By Dr. Jim Dahle, WCI Founder
Have I got an investment for you! This investment comes with a 50% front load, meaning that right after you give me the money to invest, half of it will disappear. I will eventually pocket something between 50%-110% of the amount you put into the investment in the first year.
It's going to take the investment at least 5-15 years just to grow back to the original amount you invested. On a nominal basis. Longer, maybe never, on an inflation-adjusted basis.
Your long-term returns on this investment are likely to be in the 3%-5% range (nominal), even if you hold it for five or more decades. Less than that if you hold it for fewer than 2-3 decades. Your return will be even worse if you bail out of the investment before you die. The only way to improve the return on your investment is to die young.
You will be required to prove you have excellent health to purchase this investment. If you have less than perfect health, you will achieve even lower returns or not be allowed to “invest” at all. Likewise, if you have any interesting hobbies like scuba diving, climbing, flying, or sky diving, you will achieve dramatically lower returns or not be allowed to “invest” at all.
Most of those selling this investment agree that most versions of this investment are terrible, just not the particular flavor they are selling. They will insist it is “not an investment” even after they spend hours trying to convince you to use 25%-100% of your investment dollars to purchase it.
The investment may have a surrender penalty that lasts for years. You will be required to make regular “contributions” to this investment. Usually for decades. If you do not, the specified annual contribution amount will be taken from the amount you have already invested.
This investment will be difficult to rebalance with your other investments. In fact, if you ever take the money out of the investment, you will face some serious consequences after a while. Initially, it seems great. You can take out an amount equal to your total investment without paying any taxes. After that, however, you will face an unsavory choice. You can either pay ordinary income tax rates on every dollar withdrawn, or you can borrow against the investment at moderate to high interest rates. Yes, that's right. You have to pay interest to get access to your own money.
The investment will be backed only by the guarantees of a single company and perhaps in a limited way (up to $300,000-$500,000) by a consortium of similar companies.
The investment will pay “tax-free dividends,” but like a Ponzi scheme, the dividends are really just a return of your initial investment. In essence, the “investing company” is saying you “overpaid” for the investment.
More information here:
Is Whole Life Insurance a Scam?
10 Reasons People Regret Buying Whole Life Insurance
Closing the Deal
Want to invest? No? Why not? I haven't even gotten to tell you about all the wonderful side benefits of this investment and all of the things you can do with it. You just don't care after learning all of that? Hmmm . . . maybe the next time I try to sell it to someone, I shouldn't mention any of that and I should just mention the benefits.
I mean, there are benefits. It comes with a lifelong death benefit. So, if you die young, your heirs will get many times what you invested. Sure, they could get dramatically more if they used the same amount of money to just buy a boring term life insurance policy instead, but what's the fun in that?
Did I mention it grows in a tax-protected way? Since those dividends are really just a return of your investment dollars, they're not taxed. And you can take your principal out first. Heck, you could take everything out tax-free for the first decade or so, since there won't be any gains at all.
This money might get some asset protection in your state in the incredibly unlikely event that you have an above policy limits judgment that is not reduced on appeal and you choose to declare bankruptcy.
Don't want to commit to investing in this every year for the rest of your career (or even your life)? Well, maybe we can set it up so you only have to pay for 7-10 years. Would you buy it then?
Maybe it can make your portfolio or retirement “more efficient.” It really depends on who you ask. Unfortunately, everyone who claims it does has a major conflict of interest with the industry selling the investment so it is difficult to discern the truth.
Hate banks? I bet we could rig up a policy that you could use instead of a bank savings account. Done correctly, you'll be exchanging lousy returns in the short run for a little bit higher returns in the long run. Of course, it usually isn't done correctly.
You could borrow against this investment to send your kid to college, invest in real estate, buy a car, or even pay for retirement. Sure, there are better ways to do all of those things individually, but you can't do all of them with the same financial product except this one. It's like a Swiss army knife of financial products, and I'll keep pulling out a new tool every time you object to the last one.
The return on this investment is guaranteed! Sure, the guaranteed returns are absolutely terrible and well below historical inflation, but at least there is a guarantee. I bet your mutual funds can't do that!
Not interested? Come on! Have some mercy. My kids are starving. How am I ever going to get a fancy new car or send those kids to college? Please, please buy what I'm selling. I'm desperate. In fact, I'm so desperate that I'm not even going to mention the negatives to the next person I try to sell this to. I'm not legally required to, and every time they bring them up, I'm going to argue with them endlessly until they just give up and buy it. I'll even call myself a financial advisor and they may not even recognize that I'm really selling to them. I might even change the name of this investment so the purchaser won't realize what they're buying—at least until they've invested so much time and effort into the process and relationship that they feel bad backing out.
Does any of this sound familiar to you? I bet it does. Look, if you want to buy whole life insurance, knock yourself out. I really don't care. But make sure you understand what you're buying BEFORE you buy it and make sure you really do want that. Seventy-five percent of white coat investors who have purchased whole life insurance regret the decision. Per LIMRA, 80% of purchasers of whole life insurance surrender it prior to death.
There are few legitimate investments out there with dissatisfaction rates like that.
What do you think? Are you sick of the way whole life insurance is sold too?
This is great. I hope the people selling life insurance show up again like on prior posts. Get out the popcorn!
When I was a resident, a salesman from that well-known whole life insurance company approached me as a financial advisor and wanted to have a “meeting” with me. I kept saying no and he kept insisting that we meet until I gave up and agreed to meet with him. At first he talked about buying a disability insurance policy and why it was important then he somehow switched to talking about whole life insurance. I was financially illiterate at that time so I did not know the difference and thought that he was talking about the same product. He then sent me quotes for whole life insurance policies both for me and my wife (who had not started residency yet at that time) and I thought they were for disability insurance. He kept emailing me after that and I kept saying I was not ready to commit to buying a policy yet and thankfully I did not buy them.
Awesome job man well done you are much better than me! You saved yourself a lot of pain and in my case $50,000 worth of loss! well done!
This is the dumbest blog.. Eveyone dies it’s just when you are going to die.. Life insurance is to make your loved one whole when you die.. All the time I see people begging for money or GoFund me to raise money for a funeral when all they had to do was buy life insurance and that is taken care of.. Term to me could be better as far as the term but they are designed to only pay out 2% because most people out live the term.. A permanent policy in place with a Cash Value and Death Benefit.. and UL policy could be better depending on the need.. like I’m sick of people like you bashing the life insurance industry.. eveyone buys car insurance because it’s mandatory but people act so closed minded about life insurance when that is the one insurance you need because one day you will die.. write about something else to change people’s perception and leave life insurance alone..
(go ahead and remove this as well if you remove post 3)
WCI readers have a great plan for ‘making their loved ones whole’ when they die. Term life at a fraction of the cost in the first part of life before we are FI- financially independent – and then our retirement portfolio afterwards. My retirement portfolio, after I or my spouse dies, will provide even more money for the surviving spouse with only one spouse eating and spending money. And we reached FI a lot earlier paying $700 or so a year for term life for 15-30 years instead of $10K a year for the rest of our lives.
Why would I remove it? It’s Exhibit A of what this post is talking about. I mean, sure, it’s highly likely to eventually go ad hominem, but those who sell whole life insurance inappropriately and I already have a long standing hatred of each other. They’ve cost doctors millions (billions?) and I’ve cost them millions (billions?) We’re not going to come to terms any time soon.
And here they are. The whole life salespeople can’t stand to have an article that reveals the reality of the product that they most want to sell to physicians. Thank you Jim for fighting the good fight against the sales pitch. I have been pitched whole life from multiple people throughout my career. Once even during an office visit. Thankfully I steered clear. I’ve been a boglehead and a WCI head for many years. Unfortunately many of my colleagues fell victim to this sales pitch. I hope the reader heeds this article’s warning. Stay away. There are so many better options than permanent life insurance. There are a minute number of people who might opt for permanent life insurance coverage as Jim has pointed out in previous articles. For the vast majority of physicians, buy term and invest the rest in low cost mutual funds It is really that easy.
You pitched me whole life during an office visit? No percocet, xanax, or ambien for you!
TC I lost $50,000! $50,000! I lost $50,000 to this stupid whole life insurance product and I am in the business of taking care of people. Why do you insurance salesman do this to me! Why do this to us as we’re trying to help people. I now have appropriate term life insurance to cover my life insurance needs. I never needed whole life and never needed to lose that money.
C’mon, Rikki. There are thousands of reasons why. Many thousand, green reasons! And with these reasons they will pay for their nice offices and G-wagons and sleek commercials featuring whales! Whales, yes, why oh why do they love whales so much? It’s because of the “reasons” they take when they harpoon them with their sales!
Ha! Yeah dude, good point. It’s amazing too how effective whole life is as a harpoon to kill us whales.
We’re all sick of people like you selling us whole/universal life insurance policies we don’t need. I don’t care if you think this blog is dumb. You’re not the target audience, you’re the subject.
You don’t need life insurance because you will die. You need life insurance in case you die at a time in life when dying would be a financial catastrophe for someone else. The fact that I have to explain this to you is evidence that you shouldn’t even be in this line of work and a demonstration to the audience of what they’re up against when they interact with members of your “profession.”
No, I’m not going to “leave life insurance alone.” Start doing the right thing for people and I’ll quit telling them that you’re doing the wrong thing for them. Which you are. And you should be ashamed of.
It’s kind of funny that you call yourself a doctor and a blogger—when your blog is full of ads and you offer paid courses. That would also make you a salesman? Correct? Maybe you should also add that when you introduce yourself.
Maybe I should. But at least when I sell people something they’re happy about it, rather than upset like when they realize they’ve been sold whole life insurance.
@TC What you have outlined here makes almost no sense — how can an insurance market insure against a loss that is guaranteed to occur? In your hypothetical, the funeral expenses in question could have simply been saved for. Your example about car insurance also makes no sense. Car insurance insures against *accidents*. The analogy would be buying insurance against running out of gas – nonsensical.
The risk that life insurance is intended to buffer against is that of *early* or unexpected death — the period of time in which such an early death might occur is, in fact, predictable and represents the necessary term of life insurance. Lucky for us, such a product exists and has even helpfully been named “term life insurance”!
I agree that whole life insurance is a dreadful “investment.” At the same time, I thank God that we bought four policies when we were young, because we have a son with a lifelong, incurable illness, whose only income is SSDI benefits. At the time, we had no way of knowing that this tragedy would befall the family. Our term policies end at age 80 unless we want to pay more than $25,000 per year in premiums. By contrast, we were able to let the whole life policies’ dividends pay the premiums, once Obamacare devastated the viability of my husband’s practice. If IRAs, 403b’s, and Roths had been available when we were young, I doubt that we would have purchased whole life. But 44 years ago, they weren’t available.
Yes! An actual appropriate use of whole life. Your example should be used when selling whole life. Not me who had no use for permanent insurance.
Glad you like what you’ve purchased.
Let me suggest an alternative to both whole life and buying term life in your 80s. Obviously this isn’t for you since you can’t go back and do it any differently than you did.
It’s called “buy term and invest the rest.” You simply get a big fat term life insurance that lasts until 50-65. Since this costs 1/10th as much as a whole life policy, it should leave you with a whole bunch of money to invest. Now, instead of spending that money, you invest it for the future. When you realize you have a special needs kid that needs to be supported even after you die, you dedicate some of that money to supporting the kid. Maybe that involves using an ABLE account or a custodial account or a trust or whatever. Maybe it’s just making sure you don’t spend your nest egg down as much as you otherwise would. At any rate, when you keel over, there are millions left to take care of your kid even though there isn’t a life insurance policy that pays out at that time.
I must admit that I’m confused by this post. You say that your term life insurance policies will increase to $25,000 per year at age 80. Did you buy 30 year term insurance at age 50? Age 50 is around the time that high earners like doctors should be sufficiently financially independent that they can drop term life insurance. Maybe 60 at the latest.
You and your husband have enough resources to retire. Not sure if you’re spending down principal, but you should be able to put your assets into a special needs trust upon the death of the second spouse. Likewise, a 529 ABLE should help with a special needs child.
You also stated “If IRAs, 403b’s, and Roths had been available when we were young, I doubt that we would have purchased whole life. But 44 years ago, they weren’t available.”
This is inaccurate. While Roth IRAs started in 1997, traditional IRAs and 403(b) plans have been around since ERISA in 1974. That’s almost 50 years ago.
Here’s another example where whole life insurance actually came in handy although not for any of the reasons most people on the blog would think about.
I came to the US as an immigrant and my parents worked jobs that were well below their educational level to put me through school. When I finished with all of my education, I had a riproaring case of new money syndrome.
I bought all my family lots of things that we couldn’t afford before, took them on trips, bought myself a really nice Jeep, etc. Yes, all the things that white coat investors would balk at.
The only reasonably good things I did were maximize my 401(k), and willingly buy a bunch of whole life policies, because my uncle was the salesperson. He was instrumental in helping us adjust when we moved to this country, so you can kind of think of that as paying back, although I really didn’t have an understanding of how much I was paying back at the time. I think I more than made up for everything that he did for us.
Fast-forward multiple years and COVID-19 hit and paychecks plummeted. It was that time that my wise wife asked me to please read some financial books, which I did, and bailed myself out with the whole life insurance policies, which had actually built up some money at that time.
I agree, it is not a good product for most people, except for those that are financially illiterate, who may get forced to actually put money aside in their early, formative years.
As a tribute to financial literacy, between the years of 2019 and 2024, just by learning from Jim and the likes of Bill Bernstein and Alan Roth I went from a sub-million dollar net worth to over 4 million. It can be done, even as a late learner.
I don’t think the “it’s better than nothing” argument is very strong. It is an argument though. Buying whole life insurance is better than lighting the cash on fire. 🙂
I’m quite interested in how you made > 3 million in just 5 years!
Lucky with the timing more than anything else. I invested aggressively during the COVID-19 market downturn and had some houses that I purchased for family members who live there paying only expenses. All of those values rose with the post Covid housing boom and in addition to that, I just quit spending as much.
Hi Jim
One of my friends has a whole life plan and has been paying the premiums for 15 years now. I forwarded this article and he’s asking for a solution.
Thank you
Gv
He probably ought to keep it at this point but it’s hard to know without running the numbers. More info here:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
When you die with a whole life policy the cash value typically reverts back to the insurance company. Your beneficiaries receive the face value of the policy minus any loans and any cash removed from the policy. The cash value reverts back to the insurance company to repeat myself.
It’s true you don’t get the cash value AND the death benefit (it’s just one pot of money so you get either/or). Accessing the “cash value” is just borrowing against the death benefit.
Yes, the greedy insurance company will keep your cash value the same way the greedy homebuyer will keep your home equity value, in addition to your home, when you sell your home to him.
Cash value is merely the portion of the death benefit that you can access while alive, it is a part of the death benefit the same way home equity value is a part of your house. Not two separate pots.
[Potentially libelous comment removed while awaiting confirmation from poster. Please email me any complaints about WCI sponsors and we’ll investigate and get it sorted out.]
What are some of the side benefits of whole life insurance that are often emphasized by salespeople, despite the drawbacks outlined in the article?
I mentioned most of them in the second part of the article.
Lifelong death benefit.
No tax drag on growth.
Principal comes out before earnings via partial surrenders (opposite of annuities and better than investments)
Ability to access cash value via a predetermined set of terms and interest rate
Can substitute for a bank saving account in some ways (trading better yield long term for poor early returns)
Cash value never goes down in value (assuming company stays solvent, note that premiums paid do not all go to cash value)
Can get a LTC rider on it
Lots of benefits. Downsides still outweigh the upsides for just about every one.
Oh hey, I love reading half-truths and uncloudy crystal ball reading on dividend paying whole life performance from Fortune 100 financial institutions with better financial ratings than the US government. I mean, why should high income individuals, especially those in states with high state and local income taxes, buy into ownership of Fortune 100 financial institutions that run a primarily long term corporate bond fund and get dividends from those and institutional side business profits while having tax-free access to the money throughout their lifetime within a handful of years via practical wash loans, instead of swapping CDs and Treasuries to get taxed each year, getting fiduched to get it done for them for a fee, or dealing with bond fund volatilities etc…
Whether a policy is “good” depends on the purpose of setting it up. It is indeed very dependent on company, purpose, and policy design. I wouldn’t touch a whole life policy from places like Transamerica with a 100-foot pole if for retirement purposes.
1) Saying whole life comes with “50% front load” is like saying private lending involves “100% front load fee”. You are conflating the lack of temporary access with a “fee”.
2) Ending up getting a practically tax free compounding 5% with no volatility fixed income asset for a high income individual is akin to getting around 9% interest every year from a bank from age of issue to end of life. And that is what policy projects from top mutual insurers show at current dividend scale even after 15 years of practically zero interest rate environment, which is the biggest impact on dividend performance.
In case you try to deny this, do remember that you had attributed a high interest rate environment for a 7% compounding tax advantaged rate of return on an old Northwestern policy; while everyone else was getting around 1% taxable for 15 years until recently he was at a point of getting 4-5% year-by-year without getting taxes. Can’t have it both ways.
3) Buy Term and Invest the Difference may end up with money only if the difference is in things like stocks, unlikely if in fixed income, which is what whole life dividends are primarily based on. Unless someone is like one of those practically zero people who put everything they have but monthly bills into stocks, they need fixed income in their financial portfolio.
4) The dividend is technically defined as the return of premium, but practically it is not. If it is mere return of premium, how could it ever provide a gain? It’s a legal fiction.
5) The pocketing of “50-110%” probably ends up around .01% of the total value. Much more lucrative to be fiduching people by either swapping CDs and Treasuries or putting in bond funds.
SELECT PREFERRED (Issue Age 30)
Contract Premium: $50,000/year for 5 years.
NON-GUARANTEED CURRENT DIVIDEND SCALE
[AGE] [CASH VALUE] [INTERNAL ROR]
31 $0 -100.00%
32 $62,330 -37%
33 $127,081 -15%
34 $193,803 -3%
35 $266,291 2.11%
36 $277,921 2.66%
37 $290,256 3.01%
38 $303,605 3.27%
39 $317,746 3.47%
40 $332,736 3.62%
50 $537,684 4.33%
85 $2,869,485 4.71% DB $3,377,638 5.03%
Again, for high income individuals, getting something like this can be akin to getting around 9% taxable interest every year from age of issue till end of life. And now dividends are going back up as fed rates have gone from 0% to 5.5%.
If this person prefunded the entire amount, he could’ve got 12% on year 1 and 6% every year after for the entirety in the prefund account. Why? Because with rates the way they are now, the insurer can get into something like 8% corporate bonds and hold it for the long term, make a gain, and pass it back via practically tax free dividends. What a bad deal.
Thanks for a great example with numbers! The long time frame really shows the depth of the benefits. It’s the miracle of compound interest. Unfortunately, the long term rate of return on that Preferred Select ploicy barely keeps up with historical inflation.
In contrast, a prudent investor who puts the same amount of money – 50k per year for 5 years – into a classic 60/40 fund earning the historical average 8% return would achieve, by age 57, a similar cash value to your hypothetical 85 year old. And by age 85 thr prudent investor’s initial investments would be worth over $17 million – almost 6 times as wealthy as the poor soul who signed up for a “good” policy.
Glad someone mentioned this! With a 50-55 year time horizon, the risk of short-term volatility is minimal so the “safety” of the return from the policy is meaningless. Even though the owner of such a portfolio in a brokerage account would pay long term capital gains tax in withdrawals, subtracting that out still provides far more money than the policy does. And heirs would get a step-up in basis and therefore not owe that tax, same as if they got the (much lower) death benefit from the policy.
You are incorrectly assuming that the person in the example is putting everything he has but monthly bills into a 5-year whole life premiums. It’s merely the fixed income portion of his overall portfolio, with a plan to have around 5-10 years’ worth of living expenses by retirement age. It’s not like everyone who works in the insurance industry has never heard of “stocks”, “indexed funds”, or any of the 3/4 alphabet letter soup that people typically throw around to show they are “financial pro”.
Getting something like that, which is probably the worst case scenario unless the interest rates go back down to practically zero and stay there for the rest of his life, is akin to getting around 9% taxable fixed income interest every year from now till the end of life. Do you think he could get a similar fixed income with no volatility returns elsewhere?
The real prudent investor would be putting the 40 of that 60/40 into a properly designed limited pay dividend paying whole life policy, not the typical taxable CDs and Treasuries. Very likely to get more with fewer hassles since it’s corporate bond based with a compounding tax advantage.
It’s nice we agree it’s a bad idea for most investors to hold 40% of a portfolio in CD’s and treasuries. I wonder why you think that’s a “typical” strategy. Is changing the comparison a sales strategy you use frequently?
What? What do you think the “40” in the 60/40 typically consists of?
You are the one changing the comparison by using what is a mostly stock portfolio to compare with a mostly corporate bond fixed-income asset.
No, it’s not akin to a taxable 9%. Give me a break. The pathetic returns available in many whole life insurance policies are dramatically lower. But even the good ones are likely to provide long term returns in the 3-4% range. If someone gets 9% returns on a tax-efficient investment and then has to pay 25% in capital gains taxes on that, they’re still getting 6.75% after tax, well more than the whole life insurance provides.
The dividend rate is not the return.
But yea, whole life returns look better when you compare them to low returning investments. Agents switch to that method when the mark figures out that the typical investments used for 50 years time periods like stocks and real estate are going to provide lots more money than whole life will.
Come on, you know this, as evidenced by your other posts. Fixed income interests get taxed annually, which prevents the compounding, and get taxed at higher ordinary income tax rates. The person at issue is in NY and is at like 47% tax rate. Also, NY, like most other states, does not have “capital gain tax rates”, they just tax everything as ordinary income tax, which you have to tack onto the fed capital gain tax. I see people tend to forget that.
WL return is overwhelmingly a function of interest rates, particularly corporate bonds. If WL ends up providing a 3-4% return tax free then I’d hate to see the return in people’s safe fixed income portions, probably less than the around 1% taxable that people got for over a decade until recently. It’s all relative. Again, why do you think the insurer is now willing to give people 12% for year 1 and 6% every year after for the entire prefund amount if they prefund? Because they can get into 8% corporate bonds now, which can be passed back via tax free dividends. It’s overwhelmingly interest rate sensitive.
I never said the dividend rate is the rate of return.
Again with the stocks and real estate. WL is for the safe fixed income portion, which everyone has or should have as literally no one is putting everything they have but monthly bills into stocks/retirement accounts/real estate. This may also surprise you, many people do not want to get into the hassles/risks of real estate. There’s enough drama with stocks.
Why would someone in the 47% bracket in NY be investing in taxable corporate bonds instead of muni bonds?
What do you think the long term rate of return on the premiums paid into a whole life policy is likely to be?
Or… he could do what he did and get compounding corporate bond based returns with muni tax treatment, and a lifetime of liquidity after a handful of years. Munis typically pay less than Treasuries, let alone long term corporates.
Given that top mutuals’ dividends are still close to 5% after 15 years of practically zero interest rate environment (even the “horrible” pay-to-100 WL policies show close to 5% returns for the d/b, the limited pay just pushes up the cash value return) and that institutional business profits (low/no interest rate sensitive) are consistently contributing over 1% to the dividends and the rate is likely increasing going forward (the mutual I have my policy with very recently bought a group business unit from a major non-mutual insurance company that has enough non-interest rate sensitive profit to pad the dividend by around .5%), I expect the long term rate of return to be around 6%, barring prolonged periods of extreme interest rate environment in either direction. I consider the current interest rate environment to be a little extreme in the positive direction, as well as the practically zero to be extreme in the negative direction.
What the WL return ends up being for me, who knows, as that overwhelmingly depends on the interest rate environment. However, historically and fundamentally, due to tax advantaged compounding corporate bond based return nature of it, WL return is very likely to be better than the fixed income portfolio that people typically run themselves with CDs and Treasuries. That’s my point.
No wonder you like whole life insurance if that’s your expectation. Mine is 3-4% as discussed here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
The best illustrations an agent can send me are typically 2% guaranteed over 50 years and 6% projected. I’ve never seen an in force illustration that seemed to be tracking the original projections. There has always been a lag there. Lots of crummy policies that are probably more typically sold are much worse of course. Maybe that’ll get better if rates go up/stay up. But then so are the rates on the bonds they’re being compared to.
Even if someone really did think that whole life was an attractive fixed income alternative, I wouldn’t put all my fixed income into it for liquidity/rebalancing reasons.
But let’s be honest, most people buying whole life aren’t some sort of sophisticated asset allocator comparing the merits of munis against whole life and making a conscious decision to add this to a portfolio. They’re just getting sold something “because it’ll be another source of money in retirement” or “because it’ll be protected from your creditors” or “because one of their kids has Down’s” or “because they heard it could be useful in estate planning.” I think very few purchasers are actually financially sophisticated. Which tells me a lot.
IMO, too many people dismiss it right away. Is it terribly uncommon to find physicians earning well into 6 figures, heck maybe a 2 physician couple with AGI >1M on W2 alone, forget about other sources of income? Do all the things that WCI post tells you to do and you may very well find yourself in a position where your projected taxable estate is well above the limit (due to reset to approx 7M per couple) in a few years. You can quickly find that you exhausted most qualified ways of wealth transfer. Having a 3-4M term life insurance policy that does not sit in an ILIT counts towards this BTW. So how close are you really to this limit and risk of paying a 45% estate tax, possibly more depending on your state. Maybe you own and decide to sell your practice? Fellow prior resident sold retina practice at age 40 to PE (heaven forbid anyone even consider that…) and had lump some of payout of 4M on 400K EBITDA/partner.
Many doctors ARENT using life insurance primarily as an investment nor are making it the case as a good one. They use it for asset protection, hedge against future estate tax, and many other better uses.
BUT to do it well- you need to do it when you are young, realize your most likely financial trajectory may include some of these issues above, and lock in when you are healthy.
Whole life doesn’t “hedge against estate tax.” Appreciating assets moved into an irrevocable trust hedge against estate tax. There is no requirement that the trust be funded with life insurance. In fact, on average, that’s not going to be the best thing to put in there. But it does simplify the taxation issue within the trust plus allow for funding in the event of untimely death.
I disagree that WL has to be bought young. I think that’s a bad argument that causes people to buy it when they have better things to spend their money on. Assuming they’re still insurable, there’s little difference between buying at 50 or even 60 and buying at 30. Yes, the premiums are more (and you pay them for fewer years), but actuarially speaking, it’s all equivalent.
If you hold the permanent life insurance policy in an ILIT, the death benefit passes to the beneficiaries estate tax free. The death benefit can then be used to offset the tax on your taxable estate effectively reducing it.
This is what I meant as a “hedge”. Why wound you want to your heirs to be forced to liquidate other trusts assets at an unpredicable time to pay your tax bill?? let alone in a period of emotional stress and grieving when they are possibly dealing with probate issues?
AND you can to this all the while funding your kids irrevocable trusts, spousal SLATs, GRATs, etc to even further leverage growth outside your estate as you are likely doing anyway at this level of wealth
All assets in an irrevocable trust pass to the beneficiaries estate tax free. Nothing special about insurance in that regard. The benefits of insurance in an ILIT are no tax as it grows (simplifying paperwork) and a death benefit in case you die earlier than expected so you can still fund it to your desired amount.
I fully agree that a GREAT use of WL is to provide liquidity at death. That’s a totally separate issue though. You don’t need a trust to do that.
Fun article. Honestly started with reading the comments since I knew there would be some people disagreeing. Then went back and read the article. You are spot on with your analysis Dr. Dahle. Was an entertaining way to present things. Can’t credit you but will give Jane Bryant Quinn a big thanks for giving me enough knowledge to avoid these predatory salesman when I ran into them about 15 years ago. I could have believed what they were selling if I did not have a good base knowledge and run the numbers myself (and I believe the guy who was selling to us truly believed he was selling something good). It has been a while but I think my calculations were that with term and investing the rest I saved a couple hundred thousand easy (real). (Yes, I will lose about 30-40k in term premiums over the years but MUCH MUCH LESS than had I bought the junk “insurance” these guys are selling).
Jim, thank you for your work on this topic. When I graduated from residency some years ago, I immediately had one of these people (from I’m sure you can guess which company) call me and try to sell me whole life. Mostly because of your posts, I shut that down right away. The other reason was I didn’t want to tie myself permanently to that kind of huge expense. I mean, what if I wanted to move to Thailand and drastically cut my income and expenses one day?
Although I did throw him a bone and used him to switch to a better disability policy. But that was on my terms, knowing what I wanted.
It’s ironic that as much as you are (rightly) opposed to WL for physicians, one of your “recommended” insurance agents built his career selling WL to residents. I trust that you will do the necessary review to confirm this.
We certainly review every agent we bring to ensure they are not selling whole life insurance inappropriately to white coat investor and remove them if we get complaints that they are doing so. Feel free to email me more information about the agent you worked with and when that agent sold you a whole life insurance policy inappropriately.