risk in a Whole Life so in case of a sudden swing in rates at an age where you can’t afford it (because you will be primarily invested in interest sensitive conservative vehicles) you reduced some volatility at a critical time. You can index all you want when your accumulating, but your missing the forest for the trees if you don’t acknowledge that retirement is only halftime. The second half can last 30 years and losses can be exponential since you are now withdrawing. A significant portfolio loss in the critical first years of withdrawing can shorten the time your money lasts by over of 10 years compared to a portfolio averaging the same return who suffered those same losses in the latter years. You win the second half playing defense. At retirement your policy would be growing at a steady 4-5% if you purchased it early on with zero market risk. As part of an overall portfolio this vehicle adds value on all fronts, safety, asset protection, estate planning, and tax preference.
Comments like these are why I wrote this series:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
which refutes each of this commonly used sales tactics. It turns out whole life insurance isn’t the best way to do any of the things you mention such as ensuring you don’t run out of money in retirement, protecting assets, planning estate, reducing taxes, increasing “safety” etc.
I agree that WL is like salt, if you use too much of it your retirement plan will rust out.
Credit ratings*
With life insurance it is no different than it is with car or home-owners or medical insurance. You don’t buy it because you EXPECT the worst to happen, you buy it to be protected IN CASE THE WORST HAPPENS. And with all insurance, and you know ahead of time, IF THE WORST DOES NOT HAPPEN that in a manner of speaking your money seems wasted.
The purpose of buying insurance for children is in case they become un-coverable later on in case of illness such as diabetes, which does happen. It is not a bad idea. Travel/accident insurance is so cheap that it would be foolish not to spend pennies for something that in CASE THE WORST DOES HAPPEN, you or yours will receive a relatively huge benefit. Whole/universal life is more expensive than term, yes, but you also won’t be faced with premiums you cannot afford anymore as you get older, as is the case with term insurance. You can’t take everything you read on face value, even if it stems from a certified individual.
Buying any kind of insurance is taking a chance. In a way it is like gambling, you know you lose money if you don’t win the pot, but in the case of insurance you don’t really want to win the pot, because it will mean having lost something else that is of more value to you .
The problem with buying insurance on children is that most who do so don’t buy enough that it will actually replace the amount the child needs once he grows up and has people depending on him. Besides, 30 year term bought on an infant runs out about the time he actually needs insurance because people are depending on him. So that leaves permanent options, which forces him to keep insurance after he has no need of it (not to mention prevents his parents from being able to buy enough of it to cover his legitimate needs.) I’ve had plenty of docs wonder what to do with trivial $10K, $20K, or $50K whole life policies their parents bought for them decades before because someone sold it to them based on these ideas. It neither meets their insurance needs, nor their investment needs, but at that point they feel like they need to keep it since the losses are all water under the bridge.
“Faced with premiums you cannot afford anymore as you get older” carries the assumption that someone needs life insurance until they die, which simply isn’t true. You need life insurance only until you reach financial independence or until no one else depends on you financially.
Hi, Thank You for this website. I think Whole Life as a product depend on each individual’s needs and is perpahs not for everyone. In my case, I am contributing already to a 401k, Roth IRA, Vanguard Taxable account and use Scottrade for stocks. When using the bucket approach to investment from immediate need to long term need, a product like WholeLife on top of this not just to insure myself but also make sure that if my investments fail to perform and if something where to happen to me, then my term life and whole life are there to protect my family. Whole Life obviously for my later years. So it really should not be considered as an investment and not a primary way to fund a retirement. However with the future being uncertain and health challanges increase as we get older and our ability to earn in those later years go down, one has to protect their family incase the investments dont pan out. The main component being the gureenteed death benefit and that gurantee comes at a cost via the higher premiums. Cash Value aspect is just a bonus. We can use historical data and analysis and make all different assumptions about why investing the difference is better but there is no gurantee. Some people i think want that comforable feeling of having a gurenteed death benefit. So I can see why its not the first product people want to put money into but it cannot be ignored and there is a need for it. Thanks again for this post where people from different backgroung get to share their views and opinions.
Go ahead, keep buying that term, year after year after year, after policy after policy. Can’t wait to see you in my office, trying to buy more coverage at a much older age (and, oh yeah, you are no longer preferred nonsmoker issue class; sorry, fatboy, you’re standard or rated). Can’t wait; I’ll make 5 times as much as I would have made if you had just thought it through and bought a good permanent policy from a good vendor 20 years previous.
You apparently missed half of the “buy term and invest the rest” philosophy. The point of buying term is to become financially independent at some point. For me, that’ll be around 50. After that I won’t need life insurance.
Early in the comments the author states that the Bank on Yourself concept, which is basically the Infinite Banking Concept, or Privitized banking, has been discredited. He makes no further clarification of this, and offers no reference from where he gets this notion. I would suggest you look into what Dr. Robert Murphy a profession economist has to say about this approach. To claim that it is discredited is totally irresponsible. http://www.youtube.com/watch?v=olqCSQ0BtB8
Bank on Yourself is discussed elsewhere on the blog, without having to slog through 768 comments. Linking to the “Infinite Banking Radio Show” isn’t exactly an unbiased source of information. If you want to discuss infinite banking, I suggest you do so on this thread:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
Premiums for Whole Life are LEVEL thus the red dotted line in the graph is somewhat misleading. If inflation is taken into account, then level premiums should benefit. I paid X dollars on year 2014, I will still pay the same level exact X dollars twenty years from now. The premium is inflation-proof simply because it is constant. One’s income would increase (earning potential) by then as with other goods & services but your annual premiums remain constant. Thus, percentage of whole life premium relative to annual income actually decreases.
Whole life = de escalating premiums. Term life = escalating premiums
Welcome to the blog Vince.
First, this is the 669th comment on this thread. I assure you nobody is reading this but me. Might as well send me an email.
Second, not my graph. As noted above, it’s from someone demonstrating his actual portfolio results. As I understand it, the red line is a cumulative line. Since you pay a premium each year, the cumulative total goes up each year.
Third, you’re incorrect that real whole life premiums go down and real term life premiums go up. If inflation goes up, then both premiums go down in real dollars (at least during the level term portion.) If deflation occurs, both premiums go up in real dollars. Beyond your level term, then your observation is likely correct. However, it’s a silly argument. The whole point of term insurance is not to hold insurance to the end of your life. That’s why it’s so much cheaper- because on average you won’t use it, just like all the other insurance you buy. Imagine buying homeowner’s insurance that was guaranteed to buy you a whole new house after 40 or 50 years. How much more would it cost than your current insurance? A ton. Why would you buy it? Only because some salesman convinced you it was a good investment.
Thanks for the reply! Please correct me if I’m wrong but isn’t that term insurance premium is level every 5 or 10 years and automatically increases thereafter thus the escalating premiums? Yes we buy casualty insurance because we recognize the property values of our car or home. Why does a increasing premium on one’s billing document a silly argument?
Yes we buy casualty insurance because we recognize the property values of our car or home. And we can insure for their full replacement value via casualty insurance. In these cases the insurance company will pay out IF your car gets damaged. The insurance company will pay out IF your house gets burned down.
However for life insurance its different. Because it’s not necessarily a case of “IF” but “WHEN”. You can get through your whole life without your house being burned down or you getting in a car accident but you can never get through your whole life without dying! The life insurance plan must pay out!
In relation to above, yes we recognize property values. Do note also that property values in fact a result of human effort — our Human Life Value and we can PERMANENTLY insure our Human Life for its full replacement via a whole life insurance plan that is legally obligated guaranteed to pay out “when” you are taken out of the picture, not an “if” you are taken out of the picture
I don’t buy term insurance with escalating premiums. A 20 or 30 year level term policy should suffice for most physicians.
I agree that a person can permanently insure their “human life value.” My argument is that they shouldn’t because 1) they don’t need to and 2) insurance should be bought against financial catastrophes. Dying at 90 with $2 Million in investments isn’t a financial catastrophe for anybody.
A person doesn’t buy whole life insurance because he “needs” it. He buys it because he WANTS it.
insurance should be bought against financial catastrophes – I agree, but again life insurance is a different kind of insurance, aside from protection it SHOULD do a lot more different things while you are still alive via its tax-deferred cash values (equity like in a house). Its a WHEN scenario not an IF.
“BUY TERM AND INVEST THE DIFFERENCE IS A CONCEPT THAT RECURS WITH EACH SUCCEEDING GENERATION, DESPITE THE FACT IT DEPENDS ON THE FLIMSY PREMISE THE DIFFERENCE WILL ALWAYS BE INVESTED EVERY YEAR, WITHOUT FAIL, REGARDLESS OF PERSONAL CIRCUMSTANCES AND BUSINESS CYCLES; THAT THE INVEST- MENTS WILL ALWAYS BE SUCCESSFUL; AND THAT SOMEHOW AT AGE 65 THE NEED FOR LIFE INSURANCE MAGICALLY DISAPPEARS.
INVEST THE DIFFERENCE
EAT HAM WITHOUT EGGS AND INVEST THE DIFFERENCE
HAVE YOUR CHILDREN QUIT SCHOOL AT 16 AND INVEST THE DIFFERENCE
GET RID OF YOUR KIDS, TAKE IN BOARDERS AND INVEST THE DIFFERENCE
DON’T DRESS FOR SUCCESS, BUY CHEAP CLOTHES AND INVEST THE DIFFERENCE
SELL YOUR CAR, BUY A MOPED AND INVEST THE DIFFERENCE
SELL YOUR HOME, MOVE TO THE SLUMS AND INVEST THE DIFFERENCE
STOP TAKING SHOWERS, WALK IN THE RAIN AND INVEST THE DIFFERENCE
STOP READING, ASK YOUR FRIENDS WHAT’S GOING ON AND INVEST THE DIFFERENCE DON’T BUY A RADIO, HUM AND INVEST THE DIFFERENCE
CEASE PLANNING, AD LIB AND INVEST THE DIFFERENCE
DON’T VACATION, JOIN THE ARMY RESERVE AND INVEST THE DIFFERENCE
GIVE LIP SERVICE, NOT REAL SERVICE AND INVEST THE DIFFERENCE
DON’T PAY TAXES, GO TO JAIL AND INVEST THE DIFFERENCE
CANCEL YOUR PERMANENT INSURANCE AND INVEST THE DIFFERENCE…… IT MAKES JUST AS MUCH SENSE”
If you love whole life insurance and wish to spend your disposable income or your money earmarked for retirement on it, go ahead. But it doesn’t matter how many capital letters you use in your comment, it’s not going to convince me it’s a good idea because the numbers simply don’t bear it out. But it’s your life, your money, your decision, and your consequences, so do what you like.
Likewise
If you love whole life insurance and wish to spend your disposable income or your money earmarked for retirement on it, go ahead. But it doesn’t matter how many capital letters you use in your comment, it’s not going to convince me it’s a good idea because the numbers simply don’t bear it out. But it’s your life, your money, your decision, and your consequences, so do what you like.
[Personal attack deleted. Thanks for stopping by. Curious who you thought was going to read that comment? It’s just you and me here at comment number 772 on this post. Might as well just send me a hate email. Same number of people will read it. Hope you enjoyed leaving that.]
Good job! [Extraneous material deleted.]
You are truly providing a public service here! [extraneous material deleted.]
Thank you. That’s very kind of you. Isn’t it wonderful to own your own website? It’s like owning your own living room. You are allowed to throw people out that just want to come in, track mud all over the place, poo on the sofa, and hang out with their crack pipes for a while rather than offer you any meaningful friendship. Readers will just have to trust me when I say I’m not deleting anything of substance. (And I’m just playing with the edits on your obvious tongue in cheek comment.)
I completely understand the advice on why a whole life policy is a bad investment for most but I can’t find solid advice for those who want to start investing at a younger age. I am 25 years old and my premium would be around $5000. I understand that this is a poor investment for the first 10-20 years but what about 30,40, 50 years later? Is it worth it since I am starting so early? I haven’t committed to the policy yet but only have about a week to decide!
Hi Gina–I sell life insurance and I think it’s a good idea and here’s why:
1) It’s a systematic form of saving
2) If you were to pay through, say, age 65, you would have well over a million dollars in death benefit at age 65 (you would start with about $500,000) and your cash value would be well over $500,000 at age 65.
3) The IRR on cash would be about 4 to 5% and all gains within the policy are free from taxation and all cash value is protected from lawsuits (in most states, you should confirm this in your’s).
4) You can borrow from the policy at any time once you’ve built up cash value.
5) You have flexibility on premium payments if needed.
6) You can take tax-free distributions to supplement your retirement income if desired.
If you buy the policy, my recommendations are:
1) Buy from one of the big four mutual–Guardian, Northwestern, NY Life, or Mass Mutual
2) Make sure the policy design incorporates scheduled Paid Up Additions. Your agent will know what that means, but you should apportion about $4000 to base premium and $1000 to Paid-Up additions.
3) Since you’re young, see how much it would cost to have the Waiver of Premium rider added (probably $80 a year). It makes the policy self-completing if you get too hurt or sick to make premium payments.
4) Stay the course! The design I mentioned has helped thousands of people.
Naysayers–lots around here!–will say buy term and invest the difference. Term is cheap, about $400 a year for $500,000 for 30 years but, at the end of the term, you’ll have spent $12,000 and have no insurance.
I think permanent life insurance is just another bucket, along with investments, savings, and 401(k) or IRA retirement plans.
Good luck with your decision.
1) You can do that with a Roth IRA or a taxable account. No advantage there to whole life.
2) If you want a life long death benefit, it’s cheaper to buy guaranteed universal life.
3) “Withdrawals” (actually borrowing from your policy) are tax-free but not interest free.
4) And pay interest for the privilege of borrowing your own money.
5) That’s far more limited than one would lead you to believe. For example, try not making your second year’s whole life payments and see what happens. It’s very different from not making a contribution to a Roth IRA or a taxable account.
6) Yup, tax free but not interest free.
1) If you want the policy, then use an independent agent to buy one that is designed for what you want out of the policy.
2) PUA usually increase the return.
3) If you have any concerns at all about being able to pay the premium, you’re buying too big of a policy.
4) I agree. If you choose to buy whole life, plan on keeping it for life. While returns are moderate at best over the long run, they’re terrible in the short run.
I’m a naysayer. At the end of the term you’ll be a millionaire and not need any insurance.
There you go, the pros and the cons. It’s your decision, your money, and your consequences.
1) Yes you can do that with an IRA or Roth IRA and probably should, especially the Roth. But that doesn’t mean you shouldn’t also fund WL and, if you need to access the money, you won’t face the penalties you have with the IRAs.
2) GUL is the cheapest but it’s inflexible and has no cash value.
3) Distributions are taken from basis to borrow. You pay no interest withdrawing your basis.
4) With WL95 the entire second year premium goes to cash value. You can skip premiums if needed, partial pay–there is more flexibility that most people realize.
5) Yes, consider the first 5 to 7 years start up costs (unless you die and then it was great investment for your beneficiary!). After that you can’t beat the incremental Rate of Return.
1) Yes, but there are lots of other great reasons not to fund WL.
2) EVerything is always a nail when all you have is a hammer.
3) Don’t disagree. How nice to be able to spend SOME of your own money without paying any interest.
4) BS. Are you suggesting there are no costs of insurance in year two? That’s a pretty far fetched claim. At best the costs of insurance are covered by the dividends on whatever cash value there was after year one. But the entire premium doesn’t go to cash value. That’s just wrong.
5) Why pay start up costs when you don’t have to? That’s the whole issue. You can just invest in a Roth IRA without any start up costs at all. No ongoing insurance costs. No taxes at withdrawal. At any rate, your statement of “You can’t beat the incremental rate of return?” is bizarre. Did you really mean to say that? The incremental rate of return does improve after the first few years, but I’m not sure I’d say “you can’t beat it.” At best your return approaches the dividend rate (historically in the 6-7% range,) even incrementally.
It never becomes a great investment. If you hold it for life it becomes an okay investment (i.e. one that will keep up with inflation or beat it by 1 or 2%.) But it doesn’t magically turn it good to buy it at 25, trust me, I did that and 7 years later, was still in a huge hole.
There is absolutely no rush at all. You certainly have more than a week to decide. In fact, you have 30-50 years to decide. Don’t let some agent rush your decision.
Why do you want whole life insurance? What is it that you find attractive about it?
Thank you for the advice! I was really only thinking about buying WL insurance because my financial advisor was saying what a great investment it will be, not in the next 10-20 years but later such as 40-50 years. His suggestion was to buy it while I’m younger since the premium will be lower and it will allow for big gains later on. So undecided!
You need a new advisor and you need to quit taking financial advice from insurance salesmen.
The premium will be lower, but there will never be “big gains.”
Seriously, from what you’ve said, it doesn’t sound like whole life insurance is for you. Do more research. There really is no rush. Did you read this series of posts?
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Yes! Thank you and I appreciate the advice. It doesn’t sound like it is right for me and I will definitely start to take my time in making big financial decisions!
Gina,
First thing, whole life is not an investment. It is life insurance.
Second, what are you trying to do?
I have a whole life policy but it comes after my 401k, IRA, taxable investment . After all of these 3 buckets I put a little bit of it in WL policy. Make sure it’s a mutual company.
It’s should not be thought of as an investment. This is one of the main reasons why WL gets a very bad perception. It’s needs to be treated as insurance. For me it’s hedging my risk incase my portfolio of investments do not pan out 30 years from now when I am ready to retire. It could be up or down and WL policy helps me incase markets are down and My funds are taking a hit. Incase something happens to me personally during a recession, my family will get a specific amount that I know of instead of hoping my investments pan out.
Hope this makes sense.
Yes, that definitely makes sense! I was putting into a Roth IRA but slowing that down to put any extra money into the expensive WL. Because I don’t currently have dependents, my financial advisor suggested it as a good investment and will one day provide the insurance benefits one day if I have dependents. As of right now, it seems like a lot of money to have tied up that I won’t see until I’m 70 or so… Thank you for the advice!
What is the surrender charge on your policy? Just in case you have buyer’s remorse. Has your advisor discussed it with you? If not, make sure to ask.
Permanent life insurance (Whole Life) does not have a surrender charge– some deferred annuities do. That being said, it will take a number of years for the cash value to equal outlay (depending on the type and design of the policy). Is that what you’re referring to? Your agent should show you the illustration and explain the “money stages” of your policy for sure.
While what you say is technically true, the effect is the same if you want your money back- it doesn’t all come back because some of it went to pay the insurance company and its salesman for their services.
Gina,
What is your risk tolerance?
Disclaimer: I am an Insurance Agent
I sell both Term and Whole Life Policies
If you do not want to risk too much of your hard – earned money, and are satisfied with doing ‘just a little’ better than you could do in a traditional savings account, you may be better of keeping your whole life insurance policy.
Personally, I have a high risk tolerance, and use traditional investment vehicles for investment purposes, and have three policies in addition: 1 term life for short – term needs, a whole life to guarantee someone does not have to borrow to cover my final expenses when I eventually die, and a universal life to try to gain some generally safe and conservative profit over the next 4 to 5 decades.
No matter how ‘self-insured’ one may get in their lifetime, one thing you are taught in any basic economic class is that human behavior is unpredictable. There is no guarantee that chronic illness/long term care, or someone else may not cause you to lose all the wealth you have acquired over decades of hard work and planning.
Too much energy is spent arguing wrongly on this page. Yes, if you are either highly educated and lucky, or plain lucky, you could beat the returns on a Whole Life Policy. In this light, using any life insurance policy as an investment vehicle is not great. However, if you have a fear of the market, are not investment savvy, and do not trust the common forms of investing, by all means keep your whole life policy, and it will be a great investment to you in 40-50 years when you are retiring. It will also be particularly great if the market does to people what it has done twice in the last 15 years, or if several other things happen. This is not the proper forum for financial planning, and should not be misconstrued as such. You should merely read what people say here, and do some more research and/or consultation with a certified financial planner or accountant.
If you ultinately decide to go with whole life i surance, finnd one that allows you to plan for chronic and critical illnesses for a small additional premium if you think it beneficial, so you can use it to cover care costs if need be.
I don’t know much about White Coat Investor, but it sounds like he has had a bad personal experience with whole life insurance, and has taken it upon himself to crusade against it for the most part. He also SOUNDS like he is looking to make a lot of return on investment. That’s not a bad strategy, it is HIS strategy. Identify yours.
No matter what he says, one thing remains true: he is not an expert on financial planning, or certified in the field. If you tell him you have certain health symptoms, he will ultimately tell you to go for a physical consultation with a licensed physician because it is the best advice. I will give you the same advice: consult YOUR financial planner. If you do not trust him, get a second opinion. If you trust him, get 5 more opinions. It will cost you nothing but time. Do not entrust the rest of your life into the hands of someone who has about as much training on the topic as you do.
Ultimately, there is no one that can force you to invest. If you are still uncomfortable after several consultations, keep your money in the bank, or in cash. There is no law against such. Just do not bet your finances on anything you read here. If one is not licensed and trained in financial matters, and has not sat down with you to conduct a complete review with you of your current financial profile, your personal and financial goals, and your medical background including family medical history, they should simply refer you to someone who can, and back out of the matter.
Happy New Year!
I find it interesting that you have a life insurance policy to pay your burial expenses. Do you seriously now or do you seriously plan to have less than $5-15K at death? That seems like kind of a dumb reason to buy a permanent life insurance policy to me. Why not just put $10K away and spend the interest on it if you’re really worried about that sort of thing? Personally, I expect my heirs to be able to pay my final expenses, then be able to split a 7 figure amount between them.
It doesn’t take luck or any particular amount of skill to beat the returns on a whole life policy. Guaranteed long term returns on a good policy are 2%. You can buy a long term treasury and beat that, no luck required. Short term returns are terrible and can be beat by burying the money in your backyard. If you really don’t think your investment portfolio will beat the 3-5% a good whole life policy will probably return over 3-8 decades, then you’ve got a lot bigger problems to deal with than you think, like a need to save 50% or more of your income to ever retire.
Before telling someone their whole life policy will be a “great investment” in 40-50 years, I think it would be best if you define what you mean by “great investment.” If that policy returns 4%, and inflation is 3%, your money in that policy won’t even double once in 50 years. That’s not my definition of “great investment” but it might be yours.
Financial advisors, especially those whose training is primarily in sales, are not anything like physicians, who actually have a duty to do the right thing for their patient. But if someone finds the information available on this site useless to them, they’re free not to use any of it. However, 60K+ people a month seem to get some use out of it, or they wouldn’t keep coming back, referring their friends, and sending me thank you emails. People who have a top-notch financial advisor they’re happy with have no need for this site. But I find it amazing how rare that situation is.
Thank you for your input! Everyone’s contribution has been extremely helpful in evaluating both sides to a WL policy.
Kindly,
Gina
1. It will cost more than 15k to bury me when I die, assuming I live past 70. I have a few more decades to go.
2. Whatever amount of money I can save personally for my burial, will be more in a life insurance vehicle purchased for the death benefit: if I can save it sooner, while I am younger and the cost of insurance is less expensive than if I were closer to 70, the more guaranteed whole life insurance it will buy.
3. I have been an agent for 3 years now. One thing i have noticed, people fail to account for the possibility that all their plans may come to nothing by the time they are old and retired. I have met several who have been successful in amassing a decent enough fortune to be able to retire and still leave a 7-figure inheritance for their children, so I am not trying to say proper planning does not work, but I am saying there are no guarantees there. I sat once with existing clients from my previous firm that lived in a nice home in what is one of the wealthiest counties in Maryland, whose finances were hanging by a thread. Both husband and wife were in their 70s, in bad health, and declining over time. They admitted their children knew nothing of their situation, and would be surprised to find out that they did not have the money they were supposed to/appeared to have. It is common. I stated clearly that if a person was risk averse, then WLI would be great for them, because what you are not aware of is that most human beings emotions trump their logic. If a person is risk averse and invests their money in a vehicle that is not guaranteed, no matter how much upside potential there is, they will not sleep right, and more than likely terminate the contract at the slightest chance of failure. It is one of the key reasons why most insurance policies do not last, they are sold by agents who do sales presentations and trigger enough emotional response to make a person buy, versus actually finding out what the customers needs are financially and emotionally, and then finding out if they have the right product to satisfy those needs.
Buy term and invest the difference is a great concept, if a person has a high risk tolerance, but not so otherwise… especially if they were negatively affected by the recent downturn of the stock market.
What you are doing here is offering general opinions on products, I respect that to come extent, but here’s what experienced insurance agents, and ones who are not interested in turning a quick buck do. (btw, you will find certified financial planners and advisers that do the same thing) – Sit with the client or prospective client, do a proper analysis of where they stand financially, what they plan to use finances for in the near and long term, and how they plan to retire, factor in personal and family health history, and then proceed from there. This results in less policy cancellations as a customer is truly satisfied and confident if they purchase anything.
‘BETTER’ is a relevant term; what is good for the goose, has to be good for the gander, but human beings are not geese. One of the first things you learn in any decent economic class is that human beings are unpredictable. You cannot set a carte blanche rule for investing for all people.
If a client does not have a high risk tolerance, they may very well be better suited of with a WLI that has the higher chance of preserving their principal versus other traditional vehicles that do not offer downside guarantees. It may be good to buy treasuries or bonds, but the underlying factor is the clients/prospective clients comfort with investing themselves versus finding a vehicle to place their hard-earned money into that offers more downside protection than upside potential.
Ask any honest financial planner/adviser out there; the most reservations they encounter when dealing with existing/prospective clients is the fear of losing some/all of their money – keyword “most”; not all. If a financial planner is able to genuinely promise that on any type of vehicle and can get the client/prospective client to see and appreciate that, kudos! However, please don’t send your trusted ones down an investment path based on theories versus legally enforceable guarantees. Such statements like “it will never perform less than that due to x, y and z”, without any proper backing is a huge part of the reason why severl millions lost money they could not afford to lose in the recent downturn.
Pardon me if I am long-winded; I just happen to have sat with too may people in the retirement community who lost money they were ‘assured’ they could never lose, and are holding on for dear life, when they were once financially stable (for all the concept is worth).
Thank you!
1,2. If that’s a legitimate concern for you, then feel free to use whole life to pay your burial expenses. I find it a trivial issue.
3. I find the paternalistic argument that because people are ignorant and undisciplined that you should sell them a less than ideal investing product to be very weak. Seems better to teach people how things work and help them develop some discipline.
I’m sure good insurance agents have few cancelled policies. But the fact that 80% are cancelled prior to death suggests there are either very few good insurance agents out there, or that even using an insurance based investing product those insurance agents can’t stop undisciplined investors from doing stupid things.
Most investors who understand how whole life insurance works want nothing to do with it. I get a half dozen comments/emails a week from people wanting to get out of theirs in the least painful way possible. The vast majority of its proponents are those who benefit from selling it. 80% of whole life policies are surrendered prior to death. But hey, if you and your clients want to fund your retirements with whole life insurance, who am I to stop you? It’s a free country. But when you’re extolling the virtues of a “guaranteed” investing product, be sure to point out the savings rate required to reach their goals when using it.
If your long-term whole life returns are 4% (say 1% real) versus a 5% real return off a more traditional portfolio, you have 30 years to save, and you need 50% of your pre-retirement income replaced by your portfolio, the following savings rates are required:
Traditional portfolio: 18% of gross income per year
WL insurance: 36% of gross income per year
Don’t forget to mention that. I’m sure it won’t bother them. They’d much rather save twice as much money instead of learning how the market works and dealing with a few bear markets.
WCI,
Seems like the original post is full of bad information. There aren’t fees in a WL policy. The returns are the returns. Just like a CD from a bank at 1%. There are costs the bank has sure, but the investor gets the 1%. Same thing for a WL client. I’m not in insurance but I understand it and I’m a big fan of New York Life. NYL is a mutual company so profits go back to policy holders in the form of dividends. Sure they’re not guaranteed but they’ve paid a dividend each of the last 150+ years, even through the great depression. They have billions in the bank and have the highest ratings by moodys, fitch, S&P. I’m not going to change beliefs but maybe there’s a few opinions out there than can be swayed.
I do not sell life insurance but I do strongly believe in its value. While term is important and perfect at providing a death benefit, permanent cash value life insurance can be a great asset as part of an overall portfolio. The biggest caveat being it should be issued by a strong mutual company like New York Life or NW Mutual. The death benefit from life insurance is always income tax free but permanent life insurance also has numerous other tax advantages. The cash grows tax deferred, annual dividends are tax free, the basis is pulled out first when you withdraw cash and the cash growth can be pulled out tax free via policy loans.
Life insurance growth rates will never compete against the potential growth rates of the stock market but that’s ok. Its a perfect haven for your safe money, assuming you also have a need for a death benefit. Let’s take the example of a 27 year old. She’s maxing out her 401K at work and contributing to a roth. Both of those accounts are in growth mutual funds but she also wants to put some money into a safe vehicle. She decides to put in $5,000/year into a 20 pay cash value life insurance policy. (her policy will be paid up at age 47) Her immediate death benefit is around $375,000. By age 47 her cash value has grown to $145,000 and the death benefit is now around $460,000. From that point on her policy grows by about 5.5%. Very good for safe money these days! And, she puts no more money into the policy. The cash value and death benefit each year. So, at age 67 she decides to retire. At that point her policy has a cash value close to $400,000 and DB is now $700,000. Not bad for only putting in $100,000. At any point had she died, her family would receive the DB income tax free. If she cancels the policy she’ll pay tax on the $300,000 gain. But if she takes a loan or a series of loans, she will receive that money tax free, even the growth! The loans will be paid back at the time of death by the death benefit. If she takes a $300,000 loan at age 67 she’ll get a check for $300,000 tax free (even the $200,000 gain) If she dies the next day, her family will receive $400,000, not $700,000. Make sense? It’s like getting an advance on the DB. If she didn’t access the cash and died at age 85, her DB would be over $1,000,000. It’s a powerful vehicle.
People say it’s too expensive. I say, compared to what? In this example, she will get out between five to ten times what she put in. Plus, unlike an IRA, if she died in the first year, her family would receive 75 times more than her first year’s contribution. It’s not that retired people don’t want life insurance, it’s that they don’t want the premiums! A friend of mine puts in over $20,000 per month into cash value life insurance and he will accumulate millions of tax advantaged dollars for retirement. Another friend just put $100,000 into a 5 pay custom whole life policy from NYL. After the 5th year, money will grow at about 6%, tax deferred.
I also read a lot of people say, buy term invest the difference. People won’t invest the difference but why not argue they should buy a cheaper car and invest the difference or buy a cheaper house and invest the difference, etc.?
If whole life is so horrible why does Wells Fargo have over $18,000,000,000 of cash in WL? hmmmm?
A doctor would typically have too high of income to contribute to a Roth. The only other vehicles to get tax free income are tax free muni’s and cash value life insurance.
Consider a tax advantaged cash value life insurance policy that can be paid up in a number of years you choose.
I should make a rule that you have to read the first 797 comments on the thread before you’re allowed to post your own. All your comments have been discussed ad nauseum at some point in the last 3 years since this was published.
You say you don’t sell life insurance, but it sure is a coincidence that there is a New York Life Agent named Chris who has the same last name as the one in your email address.
At any rate, the most important point you make is this:
I agree.
Your example really illustrates this. She puts in $5K a year for 20 years ($100K total.) After twenty years it’s worth $145K. That’s a return of 3.42%. And that’s the projected return, not the guaranteed one. I guess if you’re happy with that for an investment you have to hold on to for the rest of your life, knock yourself out and buy as much as you like. It’s your portfolio, your retirement, your life etc.
Yes, it makes sense. No, I don’t believe it is a “powerful vehicle.” It’s just whole life insurance. That’s the way it works. I’m not going to buy one, no matter how much Wells Fargo owns. There are a lot of things Wells Fargo owns that I’m not going to buy.
It’s expensive compared to cheaper forms of insurance and better investments. I do argue they should buy a cheaper house and car and invest the difference. Is this the only post you’ve read on the site? Good luck selling life insurance Chris. I hope you’ve got a lot better arguments than the ones you’ve put in this post. They’re pretty easy to see through.
WCI,
I only read about half the posts, sorry.
[Ad hominem attack deleted.]
no, I don’t sell life insurance. I actually work for a semiconductor equipment company.
Are you suggesting that a person should have no safe money in their portfolio? That seems like horrible advice too. Is 3.42% a horrible rate for safe money these days? Plus you’re not calculating the fact it’s tax deferred growth. Not to mention the fact you totally ignored that the money will grow between 5% and 6% after the premiums stop. Yes, a person putting in $100K and getting out $700,000 between the tax free cash and tax free DB is just awful. Why didn’t you discuss that? Because the numbers don’t lie. You’re predictable, so you’ll say, “but that’s the projection! It’ll always be lower!” Wrong, NYL’s dividend rate has gone up each of the last few years JA. So the numbers will actually be better, not worse.
“It’s expensive compared to cheaper forms of insurance.” This perfectly explains your lack of understanding on the subject. That’s like saying renting a slum for $200/month is cheaper than that 10,000 square foot house and using it as an argument to rent the slum! I agree, people should buy term insurance but WL is the most tax advantaged financial vehicle in the tax code. DB is tax free, cash grows tax deferred, dividends are tax free and cash growth can be withdrawn tax free. WL is a tax favored vehicle which is a good place to park cash for safe growth. You’re example above that quotes me as saying “…will never compete against the potential growth rates of the stock market.” You forgot one word….
[Ad hominem attack deleted.]
…”potential.” Your suggestion that everyone should have ALL their money in the market is crazy. Did the stock market or WL perform better in ’08? If people truly understood that WL is a great alternative to savings accounts or buying certain bonds because of the DB and tax advantages a lot more people would buy the policies. People should pump money into 401Ks, Roths and WL and then have not only a risk diversified portfolio but also a tax diversified portfolio. Instead, people like you ignore facts and encourage people to simply buy term and put the rest in the market. Another brilliant and very original suggestion. No one has ever suggested that before…
[Ad hominem attack deleted.]
I’m impressed you got through half of them. That’s like 3 hours of reading. I actually do believe you are a semiconductor equipment guy since your IP address goes to a semiconductor company and not to the town the insurance agent works in. I just found it coincidental. At any rate, it doesn’t matter if you sell it or not honestly. I’m also curious what motivates someone to place the 800th comment on a three year old post. I assure this comment will be read by very few. There are about 40 people subscribed to this thread and most of them sell insurance for a living. You might as well send me an email as I’m likely the only one still reading what’s posted here. And frankly, after having this conversation at least 50 times in the last 3 years, I have no need to have it again. If you love your whole life policy and think it’s the best thing since sliced bread, great for you. I sincerely wish you the best and hope it helps you to meet your financial goals. Now, on to your arguments:
Costs of insurance don’t stop. Just because you aren’t paying premiums doesn’t mean they go away. I agree that the returns are likely to improve after the first decade or two of holding a policy.
According to chart 2 in this: http://www.bejs.com/sites/all/files/bejs/attachments/BEJS_White%20Paper_Update%20on%20Mutual%20Company%20Dividend%20Interest%20Rates_June%202013.pdf
New York Life’s dividends have been on a steady decline since 1986 (along pretty much all other interest rates). They were just over 7% from 2002-2007, and since then have declined to under 6% in 2013. I expect they will continue to decline given that all other interest rates have since then. Perhaps you’re privy to information I am not aware of. But again, if you’re happy with it, great for you. I disagree that you are likely to do better than the projection of the policy sold to you when interest rates were higher. Not sure why you think that might be.
If you want a tax favored vehicle to “park cash” then you might like WL. Personally, if something is going to hold my money for the rest of my life, I expect it to do a lot more than just stay parked. I want it on the freeway.
It’s funny you should ask which performed better in 2008- whole life or the stock market. Let’s say you bought stocks on Jan 1 2008 and sold them on Jan 1 2009. You also bought a whole life policy on Jan 1 2008 and sold it on Jan 1 2009. Guess which one did better? It was likely about the same with both of them losing 1/3 of their value. But who cares. You hopefully didn’t buy either of them for their one year returns.
Maybe if people understood how awesome they were they’d buy more policies, but I doubt it. As it is, 80%+ of those who buy them surrender them. 4 out of 5 purchasers later regret their purchase. What does that tell you?
You say:
I agree that people should buy term insurance. I disagree that WL is the most tax advantaged financial vehicle in the tax code. HSAs are. Tax break up front, tax free growth, tax (and interest) free withdrawals. How can whole life possibly compete? It can’t. In fact, both tax-deferred retirement accounts and Roth accounts are superior to the tax treatment on whole life. In fact, in many ways the tax treatment of a tax-efficient investment in a tax account is superior. At any rate, I can see why you might think the tax treatment on whole life is awesome if you seriously believe it is the best tax treatment out there. Too bad it isn’t.
If you continue with the ad hominem attacks I’ll just delete the entire comment next time.
Regarding your question about my interest in a 3 year old post, I just stumbled across it and disagreed with almost everything in the original article. I do agree the HSA is a very tax advantaged vehicle and it should be used by everyone that can. You and I both know however that it’s nothing more than an IRA if the dollars aren’t used for qualified medical expenses. Again it should be used but it only will produce tax free cash for medical costs.
In my opinion, WL is a great place for safe money, not for money people want to try and get larger returns on. That’s what the market is for and that was my point about the ’08 crash. A roth is a great vehicle but it is very limited. $5K – $6K per year contribution, unless you’re talking about roth 401K. And penalties withdrawing it prior to 59 1/2 . It should be used but normally will again be used for aggressive growth, not safe money. Again, there are only 3 vehicles that can produce tax free cash, roth, municipal bonds and permanent life insurance.
The advantages I see with WL are, in addition to the tax advantages already mentioned, there are not income limitations to contribute like a Roth, there aren’t penalties for withdrawing the money prior to 59 1/2 and there aren’t restrictions on contribution limits other than the underwriting limits on the policy itself. Like the friend I mentioned that puts in over $250K each year into his life insurance policies.
Regarding the increase in dividends for NYL, it’s public knowledge, they put right on the website. “The company said it will be the third consecutive year of significant dividend increases by New York Life, for an increase of 31 percent over the $1.19 billion paid to individual life policyholders in 2012.” I’ve also seen it reflected in my own policies.
http://www.newyorklife.com/about/nyl-to-increase-dividend-payout-by-11-percent-in-2015
You must know that WL dividend rates are not directly related to interest rates, right? While it’s true that the performance on NYL’s portfolio will be a factor in the dividend rate it also depends on the profitability of the company and the cost of doing business. All insurance companies make money selling term insurance. The difference is that mutual companies like NYL and NW mutual return most of those profits to policy holders instead of shareholders. And, the dividends are tax free. Universal life on the other hand is directly related to interest rates and would be a poor vehicle to get a return from in this low interest rate environment.
There are not costs of insurance after the premiums stop for a custom WL policy from NYL. That’s why the annual rate of return jumps up and is usually around 5% – 6% annually. Not bad for safe money that grows tax deferred. Keep in mind too, the premium pay period is as short as 5 years and still can be structured to not be a MEC. A friend just signed up for a policy for a 5 pay, $20K/year. I don’t know the exact breakeven point but I think it’s in year 3 and after year 5 it will grow at around 6% per year. I know it isn’t phenomenal the first couple three years but if the insured dies, then his family gets many times more with the tax free DB. My point is, you don’t have to wait “decades” for the policies to do well if they are structured correctly to maximize cash.
Anyway, good chatting with you.
Well, if we’re going to continue this conversation, I want you to first read this series of posts:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Not that there is some huge point to continuing it, but that series of posts is much better written than this particular post and addresses most of the things you’ve brought up. Just for fun, a few more comments about your thoughts.
“Just an IRA”? Seriously? An IRA has a heck of a lot better tax treatment than whole life insurance. If I had to rank tax treatment, I’d put them in this order:
1) HSA Triple tax free. You can even hold your receipts until later. No rule says you have to pull the money out the same year the health care is purchased.
2) Tax-deferred accounts (tax-protected growth plus the arbitrage from a higher rate during your peak earnings years to a lower rate in retirement.) Plus you can stretch it. Plus it generally enjoys better asset protection.
3) Tax-free or Roth accounts (tax free growth and withdrawals are not only tax-free, but interest free.) You can stretch it. No RMDs.
4) Cash value life insurance (tax protected growth and loans are tax-free, but not interest free.)
4.5) Taxable account- if invested very tax-efficiently, can be nearly as good with tax-loss harvesting, lower qualified dividend/LTCG rates, the step-up in basis at death, and tax-free charitable donations. But hey, if you think the tax treatment of whole life is the best in the business, you can buy as much as you like. It truly doesn’t bother me.
The age 59 1/2 rule is easily dealt with using 72(t) among other exceptions: https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/ But hey, if you prefer whole life, again, no skin off my nose.
There are more vehicles that produce tax-free cash than you have listed. It’s fairly easy to structure real estate to provide tax-free cash thanks to depreciation, for instance. Too many people get scared into buying cash value life insurance for the “tax benefits” without actually learning how to invest tax-efficiently without it. I keep running into people who own whole life and aren’t even maxing out their Roth IRA.
Roth income limitations are easily circumvented by most docs. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
There aren’t restrictions on contributions because the benefits aren’t that great. Why do you think the government limits Roth IRA contributions? Because they’re friggin’ awesome! Your friend that can afford $250K a year of life insurance probably makes more money than I ever will. The average doc makes $200K. What someone who can afford $250K of life insurance every year does with his money has little relevance to what he should do.
The fact that NYL paid out more money in total dividends has no relevance to the individual investor. It’s all about whether the rate of the dividend paid went up or down. It’s been going down for decades.
WL dividend rates ARE related to interest rates. What exactly do you think the insurance company is holding in its portfolio? Magic investments? Nope. Bonds.
You’re right. After 20 years insurance becomes free. Really? No, it’s not free. You just paid in advance for it. That’s why your returns were so low. The rate of return does increase because the dividends are applied to the cash value. But it’s not 6% overall. It’s 6% after you spend 20 years getting 2% (or whatever.)
You sure have a lot of “friends” with whole life policies. It’s like a club or something.
I find it interesting that people who come on here and talk about how awesome whole life is talk about getting the policies structured just so. Yet I keep having docs show up who still are in the red after 7, 10, 12 years with these things. Somebody is selling them to these docs.
At any rate, enjoy your policy. Try not to think about what you could have left to your heirs if you had invested it in something with a higher return. 🙂
What are your thoughts on using a whole life policy for the purpose of funding my childrens’ college and university tuition? Doesn’t have many of the benefits of a 529 account, but ultimately more flexibility in the way the funds can be dispersed? Especially now with president Obama talking about taxing 529 accounts. I would love to hear your thoughts!
President Obama doesn’t write the laws. The currently Republican Congress does. Which house were you expecting to pass a bill that taxes 529s? At any rate, I think using whole life insurance for education is a terrible idea as discussed here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/
I can think of some uses for whole life that are smart. Paying for college isn’t one of them.
From a policyholders pint-of-view, life insurance should be purchased solely as income replacement and to provide your surviving family with funds for your unpaid mortgage and other everyday living expenses.
Investments should be purchased independent from life insurance.
Life insurance salespeople are pressured to sell the policy that benefits the company and the one that creates the best commission for the salesman (usually one and the same).
As a client, I would want my life insurance salesman to present my surviving wife with a $500,000 check from my term life policy rather than presenting her with a $100,000 check and also advising my wife she has an investment equaling to $20,000.
Wouldn’t you?
Yes and no…whole life or term life is just insurance and not an investment…so I agree with you on that
However, no one knows what the future holds and how long we will live. Whole life is a great product only after you invest in your 401k, IRA, and emergency funds. I say this because none of us know how the market will be at the time of our retirement…your portfolio could have performed awesome and your investment portfolio could be really good or we could be in a recession and your investment portfolio could have taken a big hit with losses…see it has to do with timing…if you survive long enough and your term is expired but we are in a recession, it would be bad timing of pulling out your funds or if you happen to die during that time.
Whole Life is just a hedge against all of the uncertainty of tomorrow. So if something’s happens to me when I am in my late seventies and eighties and my portfolio has occurred losses due to recession, depression etc…, it protects my family with a certain amount of death benefit to take care of them.
Hope this makes sense…it’s a bad investment if it is your only investment…don’t think of it as an investment and it all of a sudden has a purpose
I’m not sure whole life is ever a “great product” although there is no doubt it compares far better against a taxable account (especially one invested in bonds) than a tax-protected account. Your post deserves a couple of counterpoints. The first is your point that it’s great to have a death benefit in your 70s and 80s. Well sure, all else being equal, a death benefit is great. But that’s not the question. The question is whether you’re better off paying for that death benefit (insurance isn’t free) or putting your money into something else- paying off a mortgage, other investments, other consumption items etc. Since my family shouldn’t need a death benefit after 50 or so, it seems silly to pay for one in my 70s or 80s.
The second point is this idea that you would be better off investing in whole life instead of say stocks if the market tanks early in retirement. While it is true that your whole life cash value shouldn’t fall in a stock market crash, the real question is what point the market falls to. Consider a whole life insurance policy that has a return of 4% after all expenses over 30 years and an investment account that grows at 7% after all taxes and expenses over 30 years. Let’s say you put in $50K a year. At 30 years (the assumed retirement date) the whole life policy is worth $2.9M. The investment account is worth $5.1M. Let’s assume now that the investment account loses 40% of its value (my own 75/25 portfolio lost 33% in 2008 to give you an idea of comparison). So now it’s worth $3.1 Million, slightly more than the whole life policy. Even if the worst happens and you have to sell the whole thing low you’re still better off than in whole life, and that’s not even counting the fact that you will likely have tons of losses to deduct from your taxes and don’t have to pay interest to borrow your own money. Perhaps I ought to include this one in my next post on the myths of whole life.
I am an agent for an insurance company. While there are some truths to this article, they seem to be mostly misguided based on what was sold or how it was sold. What I do is not sales. I have been in sales before masked as a consultant where, guess what, the answer to what I’ve been asked to consult is the product I conveniently sell. I hated that.
I consider myself a consultant in the truest sense of the word now. Your comparison of term vs whole/permanent based on cost alone is ridiculous. There is absolutely zero equity in a term policy. Not only that, the cost gets EXPONENTIALLY more expensive as you get older. For pure insurance alone, max out from whatever your work provides. However, once you leave your job, you have nothing (except certain retirement situations). Let’s say you get laid off when you are 50 years old. Try to tell me how much cheaper term is than permanent insurance.
I have and will NEVER position whole life as anything but a long term deal. In fact, I emphasize that this is NOT what you want to do for the short term. I have steered many people away from that. I don’t look to replace anything or completely over-insure anyone. What I do is take a look at your overall financial situation – income, current insurance, financial goals, etc – and ask what a comfortable amount to spend would be outside of everything else you are doing currently. Whether that number is $50/month or $500/month, I put together a plan based on what my clients tell me their needs and priorities are. Sometimes it is term, sometimes it is whole life, sometimes it means other types of investing vehicles.
The problem with your entire thesis is that you look at insurance in the truest sense rather than maximizing what is offered.
As far as your statements regarding commissions and dividends is concerned, I can tell you without question that your statements are completely false. I am not sure if you are referring to one specific company’s commission structure and/or their dividend rates, but I can tell you for certain that structure does not apply to my company. Percentage wise, we get paid the same regardless of the product. Also, you should specify the company or companies you are speaking of if you are quoting their commission structure or dividend history. Based on your writing, it is painting all companies with a broad brush.
The bottom line is that, depending on people’s individual situations, whole life may or may not be the best choice. Let me ask you this. If you had $300 per month to spend on a car, would you buy a car that is $15,000 or would you lease a car that is worth $22,000? For some people it is more beneficial to lease, and for some it may be better to buy…no matter what the return is.
Welcome to this 809 post three year old thread where readers have been instructed not to leave a comment.
You make a few odd comments. The first is about the guy getting laid off at 50 and seems to suggest that if he is invested in term insurance that is somehow a tragedy. I’m not sure if you’re saying that’s because he loses his employer provided life insurance, which usually at something like ~1X income is generally totally inadequate coverage for someone who actually has a life insurance need or if you are saying that whole life would be better because he could borrow from the policy to make the premiums and not have to come up with the term premium. That, of course, assumes he’s had the policy a while. If not, well, he has to come up with a much larger premium to pay the whole life insurance premium. At any rate, the point of buying term and investing the difference is to not need insurance at all by your 50s.
Second, whole life doesn’t become instantly cheaper at a certain age than term life. Compare 5 year level term bought at 50 to a whole life policy bought at 50. Which has a lower annual premium? The term obviously. The only time whole life works out better than term is if you need/want a life-long death benefit, and hardly anybody needs that.
Third, you would put somebody into a $50 a month whole life policy? Have you looked at the IRR on such tiny policies? It’s terrible. How do I know? I owned one. If all someone can scrape up is $50 a month, you’re doing them a severe disservice recommending whole life insurance.
Please share with the crowd what the commission is on a $50K/year whole life policy from your company if you think my numbers are ridiculously off.
I don’t buy cars at a monthly price. That’s why I’m rich. Your silly question offers only two answers, both of which are wrong.
My parents are elderly and have a whole life policy from mass mutual. They have had it over 20 years paying $220.00/month. They bought a new car 1.5 years ago for 26k. They thought they would use the insurance for a car loan but right before they went in to MM for the consultation the car lot said they would give them a zero percent car loan through the dealership. When MM found out about the zero interest they gave my parents a deal they couldn’t resist matching the dealership. After believing the bs they went with the insurance company because they trusted them. Here in a nutshell is what was promised. Why pay the dealership a monthly car payment when you are already paying us $220.00 a month? We will finance your car and you just keep paying your $220.00 per month and everything is great. Well I was furious about them taking advantage of my parents especially since Mass Mutual is now charging 5% interest and the car cost 26k 1.5 years ago and now the statement says it cost 31k. They could have had 0 interest through the dealership and now this car will never be paid off and the insurance is all over the place and going down in value. Is there anything they can do at this point?
Your comments raise many questions. For example, who at Mass Mutual suggested they take a loan against their policy? Their agent? Second, if they took out a zero interest loan from the “dealership,” they would still pay the loan back, right? Are they repaying the loan they took from the insurance company? Why or why not? Third, let’s accept nothing is free, not even a “zero interest loan.” Virtually all deals are either zero interest OR a reduction in the selling price; therefore the interest is really bundled into the higher selling price.
Now, let’s look at this another way: how is that you can borrow against your policy? The answer is because you have cash value after paying for 20-plus years. What does the build-up of cash values buy? Additional life insurance for one AND the ability to borrow AND the opportunity to take tax-free distributions if desired.
So let’s frame this another way. Say your parents had been paying a mortgage for 20-plus years and they had built considerable equity in their home. They decide to purchase a car with a home-equity loan. Would they pay it back or ignore it? Would not paying it back affect the equity in their home? Of course it would and it’s no different with the life insurance policy. By the way, if you check the policy, you will find they are continuing to receive dividends each year.
Sounds like they borrowed against the life insurance policy but didn’t actually pay back that loan. So of course, over time, it gets bigger. I don’t know who promised them a 0% loan from the life insurance policy. Whatever the policy states, that’s what it is. I don’t see how there is any negotiation there.
It is really all about the numbers. I bought a whole life policy with a 500k death benefit. The premium was 9660 which I put into the plan for 30 years. Total premium 289,800. The cash value is worth 954588 with a death benefit 1,449,052. The rate of return on my money was 7.1% tax free. How is that a low rate of return? Taxable I would have had to do over 10%. I did not have to pay for term insurance and taxes along the way either which means I had the coverage and a nice rate of return on my money without having to pay extra money on taxes. I am confused how whole life is a poor choice…
Glad it worked out well for you and that you’re happy with your purchase. Your experience is similar to this guys:
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
Unfortunately, your experience is relatively rare for people who find this site.
btw, glad to see your mentioned The Visible Policy. I agree it is a great website from someone who owns a plain vanilla type whole life policy. However you seem to have failed to mention his final conclusion at the end of his site. He comes out in favor of the Whole Life policies, he claims that after all of his analysis that he likes it. He still has his policy and is happy with it.
Just thought I would point that out for your readers, since you neglected doing so.
You know you’re commenting on a four year old post that I’ve asked people not to comment on any more, right? Keep in mind that “final conclusion” wasn’t written when this post was written. That’s hardly neglect to avoid mentioning that. However, keep in mind why he likes it. He was looking for, and I quote:
“It suited my temperament and desires to acquire a policy with strong guarantees and conservatively invested policy reserves.”
If you want a cash value life insurance policy with strong guarantees (Although I don’t see 2% real as “strong”) that invests conservatively (read: low returns) then whole life works just fine. He bought what he wanted and is happy with it, even though he admits that like most purchasers, he had no idea what he was buying. Unfortunately, most of the whole life purchasers I run into bought something very different from what they wanted and thought they were buying.
As a middle class, soon to retire, but still working and looking at WL as a part of an overall retirement plan. I would agree with some of what you said. Young folks, especially with kids need life insurance and term is usually the best solution because of low cost. Once you have that box checked permanent insurance should be looked at.
I spent my entire career telling myself I do not need permanent insurance, when I retire I will have enough money. I bought enough term ins to get me into retirement, Well now I am about there and I am considering a whole Life policy, which will be very expensive and would have been much less expensive years ago.
Why do I think I need it? Several reasons potentially. Term Insurance is now very expense and will keep getting more expense due to my age. A whole life policy could have hedged against this. I have a pension with a survivor benefit. The survivor cost is high and whole life can been a better option giving tax free income and potential growth of cash value and death benefit. The insurance cost will not increase over time where the survivor annuity will increase annually with CPI.
I could become uninsurable and the whole life early in life would have hedged against that.
An income annuity and a corresponding whole life policy can allow for a greater percent drawdown of retirement income vs drawing assets from 401k, without risk out out living money
Whole Life with cash value can be a buffer for you 401k so you do not have to draw down 401k in down markets which is a double whammy.
I do not sell insurance. I havent committed to the strategy I just spoke of, yet. But it has merit and worth investigating and running the numbers.
Whole Life is a permanent policy meant for a life time so saying it can or usually does work after a long time is in my opinion complete vindication because it isnt meant to be a short term investment it meant to be for a lifetime.
I do agree with the illustrations that show bases on current conditions because current conditions are merely a snapshot of today. Guaranteed number are much more important
The fact that term is expensive at age 80 isn’t a reason to buy whole life. Buy whole life if you need whole life. It seems expensive now and seemed cheap earlier because before you had decades over which to pay for the death benefit. Now you’ll probably be dead in 20 years, so you have to pay for the premium in 20 years.
While it is possible that a single person annuity + whole life insurance is better than a dual person annuity, but everyone with that issue should run the numbers. In my experience, you’re usually better off with the dual annuity.
The tax-free income, potential growth, and death benefit are all discussed in the article. Yes, there are benefits, but I think the cost for them is too high.
I think for purposes of dealing with sequence of returns risk and market volatility, you’re better off with bonds and SPIAs then cash value life insurance. But if you’ve run the numbers, understand the downsides, and want to put some relatively small portion of your money into cash value life insurance, knock yourself out.