By Dr. Jim Dahle, WCI Founder
I recently wrote about how whole life insurance is a crappy way to get a permanent death benefit or decent investment returns. In recent years, there has been a push to use a whole life insurance policy for a different reason- for “banking.” It has been popularized as the “Infinite Banking Concept” or “Bank On Yourself.” There is a great deal of marketing and hype involved, and even some scams, but the basic scheme itself is pretty interesting.
Bank On Yourself by Using Life Insurance Policy
Instead of borrowing money from a bank to buy your next car or other large expense, you borrow it from your life insurance policy. You can pay it back whenever you like. But you actually never have to pay it back if you don't want to. Even for those, like me, who say “I don't borrow to buy cars, I just save up the money,” advocates like to point out that you may be able to save up the money more profitably inside the life insurance policy than inside the bank account (especially given current interest rates.) They say it's like getting interest free loans with an added death benefit.
Non-Direct Recognition
The key to making this all work is to get a “non-direct recognition” whole life policy. With a “direct recognition” policy, when you borrow money from your policy the insurance company first subtracts the amount of the loan from the cash value, then calculates the dividend on the lesser amount. With an “indirect-recognition” policy, the insurance company doesn't. Cool huh. If you have $100K in there, they'll let you borrow about $90K, but still pay you dividends as though there were $100K in the policy.
Paid Up Additions
The problem with most whole life insurance policies is that it takes forever to get any decent cash value in there. For example, a policy provided to me by a WCI life insurance agent as the “best” $1 Million non-recognition policy he could find [MassMutual Whole Life Legacy 100] for a healthy 30 year old male in New York, demonstrates that the cash value doesn't equal the premiums paid until year 12. I'll need another car before then! That's a pretty lousy way to “bank.” So we have to figure out a way to get the cash into the policy sooner.The way you do this is with Paid Up Additions, meaning you dump more than you have to into the policy, ostensibly because you want a higher death benefit, but in reality because you want more cash growing in the policy so you can “bank” with it.
Borrowing Money from Life Insurance Policy
After 3 or 4 years of paying premiums and buying healthy paid up additions, you've got a tidy sum of money in the contract. Now you can borrow it tax-free at a certain interest rate, say 5%. Now that 5% doesn't go toward your cash value, it goes to the insurance company, but since this is a non-direct recognition policy, the insurance company is still paying dividends, say 5%, on the money you borrowed, so it's a wash to you. You've got yourself an interest free loan. Kind of cool huh. Of course, borrowing money from your bank account is also an interest free loan, but proponents of Bank on Yourself like to point out your bank account isn't paying 5% interest. If you kick the bucket during this process, your heirs still get the death benefit (minus the loan amount of course). The insurance company doesn't guarantee death benefit increases each year, but they generally do.
Tax and Asset Protection Benefits
Insurance policies have four main tax benefits. First, you can borrow from the policy tax-free. You have to pay interest on it, but you don't have to pay taxes on it. That's of course no different than “borrowing” from your bank account or from the bank itself, but it is different from cashing out of an investment with capital gains. Second, money compounds in a tax-free manner within the policy; there's no annual capital gains or dividend taxes on growth. Third, the death benefit is income tax-free to your heirs. Fourth, if you cash out, your basis is determined by the entire premiums paid, not just the portion that went to “the investment part.”
In many states, cash value in your insurance policy is protected from creditors up to a certain amount. Those of us constantly concerned about being sued see that as a benefit. The money isn't FDIC insured like a bank account, but states generally guarantee up to a certain amount from insurance company insolvency.
The Downsides of Using Life Insurance to Bank On Yourself
You can understand why at this point people are often pretty excited about this whole concept. Higher banking returns and tax-free growth all combined with a “free” death benefit. There's got to be a catch, right? Of course there is. Let's talk about catches.
The “Load”
When you put $10K into your bank account, the next morning there's $10K there. When you pay a premium into a life insurance policy or buy a PUA, the whole premium doesn't go into the policy. Like with a loaded mutual fund, a small percentage of that money goes toward the costs of the policy and toward the commission of the salesman. If the policy is paying 5% a year, and the “load” is 10%, it'll take 2 years just to break even.
Loan Rate vs Interest Rate on Whole Life Insurance
In my scenario above, I used 5% for both the loan rate and the interest rate. It's quite possible that the dividend rate can be higher than the loan rate or vice versa. Obviously borrowing at 5% and earning 2% is a losing proposition. In the policy discussed above the loan rate is variable, currently set at 4%. The current dividend rate is below 6%. It's easy to envision a scenario where those numbers reverse.
You Still Have to Pay the Life Insurance Premiums
MEC Calculations Are Complicated
The point at which the contract becomes an MEC is influenced by the amount borrowed and the current dividend rate. With all these moving parts, it's not that hard to accidentally make the proceeds of your policy taxable. The insurance company and agent are supposed to ensure this doesn't happen, but there may be times when you may be required to unexpectedly pay back a loan or contribute more money into the policy to prevent it.
Source of Funds
You have to take the money from somewhere in order to dump it into a life insurance policy. Proponents often recommend pulling it out of your 401K, IRA, house (via refinancing or a home equity loan) etc. When it's pointed out that there are serious opportunity costs, interest costs, or tax costs to doing this, they finally settle down to “put your emergency fund and/or short term savings in it.” But for a doctor, how much money is that really? $10-50K? Maybe $100K if you're doing really well? Making an extra 4% on $20K is only $800 a year. Not exactly the difference between poverty and financial bliss for a doctor. It especially bothers me to see people recommending you stop contributing to a retirement account that provides tax protection, asset protection, and solid returns in order to buy more life insurance, that has nowhere near the same tax benefits, asset protection, or estate planning benefits. Risking your house to invest in life insurance seems even more stupid.
Takes Time to Get Money from Life Insurance Policy
Loans from an insurance policy are a bit less liquid than what I think an emergency fund should be. I've never borrowed from one, but I understand it's a matter of days to weeks to get your money from the company. That's not the place for an emergency fund. Perhaps if you know a big purchase is coming a few weeks early it could work.
Additional Complexity Borrowing from Life Insurance Policy
Everywhere else in the financial world additional layers of complexity favor salesmen and the companies they represent. Why would this be any different? In fact, as you search the internet, you quickly realize that any discussion of these comments quickly breaks down into the proponents who suggest you need their expertise to understand it, and the detractors, who don't seem to completely understand it. I couldn't find anything anywhere that seemed to be a straightforward, unbiased analysis. The sales methods and opaque nature all screams “SCAM” to me. That doesn't necessarily mean it is, but as a general rule good financial products are bought, not sold. If an extensive sales process is required, or if I can't explain it to my wife in less than 2 minutes, I try not to have anything to do with it. There's a lot of people in this world smarter than the average insurance agent and it doesn't seem to me that very many of them are banking on themselves. I can't believe it's simply a matter of bias or the word simply “not getting out.” Good ideas don't stay hidden long.
Purpose
The books and websites that most push this concept like to talk about buying cars, as if saving up to buy a car vs taking out a car loan is the biggest financial concern in the world. Most doctors can buy a decent used car out of last month's paycheck. Maybe save up for 3 months if you want a new one. You've got to think about what you're actually going to borrow money for. If you're going to borrow it to pay off credit cards, don't you think it might be smarter to pay off credit cards at a guaranteed “investment” rate of 15-30% than to buy a whole life policy? When is the last time you went car shopping? All the signs and ads I see are advertising 0% APR car loans. Why bother dealing with an insurance policy when the car dealer will give you 0% right now? A mortgage? Why pay “myself” 5% when I can pay a bank a tax-deductible 2.75%? It just doesn't pass the sniff test. I don't really finance much anyway, why do I need a “new, innovative” way to do so?
Ongoing Interest Payments on Life Insurance Loan
Let's say you want to take some money out of the policy and NOT pay it back. You still have to make the interest payments each year. My goal is to minimize my fixed expenses, especially the closer I get to retirement. If you don't make enough payments, not only does the policy risk collapsing, but that death benefit starts decreasing too.
I'm obviously not running down to the local whole life salesman to start banking on myself. I don't think you'll benefit much from it either. In my opinion, the downsides outweigh some significant positives. You're better off not mixing investing and insurance.
What do you think? Do you have a whole life policy you use for “banking?” Do you still feel like it's a good idea? Comment below.
I went digging for some historical research and found this: https://www.assurity.com/pdfs/WholeLife_miller.pdf
would love your thoughts
My thoughts are you are an insurance agent.
There is nothing independent nor appropriate in that propaganda. It’s filled with misdirection and you know it.
Why not stop the act?
Liz-
Are you trolling us here? Fess up. What do you do for a living? I’ll give you the benefit of the doubt for now.
At any rate, let’s look at this “actual study” of how some guy’s whole life policy performed from 1963 to 2012. He put in $527.22 every year for 49 years and ended up with cash value of $132,098. What’s the return? 5.57% Pretty much what I’ve been saying, no? Perhaps a little on the high side thanks to some pretty high interest rates and bond returns over that period. I certainly wouldn’t expect that return going forward. Probably more along the lines of 3-4%. And what was inflation in that time period? A little over 4.1% per year. So his real return was ~1.47%. In 5 decades he barely doubled his money on an after-inflation basis. That’s like a compound interest disaster.
Now, let’s say this guy instead invested that $527.22 into the stock market. How would his returns look then? Let’s just use something simple, like the S&P 500 which is easily invested in with a simple index fund, at least since the mid 70s. From 1963 to 2012 the S&P 500 earned about 9.5% per year. Investing $527.22 at 9.5% per year for 49 years gives you a “cash value” of $512, 692, or about 4 times as much as the guy who “invested” in the whole life policy.
The cited paper is not a particularly unbiased comparison. In order to make those whole life returns look good he has to compare them to a nearly risk-free investment like CDs AND subtract out 30% of the CD return (for taxes….you know) even though an intelligent investor would put CDs into a tax-protected account if at all possible, especially if he was in the 30% bracket. But what CDs does he pick? 6 month CDs? WTH? He’s comparing an investment that must be held your whole life to one that must be held for only 6 months? He could have at least used 30 year treasuries. (Vanguard’s long-term treasury fund has returned 8.6% over the last 26 years.) I also love how he assumes the guy who buys term and invests the rest keeps buying term into his retirement years. If you need life insurance after you’re retired, you probably shouldn’t buy term.
I’m slowly making my way through all of the entries, and trying to make sense of WL insurance. My initial thoughts after seeing the title of that “study” referenced by Liz were exactly in line with what Rex and WCI thought–WTF? All content aside, the layout of the paper looks exactly like every other “Buy Gold now before the world ends” papers I’ve come across. 😉 I’d imagine that anyone who has ever read real scientific papers at any point in their life would have expressed similar thoughts.
Great thread.
Liz-
MassMutual’s High Early Cash Value Whole Life policy is often used in business situations in order for the premium paid to the insurance company (and normal lack of cash value) not to be a burden on the balance sheet of the business (employer) purchasing the policy.
As a result, as WCI has stated, due to this structure, generally it will not provide a long-term return that is better compared to a normal Whole Life policy.
For example, I ran a MassMutual Whole Life Legacy HECV policy in the best underwriting class for a male, age 30, in New York for $1,000,000. The annual premium, including a waiver of premium rider, is $10,180 ($9,910 for the death benefit and $270 for the WP rider.
The guaranteed cash value in year 1 is $8,870. The IRR on Cash Value Report shows -12.87% in year 1. -0.96% in year 5, +0.73% in year 10, +2.14% in year 15 and +4.70% at age 65. The IRR remains under 5% until policy year 81 (the insured’s age of 111).
So, Liz, while you state, “I’m guaranteed to get 3% with life insurance and that’s just the guarantee – if the company performs like it has for the past 100+ years I’ll get between 5-7%”, using the values from my illustration above, you would not get more than 5%.
For that reason, if you do want to purchase whole life for a long term investment, the HECV policy may not be the one for you.
what do you mean am I trolling you? You were the last one that I would have expected to throw out some derogatory term on this thread – after all it is your blog, and if you treat your readers like that for too long you won’t have any more.
best of luck.
I guess trolling wouldn’t be the right term, sock puppet would be. That’s when someone on the internet pretends to be something they’re not. For example an insurance agent who pretends to be an honest buyer of an insurance policy seeking more information on it. Agents tend to do this all the time on the Bogleheads forum, so I wouldn’t be surprised to see it happen here. Thus the reason I asked you about it. If you are as you project yourself then no reason to take any offense. As I mentioned above, I’ll give you the benefit of the doubt for now, but based on your response (feigning offense rather than simply saying “No I’m not an agent, I’m a dentist” or whatever) I’m starting to suspect Rex may be right.
[Ad hominem attack deleted. One more and you’ll be blocked. I’m losing patience for these over the years. Stick to discussing ideas rather than attacking individuals.]
I think he will get more readers bc he clearly knows what he is talking about. He just smoked your propaganda and frankly was as kind as possible to you.
He didn’t even mention of course that less than 20% get the death benefit and thus 80% get worse results with most losing tons of money.
I wonder why there isn’t any independent evidence for whole life as an investment after what 200 years of the product being available? Actually I don’t wonder. I’m not going to pretend.
wow, I have to be honest gentlemen this turned bad real fast. I asked what trolling was because I’ve never heard the term…..ever. Aside from a troll being one of those little dolls with crazy hair. Now you can understand why I was offended by being called one of those.
I am in the medical arena, just not a doctor …..is that okay with you? Or am I not worthy to even set foot on your site? I’m an orthodontic assistant.
Honestly I don’t know what you have to gain by calling my comments “propaganda” and wasting your time trying to talk me out of a vehicle that has been around for 200 years and into a vehicle that is less than 50 years old.
You had my professional respect up until now. It’s starting to fade.
I personally dont mind if you invest in whole life at all. You can do whatever you feel is appropriate and we have been very clear with good evidence why its a very poor investment. Now if you want to pretend its a good investment and that its good advice to others to purchase as an investment, then no im going to continue to point out all the actual facts. What you linked is propaganda and we didnt even touch on all the aspects of it out of kindness. Have you ever wondered why only such articles are written by people in the insurance business?
You are correct a vehicle that has been around for 200 years but ZERO independent evidence that its a good investment.
[Repetitive badgering comment removed.]
let me quote from my previous comments:
“First of all I set out to determine whether or not life insurance could be an advantageous place to store extra money. ”
“If I used it, I would use it as a ‘storehouse’ for my money until I a)needed it for large purchase and couldn’t get cheaper money elsewhere or b) had an investment opportunity that I wanted to get involved in.”
this is my intention and always has been – find a storehouse for money.
Its not advantageous for even that. If its a small amount of money then who cares but for big amounts its a horrible idea. You lose money on insurance costs in the short run (no matter how you structure it) and in the long run you lose money bc of inflation. Once purchased, it must be kept in force until death or any advantageous go away (thus you need to lose money based on inflation alone) and in fact you get hit with the higher income taxes (as opposed to capital gains) on any gains if you do surrender. In the end, you just lose money no matter how you slice it as any sort of investment. Its good for a permanent death benefit although no lapse gUL is cheaper for the same amount of death benefit . Few to none need this permanent death benefit and many once they actually understand the costs dont want it. You cant invest through an insurance company and do better than you would without insurance since that costs money. So store it there if you want but i wouldnt recommend putting any significant amounts there.
Very well Liz. I’m pleased to see you’re not trolling or sock puppeting.
This idea of a “storehouse” is just marketing. A mutual fund in a retirement account could also be called a storehouse, as could an Ibond, or a savings account. Investment, storehouse, it’s all the same. Some are riskier than others.
Rex- You should qualify your comments that investing through the insurance company can’t do better than investing on your own. It’s possible to have a lower return and do better on an after-tax basis due to the tax advantages. It’s also possible you could benefit from other people surrendering their policies. The insurance company could pay you market returns plus a little bit of money from the people who surrendered and still make a decent profit. It isn’t that your main points aren’t correct, just that I think it’s less black and white than you make it sound.
I just think it is kind of silly to tie your money up for decades for what is likely to be at best 1-2% real (and that’s assuming you’re one of the 8% or so that actually holds the policy long-term). Today 1-2% real sounds pretty good, but it wasn’t that long ago that I was making 5%+ nominal in a simple money market fund.
But as Rex mentioned, if you understand what you’re getting into, and that’s what you want, more power to you. I have to admit though, most people who understand how these policies work and what your long-term returns are likely to be don’t invest in them. There’s a reason for that.
It went from 20% to 12% to 8% of people that keep their policies — why has it changed through-out the duration of this comment section. Again, where are your references?
It depends on the time period. In the first 10 years, about 2/3 of people who buy a whole life policy have surrendered it. As that stretches out to 20-30 years, the number gets larger. Eventually, it ends up around 8%. The “evidence” is the surrender rate as published by the Society of Actuaries. It’s well-known data to anyone knowledgeable about cash value life insurance, but if you need a reference, you can use this one:
https://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/2007-09-US-Individual-Life-Persistency-Update.aspx
The chart you’ll be interested in is at the top of page 14. Or you can just read this post which includes a similar chart:
https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/
This chart just proves what us advisors who practice Infinite Banking explain in early interviews with clients. Traditional life insurance has been sold for a death benefit and is not a good place to save money. If you are going to practice Infinite Banking you need to maximize the amount of cash you can put into a policy by utilizing a Paid up Rider up to the limit of the Modified Endowment Contract. https://blog.fireyourbankertoday.com/the-modified-endowment-contract-mec-explained
During my 10 years as a Financial Planner I have seen a lot of policies that have been sold by traditional life insurance agents that don’t include these riders and are definitely not being used as a financing source like what is taught by Becoming Your Own Banker.
I encourage all agents who are practicing IBC to share your persistency rate (% of policies lapsed vs policies sold)on this thread.
Mine for the last 5 years is 99.8%.
This thread is about using the Infinite Banking Concept and not Whole Life insurance. I design policies for dental and medical professionals to be a funding source for their practices which means you must minimize the death benefit and maximize the cash. People enjoy keeping access to their money and using it. This is why we have such a low lapse rate vs typical policies sold where money sits and is never advised to be used.
Buyers remorse is not exclusive to whole life insurance.
https://www.deseretnews.com/article/865614415/Its-raining-401k-withdrawals-Why-people-take-from-their-retirement.html
I agree with both your points. If you’re going to be your own banker/do infinite banking etc, you should use a policy designed to do that. That’s assumed that you actually did that when I discuss it. Also, pulling money out of 401(k)s during mid-career is dumb, although the article states that’s not necessarily because they regret the investment, but rather that they’d like to spend the cash or don’t want to or don’t know how to roll it over.
However, self-reporting of persistency rates isn’t exactly reliable information. Every agent who has ever told me his seems to have one very close to 100%, yet the overall rates are remarkably low. What are the odds that I only run into the “good agents?” Forgive me for being skeptical.
Given how their model pays so much out in commission early on let alone their ongoing costs in addition to the actual insurance component as well as the products they must invest in to make good on their gurantees, while possible its not likely probable. Also we have 200 years of evidence of them producing pretty poor returns. While they could change their model to pay the client better, that might lead to a lower lapse rate and eventually it would be self defeating. While the tax advantages help, its pretty hard to get over that hurdle.
Agreed. It’s a tall hurdle. That’s why it takes decades to even get a reasonable return (and by reasonable, I mean keeping up with inflation, not besting it.)
last thing, I promise 🙂 …The DOW has increased by a measly 1% per year for the last 13 years …..looks like inflation left me in the dust. The S&P 500 is below where it was at the end of 1999 – inflation wins again.
If I had been invested in the market for the last decade and had basically gained no ground financially how long do you think it would take me to catch up? My whole point is it’s never better to risk in hopes of returns. It’s far better to grow steadily and avoid losses which is exactly what happens inside of a life insurance policy (granted losses occur in the first 1-2 year, but I’ll give those up over the long run).
And keep in mind my money is not “tied up for decades” I can at any time borrow against or withdraw my cash value. If I borrow against it my money continues to compound at the full amount – if I withdraw I give up the future compounding of the dollars that I’ve taken out.
government sponsored plans are 100X more restrictive than an insurance policy – why should I be told when I how I can access my own savings….never has made sense to me.
anyway, I appreciate the conversation and wish you both the best. (maybe we should reconvene in a decade or so and see where we’re all at)
“The DOW has increased by a measly 1% per year for the last 13 years …..looks like inflation left me in the dust. The S&P 500 is below where it was at the end of 1999 – inflation wins again”
🤣 Well, this has aged poorly in the face of the last decade’s U.S. equities returns. It just goes to show that cherry-picking dates is dangerous and that one of the most empirical thing we can do is look at long-term historical returns.
You forgot dividends and you cherry picked on purpose specific dates. This is actually a common insurance agent trick by the way. Not that your an agent or anything. Since you must keep a policy in force until death, you need to use much longer horizons.
You also down played the costs of a loan. So many policies crash bc of loans.
We don’t really need to get together in the distant future since we have 200 years of whole life evidence. I don’t need to cherry pick short periods of time.
Liz, come on. Why pick the last 13 years? Why not use March 2000 to March 2009? That would serve your purposes so much better. I suppose I could respond by using data from 1995-2000. Or perhaps 2003-2007? Or perhaps 2009-2012? In fact, I could pretty much cherry-pick the first 10 or 20 years of any whole life policy and show pretty cruddy returns. Or alternatively, we could use the most complete data sets we can find for any given question instead of using ridiculously cherry-picked time periods.
As long as you’re cherry-picking time periods, might as well cherry-pick an asset class. Why not use small value stocks instead of large growth ones? Or perhaps emerging market stocks? Nope, wouldn’t want to do that. It wouldn’t prove your point.
And leaving out dividends? Really? What would happen if you left out the dividends for an insurance policy? That’s not going to turn out very well.
100X more restrictive? Exaggerate much? What’s the restriction exactly? Well, if you withdraw the money before age 59 1/2 except for a handful of reasons (which are exactly the reasons you might need that money before age 59 1/2 incidentally), you pay a 10% penalty. That’s 100X more restrictive?
I hope your strategy enables you to reach your financial goals. If you save enough money and live frugally enough, it just might. As Taylor Larimore likes to say, there are many roads to Dublin.
Hi Rex – how are you? I see your opinions (nor the WCI’s opinions) have not changed regarding whole life with this post.
>>>> “I wonder why there isn’t any independent evidence for whole life as an investment after what 200 years of the product being available? Actually I don’t wonder. I’m not going to pretend.”
Here’s an interesting link for you:
https://wealthmanagement.com/data-amp-tools/life-insurance-asset-class
Yes, the study in the article about life insurance as an asset class where the portfolio with permanent life insurance outperformed the portfolio without life insurance and was less risky was commissioned by Guardian Life – one of those “evil” ogres promoting whole life. However, you’ll also notice there was research performed by Roger Ibbotson (from Yale – expert on asset allocation) where he found that life insurance as an asset class can act as an attractive hedge against the loss of “human capital”—or wages over a lifetime. “To hedge against such a loss due to mortality, people should have cash value life insurance, suggests a 2005 Yale International Center for Finance working paper, by Roger Ibbotson and others.”
Unfortunately this doesn’t fit your paradigm, so I look forward to your disparaging comments.
FYI – while I am licensed to sell life insurance, I’m not affiliated with Guardian Life.
That’s an interesting use of the word hedge. Most would use the phrase “life insurance.” Hedge against mortality? Good grief. Once you retire, the human capital is gone, and the hedge against its loss is no longer needed.
Let’s talk about the link.
“Life insurance cash values don’t move in the same direction (as stocks or bonds) during a crisis.”
Okay, that’s true. Stocks go down. High quality bonds go up. Life insurance does the same old same old 2-5% returns over the very long term (negative early on.)
“Weber coauthored a white paper, commissioned by Guardian Life Insurance of America, New York, on considering life insurance as an asset class.”
As you mentioned, this hardly counts as “independent evidence.” That’s like a study showing Viagra cures cancer commissioned by Pfizer.
“The researchers looked at a 45 year-old male in good health with $500,000 invested in municipal bonds, and assumed the municipal bonds grew at a 4 percent annual rate. The investment was worth $2.9 million by the time the male was age 89.”
Sounds like a strawman coming. As I mentioned previously, you can expect 2-5% (often 5% in the past) over the long term, like the 44 years mentioned, from a whole life insurance policy. If the bonds grew at 4%, then sure, a life insurance policy performing at 5% is going to beat them in the end. But what about after ten years. Oh wait…life insurance not looking so good. We also need to consider that 4% is pretty low historically for munis. Vanguard’s intermediate tax-exempt fund has returned 5.85% a year for the last 35 years. Why not use that number? Or perhaps the 7.01% returned by the high-yield tax-exempt fund. Hmmmmm…might not reach the same conclusion.
“By splitting up the life insurance policies among whole life, universal life insurance and variable universal life insurance together, Weber adds, other research indicates a policyholder’s cash value and death benefits will keep pace with inflation.”
Seriously? Variable life insurance? You mean by trying to invest some of your money in stocks you can keep pace with inflation? There’s a surprise. Why not cut out the 2%+ the insurance policy will eat out of that stock return. It’ll be a whole lot easier to keep up with inflation.
“Previous research indicates that life insurance as an asset class can act as an attractive hedge against the loss of “human capital”—or wages over a lifetime. To hedge against such a loss due to mortality, people should have cash value life insurance, suggests a 2005 Yale International Center for Finance working paper, by Roger Ibbotson and others. “Human capital—even though it is not traded and highly illiquid—should be treated as part of the endowed wealth that must be protected, diversified and hedged,” Ibbotson says.”
I can’t seem to find where Ibbotson says buy cash value life insurance. I see that he wrote a working paper, and that he suggests insurance should be purchased to protect the value of human capital. I can’t find a link to this working paper, and it seems the writer of this article may be implying something that isn’t there. Can you produce a link to Ibbotson’s actual paper?
““No broker-dealer would permit a registered representative to perform a sophisticated analysis because FINRA rules do not permit the projection of life insurance future returns,” said Richard Weber, principal with The Ethical Edge, Inc., and Pleasantville, CA.”
Wow! I’m glad I’m not a broker-dealer so I can do it.
“Miccolis, whose company has $700 million in assets under management, does not look at life insurance as an asset class, but as part of a long-term financial plan. It is used to provide for the family when the loved one is no longer around or to pay estimated estate taxes, he believes. “I’m not sure it makes sense to consider it an asset class,” he says. “An investment portfolio is there to work for you during your life time and to meet your financial needs and goals.””
I have no idea how this Miccolis guy got into this article. It’s like this paragraph came from somewhere else. But he seems to know what he’s talking about unlike this Weber guy on the Guardian payroll.
“Counters Weber: “Life insurance may deliver greater legacy and living values in conjunction with the investment portfolio—for a given risk tolerance and reward goal—than a portfolio without life insurance. Large amounts of life insurance should be purchased on the basis of risk and reward considerations.””
That “may” in the first line is where the emphasis should be as should the “given (i.e. low) risk tolerance and reward (i.e. again, low) goal”. Then somehow in the last line of the article he makes a huge jump to “large amounts of life insurance should be purchased”? WTH? This article hardly makes a case for that bizarre conclusion.
Come on Shrek, surely there’s something out there better than this. You could at least link to an actual study rather than some bizarre article about it. The link in the article goes to the Guardian website (there’s a surprise.) I hunted around a bit on it and found a link to the actual 109 page white paper (which incidentally doesn’t have Ibbotson’s name on the front of it- you did read the actual paper, right?):
https://www.lifeinsuranceasanassetclass.com/liaaac/pdf/white_paper_809.pdf
Since when is 109 pages a “paper” and not a “book” by the way?
The methods section of this scientific paper was pretty hard to find. There is an awful lot of simple explanation of life insurance policies and very little “study” here as near as I can tell. The endnotes were pretty interesting, and the closest thing to a methods section I could find. They included a reference to Rich Dad, Poor Dad by Robert Kiyosaki (hard to take any paper seriously with that in it.) They also included a reference to Ibbotson’s asset allocation book (only because they wanted to quote the returns of the S&P 500 out of it.)
Here’s my favorite part of the paper:
“BTID strategies may make sense under the following conditions:
• There is a quantifiable period of time for which life insurance is needed or desired, with a near-certainty that life insurance will not be required beyond that period … even if for just a few years beyond;
• The “period of time” is 30 or fewer years;
• The insurance buyer is age 45 or younger, allowing sufficient years to achieve an aggressive investment potential before a more conservative asset allocation
is adopted and in an age range in which term insurance is relatively inexpensive;
• The “difference” will, in fact, be invested with a reasonable amount of discipline both as to making the investment, as well as managing the allocation through the early “risk taking” years as well as the later “risk averse” years;
• There is a budgetable difference. Term insurance fulfills an important role in providing needed or desired death benefit at low initial cost. If there are insufficient resources to provide lifetime insurance coverage with the appropriate lifetime (i.e., “permanent”) insurance product, then maintaining a suitable level of term insurance is the appropriate strategy (and presumably without a “difference” to invest).”
Okay, I agree with that. Buy term and invest the difference seems to be the message of at least this section of the paper.
Now, all that criticism aside, if someone wants to put 5% of their asset allocation into permanent life insurance and are already maxing out your 401K, backdoor Roth IRAs and other tax-protected investment accounts? Fine, knock yourself out. There are lots of dumber things you could do with your money. But these aren’t the folks who are emailing me every week as they realize they were duped by an unscrupulous agent who sold them a permanent life insurance policy inappropriately. I’ve gotten exactly one email from someone who is doing exactly this, studied it for a long time, and is reasonably happy with it. But he’s maxing out everything else and it’s a small chunk of his portfolio and he’s done all the other things right to maximize his return (pay annually, paid up additions etc, prepared to stick with it for decades). That’s not the case for most of the people I talk to about their whole life policy. They’re mostly like the 30 year old who recently posted in the other thread. $100K in income, no assets, can’t max out 401Ks or Roth IRAs, needs a ton of term to protect his family and “hedge against the loss of human capital”, and is being sold a relatively small short-term, convertible term policy combined with a whole life policy by a NorthWestern Mutual agent “friend”. Totally inappropriate.
Now fess up Shrek, did you really read all 109 pages of this paper you couldn’t even post a link to? I doubt it. I think you just read this “summary” article about the paper by Mr. Lavine which presents what appear to me to be unfounded conclusions. If there’s something in the white paper you want to discuss, let’s do so, but cite the actual pages of the actual paper you want to discuss, and we can all read those.
Hi WCI, regarding your comment of “Vanguard’s intermediate tax-exempt fund has returned 5.85% a year for the last 35 years”. Where are you seeing this? These would be amazing returns if a fund consistently did this every year.
https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns
Scroll down to the relevant fund and look at the right hand column.
Remember it’s an annualized return, not some guaranteed every year return. Really not too unbelievable given the time period. Look what rates were in the late 70s and early 80s.
Oh im fine thank you. There is no reason for either of us to change our views on whole life since the evidence against it as an investment is overwhelming (against it i might add).
WCI, yes that is the best he could come up with. After 200 years, this is as good as evidence as whole life has going for it. Is there a single medication that we would prescribe with such weak evidence….Nope…Of course since most policies lapse, few would even get this benefit. Even a seasoned agent cant come up with any reasonable independent evidence for it as an investment.
One could say that this says volumes but more simply put it says stay away from whole life as an investment. If you have a need for a permanent death benefit then either whole life or no lapse gUL is fine. If you live a normal life span, you lost money compared to reasonable alternatives but you received insurance in case you didnt live so long. If one wants to use a very very small amount for overfunded whole life then no big deal. Its not a great decision but there are worse things one could do. Putting a lot of money into whole life without a need for a permanent death benefit is rarely going to be a good move.
Sorry, WCI – you’re right. I didn’t have a lot of time with the holidays and some other priorities, but I knew about the paper (regards to Ibbotson, specifically). I wasn’t impressed with the article either (for the same points you mentioned), but I do have a ton of respect for Ibbotson and the economic research he’s performed over the years (Nobel-prize winning!).
Let me see what I can dig up, so we can have a more thoughtful discussion moving forward.
This is my first time responding to a Blog. I hope my terminology is correct. A friend of mine asked me to review this site. He wanted my input. I find it very interesting. I have found this site very informative. I wish it was in existence when i came out of residence.
I do not pretend to be as knowledgeable as the people on this site. I just have 18+ years of being in the game. I do not have all the right answers and in the end (my end, not this conversation) i may be wrong. But i do not think so.
I am a practicing podiatrist and have been so now for almost 19 years. I make a good living, in the range you stated as average for a Doc. (other site). I came out of school and residence almost 190K in debt and had a 140K practice buy-in along with a new wife, new house and three children all in a 6-7 year period.
I am vested in my companies 401K (no longer max funding, but did so for about ten years), I have rental properties (not the best investment return at this time), undeveloped land investments, some stocks (still down despite the recent jump) and i have multiple participating, non-direct recognition, whole life insurance policies with mutual companies. And i have convertible term policies. It took me almost 2 years of reading, talking to people “in the know” and praying before i bought my first policy. I am glad that i did. In the beginning i had the standard whole life policy and growth was slow and payments sometimes painful but i stuck with it. And again, i am glad i did.
I started the “self banking” concept about 4 years ago and i am very happy with it. To date, i do not believe most people understand the concept. Especially agents and the multiple websites promoting the idea. Or maybe i am the idiot. Buyer be wear! My new policies are designed with max front funding and i have converted the old policies into better policies. Yes, you can do that, and yes it costs. For me, it was worth the cost. I have borrowed money out of my policies and have paid of my student loans, practice buy in loan, two car loans and some other “bad” debt. I am redirecting the principle plus interest i was paying to the finance companies back to my policy loans. The great thing is that i am paying back my policy loans and the interest in a total of three years. The other loans would have still been in repayment at the end of three years and some ended with a ballon payment. All this with the same money flow. No extra $ out of my pocket per month.
For me, the use of whole life insurance as a financing vehicle and savings account is working. (my definition of or use of whole life insurance changed about five years ago.) Now, someone may be able to show how poorly i used my money and how i might have done better else where but peace of mind is peace of mind. As listed above, many of my investment choices could have turned out better. But that is life and that is the risk with Investments. I ran an In-force (sp?) ledger on both my life ins. policies and on my 401k over the life of my accounts. The insurance has done better. Not by much, but better. But in my opinion it is comparing apples to oranges. There may be those who want to see my numbers. Believe me or not. I have no skin in the financial part of this game.
I am a “White Coat” and i am more than happy with my choices. There is no free lunch out there and everyone is trying to make a buck of physicians. Doctors need to be in control of their money.
I think Will Rodgers said, (paraphrasing) “It is not the return on your money that counts, it is that your money gets returned”
I have truly enjoyed this site and plan on visiting it again. I am not interesting arguing all the points above. I do not have the time nor the desire. As responsible adults and physicians we have to live with our decisions. And if something does go wrong, and it will, look in-ward before you look out-ward!!
Thanks for your comment. I’m glad to hear you carefully investigated the benefits of a whole life policy before purchasing, are doing what you can to maximize it’s return and value to you, that you actually track your return, and are happy with your decision.
I’m sad to hear you have any stocks that are underwater after our recent 4 year bull market and that your 401K has underperformed your whole life insurance. Over the long run, a reasonably invested 401K should outperform whole life insurance. But poor investment choices, high fees, unfortunate timing, and especially investor behavior, can lower those returns substantially.
Your level of educational debt ($190K 20 years ago) is now, unfortunately, becoming standard so financial education for doctors is getting more and more important all the time.
Good luck investing.
It’s baffling to me that after all the market crisis, QE, printing money, market manipulation, etc. that half-way intelligent people are still recommending “buy term and invest the difference.” It’s time to do real objective research (without bias). Banks commonly keep more money in life insurance than any other Tier One asset. Almost every major executive and politician keeps massive amounts of money in overfunded life insurance – because it’s off the radar. Arguing about this is a waste of time because people will usually see what they expect and want to see.
“There is a principle which is a bar against all information, which is proof against all arguments and which cannot fail to keep a man in everlasting ignorance – that principle is contempt prior to investigation” – Herbert Spencer
Are you suggesting that a typical professional should model his investment portfolio after that of a bank, a CEO, or a politician? While it is possible that would be a wise move, I think assuming it is a true is folly. I don’t need my money off the radar. I need it to grow at a reasonable rate to reach my retirement goals.
Despite the market crisis, QE, printing money, and market manipulation, the stock and bond markest is still growing money at a reasonable rate (higher than that of cash value insurance policies), especially when you minimize fees and taxes.
The US Stock Market via VTSMX has an 8.69% annualized return over the last 10 years. The US Bond Market via VBMFX has a 5% annualized return over the last 10 years. The non-US Stock Market via VGTSX has a 10.19% annualized return over the last 10 years. Despite the crisis, QE, printing money, and market manipulation. Someone who invested 10 years ago in a whole life policy 10 years ago is now just breaking even. Those investing in a whole life policy now should expect returns over the very long term (3+ decades) on the order of 2-5%. That might be an adequate rate of growth for a bank, an executive, or a politician, but not for most professionals who want to retire in the next 20-30 years.
That’s why buy term and invest the difference is still recommended after real objective research (without bias). I do, however, agree with you that arguing about this may be a waste of time. Best to collect all the data you can and make your own decision.
White Coat Investor – I certainly appreciate your attempt to provide alternative investment and financial advice. It really is a breath of fresh air. I don’t have the time to write a full article on the site… although I’d like to find the time to give you all of the research I’ve done at some point.
I’m in my late 50’s. I have a very good friend who has just turned 70. We’re both orthodontists. A couple of years ago we got together and began talking about our financial endeavors over the years. We’ve invested in most of what you can think of – stocks, bonds, mutual funds, real estate, businesses, and so on.
In the early 80’s we both bought whole life policies with major mutual companies. And they weren’t the overfunded kind. They were the typical high-commission kind. There were many times throughout the 80’s and 90’s that I thought about cashing it in. It seemed illogical to watch my cash-value grow so slowly, only to watch my mutual funds increase substantially.
Every time I decided to cancel my agent would talk me out of it… and for some reason I kept the policy. I’m glad I did.
These policies have grown at just under a 5% compound annual growth rate. What’s crazy to me is that my IRA statement says that my ROR has been 7 and a quarter over the same time period – but the whole life cash-value has grown proportionately better. I certainly wish I had put all of my investment dollars in this kind of life insurance. Turns out my friend’s policies had grown the same way.
After talking with an economist early last year he explained to me that the market was not an efficient place to put money because of taxes, fees (yes, even ‘low’ fees), and market corrections. This is not to say that you can’t make money there – you can. It’s just a matter of not putting all or most of one’s money there.
My question is this: why would I want to take substantial risk to typically barely even keep up with inflation when I could put the money in life insurance and keep up with or beat the market over 30 years? After doing much more reading and research with my good friend a few years ago we actually decided to redirect more money to the overfunded type of life insurance. Within the year we began using our cash-value policy loans to make money within our expertise: the dental and orthodontic market.
To date we’ve made more money through our ‘banking system’ then we could have ever made in the stock market over the last 5 or 6 years.
White coat – it really seems you’re trying to give good advice. It just seems to me that you may be unknowingly leading people astray.
I don’t doubt there are many people who do better with whole life insurance than they did in more market-based investments due to behavior, timing, high fees or whatever. I’m not sure I understand how your IRA grew at 7.25% and your whole life insurance grew at 5% (which doesn’t surprise me by the way, just about any policy bought in the 80s and held until now should have a return in that neighborhood), yet the “investment” growing at 5% ended up growing faster. How do you explain that? Was the 7.25% before fees or something? I’m not sure you’re calculating your returns right.
I don’t doubt you’re able to make more money in the dental and orthodontic market than in the stock market, no matter what you used to fund the endeavors. I’m glad it’s working out well for you. There is more than one road to Dublin. As far as leading others astray, are you suggesting perhaps that I should be telling physicians and dentists to buy whole life insurance instead of investing in the stock and bond markets? In my opinion that’s not what the evidence suggests is most likely to be beneficial. But that’s the fun thing about the internet and life in general. You’re allowed to have a difference of opinion with others.
WCI – I agree with you final statements. Thanks for the opinions. It’s always worthwhile to think about things from all perspectives.
The 7.25% was an average annualized return.
The 5% was a compound annual growth rate (CAGR).
I am calculating my returns right. There is a major difference between how “rates of return” are calculated. Most index funds, mutual funds, and variable annuities do not calculate the CAGR, just the average.
White coat — used the word evidence but did not follow it with any reference? You are giving people advice but we should be able to look at your evidence and make our own assumptions. You should know that if you are in the health-care field. That’s what evidence based medicine is. So, please ‘either you or Rex’ give me your articles, publications, etc that show whole-life policies ‘lose me money’ and ‘I shouldn’t investment or put any more into these policies’.
It’s not clear to me what evidence you are looking for. Can you clarify?
Liz – Just curious if you moved forward with the mutual dividend paying WLP? I have been on the fence on starting a policy like this for the past month after reading Nelson’s book and Pamela’s book. I even spoke with three different agents from Tom McFie, Chase Chandler, and Scott Plamondon. I still can’t decide on which direction to go. The more I read on forums, the more negative comments I read on these types of policies.