[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.
Who cares about cancellation of term insurance except for the companies you leave? I have cancelled 3 term policies and replaced them–each was appropriate for my situation at the time. I recently set up two policies–a 2M 30 year term and 1M 20 year term policy. I hope to be self insured well before the 30 years are up and would be happy for both to lapse unclaimed.
wm77, one thing to look out for is the comparisons to the SP500 returns that they use. They will often try to compare returns to the SP500 without dividends reinvested which is dishonest. They also count on people not understanding real values vs. nominal values.
Mark,
Every day as we age life insurance premiums increase. one reason to keep it is that if you terminate your policy your next policy will cost you more based on your age. but if you have health issues along the way you may not be eligible for life insurance at all. Again I Hear the word HOPE, I hope to be self insured well be for the 30 years. The question to that would be What If you are not? But then again there are ways that you can get all the premiums you pay in back so you are not just paying for something and in the end they lapse and you still haven’t become Self Insured. Just something to ponder. That I have learned though the years.
Welcome to the blog Bill. On this blog disclosure of financial conflicts of interest are important. You should probably mention you and your buddy Voss are New York Life insurance agents so readers will understand your conflicts of interest.
I’ve written previously about return of premium insurance and why that’s not such a hot idea:
https://www.whitecoatinvestor.com/return-of-premium-is-not-a-free-lunch/
WCI,
I would like to keep my buddy out of this if you don’t mind, But I am in that industry. I didn’t see your rules of engagement until tonight so I apologize if I said or did anything to offend you in any way.
People do ask about the return of premium but generally speaking you are right it is not a hot idea. Just an option to look into if that is what the person really wants. After the pros and cons most people don’t go with it.
I will read through what you wrote though, thank you.
I agree with you, there is wrong use of language by calling the growth of the CV as tax free.
IT is indeed tax deferred but contrary to all other investments the tax deferred growth can be taken out free using loans that will be repaid by the death benefit.
Mark’s comment about who cares if the term policy is cancelled or expire without a pay-off is because you guys do not take in consideration loss opportunity costs.
I have let myself been led away from the real purpose of using whole life as a financing platform and not investing, because once you have accumulated capital, you can basically do all the strategies you name and put back the profits inside your policy to grow it and do it again.
Jorge,
A few life insurance companies have none direct recognition of your cash withdrawals. Meaning your money still grows based on the amount you had in before you borrowed any money from your policy.
Non-direct and direct recognition is discussed in this post on the Bank On Yourself/Infinite Banking concept:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
You have again posted incorrect information. The loans are not free. Which insurance company allows you to tell clients loans are free? I perfectly understand non direct recognition and the loans are not free. Many policies actually collapse bc of poor decisions involving loans. Your additional opportunity cost comments about term just dont even make sense. It seems like you just throw out information, much of which isnt true hoping something sticks as a reasonable idea. Additionally 33% of whole life policies are surrendered within 5 years all for huge losses, around 50% by year 10 many with losses and all with losses if you include inflation and true opportunity costs, and still yet additional policies get surrendered such that likely only about 25% of whole life policies are in force at death. No one lead you into anything. You either dont understand whole life as much as you should or you dont care that its a poor investment and just want to make more money pushing it on doctors. Nice wording on financial platform….completely meaningless term.
Rex,
You are right, when you borrow or take a lone from your whole life policy you have an interest rate tacked on to the amount to be paid back. Such as you would from a bank. If you are still paying your premiums your policy will stay in force, based on your premiums and the dividends giving back to you from the insurance company. There is still more money going in then the interest you are billing. Where did you get your Percentages you talked about? I would love to read about all that.
Whole Life Is a pour investment, you are right. In isn’t meant to be an investment. It is a form of life Insurance that will stay enforce for up to age 121, based on you paying your premiums.
On the other hand what if you could have a permanent life policy that acted like a term policy? Term policies you pick how many years you would like to keep a level premium right? What if you could have a permanent Life policy that you only pay in for say 10 years and after that time you don’t have to pay in any more premium. But it still keeps growing and stays enforced for the duration of your life? Now that would be interesting….
Very interesting discussion. I am glad that I ran across the website. I am just out of fellowship for couple years, and looking into getting life insurance. My insurance agent just told me yesterday to consider 20 year term and investing in Mass mutual whole life.Their dividend rates do look impressive, especially because I do not think I can beat those by trying myself. What do you guys think about mutuals, where the proceeds goes to policy holders rather than the shareholder companies?
Here is the published article about their divident rates, especially last two pages:
http://www.twintierfinancial.com/site/wp-content/uploads/2011/03/Mass-Mutual-Dividend-Study.pdf
THose rates look good. But I guess is the catch is in the statement “Dividends include an investment component, a mortality component and an expense component.”
Does this mean those are not the actual rate of growth that we will see?
will Appreciate your help
Sam……
If you dont need or want a permanent death benefit then buying any whole life product is a mistake. You can not buy the product as a strict investment unless you want a very poor decision. The primary reason for a permanent life insurance policy must be a permanent death benefit for it to make sense. The basic reason is as follows: When you buy Mass Mutual or any whole life, you are buying bonds but are paying also for insurance to cover your entire life but on a level basis, paying also for a very pricey middle man, and decreasing your liquidity. A plain vanilla whole life policy takes 13 years for the premiums to equal the cash surrender value. Why do you think you cant do better than that over 13 years? Most over funded policies take almost a decade to break even. I dont think you understand dividends that well. It isnt a return on your “total investment” and each company actually calculates it differently so they arent completely comparable.
Sam-
Welcome to the site. I agree with Rex’s comments. His explanation of the dividends is right on. The dividend is based on the cash value, NOT the total of your premiums. Big difference.
That said, the dividends are real, and are generally higher than what you would make in a bank account or a CD with your cash value. It’s just that unlike with a CD or another traditional investment, not all of your payment goes into the investment, only part of it. The rest goes toward insurance costs and fees.
And I do prefer mutuals in general, but with term life insurance, it really comes down to price. Term life is a commodity, like gasoline. You buy the cheapest of the type you need. I suggest you go to term4sale.com and compare other policies to the one your agent is offering. If he can’t sell you all of those policies, you need a new agent.
Also, your agent is recommending a 20 year level term policy. If you don’t plan to be financially independent in 20 years, I suggest you get a 30 year level term (assuming you need insurance at all). You can always cancel it early and it doesn’t cost that much more. In fact, I bet you could get one for nearly the same price as what he is selling a Mass Mutual 20 year level term for.
Also, remember that the brochure is demonstrating PAST dividend rates, not future ones. Given our low rate environment, you are very unlikely to see this high rates going forward. How will the insurance company provide them? It did it in the past by buying 30 year treasuries and other bonds, taking their cut, and passing the rest on to you. 30 year treasuries currently yield less than 3%. Don’t expect 7% dividends in this environment. Someone above mentioned that dividend rates lag behind about 6 years. I don’t know if that’s true, but if it is, a lot of people expecting 7% dividend rates are going to be very disappointed in a few more years when their dividends drop to 2%.
white coat,
Sam,
Dividends are based on your total Death Benefit at the time the dividend is issued not the cash value. Just a note to clarify.
The reason for life insurance is to protect the ones you love if you were to die tonight. Your total amount of death benefit should be a should cover all your liabilities and expenses. That way when you die your family will not have to bare the financial burden alone.
A question to anyone, how much of your yearly income does your family depend on for living the life they have? Besides the clothes on your back and the food you eat…. it would most likely be all of it.
Question 2, goes to your spouse and family. How much of that salary would you like to come in every year after you are dead. (if you are not including liabilities and expenses just based on yearly salary or income)
A couple year? 10 years? Till the kids are out of school? Till retirement age? Or the rest of their life?
Life insurance is about the death benefit. If you have accumulated enough money in savings to cover all your liabilities and expenses and cover your loss of income to your family, at the time of Death, then there is no need for life insurance. But who here can tell me the exact date of when they will die?
And Just a thought but most Americans live their life styles based on their house hold income. How much money would you need to have in savings/liquid form in say 10-20 years (if you don’t die tomorrow) to cover your loss of income to your family? for the rest of their lives?
Term is good to cover short term goals in life permanent is good to have for after your term has expired(but term doesn’t expire until about 90 years old just your level premium, term premiums after your 10,20,or 30 years is up are based on your age)
Life insurance gives your the piece of mind that your financial goals will be self completing upon your death (if you have enough to cover everything)
You guys are awesome. This now makes lot is sense. I am going to get 30 years term for now and then think of investing rest at some point.
Both of us at one time made a serious mistake and trusted insurance agents. While i dont know WCI personally and we dont agree on all things, i think i can say that neither of us wants other physicians to fall for the same garbage. He does a great job with this site and i hope others find it and make use of the good information. Many agents get their claws into us via disability insurance (which is likely a good idea to acquire) and then we make the mistake of trusting them with our financial decisions. Always keep the insurance agent away from your investing. They typically do not have your best interest at heart.
Hi Rex, you try to show yourself as very knowledgeable, but you fail in reading comprehension, I did not say the loans were free. The word “free” was there in reference to withdrawing the money on a tax free basis.
At retirement age loans can be taken on the policy and that does not trigger tax on this money. These loans do not even need to be paid because the death benefit will paid them at your demise.
For you, the financing features of a whole life policy might be meaningless but it is not meaningless to guys that follow Austrian economics.
I think the experience was interesting. Thanks for the information shared.
no matter how you slice it you said taken out free and you made no mention of the cost of accessing that money. you pretended like it costs nothing or that cost is meaningless. I understood perfectly what you tried to do. everyone can read your comments and its clear what you wrote. im sure you will soon disappear from this conversation bc you have no evidence, just insurance agent talk. when the truth comes out, people like you run for the hills.
Well, I am one of those ‘just graduated from residency’ folks who bought into a whole life policy. So reading through these comments, I am still not sure if I made the right decision or just got suckered. I felt that my 401k, Roth and standard IRAs, investment accts, 529s were basically all in the same pot – the market (domestic and international funds). I own a house, i have a rental home, I have a paid off car. I am a very good saver (in the work force for a few yrs before going back to residency)… But the recent market tumbles have only brought disappointment in unrealized capital losses and any realized capital gains get whoomped with a 33% tax. So, the idea of earning dividends through paid up additions and not getting taxed seemed like a nice addition to balance out my portfolio… It also offered piece of mind that my children would get the death benefit if I passed early. But, did I just get suckered? Can someone enlighten me as to what all these magical places to ‘invest the difference’ are??? I have been invested in no-load, diversified funds for a long time and they looked great until about 2008. Any advice on other ways to invest? Anyone have thoughts on DFA funds?
What you are missing is that there are no magical places to invest. None for the insurance company either. Thus if lets say bonds poorly perform over the next 40 years of your life (which is what they mainly invest in), they might not be able to make good on their guarantees and you would have to hope the state guaranty assoc can get another company to cover your policy. This is one of the reasons why dividends are continuing to drop on whole life and likely will do so for years to come. There are no magical investments for insurance companies. They dont necessarily invest better than any other company. Now i dont think that most whole life companies will go under. I think what will happen is that you will get a poor investment but you will get a death benefit if you are one of the few that keep a policy in force until death. Hopefully you purchased plenty of term in case you die early since whole life isnt about dying early, its about passing money when you eventually dies which statistically will be several decades from now. For investing advice, besides here, id go to bogleheads.org and read up on the recommended lists. DFA is fine in my view if comparable to vanguard. The problem typically is that many advisors charge you AUM fees to make it such that it isnt worth it. If you can cut that out or reduce it or make it flat rate then im more in favor of them. Again there are no magical investments for anyone or any company.
Kathy-
Cash value life insurance is a much worse investment for those passing up obvious tax breaks like their 401Ks, 529s, Roth IRAs etc. I’m surprised how many docs don’t even know if they have a 401K (or don’t bother setting one up if in private practice) and have never heard of a Backdoor Roth IRA. If you’ve maxed out ALL OF THAT and then want to put some into cash-value insurance, there are worse financial choices. Keep in mind that after a few years, you’re often times better off STAYING in a policy. You should order a current illustration from the company (and pay attention to the minimum guaranteed returns) to help you make a decision. But if you’ve already been in this policy for 10+ years, you probably ought to keep it.
Keep in mind that not all publicly traded asset classes got whomped in recent years. My TIPS fund surprisingly returned 12% this year, for instance. Also, for those who didn’t bail out at the bottom (and added more in late 2008 and early 2009) the recent bear market worked out just fine.
DFA offers some great funds. They’re a bit pricey for me after the ER (which is usually added onto at least a flat fee, but often an AUM fee), but there’s a lot to like about them. Magic? No.
I’d also avoid realizing short-term capital gains. In fact, I try to avoid long-term capital gains. That 33% tax rate is relatively easily avoided for investments. Using widely diversified, low turn-over, primarily index funds in the taxable account also helps minimize the tax burden.
WCI,
Your tax break for 401k is that you dont have to pay tax on the money now going into it. But you should mention that you will have to pay the tax on every penny you put in and every penny of growth later. The Question that you would need to ask yourself is…. If you were a farmer and you bought a bag of seed, the cashier says would you like to pay the tax on this bag of seed or would you rather pay the tax on the Whole Harvest later on??? which would you rather pay tax on??
Do you know of the 3 products that are funded with after tax dollars grow tax-deferred and if structured correctly have tax free withdrawals????
What is the cut off income level for a Roth IRA and how much can you contribute a year?
On your portfolio you said you have 12% gains how much of that was taxed? What was your take home % after Taxes?
Thanks for the replies. I max out all of those (of course, now I am out of the Roth IRA salary limit). I definitely did not bail at the bottom, I’ve just left everything alone. I guess at this point, I am stuck in the WL policy, it would definitely not work to my advantage to bail. I feel like I don’t have time to read about different funds, so I just go with target funds, or large class funds. What is a backdoor Roth? is that when you put money in a standard roth and then convert it to a Roth?
Kathy,
I hope you didn’t dump your WL just yet. There are other options. Yes a Roth has an income limit and a limit on how much you can put in. WL doesn’t have an income limit but the limit for contributions into it peaks at 2million dollars a year I believe. WL can be structured in ways to accommodate your financial growth through the years. Yes they don’t have a tie to the market, but if you desire a safe place to put your money with growth potential (on a conservative basis) WL is a good place for it. However everyone’s situation is different. That being said there are different ways to set up a WL policy, but for starters you would have to find the largest and strongest mutual life insurance company to see what all those options would be.
Annuities are also a good path to save money for retirement. They buy a pay check for life upon annuitizing them.
in regards to your whole life, you really have 4 options.
1. continue to fund it either indefinitely or for a while and if you do fund it just for a while then you could do option 2 at some point. if during the next several years, you develop an unexpected health problem then id definitely keep it. If you are healthy and you are sure you dont want a permanent death benefit then take action 2 or 3 at some point.
2. do what is called a 1035 exchange into an annuity such as a deferred vanguard annuity. the benefit of doing this is that the cost basis is kept with the transfer meaning if you have paid 200k in premiums then all gains from the current cash surrender up to the total premiums paid are not taxed. You wouldnt have to add any additional money into the annuity if you didnt want to (and i wouldnt recommend it). This works best when the difference between the cash surrender value and your premiums paid is high but such that over the time period you want to invest, the return on the annuity will beat or at least tie the whole life’s cash surrender value. You usually cant accomplish this well in the first year or two of the policy bc there is so little cash value it will never multiply into your original investment but can somewhere a few years later. Let me know if that doesnt make sense.
3. Surrender the darn thing and move on. You must have good term in place before doing so. You dont get any tax advantages as with the 1035 exchange. I think this is best if you paid less than 1 year or when the cash surrender value is close to the premiums paid. At that point the 1035 exchange isnt as valuable an idea.
4. try to maximize your living benefit out of the policy and change your goals such that now you want a death benefit. To maximize the cash value in the policy, you need to pay it yearly (which you should do anyway bc there are fees if you pay it other than yearly), overfund it with PUAs to just below MEC levels (the insurance company can tell you how much this will cost and you should ask for illustrations showing this). Later in retirement plan to take about 90% of the cash surrender value out in loans and not pay them back. Your heirs get the difference betweent the death benefit and what you took in loans. PUAs are tiny little paid up insurance additions that come at a much lower cost. By purchasing them, you will increase both your cash surrender value faster and death benefit over time.
Just as an fyi, im in a similar situation to you.
Read more about a Backdoor Roth IRA . But it sounds like you’ve got the basic concept. I do it every year for myself and my spouse.
I am also in the same place as Kathy and Rex (as mentioned in the very original comment). Rex your last comment pretty much tracks my thought process as well. Nicely done.
I really pity the white coat professionals that listen to your rhetoric. Your talk sounds very credible but that does not make it right.
Let me document why I defend the Infinite Banking Concept:
I have three policies and the cash value grows in them very strong. I use my policies for investing, I have bought income properties and get the rents back into the policies.
I finance my needs with the policies. I go on vacation and take a loan to pay the cost of the vacation, then I set whatever terms I want to pay my policies back.
I would have had to pay credit card companies a high interest or pay cash that steals the interest that my cash could be earning.
I sleep like a baby no matter if the stock market goes North or South. I could care less.
I feel good that I do not have to pull my hair looking for what investments to choose.
I know that by just working my policies and finance my own and my family needs, we are
growing.
You can check these books:
“Becoming y0our Own Banker” by Nelson Nash.
“How Privatized Banking Really Works” by Carlos Lara and Robert P.Murphy, Ph.D.
“A Path to Financial Peace of Mind” by Dwayne Burnell, MBA.
“Your Circle of Wealth” by Donal L. Blanton.
“The Pirates of Manhattan” by Barry James Dyke.
“Money for Life” by Jeffrey Reeves.
“Tax Free Retirement” by Patrick Kelly.
in case you didnt realize, not a single doctor on this thread would pay for any of that with credit cards and allow a balance to remain. You still dont even seem to realize the costs for financing through your whole life policies. None the less, glad you are happy with your purchase.
i pitty the people who use you as an agent. You cut and paste obviously wrong information and then in your own words post additional incorrect info. What does that say about your knowledge and understanding of these products…..tons. You have yet to provide any real data to support your ideas. I wonder why? Maybe you could post some more false information…
You forgot several other books but they are all the same thing. They are filled with stories and superficial knowledge of the subject so that you are left without the complete picture. You have yet to provide any data on whole life and you dont even seem to understand why dividends have been decreasing over the years. Glad you sleep like a baby.
Please avoid the personal attacks and focus on the merits of the ideas presented.
I don’t think Jorge is the best proponent of Bank On Yourself. I actually think there is some merit to the idea. I don’t think I’d ever get into it. But I don’t think it’s the stupidest thing someone can do with their money unless they’re passing up obvious tax breaks like contributing to their 401K or a Roth IRA or making stupid financial decisions like not having enough term life insurance to actually cover their life insurance needs.
Jorge makes a couple of errors advocating this. The first is he doesn’t mention the borrowing costs. Most whole life insurance policies charge you 1 to 1.5% to borrow your own cash value. That’s a real cost to borrowing that money. No, it isn’t very high, but it counts for something. Second, he seems to advocate living the consumer lifestyle. “Now I can borrow and go on vacation or buy a car” or whatever. Better to use saved money for consumer goods. Studies show you spend less and enjoy the purchase more.
He’d do better in this argument if he focused on opportunity costs and the tax savings. The cash value in the whole life policy DOES grow
tax freetax-deferred, meaning it isn’t taxed as it grows. If you choose to surrender the policy (or it fails), those gains become taxable. 100% of your premium payment doesn’t go into the cash value obviously, and with tiny policies like the one I used to own hardly any of it does. But you can increase that percentage by buying a big policy, making paid up additions, and minimizing fees and insurance costs as much as possible. As long as you don’t run afoul of MEC issues, you also get to BORROW the money tax-free. It’s not fee-free, and if you decide to pay the money back into the policy you do so with post-tax dollars, just like the original premium payments. But you don’t have to pay that money back nor do you have to pay taxes on it. There’s some value there. Yes, much of it is just the return of part of your premiums which were already taxed anyway, but not all of it, eventually.The other key thing that makes this whole concept reasonable is the concept of non-recognition. That means that even if you borrow the money out of the policy, the policy still credits dividends on the amount you borrowed. So let’s say you’ve got $20K in cash value, and then you borrow $10K from the policy. If the next dividend is 5%, the cash-value account in a non-recognition policy gets credited with $1000, not $500. Now, the insurance company isn’t going to give you that feature free. I’m sure they make up for it with a lower dividend scale or higher fees. They’re not stupid. But in essence, you’re creating money. You could pull the cash value out and use it to buy index funds or buy investment property. So the $10K in an index fund provides you dividends while the insurance company is still paying dividends on that $10K. That’s worth something. Is it worth more than the costs, hassle, and illiquidity of the insurance policy shell? I’m honestly not sure, but I doubt it. So obviously there’s an opportunity cost to leaving the money in the policy. It seems to me you’re better off pulling it out and investing it elsewhere ASAP. I don’t know if you can add more paid up additions when you’ve got a big chunk borrowed, nor am I entirely clear on the intricacies of keeping the thing from becoming an MEC, which would be financially devastating to someone who had borrowed a lot from a policy. I’m also not clear on how the borrowing fees work if you never pay the money back. Is that 1-1.5% taken out of the remaining cash value, or just subtracted from payments you do make back into the policy? It would make a big difference in the financial viability of this approach.
There are also two very big risks to doing this type of a thing. First, the insurance company can change many of the rules. For example, it can cut dividends to nothing. That seems pretty likely if there really is a 6 year lag between bond yields and insurance company dividends. Second, Congress can change the rules. They did it in the 80s to prevent life insurance policy “abuses” not so dissimilar from bank on yourself. If this becomes really popular, it’s possible they’ll do it again. Then what are you stuck with? A crappy whole life insurance policy. At least if you had the money in more liquid investments you could just cash out and move on to something else.
Overall, there are big red flags to doing this. The first is that it is complex. It is a general rule that the more complex the product, the more likely you are to be screwed over using it. The second is that very few credible investment authorities (possibly none) advocate doing this. The only real advocates out there have a financial stake in it. Bad sign. Third, there’s nothing magic about what an insurance company does. It isn’t scalable to pay out huge dividends every year on empty cash value accounts. Eventually the company would go broke doing this. It isn’t logical. So eventually, somewhere, the company is making up for those losses, or they go out of business. Both are bad for you.
My Guardian policy is 8% if i were to take one. Now Lafayette (the typical chosen BOY company) actually reduced their loan rate to around 5% bc they are trying to create a situation where it is a near wash given their current dividend rate when you consider non direct recognition but it is not free but similar to what WCI mentioned. As dividends decrease this may or may not be harder to maintain a good balance for them as a company. Its a moving target since in a bad economy maybe more people are forced to surrender their policies. This is one of those strange situations of bad for them but okay for you if you already have a policy. Many companies also have reduced loan rates after 20 or 30 years. In general most non direct recognition companies have slightly lower dividends than direct recognition to cover this cost of business. If you know you will never take a loan and still want to use whole life, you may wish to actually consider a strong company that is direct recognition instead although you may prefer a no lapse gUL policy if you want permanent insurance and dont have to worry about paying the premiums since this would be cheaper for the same death benefit but near zero cash surrender value. Finally, if you have a policy and want to see what taking loans will probably do to it, have the agent create an illustration with the loans. Remember these are dividends are not guaranteed and the illustration will be with the current dividend scale. if dividends continue to go down, you will have to re-evaluate how you are doing this but it will show you what reductions in cash surrender value and death benefit may be occurring on your policy by taking the loan vs not taking any loans. With money coming and going out of a policy, it can be very difficult for an individual to predict the total costs of doing so. In general it is best with whole life to take the loans out later in the policy if possible to reduce risk that the policy could go bust. For instance if you took a loan out in year 10 that was substantial and couldnt pay it back then with reduced dividends your policy may actually go bust before you die. If you take out a large loan at a much older age, chances are less that over the fewer years you have remaining for there to be drastic changes in the dividend rate and thus its easier to predict taking the loan will be “safe”.
I recently have been in conversation with an agent from Northwestern regarding whole life insurance and I thought I’d throw what they told me into this convo. One thing he kept repeating was that the cash value would grow (guaranteed) at 4% annualy, which was better than inflation (which he quoted as 3%) and would be better long-term, especially if taxes rise. That, along with the tax break, was his major selling point
He gave me a print-out showing a $25,000 annual contribution to a whole-life policy. IT’S NOT AS GOOD AS THEY MAKE IT SOUND. I crunched the numbers myself and verified with my brother who’s a CPA and it amounts to 2 things:
1) It will take 33 years to break even b/w premium payments and guaranteed cash surrender value; 13 yr to break even with non-guaranteed value (agent could’t elaborate on discrepency)
2) At 50 years in policy guaranteed value is 1.5million, non-guaranteed is 5.1million. That’s a .004% and .006% return annually, respectively.
I’ve decided that this avenue of investment is not for me. I hope that anyone who is considering this as a new form of investing or diversifying your portfolio analyzes it closely. They make is sound very attractive but crunch the numbers and see what you find before you sign!!!!!!
P,
Let me say that your conclusions about it being a bad investment are correct although the math on your return isnt exactly accurate. To try and explain the discrepancy for you….Dividends are technically a return of overpaid premium. This is a technical classification to get the tax benefit and what happens is that if the insurance company makes money over the year, at the end of the year they declare a dividend and credit your account some of this money. The company gets to decide how much they are returning to policy owners and its a black box how they compute this. At the moment, companies have been returning dividends for multiple decades so its likely at the moment that you would receive a dividend. It has practically become expected at this point although they do not have to give you a dividend. Dividends have also been on a steady decline for a very extended period of time. The policy shown to you at the moment would perform greater than the guarantee. I would personally bet that in the short term that it will perform worse than illustrated initially since interest rates and dividends continue to decrease. Over the long haul, its not possible to predict how it will do since maybe interest rates and dividends will rise(although i wouldnt predict this in the next few years personally) over time. If one were to purchase a policy at a time period when interest rates and dividends are at their lowest then a policy will actually outperform the illustration in the end. Thus it can be difficult to actually know the true costs to you over time. Agents like to pretend there are no risks but underperformance is a risk since it costs you more money. With typical whole life, a premium is paid for that insurance every year. Over time, it may come from the dividends but if a policy doesnt perform as expected then it comes out of your pocket. This of course doesnt even take into consideration risks that the insurance company goes under. Again only buy whole life if the primary reason is a permanent death benefit. If you already have one, dont immediately surrender it but carefully consider your options as ive listed above.
The thing that I find the most shocking is that an insurance agent or financial planner would even propose that a resident or fellow purchase a Whole Life Insurance policy. Generally, unless the client owns their home, is maximizing their pension plan, is doing a “back door” IRA, is funding for their child(ren)s college education, and still has a few thousand dollars left over every month, there is no reason to consider it at all.
I have to agree wiith this comment and while not an Medical Doctor
Mr. Kelley, While you are a broker, I still agree wiith your comments and I feel that “whitecoat” does a very fair job on this site of stating the true reason to get whole life, vs. term vs. investing in your 401k, Roth IRAs, your 529as, and stock/bonds etc. The reason should only be a death benefit, unless you are already so diversified as you list, that this is a reasonable option as a hedge, but knowing its not a great investment, more like a passbook savings account (with a death benefit)-and that is if you get get a good policy and company for WL!
Given the pretty solid advice here (even if I had it 20 years ago), I still have exercised the conversion to WL, of my employer term policies, as in that time, the advice “you get it if you need a death benefit applied.”
I would have been savvier and asked better questions…and finally likely rejected the more costly of the two WL policies.. I eventually did drop the more expensive WL policy (from CG) as it was virtually the same price as a policy providing a 65k (30%) larger death benefit for only a small amount less annually than the other policy. I can not fathom how insurance could vary so much on a guaranteed conversion other than its an unpopular policy to sell and they want to discourage folks as much as they can without drawing scrutiny from widely varying state insurance commissioners. This is an area the ugly underbelly of life insurance shows and a reason I would strongly encourage folks to get a level term policy while they are young (before considering WL ever, and then only after you have done all of the accounts mentioned before this).
So, just to show an example of the untruths presented (even if my premiums and WL policy are not perhaps as cheap as a healthy appiicant applying for their own WL policy). The second policy required I meet with an agent (Metlife) and broker was amiable, discussed all options but finally got that I needed the WL
policy at that time.
I was shown 2 illustrative (projected cash value/dividend/amortization) charts, mainly to show
how the premiums, eventually disappear, being a good selling point in that the polcy eventually becomes paid up (if one does not want to increase the value of death benefit or CV etc.) and in no case was I shown
any projection of a guaranteed cash value, or guaranteed minimum time to be “premium free”!
and included if I paid to age 65, at which point I could convert to an annuity and use to supplement retriement income etc. The two illustrative value charts shown were:
A) conservative estimate, I thought it was the guaranteed value/worst case (there was nothing presented about any “CV” cash value guaranteed benefit but I assumed chart A was it, foolishly.
Showed years from then to age 65,with dividends ramping much more quickly after first 7 years
and the cash value increased until by year 22 the equity/CV dividends covered the 2k a year payment and I was essentially “Paid UP” on the face value of 175k. Told, then I would have to make no payment to keep the full death benefit if I died. I noted the Cash Value/Surrender guaranteed amount was not close to the
value of the death benefit, but given the dividends (of the conservatice) estimate covered the annual bill, I was
satisfied and have held the policy, expecting a sudden jump so I do not have to pay the premiums! Wrong!
B) estimated benefit if dividends were more in line with typical years past (or so I was told), That schedule showed me reaching the tipping point of dividends covering annual premiums at 17 years (forgot the dividend amount but it must have been in the 7% range I am guessing). Either way, I never assumed that the second chart was vaild, but did assume the first chart was-so wrong. I never got a guaranteed value chart from my insurer, their broker or anyone and still can not seem to even after calling the servicing center (they say to call my original broker-now replaced and long gone). So I am now in year 20, with “allegedly” , in conservative estimate I was given, 2 years left to make a a dividend that will cover my premium fully!
Well, reality is, my dividend is about $500 at most (I did borrow a small amount against the CV, and been repaying that, but I also did not use dividends to reduce premiums until 3 years ago when I noticed they set it up to buy more paid up insurance, and not apply to reduce premium. So even if the loan reduces dividends slightly, repayments should shore that up eventually, and also the added paid up insurance bought should increase dividends (and cash value) such that by now I would have reached the “tipping” point of no premiums even sooner!
Well, finally called Met life customer service yesterday, and was told they could not provide anything on my polciy history in terms of, how they dividends were arrived at, why the illustrative values were so far off, and above all ( I believe blog author and others have said one can request the guaranteed Cash Value forumula of one’s policy from the insurer)- I realize the dividend payment is not divulged clearly at all but one should at least be able to come to a relative idea of when one’s WL policy dividend would cover the premium, if not 22 years, what 30 years-as at 65 one is not going to pay any more in and taking an annuity is only for those that already have wealth to leave their families as the cash value is no longer yours after you elect annuities (then if you die it goes back to the insurance company
.Anyway, central processing center of MetLife referred me to my original broker’s replacement in the office I initially went to. in other words the servicing center claims to not have access to my basics? Every other insurer’s electronic servicing has my homeowners, my auto, and any other insurance I carry online with a printout of the policy available right from the web-why is it different for a whole life policy? I fail to get
I get they do not want to own up to bogus illustrative values but why can’t they explain to me how my policy has underperformed or how it has met some “guaranteed cash values” spoken of in these threads?. I do not want to speak to broker whom I never dealt with about illustrative values, I want to obtain the bottom line (and if I do not have it why can’t I get it as it has to be in writing someplace right? Without knowing what he actual guaranteed values (or minimum, or how they varied based on the reality of last 20 years and why), how can I make a reasonable choice to continue to hold and pay on the policy:other than taking the general consensus that its a bad idea to surrender once you have paid in as long as I have…entered this policy for right reasons and want to exit it, if need be, for right, not wrong, reasons…
,
Metlife setlled a big class action lawsuit, and I was a member by default and got about 8 shares that were worth maybe $300 dollars (so add that to this years dividend and premium is 1200) but that was a one time payout that I assume was precisely for the use of illustrative values not at all in line with reality. Still why is it that 13 years is listed as avg. for CV being what you paid in, when it seems for me its 20 years?
Lengthy comment, but I think I am first person to put forward hind sight view of my WL, and seems not to be a very positive endorsement of them as anything but a means to a guaranteed death benefit, not an investment option for any but the most well heeled (and even many doctors will not find that a needed choice).
Thanks in advance for any useful feedback. My editorials are based on my experience and I do not care to debate my experience, only to understand what I can do to help me get the data I need from my insurer so I can make a reasonable choice…as for now, i plan to hold on to it, but I am none to happy about the way things are going….:0(
Me. Keller (sorry for type on your name)…
What you ought to ask for, and have a right to get, is an in-service illustration. You almost surely should keep the policy at this point though. The poor returns are all water under the bridge now.
You can get the policy evaluated independently by Mr. James Hunt:
James H. Hunt, CFA/IG
8 Tahanto St.
Concord, N.H. 03301-3835
He has also published a few articles on his observations of whole life insurance policies. We had him evaluate a whole life policy for us in 2011 and at that time we had held it for about 20 years and had the same concerns as yours.
His latest article is titled:
Further Observations on Life Insurance
James H. Hunt, F.S.A., Retired
June 2013
His website is:http://www.evaluatelifeinsurance.org
You’ll have to send him an in-force illustration though.
I confess that I find your post confusing, but think the gist of it is that you’re unsure how your current policy is performing.
When you are first considering life insurance, the agent will provide an illustration that projects values. The insurance contract is specific as to the guarantees provided and the illustration will note these values. For example, in a permanent whole life policy, you will see columns that show guaranteed values (including, yes, cash value and death benefit). It’s a unilateral contract, meaning that that the insurance company makes an express promise: you pay your premiums and you will receive the guaranteed cash value and guaranteed death benefit.
Some–not all–whole life policies are participating, meaning that the policy owner may received dividends on his policy. THIS IS THE ONLY VARIABLE WITH A WHOLE LIFE POLICY. Slight digression: insurance companies are either stock or mutual companies. Stock companies pay their stockholders, then their policyholders. Mutual companies are owned by the policyholders and dividends flow directly to the policyholders. Met Life is a stock company; Guardian, Mass Mutual, NYL, and Northwestern are the big four of mutual companies.
You can elect how the dividends are applied to your policy, the default is usually “Paid Up Additions,” meaning the cash value gained will also result in a higher death benefit (“Additions”). Dividend options include choosing to reduce premiums or having dividends paid in cash.
There usually is a point where the cash values in the policy are sufficient to make the policy self-funding. Some call this “offset,” others may refer to “vanish.” Depending on how the policy is designed, this could occur within 15 years. It’s quite possible to add enough PUA (Paid Up Additions) so that this could occur in six years IF THAT WAS YOUR EXPRESSED INTENT IN DESIGN. Or you could purchase a limited pay policy–10, 20, or Life Paid Up at 65–that would guarantee that no premiums would reoccur after those periods.
Borrowing from the insurance company will add a loan to your policy and interest and will, as you can imagine affect the offset.
You can request from your insurance company an “in-force policy projection.” When you receive it, you’ll see how your policy has actually performed and how it’s projected to perform in the future. And please don’t tell me that they will refuse to do this: I do this all the time for clients and have never once had my request refused by any insurance company.
There is a broad brush on this forum that paints insurance and insurance agents as bad actors. To me, it’s like saying guns are bad or automobiles injure people. It’s all in the way they’re used. Too many people see numbers on a page and take them for reality or blindly accept “the stock market will give you an 8% return.” If you’re a medical professional, I hope you’re skeptical men and women of science and ask questions like, “what are the guarantees?” and “what would have to happen to make the projections occur?” And, “what are the repercussions if I decide to stop funding?”
If anyone has a policy they want examined, I’ll do it. It will require that you ask for an “in force” from your insurance company. I’ll tell you exactly what you have and give you your options.
I don’t think I’m painting either insurance or insurance agents as bad actors. I publish multiple guest posts a month from insurance agents, and have several advertisers I refer docs to regularly. I also advocate that doctors go and see highly-qualified, independent insurance agents and purchase large insurance policies, such as term life, umbrella, disability, and malpractice. However, insurance companies and their agents often try to sell doctors insurance policies that are inappropriate for them, often for dubious reasons. Whole life seems to be the most common. It is sold using myths that while perhaps true in rare circumstances, aren’t usually true for that particular client. It wouldn’t have to be such a broad brush if there weren’t so many agents out there doing it.
Well, the crux of all this is that you think a 4 to 5% after-tax IRR sucks. I don’t and I’m consistent in saying that it works well as part of your overall investment strategy, and especially when spending down in retirement.
I reviewed your initial observations about whole life insurance–those that preface all these comments and visited the website you mentioned, The Visible Policy. At the end of a pretty exhaustive appraisal, the author states that after 14 years, he likes and is fully satisfied with his purchase. I hope the link below appears, but if not, just Google “The Visible Policy” and go to the final page. http://r0k.us/insurance/vp/vl12.html
It’s not after-tax. If you go “after-tax” it’s much lower. That’s the return if you borrow from your policy (paying interest.) Apples and oranges.
I agree that for money I’m planning to invest for over 5 decades, 4% sucks. The 2% guaranteed return especially sucks. If you think 4% is great, then feel free to buy whole life because I think that’s a realistic expectation.
The build-up of cash value in a whole life policy is free from taxation.
The distribution of cash value from a whole policy is also tax-free, and is accomplished by by using a “To Basis and Borrow” strategy. If you wished to only distribute to your basis, then no borrowing occurs. If you do borrow, full dividends are still paid (in fact, with direct recognition policies, the dividend is enhanced).
I support the idea of buckets of money. Some of my money is in IRAs, some is in a deferred annuity, some is in savings and checking accounts, some is in the cash value of my life insurance. If I needed access to $50,000 in cash–some emergency or some opportunity arose–I can have that $50,000 wired to my account within 48 hours from my life insurance. Simple, no questions asked. In the meantime, I’m making a plus 4% return.
When I do retire and take distributions from my IRAs, I’ll do so only in up years of the market. In down years, I’ll supplement my income from distributions from my whole life insurance. I can take a larger distribution without fear of running out of money.
I’ll be curious of what the IRS thinks of your strategy not to withdraw from IRAs in down years. Might want to Google “Required Minimum Distribution.”