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.
Hi,
Taxes have not always gone up. In fact taxes have come down considerably for top wage earners in the last thirty years.
Case in point: Robert Reich (former Secretary of Labor, economist, and Road Scholar) in his documentary “Inequality for All” states that taxes have dropped to their lowest point in years for top wage earner.
Will taxes definitely rise? Just like smart people like Alan Greenspan and Henry Paulson couldn’t predict the real estate and financial collapse in 2007, I don’t think anyone on this blog site can confidently state that ” taxes can only go up”.
Taxes should go up but history has not borne that out.
Lastly, I don’t necessarily support democratic fiscal policy. I actually side more with the austrian thought on economics. However, the austrian advoctats ( many from the IBC community) haven’t necessarily been right with their predictions either. Just saying!
Wow WCI, you do get a lot of comments on your insurance articles.
I think you’ve got a substantial part of your post wrong. I do agree with some of your criticisms of agents and WL policies here and elsewhere.
I disagree with your estimation of some of your facts though.
Ex: your description of MEC isn’t really contextually accurate, and you overstate the dangers there.
The paid up at 100 isn’t the best non direct recognition policy on the market. Even within Mass’s product portfolio, you’d have to go with their 10-Pay, which they’ve had for a long time.
Either your insurance guy doesn’t know that much about whole life (which isn’t an unreasonable assumption, even by your own admission) or he’s not that familiar with Mass’s product line and pricing schemes (also not unreasonable).
As for borrowing and spreads, I think you’d find them to remain relatively consistent, ratio-wise, if only because of how insurers peg the loan interest rate to the bond market.
The times when you see that inverted is during an inverted yield curve, which doesn’t happen often and when it does, inverted spreads on your whole life become the least of your worries.
What happens when you are disabled, or become unemployed? Well, based on how these agents set up “BOY”/”Infinite Banking” policies, you decrease the paid up additions and pay just the base premium or use a premium loan to cover the very modest base premium or use a disability waiver to pay the prem if you’re disabled. You could also use dividends, if there are any, to float your way through hard times. It’s not nearly as insurmountable as you make it seem.
I mean I understand where you’re trying to go with this but I don’t think it’s very convincing. I think you know just enough about life insurance to be dangerous, but not really helpful to the general public.
That’s not meant to be an outstanding comment. By your own admission elsewhere, whole life can be complex (so can mutual funds, stock analysis, and risk management in general). That’s why there are professionals and a financial planning and insurance profession.
Let’s flip this around. You don’t see insurance agents walk into an emergency room handing out motrin and kleenex, and trying to do a doctor’s job as a hobby for a reason.
It’s not as easy and reading some books and talking to a couple of people in the industry.
That would be awesome to have some extra people around the ER to hand out motrin and kleenex. I’ll show you where the Dr. Peppers and warm blankets are too.
As I’ve said many times before, if you love the idea behind BOY/IB, go get a policy and go for it. I think there are far stupider things you could do with your money. It’s not for me, but it’s a much more reasonable use for a whole life policy than most of the reasons they get sold to docs.
As far as what policy is the best for doing it, every agent seems to have a different idea. If there is no consensus among BOY/IB’s biggest proponents, don’t blame me. If there is consensus, why not point out what it is and we’ll see if you can get all the agents and policy owners to agree.
Compared to cash value life insurance, mutual funds are downright simple, stock analysis is practically unneeded by the individual investor, and risk management is relatively straightforward.
“Compared to cash value life insurance, mutual funds are downright simple, stock analysis is practically unneeded by the individual investor, and risk management is relatively straightforward.”
I disagree.
Whole life is actually really simple to understand. You pay a premium. A small portion of that pays for expenses associated with policy management, mortality, and overhead.
The rest is used to build the cash value, which is a cash reserve that gradually replaces the death benefit over time. At age 100 (or 120 depending on your policy), the cash value is guaranteed to replace the insurance.
This is very simple from the customer’s standpoint. You’re buying a future savings that matures (endows) at age 100.
The rest is just customizations to the basic policy.
Mutual funds aren’t inherently difficult to understand either, but they are difficult if you want to understand how the fees are derived or the companies behind them.
If you want to invest in index funds, fine. There are worse things you could do with your money.
But, you’re understating the risk, specifically market timing going in, volatility, and market timing coming out.
Risk is anything but straightforward because the best guess that individual investors have are basically just random guesses (i.e. Monte carlo analysis or aftcasting). Unless you’ve figured out how to predict the future, I think you’re giving your readers a false sense of security.
And if you HAVE figured out how to predict the future, I need the powerball numbers for the next draw. 🙂
Most individual investors today are speculating on asset prices through mutual funds, leaning into compressed bond yields, hoping that their equity strategy will pay off.
And this is bleeding over into index funds, a problem that even John Bogle acknowledges.
You don’t accept market timing or speculative risks with whole life. That’s something the insurer manages for you.
And, if you think you’re better than the insurance company at their own game, have at it. Like I said, there are worse ways to invest your money.
But I think you’ve got some of your facts wrong and you’re understating market risks by a lot.
I think the insurer charges too much to manage those risks. Better to run them and be paid for doing so, especially over long time periods like those required for whole life insurance to work out “okay.”
And those “customizations” are where the devil lives. The devil is in the details. Compared to those, an index fund is ultra simple. US stocks made 8.9% this year so my index fund made 8.85%. Very simple.
>>>I think the insurer charges too much to manage those risks.<>
OK, I’m going to try this one last time, because for some reason it’s stripping some of my comment out. Basically, I disagree with this. I reverse-engineered my own policy and the cost per $1,000 was comparable to BTID (term insurance + mutual fund fees). So was the after-tax savings and income stream, even when I adjusted for market returns and a higher contribution rate in a 25% tax bracket for the 401(k).
Let me explain. A typical whole life policy has a long term return of 2-5%. I find it relatively easy to assemble a portfolio of low cost index funds that I expect to have a long term return of 7-9%. So let’s call “whole life” 4% and we’ll call index funds 8%. Over 30 years, investing $50K a year, an investment growing at 8% ends up at $6.12M. At 4%, it ends up at just $2.92M. So, that extra $3.2M is the cost of “insuring against volatility/risk.” Yes, if you need term insurance for those 30 years that reduces the difference a bit, but it’s still huge. I see the cost of insuring against volatility and risk as being too high, so I choose to run the risk myself, rather than paying someone else to do it. Now, maybe you think the long-term return on an index fund portfolio is 6% and you think you can get 5.5% out of your whole life policy and so you think that is worth the cost. Fine. You makes your bets and you takes your chances. We each live with the consequences of our choices.
P.S. I have no idea why your comments are being held. Software thinks they’re spam or something.
(you don’t have to approve the other comment. It seems as though it chopped off part of my response the first time I tried to post.)
>>>I think the insurer charges too much to manage those risks.<<>>And those “customizations” are where the devil lives. The devil is in the details.<<>>Compared to those, an index fund is ultra simple. US stocks made 8.9% this year so my index fund made 8.85%. Very simple.<<<
Except when it isn't very simple. You have to know the rules for 401(k)s and IRAs, understand asset allocation (harder than it sounds), how to time the market when buying in and cashing out (to time your retirement). In one sense, yes you're right it is simple. In another sense, it's not and if you screw up, the IRS screws you over. And, you're generally more "alone" when it comes to a 401(k) (because the typical HR department doesn't really understand investments) and self-directed IRAs.
Every insurance company I've ever done business with will actively help you keep your policy in force, and prevent it from becoming a MEC by automatically refunding your premium overage, if any.
A good HR department should help you avoid over-contributions and help you navigate the plan, withdrawal strategies, asset allocation, etc., but really, it's not their core competency.
If you're in a 401(k), you made less than 8.85% because of your future tax liability. If you're in a roth, you did well this year. Congrats!
I think John Bogle expects a long-term equity growth rate of about 5 percent, low inflation, and a percent or two for dividends (but what does he know, amirite?). He estimates a long-term return of 6-7% for most people. That doesn't include the weighted average interest rate if you diversify into bonds…
…unless you believe a 100% equity portfolio is suitable.
At the end of the day, if you want to dig deep enough into any financial product and get to the nitty-gritty details, you can find all sorts of complexity because you always go through an intermediary – whether it's a mutual fund company (and then, most people go through multiple intermediaries: the mutual fund company and the 401(k) broker/administrator, at least) or insurance company.
But, basic financial products should be simple to explain to consumers, like whole life insurance, mutual funds, stocks, bonds, etc. IF you explain them in terms of essentials.
So, I fail to see the holy grail of index funds as being "very simple" compared to whole life. In both scenarios, you're doing essentially the same thing:
1) buying life insurance and;
2) accumulating a cash savings.
You're going about it in very different ways, but it's just not that hard for a normal person to understand.
>>>Let me explain. A typical whole life policy has a long term return of 2-5%.<<>>I find it relatively easy to assemble a portfolio of low cost index funds that I expect to have a long term return of 7-9%<<>>Over 30 years, investing $50K a year, an investment growing at 8% ends up at $6.12M.<<>>Now, maybe you think the long-term return on an index fund portfolio is 6% and you think you can get 5.5% out of your whole life policy and so you think that is worth the cost. Fine. You makes your bets and you takes your chances. We each live with the consequences of our choices.<<<
OK. I think this is the first sensible thing you've written yet. I do understand that people believe they will get 9 percent yield over the long-term. Almost none of the most successful investors in the U.S. (Buffett, Bogle, etc) believe that that's possible. Which means you believe that you're going to do better than the best investors in the U.S.
If I were you, which I realize I'm not, I wouldn't take that bet. That's a bad bet. There's a slim chance you'll win and a very good chance you'll lose. And, for most people, it's not a good bet. Even if you think you're a superstar, most people aren't. They're, by definition, average.
Let me explain…even if people did get 8 percent in equities, most people do not go all-in on stocks. That's not how they invest and for good and rational reasons. They use a 60/40 split. That means with 3 percent bond rates, their weighted average return is right around 6 percent, and that's before fees and taxes.
Now, if they're doing things like investing in very low yield HSAs, or doing something else to compartmentalize their savings, their total average weighted yield is even lower.
High CV insurance is looking pretty good at that point.
Regarding some of your other assumptions, your hypotheticals simply don't match up with the actual reverse-engineered analysis I did on my own policy and a hypothetical 401(k). You consistently low-ball insurance and are way too optimistic about equities in a low inflation environment. I just don't think that's realistic.
I think it's more realistic for the average investor (most people) to get about 5-6 percent yield on their investment portfolio over the long-term. When you compare that to an insurer's GIA + divisible surplus, it's very competitive.
At the end of the day, a lot of people do value a permanent policy, or at least the idea of permanence in their insurance. And, if an agent does a good job, there's the potential to have a cash value comparable to a diversified portfolio. Of course, that extra growth in a whole life isn't guaranteed, but neither are stock market returns.
At the same time, historically, both have done very well. Going forward, I think it's going to be different because of the way most of them are diversifying now. I think insurers are going to become more competitive and individual investors are going to wake up and realize that the 90s are gone forever.
I disagree. Someone who invests a significant portion of their portfolio into a good cash value life insurance is likely to end up with MUCH less money than if they invested the same amount of their portfolio into a good combination of stocks, bonds, and real estate. You may think 6% is the best anyone will see. Yet I have carefully tracked my returns for the last 11 years, through the worst financial collapse since the great depression, and I’m making 9%. Weird, I know. And that’s not even counting all the awesome benefits from using tax-advantaged accounts, including literally hundreds of thousands in tax savings.
But hey, if you think the best you can do is 5 or 6% over the long run, and you think your insurance policies will give you that, I can’t blame you for dumping all your money into them. I hope you can still reach your financial goals. But keep this in mind- your insurance company has to invest your funds in something, and if that something has low returns over the long run, your insurance policy isn’t likely to have high ones.
Interesting how he mentions mediocre returns on equities based on the assumption that we’re only willing to put money solely into Us funds but completely ignore the fact that most people put anywhere between 20-50% of their equity allocation into an international stock fund.
Thankfully that’s the difference between Universal Life policies, which should NEVER be used for IBC and Whole Life contracts. I have an in writing guaranteed rate of 5%. Period. The market could go to hell and I still get my 5%. Granted the market could go back to 20% and I would go to maybe 7 or 8 but it doesn’t stay at 20.
On that note, I just saw an IBC policy today set up on an IUL where the rep promised them 8.25% guaranteed and explained to them the banking concept. They’ve had it since March. Needless to say we are filing a DOI complaint and getting their money back. Unfortunately there are terrible reps out there that do lie to their customers just for that commission check.
Guaranteed what of 5%? Guaranteed dividend rate? That’s not the same as return on the investment.
I agree there are terrible reps out there.
And I’m not sure you understand how high the likelihood of getting one of those terrible reps is.
I’m glad you did that well. At the same time, as far as investments are concerned, the past is completely irrelevant going forward.
Have you seen GDP? Corporate earnings? Forward revenue projections? This is why Bogle is estimating 7%, give or take for the long-term, not 9%. And that’s just for stocks.
But hey, it’s your retirement, not mine. Actually, if you’re telling other doctors to invest like you, it’s their retirement too, and I think that’s where the problem lies, since you can’t know their risk tolerance, financial situation, and personal goals in a one-way conversation.
In one breath you tell readers that whole life has low returns, and that they shouldn’t buy it. In the next breath you publish a post about a whole life success story. Then, you tell readers that if they’ve held whole life for more than, maybe 10 or 20 years, it’s best to keep it because they’ve paid in all these years after all (the implication being it was worth purchasing over the long-term anyway, but you’d never say that). In yet another breath, you talk about the high returns one can get in the market, then temper that with a diversified portfolio, and then write about how HSAs might be the greatest retirement account ever (many of which invest in fixed interest investments), all of which would seriously drag down their market returns.
Oh, but they can invest some of these HSA funds into Vanguard. Wonderful. Don’t have a medical emergency or doctor’s appointment during a market correction. It’s a complete mess.
Meanwhile, you ignore professional investors who are investing alongside you. Bogles’, etc. explanations make sense, and he’s a perma-bull. I’m not saying that 5-6% is the best I can do. I’m saying *he’s* saying that’s the best *most* people can expect.
But who knows. Maybe most of these index fund people are wrong and an ER doc writing about investing on the side as a hobby is right.
As for my insurance policy, yeah, they do have to invest in something. And, I know what that something is. It’s a diversified portfolio. They also own multiple businesses, generating market-agnostic returns through business activities and “passive income” (I hate that phrase).
They increased their reserves by high double digits for the last 5 consecutive years. There’s plenty of cash to go around. I’m not in an either-or position either, like readers who compartmentalize their savings. I’m not against investing in the market, and I’m not against buying real estate or other assets. I think they can be wonderful investments if they’re not overpriced.
And, I can buy them easily enough, but I’m not forced into a position just to have one.
If you think the returns of whole life insurance are attractive, buy as much as you like.
Dodging all criticisms of your unrealistic future guess on the stock market. Clever. 🙂
Setting aside all of your guesses, which are all over the place, a bit inconsistent, and unrealistic when you consider all of the many positions you advocate, it’s not just about whether whole life has attractive returns compared to an index fund. It’s about whether the product (whole life) is or *can be* a net value. I think it is, and it is for most people who have values they want to protect at any age. That’s not to say it’s the *only* way to go.
But to say it has low or no value, as such, is incorrect, and many of your criticisms are either incorrect or irrelevant.
I’m sorry, I having a hard time keeping track of 12 different arguments with 12 different insurance agents spread across 10 different threads on this website. This particular post is about Banking on Yourself, which I am relatively neutral/slightly positive toward, even if it isn’t for me. If you wish to know my thoughts on whole life insurance returns, they can be found here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
If you want my thoughts on how I think the benefits of whole life insurance are dramatically overstated, that can be found in this series:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
If you want to/think you can convince me to buy a whole life policy or recommend it to my readers, you probably ought to know that you’re about the two hundredth agent to use a long, drug-out series of blog comments and/or emails for that goal in the last four years. What makes you think you’re any better at selling this stuff to me than they were? The only reason I bother engaging at all is readers tell me they like hearing my responses to you guys as it helps them see that all these arguments have stronger counterarguments.
Absolutely, and thank you for taking the time to do so. I’m still surprised at how much time an ER doctor can allocate to maintaining this wonderful blog. So far, a lot of the typical responses to your posts are either misleading, make us of mathematical gymnastics, or are shills posts like J Baker’s.
No, 5% of my cash value. The dividend is separate and makes the actual ROR higher as the years go on. 1-5 you won’t see a significant difference but years 15-20 or 30-35, you can see ROR of 15+%. Each policy is different and each dividend is different depending on the company. The “guaranteed 5%” is strictly on cash value, nothing else.
So you’re claiming you will be making a return of 15% on your whole life insurance policy? Seriously? Please forward a copy of the illustration.
I like whole life, but let’s be honest. There’s no way the IRR on whole life is 15%. Mass Mutual has the highest dividend IR right now, and they’re netting 7.1% to policyholders after fees. Even with their massive reserves, and ridiculous income, they’re not touching a 15% ROR on cash values even after 30 years.
And a 7% dividend rate, of course, isn’t a 7% return on your money. I’ve looked at whole life returns before, and you’re basically guaranteed 2% and projected to get 5% over the very long run. Maybe you can design a policy to do slightly better, but probably not even 7% these days. And 15%? Come on.
It’s true, a 7.1 net DIR isn’t a 7% crediting. What’s your point? That you believe you’re likely to get closer to the guaranteed rate? Probably not.
The guaranteed @ 2% represents a condition where the insurer never pays dividends after the policy is issued. You would do well to read up on what Glenn Daily has to say about it. He nails it:
https://www.glenndaily.com/glenndailyblog18.htm
Basically, you’re so pessimistic on whole life as to be unrealistic about it. I’d hardly call that objective.
What do you mean unrealistic? You think it is unrealistic to believe the return will be somewhere between the 2% guaranteed scale and the 5% projected? I hardly find that unrealistic.
But again, if you love whole life, buy as much of it as you like. If you think it’s good for your clients, tell them to buy as much as they can afford. It’s a free country.
What is unrealistic is when you claim that whole life will likely perform closer to its guaranteed rate, or when you say that it’s easy to see how loan rates and the DIR could flip, or…”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.”.
None of that is true, or at best it’s misleading. Especially the bit about Mass’ Legacy 100. And, if you don’t understand what I mean by that, why would you attempt write an entire post about “Bank on Yourself” when you don’t understand how IBC/BOY agents structure policies?
They wouldn’t use Mass’ Legacy 100 at 100% base whole life, which takes 12 years for the policy’s CV to equal the premiums paid. Mass’ products are generally high CV when you add their PUAR, meaning you’re positive in year 2, 3, or 4 depending on your age, the underwriting class, the amount of insurance you buy, etc..
Look, there are many ways to skin a cat, so I really don’t think it matters (numbers wise) whether *you* put 60%+ of your money in index funds and 40% in bonds in a 401(k) or IRA, or *I* buy whole life and put 20% of my money in BRK. We could end up in the same boat in 30 years, net of tax. You’re comfortable putting on a blindfold and letting the market take you where it takes you with no concern for underlying fundamentals. I will have way more liquidity and take much less risk with my strategy, but to each his own.
[Ad hominem attack deleted.]
If you don’t like my blog, you’re welcome not to read it. You’re also welcome to start your own blog. You can call it “Whole Life is Awesome For Doctors.” I’m sure it will have many loyal readers.
I certainly don’t expect an insurance agent to agree with me that whole life insurance is, at best, an optional product for the vast majority of physicians. If you think a portfolio composed of 80% whole life and 20% in a single (insurance company) stock is great, go buy it, it’s a free country. Or, you can hang around a blog you hate leaving comment after comment. Your choice.
I keep commenting because I like the dialog, you’re teaching me a few things, it doesn’t take up a lot of my time, and it’s entertaining.
Of course you wouldn’t agree that whole life is suitable for a lot of people, because you don’t really understand how it works. You spend a lot of time telling people that whole life is overpriced.
Then, you turn around and tell those same people to overpay for stocks (that’s what you’re doing when you buy an index, by definition, because of how it’s weighted), but keep an eye on fees, because those are bad. Nevermind that you’re paying way too much for 80% of your portfolio.
You’re comfortable calling this good advice, and have a lot of fun “debunking” anyone who disagrees with you, even when it’s a fee-only insurance consultant like Glenn Daily or an actuary like John Skar (who doesn’t get paid to sell whole life, and yet still recommends most people look at buying it because it’s a valuable product) or Jason Konopik (another actuary who also recommends buying CV insurance and yet doesn’t get paid to sell it).
You’ve often claimed that the only people who sell it are people earning a commission on it. Clearly, that’s not true.
By the way, that single stock (BRK) has returned over 600,000% since its inception, compared to the S&P500’s 9,000 something % over the same time period. It has excellent management, and at least 2 investment managers who are now at least as good as Buffett. So, yeah, while I’m not making a recommendation for anyone else, I feel comfortable with an 80/20 split like that.
[Ad hominem attack removed]
P.S. There was no ad hominem attack in my last post. You’re inserting it in there for some unknown reason.
I’m not sure you understand the meaning of ad hominem. When you’re focusing on me, it’s ad hominem. When you focus on an idea, it isn’t. The second is allowed. The first is not.
If you love your BRK/whole life portfolio, enjoy it. I sincerely hope it assists you in meeting your goals. Obviously, I don’t recommend it. Nor do I particularly enjoy reading dozens of 500+ word comments on a daily basis from a dozen different insurance agents. If you have something new to say that hasn’t been said in the previous 3000 comments after whole life insurance posts, have at it. If not, well, have a nice day.
WCI, If you would please indulge me, how do you purchase your vehicles? Do you pay cash, do you get a loan, or as most Dr’s do are you leasing them through the business?
I buy them. Just like I buy boats, vacations, groceries, and investments.
I did point out more than a few things that weren’t mentioned before. Many of the points raised in the post are inaccurate or wrong. They don’t get fixed, regardless of what gets said. There doesn’t seem to be any concern over that or the fact that readers are getting inaccurate information.
That’s because you’ve never pointed out what you think is wrong. You make vague personal attacks such as “readers are getting inaccurate information.” Kind of weird that 350 comments over 3 years have been made, mostly by insurance agents, but apparently none of them saw these “obviously inaccurate” statements I’m making.
No WCI, I was really specific and did point out this stuff in detail. Maybe you missed it. And “readers are getting inaccurate information” isn’t a personal attack, so don’t take it personally. It’s an estimate of the advice they’re receiving. Please bear with me.
For example (as I’ve stated before in other comments):
You got an illustration for “the best” non-direct recognition policy as Mass’ legacy 100, in an attempt to illustrate the benefit of paid up additions. This isn’t accurate. Their highest CV product is the Legacy 10-pay or HECV paid up at 85 product, making them the best (at least at Mass) non-direct recognition policy. If you want to juice CV, most people start with that, then add PUAs on top of extended term or just use the base 10 pay or HEVC for simplicity. You also didn’t mention anything about term blending, which dramatically lowers costs, which is why PUA works really well on base whole life. I believe Glenn Daily had already pointed this out to you, as did Brian Fetchel.
You write, “The key to making this all work is to get a “non-direct recognition” whole life policy.” That’s also not true. The loan provisions make little, if any, impact on the end result of the idea of borrowing and repaying.
You write: “but an investment called a Modified Endowment Contract (MEC), and it loses the tax benefits accorded to life insurance policies”. Partially true, but easily misleading if a person doesn’t understand the CV buildup is always tax deferred and the death benefit doesn’t lose its tax benefits. You never explained this. To the casual observer, it looks like the policy loses *all* of its tax benefits, which it does not.
“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.” – Not true. Within a few days of paying your PUAs, you have a large percentage of your money available for policy loans, usually at least 70% worst case. 90+% best case. After one year, there’s substantial CV.
Under “The “Load”” heading. You’ve technically got the facts right, but it’s somewhat of an irrelevant point to be making. What would be the alternative to this strategy? – a bank account (which won’t pay as much interest over the long term as you mentioned previously) or an investment + a bank loan, which is a more complicated scheme once you’re done filling out all of the loan paperwork, managing your credit score on multiple loans, and matching interest rates so you don’t get upside down on the spread. With the insurer, that’s managed for you, for a low cost, and the spread, while not guaranteed, is difficult to get upside down on.
The loan rate – When you say it’s easy to see how the DIR and loan rate could flip – that’s unlikely to happen unless we see an inverted yield curve. That doesn’t happen often. So, really, I think this isn’t that relevant or the disadvantage is way overstated.
Next you write: “Buying a life insurance policy is a long-term deal. Those premiums come due every year, whether you like it or not and without concern for your current financial situation. Lose your job? Disabled? Retired? Wanted to cut back? The policy doesn’t care. With this particular policy you pay until you’re 100.” – I already addressed this issue. You are correct…on a paid up at age 100, you keep making premiums…unless you call the insurer and ask them to give you a reduced paid up policy. Problem solved. OR…
…since you’re making substantial PUA payments, you cut back and use premium loans to make the payments until you’re back on your feet. Those base premiums are almost nothing. That’s the point of a high CV policy. Disabled? Use the disability waiver. Problem solved.
But, this is also a little bit of a red herring. What would the person do if they were saving money for retirement and they were disabled? They wouldn’t be putting money into their retirement account either. It’s disingenuous to suggest or subtly imply elsewhere that investing in a 401(k) would yield superior results to a WL policy and fail to mention the risk is the same with *any* savings strategy.
You then say: “If you stop paying the premiums, any loans you’ve taken out become fully taxable” – Could be true, but in practice usually not true. I would say this disadvantage again is way overstated. Insurers must offer you non-forfeiture options, one of which is extended term insurance, but they also offer you a grace period, premium loans, etc. They bend over backwards to help you keep your policy…because they want to keep getting those premium payments.
You then go on to say: “One new expense and all of a sudden his whole financial system is collapsing around him.” – Not true, unless the guy just stuffs the multiple lapse notices he gets from the insurer under his mattress and never does anything about it. There’s always, always, an option for a reduced paid up policy. That stops all underfunding concerns. Always. You never mention this. Ever.
You say: “With all these moving parts, it’s not that hard to accidentally make the proceeds of your policy taxable.” – Actually, it’s very hard. The insurer is directed to send back any premiums that will force the policy to become a MEC unless the policyholder directs the insurer otherwise. Loan repayments and additional payments that must be made to keep the policy in force, by definition, will not trigger a MEC because it would not fail the 7-pay test. The same sort of thing happens in 401(k) plans. Your HR department doesn’t let you violate IRS rules on contributions.
I could go on and on and on, because there are numerous other inaccuracies. I think it’s important to point them out to readers because I think the truth is important. Context is important. But you already told me you’re tired of reading 500 word comments from insurance agents.
You don’t like whole life. I get that. At the same time, I think there are factual errors, misstatements, inaccuracies, etc. in your posts about whole life. I do not think you understand how these policies work.
1) I understand you don’t think this is the best policy. Bear in mind I asked an agent which policy was best and this was what was recommended. When you agents all get together and decide which one is really best, we’ll take a look at it. As you know, since I’m not an agent, I can’t run all these illustrations myself since I don’t have the software. Any process like this is garbage in/garbage out.
2) You think “blending in term” makes everything better. That may be true. But this post is about using insurance to bank on yourself, not to insure your life. As such, there is no need to “blend in term.” Or are you saying you shouldn’t bank on yourself unless you have an actual insurance need?
3) Everyone else who writes about banking on yourself agrees that non-direct recognition makes a big difference since the policy continues to grow as if the loan wasn’t taken. Why you don’t think that is important is beyond me. But I suppose you’re entitled to your opinion.
4) If your goal is to borrow money out of your policy tax-free (the only way to get to it tax-free while you’re still alive) then becoming an MEC is bad “because you lose the tax benefit.” I stand by what I said. At any rate, the deferment of the low returning gains on this money that was after-tax to start with is pretty minimal and of course the death benefit is tax-free. That goes without saying.
5) I didn’t say there wasn’t any money to borrow after 3 days. I said there was a “tidy sum” after 3-4 years. They are not mutually exclusive.
6) Sorry you feel the fact that you take an instantaneous ~25% loss (at best) on your money the second you put it into the policy is irrelevant. It certainly isn’t irrelevant to many, many doctors who wish to get out of their policies with a loss shortly after they purchase them.
7) Just because you don’t think an inverted yield curve happens very often doesn’t make this concern irrelevant.
8) It’s hardly disingenous to point out that premiums must be paid. Sure, you can make them from the policy cash value, but they still have to be paid. Not so with an alternative savings strategy.
9) If the policy collapses, the tax benefits go away. That’s true. Overstated is just your opinion.
10) Not mentioning every detail about whole life insurance in a single 1000 word post is hardly a sin when it apparently takes you 1000 words just to point out a handful of things you don’t agree with.
11) HR people and life insurance people screw up all the time. Read the comments below some of the other whole life threads and you’ll see some examples.
You say you could go “on and on.” I don’t doubt that as you have been going “on and on” for two weeks now. But if you would like to point out something I said that is inaccurate, I would be glad to correct it. It seems you just don’t like it when anyone points out the negatives of your strategy and you wish it to be cast in a better light.
David,
It is my understanding that career Mass Mutual agents cannot sell IBC policies and that they will lose their jobs if they try. Maybe things have changed since I last checked but knowing that I would hardly suggest them for the best IBC policy.
As we work with Ameritas as much as we do, we have actually had them change how they write these policies to accommodate banking. Anyone accredited through the Infinite Banking Institute uses Ameritas. WCI if you’re looking for a consensus you might want to check that out. If our clients dump cash into the policy upon it’s inception it can be immediately borrowed out as opposed to many companies that make you wait at least a year, most of them 2. Many years ago they were like any other life insurance company but as they kept getting more and more business we literally had them change their contracts to better suit our clients IBC needs. There is also Guardian and several other companies that work well for banking but the vast majority of them do not allow first year loans which defeats the purpose of front loading the policy. When we have a large client come and investigate our company and who we primarily write through we often get asked what they do with the 34 Billion in assets that they manage. Instead of coming up with some bull shit answer we get the Chief Investment Officer on the phone and have him talk to the clients.
Again, I could have outdated information but as of about a year ago Mass could not write IBC policies properly and would terminate their agent’s contracts if they tried. Please let me know if that has changed.
1) Right. Well, it’s not just me. Mass’ 10 pay and HEVC is actuarially designed for that…it’s….math.
2) “But this post is about using insurance to bank on yourself, not to insure your life. As such, there is no need to “blend in term.” Or are you saying you shouldn’t bank on yourself unless you have an actual insurance need?” — Uh…I’m saying that if you want high cash value one of the best ways to accomplish that is to blend term insurance into whole life so that it changes the calculation for the 7-pay test.
In fact, this is how I usually see it done. Again, I think Glenn Daily mentioned this before. If I’m not mistaken, he even stopped by your blog and tried to explain that.
Yes, it also gives you the term insurance you might need (why would think these things are mutually exclusive?).
I’m not saying one way is necessarily better than another, but you’re the one writing a post about adding PUAR to a Legacy 100. Shouldn’t you know how it’s done? Or, shouldn’t the agent you got to do it for you know how? If not, how are you writing the post with any sort of accuracy?
3) “Everyone else who writes about banking on yourself agrees that non-direct recognition makes a big difference since the policy continues to grow as if the loan wasn’t taken. Why you don’t think that is important is beyond me. But I suppose you’re entitled to your opinion.” — No, it’s not my opinion. Why you believe it’s my opinion is beyond me. Not everyone does this. And, it doesn’t make a big difference. In fact, it makes almost no difference.
One of the carriers these guys use is Guardian, and they’re exclusively a non-direct reco company. Again, this is a matter of contract provisions, not opinions. Direct recognition. Non-direct recognition. The only thing that matters is the loan spread. Whether or not the loan is recognized doesn’t really matter. Maybe you’re getting bad intel.
4) ” If your goal is to borrow money out of your policy tax-free (the only way to get to it tax-free while you’re still alive) then becoming an MEC is bad “because you lose the tax benefit.” I stand by what I said.” — You have every right to stand by an opinion, though I’m not sure why you would. You just said you’re not an agent and don’t have access to all this software. Sure, making the contract a MEC is bad during your lifetime if you want tax-free access to CVs. But, this wasn’t your original argument. Your original argument was that it was easy to MEC the policy. The MEC calcs aren’t that difficult for the consumer or agent. It’s calc’ed by the insurer’s software. Additionally, the insurer won’t accept premium over their MEC calculation unless you explicitly authorize the insurer to create a MEC.
5) “I didn’t say there wasn’t any money to borrow after 3 days. I said there was a “tidy sum” after 3-4 years. They are not mutually exclusive.” — Sure, like I said. Technically correct, but why not tell readers cash value builds immediately? It’s not so much what you say here. It’s what you don’t say.
6) “Sorry you feel the fact that you take an instantaneous ~25% loss (at best) on your money the second you put it into the policy is irrelevant. It certainly isn’t irrelevant to many, many doctors who wish to get out of their policies with a loss shortly after they purchase them.” — 25% loss at best? No, at worst, if it’s a HCV policy. But you bring up an interesting point: why would someone knowingly walk into a long-term contract only to cash out shortly after they purchase? Is their income that unstable? Because if it is, you’re right. They shouldn’t be buying whole life. But, they also shouldn’t be saving money in index funds. They need an extremely short-term emergency fund.
And, before we go round and round with this same issue again, there are numerous ways to alter the policy’s premium to keep it in force. And, as I said before, assuming you wanted to do this strategy in a bank account or a fund + bank loan, you’re missing either long-term interest (by using the bank account), or you’re making the process more much more complex than using the insurance policy’s loan provisions.
7) “Just because you don’t think an inverted yield curve happens very often doesn’t make this concern irrelevant.” — Yeah it does. Because it’s not that I don’t think it happens very often, it actually doesn’t happen that often. Because when it does, it has almost always signaled a really really bad recession. And, that makes the inverted loan on your life insurance irrelevant or mostly irrelevant because your index fund is going to tank 20-40% while your whole life CVs are very well protected from loss. Your policy might be charged a 2% spread that year if you’ve got a loan out though. Honestly, I think most people would take that deal on a policy loan rather than erase 5-10 years of hard-earned stock returns.
8) ” It’s hardly disingenous to point out that premiums must be paid. Sure, you can make them from the policy cash value, but they still have to be paid. Not so with an alternative savings strategy.” — Yes they have to be paid, but what happens if you don’t save money consistently every month in your 401(k)? You don’t have savings. That’s not going to be any better than missing some payments on your policy. That’s why it’s irrelevant. Under both assumptions, no out of pocket money is being saved. At least with one strategy, your premiums will be paid for either through premium loans or a disability waiver. In some cases, an unemployment waiver.
9) “If the policy collapses, the tax benefits go away. That’s true. Overstated is just your opinion.” — Yes, I agree it’s true. It’s overstated though. You really can avoid a lapsed policy very very easily, using multiple different approaches. They’re all in the contract. I don’t see how that’s an opinion.
10) “Not mentioning every detail about whole life insurance in a single 1000 word post is hardly a sin” — you don’t have to mention every detail. But, the details you *do* write about should be accurate. They’re not.
11) “HR people and life insurance people screw up all the time.” — Agreed.
“But if you would like to point out something I said that is inaccurate, I would be glad to correct it.”
–I did. Multiple times. You haven’t. I can’t really say why.
“It seems you just don’t like it when anyone points out the negatives of your strategy and you wish it to be cast in a better light.” — Weird, I was thinking the same about you. Things you think are my opinion are part of insurance contracts or well-established historical anomalies or are actuarial science. I mean, really, where do we go from there? haha.
If you think I’m missing the boat and you can explain the upsides and downside of banking on yourself better than I can, then submit a guest post and quit leaving comments no one is reading except you, me, and Jason.
And “your cash value builds immediately” sounds way more positive than “you just took a 25% loss,” I can see why you would use that phrase.
J,
Weird. I have a policy with them and they don’t care that it’s designed that way. I don’t know about captive agents though. The last time I chatted up a financial analysts there, he was pretty candid about the fact that, internally, folks that buy WL there do base + LISR and just load up the PUAs, but they don’t actively advertise it.
First-year loans. Not a problem. In fact, if you need an emergency transfer, they will overnight funds. If they’ve instituted some kind of ban on IBC, it doesn’t show.
When the dividends are added to the standard 5% on cash value, yes. Not at first, not even in the first 10 years, but as the policies get older, they get better. I’ll email you a copy of one of my active policies.
I’ll be sitting here wringing my hands waiting for it to land in my email box.
Okay, I’ve got Jason’s illustration here. On the guaranteed scale, after 5 years he still has a negative return. After 10 years it is slightly positive. After 20 years, he’s paid in $591K and it has a value of $784K.
Even on the projected scale, it’s still negative at 5 years, slightly positive at 10, and at 20 years, he’s paid in $591K and he has $914K. The premiums are all over the place, so I’d have to do some crunching to get the actually XIRR, but the bottom line is that you don’t even have twice as much as you’ve put in after 20 years. That’s not 15%. At 15%, an investment of $30K a year grows to be $3.5M after 20 years. $600K in, $3.5M out.
This policy seems to be set up well to bank on yourself, but doesn’t somehow magically get 15% out of a whole life policy.
You’re looking only at the Guaranteed value. Historically mutual companies our perform their guaranteed illustrations. They might not be as high as the non-guaranteed side, although some are, but they are always better than the bare minimum. I looked at one of my in force illustrations and I broke even 2 years and 8 months into the policy. I will send you a copy of that as well. Either way, to pass down several million to my kids and charities tax free, even if I didnt break even till year 20 or 30, it would still be a no brainer because it is 100% liquid.
I mentioned both the guaranteed and projected. I’m glad you love your policies. I sincerely hope they work out well for you.
Are you aware that you can leave just about anything to your kids and favorite charities tax-free? It doesn’t have to be life insurance. I’m not sure if most insurance agents don’t know about the step-up in basis at death (and deduction for charitable gifts,) or just choose not to mention it.
How many more comments are you going to leave me this week on this 3 year old blog post? I can never quite understand the motivation for the hundreds of agents who have done the same over the years. Sharpening sales skills maybe. I dunno.
Thanks for stopping by.
What if you buy a whole life policy. Secure the death benefit that it purchases. Then take a non direct recognition loan. Then take the money that you borrowed and purchase shares of an index fund. What would be the internal rate of return on that money including the guaranteed values that it is earning as a policy loan. How is that for leveraging and velocitizing your dollars?
I got a better one. Why not buy a whole life policy, then take a non direct recognition loan. Then use that money to buy another whole life policy and take a non-direct recognition loan. Then buy another whole life policy and take a non-direct recognition loan. Then buy another whole life policy and take a non-direct recognition loan. Then what would the internal rate of return be?
Or, you could just go buy the index fund and get back to something you enjoy.
Because its illegal? There is language in every life contract that asks if a loan is being used to pay for part or all of the policy.
Money is fungible. Live off the loan proceeds and use “other money” to fund the next one. But the suggestion was tongue in cheek to start with.
“And “your cash value builds immediately” sounds way more positive than “you just took a 25% loss,” I can see why you would use that phrase.”
— It’s no less interesting, and no more or less positive, than what happens when you buy term and invest the difference. IRR for term premiums + savings contributions is often negative in the first few years. Sometimes, it’s significant. I’ve calculated as little as -5% and as much as -45%, depending on the amount being saved, the amount of term, the nominal return, etc.
You take a loss there. Do you ever say, “You take a 20% loss on your BTID strategy in the first year, but don’t worry, you’ll be positive in 3 years?” No. But you could.
Whether you buy term and savings as a bundled product or separately, there’s always cost you can’t get around, no matter how much you want to.
P.S. Thanks. I’ll think about the guest post.
White Coat,
I read every single one of these posts. They give me insightful information as to how to best understand and utilize the WL policy that I have on myself and also on the WL policy that I am taking out on my wife. Be Happy, this kind of traffic is great for your site and rankings on google. Don’t be so cranky buddy:)
Sorry. I just get frustrated to get the same thing over and over again from people who haven’t read the other 12 posts on the site nor the 3000 comments below them. They’re just convinced that I’ve never heard what they have to say. Time spent responding to insurance agents is time not spent responding to doctors.
Hello WCI
I’ve been reading your post and many (but admittedly not all – there are lots!) of follow up comments. It has been a good discussion and admittedly I am not super knowledgeable about investing and finances though I know a bit and am motivated to learn more in order to make good financial decisions.
Just thought I’d tell you my experience. My husband and I are PAs and in 2011, after the birth of our first child and just a couple years out of school we met with a financial planner. We had been investing about 10% of our income through our work’s version of a 401k and trying to build up emergency savings (in addition to paying off those pesky student loans). He recommended a WL policy for our emergency savings and to continue what we were otherwise doing. I was super skeptical, again I’m not well versed in this stuff but I had heard negative things about WL (Dave Ramsey and all that). The financial planner was super persuasive so we went ahead and did it. But when I made our annual premium check I worried that it was a bad idea, mostly because I didn’t like that it would take time for us to break even. But we decided to just keep going with it.
Here we are at year 4 and our 5th year premium is due in about six months.
Annual premium is $6875
Total paid into the policy after four years (four premium payments) = $27,500
Current cash value of the policy is $33,358
Total gained in the cash value in four years: $5,858
I have to say I was surprised we would have gained this much already.
To be clear, we never intended for this to be any sort of investment. It was only meant to be a vehicle for emergency savings that would gain a bit as opposed to a CD or savings account which have been gaining close to 0% for some time. We still contribute about 10% to our retirement account, and we’re hoping to increase that to 15% in the near future. At about year 7 when (if?) the gains equal the premium we’ll stop contributing and just let it pay itself. And we’ll take the $ we put into premiums and invest that in our retirement account. But at that time we’ll have a nice, sizable emergency savings. So that’s good.
I never expected to use it as an interest free loan, though this was a selling point from the financial planner. Right now it’s east to get a car loan, for example, for 0% financing. But then we decided to build a house and our builder required a fat (refundable) ernest money check. Our current house hadn’t sold yet so it was nice to just call Mass Mutual and get the check for what we needed. Not sure we’ll use it as a loan in the future since we’d like to minimize debt anyway. I suppose if interest rates increase and we need a car loan it would be a good idea, but hopefully we’ll be able to pay for future cars with cash anyway.
What I like about this policy:
~ Emergency savings with interest better than what we would get in a CD or Savings Account. Might not be the case someday if interest rates increase. But when we bought in they were so low that had we just put this into one of those vehicles we wouldn’t have gained so much. Currently gaining 5%.
~ Emergency savings that is accessible (got our check in about 3-4 days) but not so accessible that it’s too easy to access. We’re not big spenders but still, I don’t want the temptation.
~ Death benefit. The policy is for 850k. Granted, we wanted life insurance to benefit our children while they’re young in case something happened. But even if I live to 100, I guess it’s nice that my beneficiaries will get some nice inheritance 🙂 And hopefully our nest egg will keep growing with this policy only being a part of the overall financial picture.
What I don’t like:
~ This stuff is complicated! And not everyone loves learning about investments, etc. But we’re working on it, I just feel like I need to keep researching to fully understand our policy.
~ Bad reputation, and with good reason after reading some of the above comments. If people start talking financial stuff at a dinner party, you can bet I’m not going to bring up our WL policy.
Bottom line – I was nervous to get the policy in the first place but have been pleasantly surprised by the return, especially since this is only used as our emergency savings and we are not using it as an investment. And we’re far enough into it that we’ll continue making premiums until that magical year 7. But we’ll continue and hopefully increase the amount we’re investing in our retirement account and in the meantime I’ll keep trying to really understand our policy and investing in general. And your post and the comments have been very helpful with this so thank you!
Anyway, do you think we did ok?
Any advice on this?
Thanks!
I have MM WL policy and the way MM displays current value, includes the premium for the current year. With the premium paid in advance, six months above the four years, means you would have paid five premiums, not four. Counting the six months remaining in advance payment, actual surrender value is not @33,358 but closer to 30K. Even at 7 year out, increase in cash value does not equate to return that you can pay the premiums out of but would have to look at the dividend amount. You would need >$135000 in cash value to have 5% dividend equate to $6875.00. I do not see how that is possible! You are tying up significant funds for long period of time. You are not going to need large amount of fund for emergency savings and will be getting sub par returns for future for the rest of the amount of cash value tied up as life insurance. Cash value growth will decrease if you have the dividend paying the premium or take out the loan, unless you pay back the loan with interest. There are benefits to life insurance whether WL or term or other variants but investment return will be correspondingly lower. Granted better in long term than CD or money market accounts, but who is going to keep large chunk in them at younger age. If you would have opted for term, level premium would have cost no more than $1000 for 30 years guaranteed, so you have to compare longer term performance of different investments to see if that makes sense. Guaranteed values are barely above the inflation adjusted accumulations. Rest of the projections are just that with all investments, life insurance not being different.
Grrrrr……you are correct. I miscalculated how many premium payments I have made. To cut myself a little slack, their statements don’t tell you how much you’ve actually put in so far, just what the cash value amount is. So much for being pleasantly surprised – I still haven’t broken even. So at this point what is your suggestion? Should I pull my funds out and do the “buy term and invest the remainder?”
It depends on what your goal is. Look at this way, if you are still a good insurance risk, and you can be insured under term for like amount for under $1375, you will have $5500 amount to invest per year for thirty years with thirty year guaranteed term. Please look at your policy and see what is projected at insurance age 35 (equal to five WL so far and next 30 term if you surrender and invest the difference) and compare it to a projected/calculated investment in a different product. Past history is no guarantee, but a good diversified investment can average 7-8%, would total $831,345 before tax on the gains if you cash out at that time. Here is the calculator —
https://sporkforge.com/finance/invest_grwth.php initial amount 30K, annual $5500 and return of 7.5% for 30 years by 2045. Again, depends on your comfort level and what are you saving outside of WL.
Meg,
This is what I’m talking about by deceptive….. He is assuming a guaranteed return of 7.5 EVERY year for 30 years. With the market doing what it is right now, I would prefer a guaranteed 4.5% with possible dividends and no fluctuation whatsoever. He is also assuming you will not need a life policy after those 30 years. If he tries to say “buy another one when it ends” just think of how expensive that would be……
My response was not deceptive. I did not say non WL investments are guaranteed. Second, you do not need 7.5% return “every” year. You just need to average over 30 years. My mutual funds from ’91, even with the current market how is, have on average 7.8% annualized return even including the 1% investment expense on assets. Fear mongering for how the markets are doing now, does not take in to consideration good times or when it would do better in future. Life insurance does not guarantee 4.5% returns. They are projected. Dividends are not guaranteed and they do fluctuate with WL. I was giving a different way of looking at the idea of investment. If you are happy with 4.5%, then good for you. If you really want to be further conservative and be happy with even lower return and safer investments, then you would be taking different kind of risk (inflation risk, credit risk, devaluation of currency risk etc). If you accumulate the face value of WL by the time of 30 years, I am not sure that one would need the life insurance beyond that.
As far as the loan is concerned, you can get margin loan against your assets in your investments that does not require any tax payment. You continue to remain invested and earn the growth/dividend and capital gains and take conservative loan amount against assets and passes tax free to heirs unless you exceed the estate tax.
If you read the note, I indicated that I do have WL policy with MM and am not against the life insurance. What I started out with was smaller portion of WL, somewhat larger portion of term for a limited time and after 20 years, have accumulated enough of investments to drop the term. You are your own safety net beyond mostly 30 years. If you read the illustrations, the cash value increases per year tend to flatten out or relatively decline in later years due to increasing life insurance cost component even with lower risk for the life insurance company (face value-cash value equals the insured risk that the company is taking) and would not recommend to reinsure at that stage.
If you prefer a 4.5% annualized return over a 7.5% annualized return, then I can see why you would prefer a whole life policy to a traditional mutual fund/real estate portfolio. But people who go that route should be aware of the consequences.
https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
WCI,
Hadn’t had much time lately to check in on you to see your thoughts on the latest bubble starting to lose air. Your comment above about mutual fund returns are interesting though. I believe we are about the same age (38). When I graduated college in 2000 the Dow was at 11,500 it now sits at 16,250. A simple IRR calculation over the last 15 1/2 years shows a return of 2.26%. Where’s the 7.5%?
I’m not trying to compare mutual funds and whole life insurance b/c I think they are totally different things. One is investing and the other is savings, but I think your numbers might be a little skewed.
By the way we had Nelson Nash in our office yesterday and he shared information on 1 of his whole life policies that he bought 57 years ago. The cash value for the last year grew at 4.1% after insurance charges, fees, commissions, and free of taxes. Not bad considering it was just a boring old whole life policy and the Dow is negative 5% over the last year.
Nelson Nash is a pioneer and a very dynamic speaker. Anyone who hasn’t heard him speak should take an hour of their weekend and do so.
I’m sorry you don’t know how to include dividends, nor to use an appropriate total stock market index. If you’re happy with 4% long term returns, buy as much whole life as you like.
The stock market goes up and down. It isn’t necessarily a bubble when it goes up, nor “losing air” when it goes down. That’s just what markets do. If you don’t like, buy whole life insurance and save twice as much of your income to make up for the lower returns.
Stock Market Long-Term Average Annual Rate of Return
(e.g., since 1929; past 1, 5, 10, 20 … years.)
What is the long-term performance history of the stock market? Throughout stock market history, the average yearly return for periods of 25 years or longer has been around 9-10%. Here we mean total return — i.e., including dividends. Following are the results for some periods of particular interest; results are through year-end 2012.
Average Stock Market Return per year: Last 5, 10, 20 … Years
The long-term, more than 100-year performance: Since 1900 (end-of-year 1899), through 2012, I estimate the average total return/year of the DJIA (Dow Jones Industrial Average) was approximately 9.4% — 4.8% in price appreciation, plus approx 4.6% in dividends. (Some numbers may not add up due to rounding.)
Since 1929 (year-end 1928 — i.e., before the crash), through 2012, the return was 8.8% (4.6%, plus 4.2%) [note: see The 1929 Stock Market Crash]
Since end-of-year 1932 (i.e., after the crash): 11.1% (7.0%, plus 4.2%)
The average annual stock market return for the past twenty-five calendar years (since 1987) was 10.6% (7.9%, plus 2.7%) The market was up over 40% before the October 19, “Black Monday,” crash. After a significant recovery, the Dow actually closed up 6% for the year.
Stock market returns for the last 20 years (since 1992): 9.6% (7.1%, plus 2.4%) In the middle of one of the longest bull markets in history. [see below for additional 20-year periods]
Returns since 1999 (13 years) — the dot-com bubble year-end peak: 3.4% (1.0%, plus 2.4%).
Returns for the last 10 years (since 2002): 7.2% (4.6%, plus 2.6%) Year-end trough after the dot-com bubble. [see below for additional 10-year periods]
For the last 5 years (since 2007), 2.6% (-0.2%, plus 2.8%) Year-end peak of housing bubble.
Since 2008 year-end trough after the housing bubble: 13.4% (10.5%, plus 2.9%)
For 2012 the stock market (Dow/DJIA) total return was 10.1% (7.3% plus 2.9%)
2012 year-end dividend yield was 2.7%
This is as of March 2009. Beyond that from past five years annual (not cumulative return for the five years) have added another 11.54% per year. It is easy to take glass half empty viewpoint and pick your time frame and one can argue for the foley of stock investing. But it would not stand a chance with inclusion of complete data. Past is no guarantee but is best measure available to compare different alternatives.
He he, he said foley. he he. 🙂
Ah, there you go. Figured as much. That’s pretty typical. This post may help you decide what to do. Remember that the decision to keep a policy is different from the one to buy it in the first place.
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
If what you’re saying is true, then you’re doing a heck of a lot better than okay on this policy. In fact, you’re doing so well I’m pretty skeptical you have the facts right. I calculate your stated return at 9.8% a year. Given that I don’t know of a single life insurance company that even pays a dividend of 9.8% a year (much less a return of 9.8%) I think you’ve screwed something up. But if not, I’d love you to email me a copy of your original illustration as well as your latest statement and I’ll do a post on it.
Meg,
The first years of a whole life policy are the worst. The longer you have it, the better you’ll be. Because you have already been through those first years I would HIGHLY suggest you keep the policy. “Buy term and invest the rest” is based off several principles, many of which are almost never factual. First it assumes that every person has the discipline to actually invest the difference. The majority of people will see that extra money in their account and go spend it, that’s human nature. Some are able to beat it, but most do not. Second, it assumes that you will not need life insurance past 65 and that your retirement will be taken care of. Again in most cases this is not correct. I use my money to purchase cars while still earning 4.5% in my policy. Can a mutual fund or any other investment do that? Nope.
For anyone to assume that everyone past 65 has not financial obligations is not only ignorant, it is deceptive. Most still have mortgages, most will still buy cars, vacation, etc. A “Whole Life” Plan GUARANTEES that if you pay the premium, that policy will pay out to your beneficiary. There can be an argument made on what else you could do with that money but if you have kids and legacy is important to you, keep it. Put it in an Life Insurance Trust and make sure it goes to the proper places and that it goes TAX FREE. As opposed to you leaving money or investments to your heirs that will be taxed.
Personally I try and keep my taxes as low as possible because I know how badly our government wastes my money. I don’t feel the need to be generous with Uncle Sam and I’m sure you feel the same. I’d rather my money go to my kids, charities, and grandkids.
Again, it is not just a simple debate between returns but I would be happy to debate them. This is a decision to provide for your family in the event you are no longer here while still having access to your cash. It is NOT “locked up” like any other investment would be. You can use it as you please in the meantime and when your day comes, the benefit will go to whoever you have decided.
So my professional opinion as a financial planner, insurance broker, and owner of similar policies, is to keep it. Life insurance is not a short term investment. Most companies do not set them up properly and it takes 10+ years to get a good return. Either find someone that can do it in 2 years or keep it….. You have already paid your dues, now it’s time to sit back and watch the policy grow and do what it was always meant to.
Facts are 1. If you are disciplined enough to put aside money for WL premium, you are disciplined enough to put it aside for investments.
Facts are 2. you do not get to use your money while earning 4.5%, you have to account for the interest that they charge you. Interest that you pay is not added to your cash value on top of the 4.5% non guaranteed return that you are counting. You can take margin loan against your investments similar to what insurance company loans to you.
Facts are 3. Insurance in a ILIT is not controlled by you and it not in an ILIT, assets are counted for estate tax purpose, although are given tax free to heirs. For clarification, investments also go tax free to heirs with step up in cost basis as long as you are under the inflation adjusted estate tax cap.
Facts are 4. Investments are not locked up anywhere. You do not even have to request an loan with an application, money can be wired overnight if need be with margin loan as simple as writing a check or a phone call away.
Facts are 5. Dues are not “already” paid with WL at any time. Every premium has a load factor of 7-10% that you are paying every year that you keep the insurance in force and there is indirect cost to the WL cash value in form of lower return. Index/ETF/mutual funds cost 0.05-0.5% to 1.0% per year direct or indirect, compare it to more than 3% spread of lower return with WL.
Facts are 6. You have to realize that you are not going to have greater need for insurance at age 65, what with kids growing up and settling, moatgage partly paid up if not completely. If your retirement is not taken care off and if you want, can get out of the investments and buy annuity at that point.
I am not an insurance broker but I am an owner of the investments and insurance policy both and I am financial planner for my own life and family. I am not advocating either/or approach. Hope that helps to balance the posts.
A few comments on this lengthy comment that are worth considering.
1) If people don’t have the discipline to “invest the rest” it is unlikely they have the discipline to keep making WL premium payments. Weak argument to keep a policy in my book.
2) If a doctor reading this site in their 30s isn’t financially independent by 65, they didn’t read very closely. You seem very unlikely to me to need life insurance after age 65.
3) He mentions a policy that still pays 4.5% on money that has been borrowed out. Make sure your policy actually has this feature before assuming it works the same way as his. Google direct/non-direct recognition whole life policies for more details.
4) It is more important to me to have the most amount of money after-tax rather than to pay the least amount in tax. I suspect when you think about it, you’ll agree with me more than Jason’s plan to minimize taxes no matter the cost. I hope Jason isn’t hiding behind the soldiers, driving on the roads, or visiting the parks paid for by all those wasteful taxes.
I’m surprised you’re giving a “professional” opinion without having more details. Keeping it may be the right decision. It may not. But I think I’d want to see what you’re doing with the rest of your money, how much you value the pluses of whole life, and what your future projected and guaranteed returns are on the policy before I’d give layman’s advice, much less professional advice.
“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
The insurance companies love to sell permanent insurance (and are highly profitable selling it). The agent loves to sell permanent insurance (50-100% commissions on year 1 insurance premium, plus trailing commissions). So who is the patsy?
Permanent life insurance is a bad idea for almost everyone. In my opinion there are three possible exceptions: 1) those who need a permanent death benefit (very, very rare) and who have consulted estate planning attorneys and fee-only financial advisers (not insurance salespeople); 2) those who have very high income and can’t control their spending (Eg. the policy becomes a forced savings vehicle) – of course, there are better and cheaper ways to force save outside of life insurance; and 3) those who have owned their policies for years and have established a sizable cash value (these folks have already been raked over the coals and by now their is more upside than downside).
The reason these policies don’t make financial sense is obfuscated in detailed legal documents, colored with illustrations that no one understands. Boil the financials down to cash flow from both the insurance company’s standpoint and your standpoint as a standalone investment, and it simplifies the analysis considerably.
Insurance Company Cash Flows In:
–Policy holder insurance premium
–Policy holder PUA/investment contributions
–Earnings on investments
Insurance Company Cash Flows Out:
–Death benefits paid
–Management fees, operating expenses, profits to shareholders (if applicable)
–Salesperson commission
That’s about it. All other mumbo-jumbo of guaranteed returns/dividends/etc. is baked in. There are no other sources or uses of cash for the insurance company. Now think about the comparable cash flows for your own investments:
-Investor Cash Flows In:
–Your own investment contributions
–Earnings on investments
-Investor Cash Flows Out:
–Management fees
–Income tax on the growth
So how do we evaluate this?
-Insurance Premiums Paid In / Death Benefits Paid Out: Almost no one needs to buy permanent insurance. So the policy holder is “losing” off the bat because they’re buying a product they don’t need — forever. Since selling life insurance (even term insurance) is profitable (eg. premiums paid in are greater than death benefits paid out), on average policy holders will “lose” this financial bet. 1 point against permanent insurance.
-Earnings on Investments: As demonstrated earlier in the thread, the investments that most insurance companies are buying are readily available for retail investors through low-cost firms, such as Vanguard. The insurance company and the retail investor are buying the same 30 year Treasury bond. In both cases the earnings and returns are low risk and guaranteed. Earnings on investments are a wash between both options.
-Management Fees/Operating Expenses: I can own mutual funds at multiple providers with ongoing expense ratios of 10-30 bps. The operating costs to run an insurance company are 10-15% (eg. 1000-1500 bps) of revenue (Yahoo Finance Met Life 2014 SG&A income statement). If the Company is not mutual, there will also be profits that are generated at the policy holder expense. 1 point against permanent insurance.
-Sales Commissions: I can buy a mutual fund for $7 commission if I invest on my own. In the insurance scenario, I am paying 50-100% of year 1 insurance premiums as commission to start, plus trails of 100-150 bps to the sales agents. 1 point against permanent insurance.
-Income tax on growth: If the policy isn’t MEC’d, then income tax on the investments in the insurance policy can be tax-free if borrowed against the policy and paid off via the death benefit. If I’m investing on my own, I’m paying income tax on the growth (if we’re still talking Treasury Bonds, then Federal only and no state/local tax). I can manage by tax burden lower by buying triple tax exempt munis, buying-and-holding growth stocks and then donating shares, etc. But this adds complexity. 1 point for permanent insurance.
So, the question really is: does buying permanent insurance that you don’t need, paying ongoing management fees + operating fees (100x higher than the alternative), and paying sales commissions (1000x the alternative) offset the income tax on the growth of your investment. It’s theoretically possible, but all but impossible.
Of course you could try to plan on being the one that “wins” at the life insurance game (by dying young), or you can hope that everyone else surrenders their policy which leaves the insurance company more money to pay you in dividends…
“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
Zill, I’ll try over the next week to dissect your comments, a little too lengthy for a Saturday night. However your first argument makes me not motivated to assume you have any accuracy in the rest of your post. You are entitled to your own opinion, but not your own facts. Give me some actuarial data that a permanent policy is more profitable for the insurance company. Completely false. Follow the math. Studies have proven out that 98-99% of all term policies never pay a death claim. (Not looking it up for you, but Google Penn State study on term policies)
Spare us the argument that whole life policies are sold only for the commission. Wall St. wasn’t built on a non-profit model.
Thanks Russ!
One thing I’ll ask is if you could grant me the courtesy of sparing the sales pitches and sales lines. I did not say that term insurance isn’t profitable. If it wasn’t profitable insurance companies would not offer it for sale. However, It is undoubtedly not nearly as profitable (for the insurance company or the agent) as permanent insurance. If for nothing else, the premiums are normally 4-8x higher on permanent vs term insurance.
The fact that term policies rarely pay a death benefit is by design. I am sure you know this (you claim to be a CFP after all) because this is basic actuarial science that applies for all types of insurance. The actuary uses claim tables, mortality tables, and insurance company experience to understand how many claims are likely in the population of insurance buyers, multiplies number of claims x benefit, adds in operating costs and profit margins, and divides by the number of individuals buying the insurance to determine premium.
Following the logic in reverse, you can estimate number of claims for a policy. For example, my Umbrella liability policy premium is $100/year for $1 million of coverage. This means that the insurance company would expect 1 claim in 10,000 policies (the reality is even fewer claims expected because the premiums need to cover commissions, operating expenses, and profits). If these 10,000 policies are held for 75 years (from age 25 to age 100), then we would expect 75 out of 10,000 policies to pay a claim. In other words, at most 99.25% of umbrella policies will not pay out over 75 years! This is a hit rate even lower than term insurance! But Umbrella liability insurance, just like Term life insurance, plays an important role in the financial plan of an individual with assets and income to protect.
I totally agree with you on your last point about Wall Street. All low cost ETFs/mutual funds and no load investments for me. But if commission wasn’t a factor for permanent insurance, I would guess that you would be far less likely to extol it’s alleged virtues.
In any case, the more you analyze these policies on a cash in/out flow basis from the insurance company standpoint, the more you realize it is almost impossible for these policies to be a good investment (hence the reason why you can’t call these policies investments). The insurance company isn’t making more on their investments than you or I can through a low cost brokerage. So the excess returns claimed in the illustrations are either a) made up / not true; or b) come at the expense of lapsed policies (and despite a consumers’ best intentions, their policy will likely lapse). It’s usually (a), but if it’s (b), then these policies venture dangerously close to the land of pyramid schemes, where existing policy holders have to hope there are more suckers out there to keep buying policies and lapsing to provide them a decent return. What a mess.
For the rare high net worth individual or family that has unique estate planning needs for a death benefit, a straight-up whole life policy MAY be a good option. For everyone else, steer clear.
As usual I have derailed a conversation into an area that shouldn’t be the focus. If you or anyone really wants to understand how a whole life policy works in comparison to a term policy read this article from a PhD economist. None of us have spent half the time he has with actuaries to be qualified to speak on the subject more than he does. [Link removed- Stop using my website to advertise your whole life sales practice Russ or I’ll block all your comments.-ed]
It seems from reading your 2 posts, your are trying to say people shouldn’t buy whole life insurance for these reasons:
1. Don’t really need the death benefit
2. Too expensive
3. Poor returns
1. If you are smart enough to know how much insurance someone should buy you shouldn’t be wasting your time talking on blogs. You should go make a fortune predicting the future. OR, if you are saying people shouldn’t buy insurance b/c they don’t need it then I should stop wasting my time trying to teach you responsibility. B/c if your parents, teachers, mentors haven’t taught you that by now, I don’t think I can.
2. Compared to what? Term? Nothing? You get what you pay for. Dave Ramsey who hates insurance owns a 7 million dollar house. Is his house expensive, sure. Could he rent an apt for he and his wife for cheaper, sure. I chose to own my life insurance versus rent it.
3. I don’t invest in my insurance policy b/c it’s a savings tool. I invest in things I can directly impact: real estate, small businesses, & 3rd party loans. You use a savings/checking account I’m assuming, I use the cash values in my 12 polices. Are you wanting to compare my investments versus your investments, or are you wanting to compare your checking/savings account versus my insurance policies?
I get it that you have not used this concept in your finances and [ad hominem attack removed] If you don’t understand the concept the details won’t matter. This concept has nothing to do with rates of return. It’s about being in control of your money. I cannot predict the returns on my investments any more than you can. However people who participate in this strategy when asked how this concept has benefited them rarely talk about the insurance policies returns versus what it has provided them the opportunity to do. [Link removed-ed]
Those using this concept have memories from what this concept has allowed them to do. They don’t sit around looking at investment statements dreaming of what it would look like if they cashed out their accounts and did something with it or waste their time reading blogs on better ways to save 10 basis points on the next ETF. [ad hominem attack removed.]
I used to sell insurance and financial products, so I understand the concepts very well. Nobody could explain then, and nobody can explain now, how does the insurance company take your money, pay commissions and operating expenses, and then invest what’s left it in the same things you or I would invest in, and somehow come out ahead of you just investing the original sum yourself. It is simply not possible.
But your reply says it all:
“This concept has nothing to do with rates of return.”
Nearly everyone who “invests” in these policies regrets it. There are billions of dollars of permanent policies sold each year, yet there are only a handful of sales websites that promote the “memories from what this concept has allowed them to do.” Of those buying policies, many would have not lost money, and virtually all would have earned a higher rate of return, have had more liquidity, and would incur less default risk by not buying one.
Zill,
Couple thoughts.
1. At age 65, would you rather be in the last year of your 30 year term policy (with an annual renewal likely above $10,000/yr) or sitting on a fat mound of cash in your whole life policy? Which would your wife want you to have?
2. Don’t confuse the vehicle (whole life policy) with the investment (real estate, in my case). You can invest the cash value in whatever you please, real estate, business startup, etf, mutual funds, etc.
3. Lots of other thoughts… If you really want to learn, make an appointment with someone who knows how to design whole life policies for maximum cash value, ( mass mutual, northwestern mutual and new York life won’t cut it) and see what they can do for you. Worst case scenario, you are out an hour of your time. Best case, you find out that something you thought you knew is not what you thought it was.
Using whole life policies has changed my life, they might be able to do the same for you.
I find this particular argument for a whole life policy rather weak. What you’re really saying is
I prefer waiting five years to invest my money in real estate rather than doing so now or
I prefer having less to invest in real estate rather than more.
If you would just go invest your money in real estate instead of FIRST buying whole life insurance and then using the whole life insurance cash value to buy real estate, you could invest sooner or invest more.
I get the whole BOY/IB concept, but it seems an unnecessarily complex structure if all you want to do is go buy some real estate. I guess I’d rather keep it simple in situations like that. It just seems like whole life agents are looking for yet another reason for me to buy whole life insurance because the last 10 reasons weren’t good ones.
I mean, if you’re into it, knock yourself out. But there is no magic here.
I may be missing something about BYO/IB, but the core principle seems to be that loans from the policy are “tax free” and that you have flexibility in repayment.
All loans, from just about anywhere, are “tax free”. I can borrow “tax free” to buy a house, a second house, a third house, an Cessna, a yacht, a Jaguar, a jumbo-TV, a washing machine. I just don’t see the benefit in doing this in an expensive life insurance policy and committing to it for 30-40-50 years..
If I borrow from myself, I pay the insurance company interest and if I borrow from a bank, I pay the bank interest. If I don’t pay back the insurance company loan, then interest accrues on my debt which I have to pay back eventually (maybe at death). In principle, accrued interest payable at death is just a form of financing (expensive financing since it’s inside the policy). If you aren’t careful in BYO/IB, your insurance policy will collapse and you will likely have a tax liability, and if you aren’t careful paying back a bank, they can take the collateral. Either way, you’re borrowing money.
Seems like another scheme to promote permanent life insurance.
Oh, it’s definitely a scheme to promote permanent life insurance, no doubt about that. But there’s a little more to it than that when you look at the concept of direct recognition versus non-direct recognition loans. That and the paid up additions.
Direct recognition vs non-direct recognition is largely smoke and mirrors. Assuming the insurance company actuaries did their job correctly this choice is neutral from an actuarial standpoint. If the insurance company offers to pay dividends/interest on cash balances – even when they’ve loaned the money back out to you – they have to make that money back somehow. Usually the dividend is lower than what it would be in a direct recognition policy; if not, they’ve siphoned off more money elsewhere, perhaps in the underlying insurance premium, or in the amount credited to cash value. The insurance company can’t earn returns on money it doesn’t have.
Similarly PUA riders are, at best, actuarially neutral. The insurance company isn’t going to sell you a rider that results in it making less money. PUAs mean you’re buying more insurance (which you probably don’t need and has a real ongoing cost), and you still lose 3-7% off the bat for commissions. And the cash value still suffers from the fact that you can’t count on returns inside the policy beating what you could earn investing the same money yourself.
If the goal is cash value accumulation (which i’m not sure it should be), then an over-funded policy that leverages PUAs will enable more cash value at a lower commission load than an otherwise identical policy. So it should be “better”for the consumer. But at the end of the day, even that type of policy is still a poor choice for investment or “banking”.
Commissions are lower on PUAs, allowing you to use a higher percentage of what you’ve paid in.
I think the actuaries assume/calculate that many purchasers won’t actually use the non-direct recognition loans even though they are available. So those that do come out a little ahead.
So I think it’s a little more than smoke and mirrors, although there is plenty of that involved in the sale of whole life insurance.
Yeah, you’re right. It’s a form of return of premium. In other words, they charge you $3 for the rider when it only costs them $2 and then credit all or part of the extra dollar back as a “dividend”. There’s no economic value or actual return on investment created for the consumer in that transaction, but it makes the sales materials look great.
There’s also a bit of a moral hazard… in that your returns depend in some part on hoping others lapse on their policies or don’t take loans, etc. and that the insurance company continues to find new purchasers (who we know will lapse at 80% rate). It’s not a pyramid, but there are pyramid-like aspects. I find it hard to feel good about that.
Zill:
Not to be a smart ass, but aren’t all insurance companies pyramid-like? Use term insurance. You hope a bunch of people buy in, pay or don’t, and you as the insurance company hope they don’t die when the policy is still active. The insurance company doesn’t want to pay out when you hit the unlucky lottery.
Same with renter’s insurance. I’ve been paying for years. Never wanted to use it but this last month I had to start a claim. So they will now be making less profit because of my contents getting damaged.
Same with any insurance really. Sucker a bunch of people into premiums, keep it going for years, hope you don’t pay out.
No, you’re not being a smart-ass… this is a good intellectual discussion!
Insurance itself is not pyramidal because someone paying the premium is paying because they’re receiving an actual product that they need — the renters/life/liability/etc insurance coverage. People can join and leave the insurance pool and it has no net effect on the other policyholders (unless everyone leaves and the insurance company goes bankrupt). Existing policyholders do not benefit nor are they hurt if someone joins or leaves the pool. Of course, insurance still has a negative expected return (so you shouldn’t buy coverage you don’t need), but it is not a pyramid.
Permanent policy dividends may be supported by the lapse of other policyholders. That element borders on pyramidal. Existing policyholders hope (speculate) that their fellow policyholders lapse before they do and that the insurance company can keep finding new members to bring into the pool (of which 80% of the new members will lapse). The surrender fees (and other net costs) charged to those who lapse go into the general fund, and a portion of which is paid back to the remaining policyholders as a dividend. It’s a beautiful thing for the insurance companies and agents – they keep selling policies collecting commissions and fees, don’t pay death benefits, and show amazing “dividend” returns. That’s why once you’ve paid in to your permanent policy for a number of years, your best approach may be to hold on to it.
Zill,
Stop! You are misrepresenting how an insurance company works so bad it’s scary.
Insurance companies use facts not speculation to create their products. They use hundreds of years of data to determine the pattern of deaths, cost of operation, interest rates, lapse ratio’s, etc.
Filling a claim on any insurance policy isn’t news to the company. They already knew when they created the product how many claims they would experience, they just didn’t know who. It was factored into the price from the very beginning. If this wasn’t the case then you would see insurance companies going out of business all the time.
Name a business that has gone under, a restaurant, a bank? Try without Google to name an insurance company.
Invest in whatever you want to but please stop trying to be an expert in insurance.
Russ,
I’m leaving for Thanksgiving, so I’ll leave you to man the blog. But a quick reply before I go:
-What you’re saying about claims/lapses/dividends is incorrect. This is basic insurance 101. NWM has a good explanation of how they calculate their dividend online. Google and read it. It’s exactly the opposite of what you are saying. The dividend is when the insurance company over-estimates costs and returns premiums to the policyholders.
-Insurance Company that went under without Googling… took me 5 seconds.. AIG.
Happy Thanksgiving!
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The insurance company may know how many people are going to die, but they don’t know who is going to die. They leave that up to the Mafia.
And your # 1 is ridiculous. Of course if my wife has to choose between nothing and a big fat cash value policy, she’s going to choose the big fat cash value policy (as would I.) But that’s not the choice. It’s a straw man. The choice is between a big fat cash value policy and an even larger investment account.
Zill,
I didn’t add dividends into my list of items. They take all the information I gave add in a fudge factor (just in case) and create the rate for the product. They build the price of the product expecting a lower cost than the price based on all the factors that I mentioned. The excess is what comes back in the form of a dividend or more accurately return of premium (capital). I don’t need to read a website for the definition I personally have sat with actuaries and talked to them at length about this.
P.S. Last I looked AIG is still in business.
I didn’t have to wait 5 years to start investing in real estate. I started within a month or two of when my policies were written, I can get exact dates if that is important to you.
I did “give up” some money on the front end, but the trade off is Guaranteed Life Insurance For The Rest Of My Life. GLIFTROML. Not very catchy, not very flashy. Just does what it is supposed to do.
Have you ever bought a home and got a guaranteed death benefit to go along with it? It might happen, but I have never heard of it. If I were to die, my wife would have 3 things. Cash from the policy, An income stream (from the houses – also paid off with the life insurance proceeds), and a nice real estate portfolio that she could sell if she so chooses.
It certainly isn’t necessary, but it certainly isn’t complex. And sometimes things worth doing take some time and effort… Yeah, it isn’t for lazy people. No, it isn’t for people who don’t want to work. It isn’t for people who are looking to get rich quick. It will work for anyone who isn’t living paycheck-to-paycheck though.
Is my argument a straw man, or is it mostly just true?: https://www.thisismoney.co.uk/money/pensions/article-2885119/Professionals-75k-plus-feel-poor-retire-65-finds-survey.html – A UK article, but I would venture to guess it pretty much mirrors what you see in your colleagues. Certainly rings true of some of the professionals that I know…
Of the wealth that most people possess, a significant amount is in the equity in their home: https://www.census.gov/people/wealth/files/Wealth%20Highlights%202011.pdf
The home is just another example of a forced savings vehicle… Whole life insurance might not be the worst idea for MOST people, based upon that fact.
Most of the things that work in this world aren’t magic: eat right, exercise, get 8 hours of sleep… It just takes proper execution, and dedication to the goal.
I look at Whole Life Insurance as a tool in my belt… It isn’t the only tool, and I don’t use it to both hammer nails and cut wood. But I’m also not throwing the tool out of my belt simply because it is “complex” or because it has some costs of ownership (commissions). The tool does what I need it to do, provide a pool of capital that I can deploy without interference, and protects my family against the premature loss of my earnings. TADA!
John-
That’s exactly my point. You traded having more money now to invest in real estate for life insurance for the rest of your life. If you want life insurance for the rest of your life, then sure, buy some whole life insurance. But you don’t need it in order to invest in real estate. Trust me, I own lots of real estate and am buying more all the time, all without whole life insurance.
I don’t want or need a guaranteed life benefit. When most people think about the opportunity cost of getting it, they don’t want or need it either.
Your argument is still a straw man. You’re now making a new argument, that whole life insurance works because it forces people to save. I disagree. I think people who won’t save aren’t going to save just because they buy whole life insurance. They are more likely to be in the 80% who don’t hold their whole life insurance until death.
I don’t disagree that you can use WL as a pool of capital to deploy, nor as protection against premature loss of your earnings. What I’m saying is it isn’t the best tool for either of those uses. I deploy the money in my checking account and I protect against premature loss of earnings with term life insurance. I think that’s a better strategy. I don’t expect to convince you though.
You don’t think this is the most efficient tool for each of these purposes, but can you name another tool that allows you to do BOTH, and with similar tax consequences?
Come on… seriously!
You can try that line at Best Buy selling appliances. You can buy a standalone washer for $500 and a standalone dryer for $500… or you can buy the 2-in-1 machine for $1,200! There’s no other machine that can wash and dry!
You simply don’t understand how some are using these vehicles to make and save money, and it doesn’t look like you care to learn. I’m posting for the benefit of those that do want to learn. I’m not interested in selling anything. I’m interested in supporting as few people as possible in my retirement. (Those who plan poorly or fail to plan)
I’d venture to guess that Russ and Howard have more in their policies than your net worth Zill. I bet that will remain true throughout your respective lifespans also.
There is enough snark on the Internet. Yours doesn’t add any substance.
Another tool that combines life insurance with a crummy investment in one purchase? Nope. That’s the only one. 🙂
Seriously though, if you think it’s right for you, buy as much of it as you want. It doesn’t bother me a bit. I just want people purchasing this sort of thing to really understand what they’re buying, and judging by my email box, that doesn’t happen very often.
What makes a “crummy investment”, life insurance, stock market or otherwise?
(NB-I don’t consider life insurance an investment.)
High fluctuations in value? Upfront sales commissions? Lack of liquidity? Limited use of the investment? Little control over the investment? Lack of protection from creditors? Taxes for any transactions? Backend costs to liquidate?
You mention that you have lots of real estate. What are the returns from your real estate investments? Appreciation, extinguishing debt, and hopefully some cash flow, right?
Because of whole life insurance, mine also has the benefit of lowering my taxable income. Using this strategy, I save about as much every year as I “lost” to sales commissions in the first 2 years. ( my policy was cash flow positive at year 3 – I put in $1 and it increased in value by $1.03, and it was break even at year 5) and the cash value is steadily growing. What has your investment portfolio looked like over the last 10 years?
I rest easy knowing that if I die tomorrow or in 80 years, my family will be supported. My wife likes that. That’s worth more than amateur opinions any day. 😉
Again, I know you aren’t interested personally, but some people out there are. Not trying to convince you or waste your time. Just want those people out there that are looking for info to have a resource.
Happy Thanksgiving!
It will be a very rare person who reads 417 comments below this post. At this point, only those following this thread are reading, and all of them are already convinced, one way or the other.
Don’t forget the fourth way real estate makes money- depreciation. You know, how it can reduce your taxable income without requiring you to purchase whole life insurance.
5 years to break even is pretty typical with a good whole life insurance policy (bad ones may take 10-15 years.) If you’ve got real estate earning 12% a year, you’ve nearly doubled your money by year five, not just broken even. By year fifteen, you may have four times as much money.
By the way, you’ve got one of the more interesting CVs I’ve seen on these threads in a while. Insurance, real estate, and pharmacy. Interesting combination. I’d like to hear the story some time.
Let me know what you want to know. I’m happy to share.
It’s just an unusual combination- financial services and healthcare.
WCI:
I agree with you that it may not be the best tool, but it’s one tool that can provide multiple functions at the same time. Can they cost be high? From a strictly economic sense, there are more affordable options out there. But for what I was looking for in my overall estate plan, it is doing what I need for it to be doing.
Because I have no skin in the game, I am comment 250, and showing the percentages of my personal policy and I’ll update it again come July so people can come to their own conclusions if it’s worth it or not. I know John and I have spoken offline about the uses of the policy. He is more aggressive in the use of his policy with policy loans as I am using it as a savings vehicle, but his ROI is positive as he is taking out a (roughly) 5% policy loan and making double digits via real estate, stock market, other businesses, etc.. And he has the death benefit. He has been implementing the IB as advertised.
As for me, I am much more conservative. It has been a savings vehicle – no loans, but I am thinking in the future as a “tax-free” quasi-annuity via policy loans that if not used, then becomes a nice chunk of tax-free inheritance for my kids. I started early just for compounding purposes without the wild ride of the stock market. I just wanted something steady that had a guarantee and has a nice variable “dividend kicker.” It has done what I needed it do.
John is not right or wrong, I am not right or wrong; WCI is not right or wrong. It’s about what do you feel comfortable with. If paying off your student loans is going to give you peace of mind, then pay off the loans. If paying off your house as fast as you can gives you peace of mind, then pay off the house. Does it come at the probable risk of better returns elsewhere? Absolutely. So I see this the same way: having a pool of money that I can access that has several capabilities if I need them gives me peace of mind.
I’ll sit back, go get my popcorn and keep reading.
Howard – your logic makes sense… for you, the piece of mind is worth more than the returns. One reason why the piece of mind may be meaningful for you is if you have an actual need for a lifetime death benefit. My issue is that most people are sold these policies on the basis that these policies will be a great investment (which it hasn’t been so far for you) and that they need a permanent death benefit (which nearly no one needs).
For individuals that need permanent insurance, then a permanent policy may be a good idea. Nearly no one “needs” permanent insurance any more than they “need” to go the casino. The purpose of insurance is to pool risk to protect an individual against an unexpected loss. If you die at 45, you will lose income — that lost income should be protected. If the same individual dies at 95, there will be no income lost, so there is nothing to protect. Barring any unique estate situations, the individual at 95 with no income who owns a permanent policy is just gambling. There is no difference between that 95 year old taking his or her premiums to the casino and hoping to strike it rich. It is exactly the same thing, except that the casino payout of 90%+ is actually probably better than the insurance company payout.
Although I wouldn’t go to the casino, that doesn’t mean I think that others shouldn’t. My issue is that the vast majority of people buying these policies think they’re getting a great investment vehicle and don’t realize they’re just gambling (morbidly, on their own death). If you have a unique estate planning purpose for permanent insurance, then buy it. If not, just plan on going to the casino and having fun.
I’m not sure I’d call it a casino. I mean, the expected return on your money, if you hold it for decades, is positive. It’s just low compared to other investments typically used for money not needed for decades.
WCI – I was referring to the insurance portion of the policy. Insurance has an expected return less than 1, just like a casino. That’s why if you don’t have income (or implicit income, for example the value of child care) to protect, you generally shouldn’t buy insurance.
I agree with that, of course. There is also a bit of a casino effect, in that if you die earlier, the return is even better!
Agreed. It’s not a casino. Holding a policy for 30 years, the research has shown the “investment return” has been right around 4.25% CAGR. For a “safe investment” with no negative return, I don’t see that being horrible. Of course, you do have to hold it for an extended period of time, but I never looked at this as get rich quick, as you can read from my explanation above. It was supposed to be the stable part of the estate plan with the multi-functionality, if needed.
I guess if you want to start referencing casinos, you hope your policy is not with a company like one of the old hotels they blew up on the Las Vegas Strip.
Howard – you’re referring to the cash value portion of your policy. The insurance portion of the policy is very similar to (if not exactly the same as ) a casino. There is only one difference: in the insurance policy, you know when you die your estate will get the payout. In a casino, you don’t know exactly which hand or pull of the slot machine will get the payout. But play enough games in the casino, and statistics will work their magic. In both cases, you have an expected return of around $0.90 for every $1 “invested” in insurance.
Zill,
If I was getting $0.90 on the $1, I wouldn’t be in the game. I think your statements are based on false assumptions, which aren’t terribly uncommon as it turns out. This isn’t your father’s whole life insurance. If you want to learn, the resources are out there.
What is the tax difference between K-1 income and interest income in your state/situation?
Since there is no personal income tax in my state, I am going to say zero difference. That’s why I have an accountant.
Federal tax rates on the same?
K-1 is partnership distributions. Interest income is 1099. And then there are qualified dividends. They are different line items on the tax return, and have a different tax rate depending on income. I would be happy to answer your question, but I’m not sure how to John.
What are you trying to get at? K-1 distributions traditionally lower cost basis?
[Links removed. Again. Please stop posting links. You’ve lost that privilege here.-ed]
By the way, Insurance is a transference of risk for those who don’t want to take risk or cannot afford to take it. Buying term insurance is betting against the insurance companies, buying whole life insurance is betting with them. There is one company (GE) that was and still is a part of the Dow. Almost every major life insurance carrier you would purchase a policy from was in existence prior to 1896 when the Dow was started.
WCI, you say your email box is full of people who are disgruntled with insurance policies they have purchased. How do you think that compares to those disgruntled investors from the stock market? It seems like your argument is a straw man.
It’s not a straw man. It’s a description of my inbox. I don’t recall ever hearing from a disgruntled stock market investor. But it certainly doesn’t happen on a weekly basis.
Financial planning strategy is to establish an insurance plan that pays for your future financial obligations, and then to build a secure savings that eliminates the need for the insurance.
Too quiet in here… Buying another whole life policy today. Thought I would fan the flames while I was at it! Cheers!
I have no problem whatsoever with somebody who understands how a policy works and still wants it buying a whole life policy. My problem is with the thousands of doctors being sold policies they don’t understand and don’t want once they do understand it.
WCI,
If any of those thousands of doctors who bought WL policies and realize they don’t want them anymore please have them post here first. I have a group who is willing to buy them at a premium and allow them to keep some of the death benefit.
I’m not running a bulletin board for your business. If you want to have people who want to sell their whole life insurance policies referred to you, buy an ad or a listing. Or if you just want to be helpful, post the contact info for the group willing to buy them “at a premium” and maybe I’ll do a post about them.
The “group” is an informal investment club consisting of doctors and entrepreneurs so there isn’t an official site but I’m sure we can create something. Just thought this would benefit you and your audience. Not trying to sell anything just helping people out. Thanks for the idea