Today we continue our series on whole life insurance. On Monday we learned about the basics of whole life. Yesterday, we learned it isn’t the best way to protect your pre-retirement income, that it isn’t the best way to get a guaranteed death benefit, that it provides low returns, and that insurance companies aren’t any better at investing than mutual funds, pension funds, or intelligent individual investors. Today, we’ll explore 5 more myths used by insurance agents to sell whole life.
Myth # 5 Whole Life Is A Great Asset Class
There are lots of asset classes worth including in a diversified portfolio, but whole life isn’t one of them. Insurance salesmen generally resort to this argument once they’ve realized they can’t convince you that whole life is a great investment in and of itself. They say that if you mix it into a portfolio of stocks, bonds, and real estate that it will improve the overall portfolio. However, you can call anything you want an asset class. Horse manure can be an asset class, but that doesn’t mean you should invest in it. Think of it this way. If I told you I had an asset class with the following characteristics:
- 50% front load the first year
- Surrender penalties that last for years
- Requires ongoing contributions for decades
- Difficult to rebalance with other asset classes
- Backed by the guarantees of a single company (and whatever you can get from a state guaranty association)
- Requires you to pay interest to get to your money
- Guaranteed negative returns for the first decade
- Low returns even if you hold it for decades
- Must be held for life to provide even a low investment return
- Excluded from the investment for poor health or dangerous hobbies
would you buy it? Of course not.
Myth # 6 Whole Life Is A Great Way To Save On Taxes
Whole life isn’t the best way to lower your investment tax bill, retirement accounts are. Many agents like to tout the tax benefits of whole life insurance, often comparing it to a 401K or a Roth IRA. The cash value does grow in a tax-protected manner, the cash value can be borrowed tax-free, and proceeds from the policy at your death are income (although not estate) tax-free. So some whole life advocates suggest you use whole life insurance instead of a retirement account like a 401K or a Roth IRA. However, a 401K or Roth IRA not only provides MORE tax savings and allows you to invest in riskier investments that are likely to provide you a higher return, but you also don’t have to borrow your own money, nor pay interest for the privilege of doing so.
I’ve posted previously about the Three Ways A 401K Saves You On Taxes and on how Whole Life Insurance Is Not Like a Roth IRA. I’ve also posted about how tax-efficient investments in a Taxable Investing Account don’t carry nearly the tax burden agents like to tell you they do. Are there tax benefits of investing in life insurance? Yes, but they are dramatically oversold.
Myth # 7 Whole Life Insurance Protects Your Money From Creditors
Insurance agents love to use this one on doctors, who can be paranoid about asset protection issues. However, they often don’t mention (or perhaps even know) that asset protection laws are very state-specific. For example, in Alaska, only $12,500 of whole life insurance cash value is protected from creditors, but 100% of the money in your 401K or IRA is protected. West Virginia only provides an $8K protection. South Carolina protects $4K. New Jersey doesn’t provide any protection. Many states do provide 100% protection for whole life insurance cash value, but you probably ought to look up your state’s specific laws before falling for this myth.
Myth # 8 You Need Whole Life For Estate Planning
Cash value life insurance has some great estate planning features that can be very useful. However, the vast majority of people, including doctors, don’t need those features. The primary benefit of life insurance is that you get a bunch of income-tax free cash at your death. This can help with a lot of liquidity issues, such as ownership of expensive property or a private business. If you have two children that you want to share in your estate equally, and most of your estate is the family farm, they would either have to sell the farm, cut it in half, or have one buy out the other in order to share equally. However, if you also had a life insurance policy with the same value as the farm, one kid could get the farm and the other could get the insurance proceeds. Likewise, in the fortunate event that you have a very large estate (more than $5 Million for single folks in the federal tax code, but can be much less in some states), the life insurance proceeds can be used to pay the estate taxes. This would be useful even with a single heir to prevent him from selling a valuable property or business at fire sale prices in order to pay the tax bill.
Some folks also like to put life insurance inside an irrevocable trust to decrease the size of their estate and avoid estate taxes. While you can put simple taxable investments into the trust instead (and would likely come out ahead due to higher returns), trust tax rates can be quite high, putting serious drag on returns for tax-inefficient investments, not to mention the hassle factor. It’s important to point out that it isn’t the life insurance saving money on estate taxes, it’s the fact that you’re giving away your assets before you die by putting them into the trust.
However, the fact is that the vast majority of Americans, even physicians, and even including physicians with an “estate tax problem”, don’t need whole life insurance to do effective estate planning. Most people will die without any estate tax burden. Of those whose estates will owe some estate taxes, the vast majority have liquid assets that can be used to pay the taxes. Even if you want to reduce the size of your estate to prevent estate taxes, you can easily do so without purchasing life insurance. You and your spouse can give $14K each to any heir in any given year without any estate/gift tax implications. As an example, if you had 4 kids and they each had 4 kids and all 20 heirs were married, that’s 40 people. 40 x $14K x 2 = $1.12 Million per year that can be taken out of your estate without paying any estate/gift taxes. It won’t take long to get underneath the estate tax limit at that rate, no insurance needed.
Myth # 9 Whole Life Is A Great Way To Pay For College
Some agents even go so far as to suggest you use a whole life policy to pay for your children’s college. Can you do this? Of course. You simply take out policy loans and send that money to the university to pay tuition. But you’re better off saving up for college using a good 529 for multiple reasons. First, you often get a state tax break by using a 529 that isn’t available for whole life insurance. Second, you don’t have to borrow money from your 529, you just withdraw it. No interest payments required. Last, but certainly not least, consider the time frame of college savings. Parents generally save for college over a period of 5-20 years. By investing that money aggressively, they can expect a return of 7-10%. Whole life insurance has very poor returns for time periods of less than 20 years. In fact, many times the cash value return on your “investment” in whole life is negative for at least a decade. It’s important to make sure your money works as hard as you do, and your money is on vacation for the first decade in a whole life policy. Whole life advocates will point out that if you died, the death benefit could still pay for Junior’s college, but it is far cheaper to cover that risk with term life insurance.
Tomorrow we’ll talk about 5 more of the myths of whole life insurance, but for now, let’s talk about these five. Agree? Disagree? Comment below! Please reference which “myth” you’re referring to in your comment and keep comments civil and on topic. Ad hominem attacks will be deleted.
I agree with the value of debunking these myths that are perpetuated by many insurance salespeople who are disguised as “financial planners” etc. It is sad that it is necessary to go through this exercise to inform doctors of the poor choice that is “whole life”. But it is necessary and I commend your efforts. I get solicited regularly from these individuals. Even a patient asked me out to lunch to pitch this on me as he was trying to impress his new boss that he could bring in a new client for a new financial product. He brought me some info and it was clearly whole life described as Financial fortress or something like this. He didn’t even understand the product. I politely declined and 6 months later he came back to see me and told me that I was so lucky not to have “invested” with her. He lost money and several other people lost money too when they tried to get out (surrender penalties). Bottom line- don’t do it. And beware of people touting the “benefits” of these plans.
Unfortunately, all too often this is what I see daily regardless of the product. The patient comes in, the doctor feels an obligation to meet with that person and they get pitched on any number of financial produts.
I had a client recently that had that happen to him. He did not own his home, was single, not eligible for the pension plan at the practice and was not even funding an IRA.
The recommendation was to replace his existing disability policy (that was excellent) with an inferior one, as well as, purhcase a VUL policy with a premium that started out at $10,000 annually and became $30,000 after 5 years.
No surprise that both products being recommended happen to have the name of the company that he worked for on his business card – surprise, surprise!
Lawrence,
I can’t recall if you mentioned this in a previous post, but in which sitution do you actually recommend whole life insurance for your physician clients, if at all?
Thanks,
Adam
Adam-
I will mention it if a client owns their home (not outright but has a mortgage interest deduction), has maximized their 401(k), 403(b), 457, profit Sharing plan, etc. are saving for their child(ren)s college education(s), have done the Back Door Roth IRA and have a few thousand dollars left over each month and are looking for another place to put money.
However, existing and potential clients will typically bring up the idea of Whole Life to me to either get my opinion after someone has pitched it to them in some way, shape or form (or they use it as a way to test me) long before I ever bring it up to them.
I spend most of my time selling disability insurance, term life insurance and other financial planning strategies.
I am a firm believer that a substitute for pressure is volume. As such, I never feel it necessary to make recommendations that are not in the best interest of my clients or something that I would not do myself.
Hope this helps.
Have you actually every met someone for who you have strongly encouraged it (rather than just mention it). I meet all of your criteria and I thought long an hard about a VUL policy, and I still didn’t think that it was worth it.
Have I ever strongly encouraged VUL? No. There are far too many moving parts and expenses associated with it. In fact, I wrote an article warning physicians against it for General Surgery News Magazine.
http://www.physicianfinancialservices.com/files/7760/GSN0606insurance%5B1%5D.pdf
At the end of the day, you must remember that life insurance is ultimately purchased for your beneficiaries. While arguments can be made for permanent coverage (depending upon individual circumstances, client needs and goals) they are all secondary or incidental to that fact.
Here is a link to another link that you might find informative:
http://physicianfamily.com/should-physicians-buy-variable-universal-life-insurance-w-ben-utley-cfp-answers-in-ophthalmology-business-magazine/
I didn’t mean VUL specifically. I just meant whole life or any similar products.
I think in today’s post, (Debunking The Myths Of Whole Life Insurance Part 4), the majority of the points in WCI’s summary must be met in order for someone to consider purchasing Whole Life or a similar product.
If one asks about it, learns about it, and goes to this website (I often refer them to it) and they still want it and are comfortable with what they will be purchasing, it most likely it is the right product for them.
As you can imagine, all too often, not only is it not right, it is just plain wrong.
Ironically, even something as simple as purchasing term life insurance can be complicated by an insurance agent or “financial advisor” setting up a client to (potentially and often unknowingly) purchase Whole Life Insurance in the future.
I get these emails all the time. I got this one today:
So I met with my guy yesterday and an hour long meeting turned into 2.5 hrs of me arguing why I don’t need whole life. He showed me all these projections showing whole life outperforms stocks and bonds by themselves to the tune of 5 million. I still said I did not want it. he said I should think of whole life as a Bond portfolio than why don’t I just simply invest the 2k a month in bonds? In his plan he also said I should start in rental income in a few years which after examining the market in [my city] does not seem unreasonable but he said I could use the cash account in whole life as a down payment but i said wouldn’t I be paying interest on my own money? He said no. Isn’t this a bold faced lie? Anyway just wanted to hear your thoughts
and my reply:
Of course you’d be paying interest. So that is a lie. But the policy dividend on the borrowed money might be the same amount as the interest on that money if it is structured as a non-direct recognition policy. So in a way, he wasn’t being entirely untruthful. If you’re buying whole life in order to borrow from it you should probably choose a policy with non direct recognition loans. I don’t think this is a great reason to buy a policy, but will discuss this later this week. Sounds like you’ve had the “whole life experience.” Every one gets it pitched to them at least once. You need a new “guy.” This one is a salesman, not an advisor.
A couple of weeks ago I had a similar email that made me laugh:
Hey, long time fan of your blog and ideas. I just wanted to share with you a story about a recent interaction I had with an insurance agent.
So I was buying an own occ disability policy from Guardian. I went through a broker from my state. I got the policy locked down and he wanted to talk to me about ‘what else he could do’ for me.
He got me talking about how I invest waiting to spring whole life on me I am sure. I told him about how I like passive index funds, boglehead style. I said I got most of my info from online sites like the Bogleheads forum and White Coat Investor. When I mentioned your site his face actually contorted with rage/agony. It was the funniest thing I have seen in a long time. He would be a bad poker player I guess. It was a short conversation after that! Anyway I thought I would share! Keep up the great work on your blog, you have helped my family and I immensely!
If one has placed money into whole life, and wishes to close out and pursue term/ etc, how is the payout structured? If one is taking out “loans” from cash value, paying interest on these “loans”, how does the insurance company treat this if an account is closed?
If you “close the account” i.e. surrender the policy, you receive the cash value, minus what you have borrowed from the policy, minus any surrender fees, minus taxes due (if any) on that portion which is greater than total premiums paid.
Myth #9 ends the debate for me. As a parent of several children, just getting term life insurance and stuffing money into 529s has been so empowering and the hugest relief of all.
By the way, it took five complete months to get our term life policy in place. Our agent “lost” documents every step of the way and would always ask if we wanted to stop and “go another route” (cue the whole life sales pitch). It was a bit comical to see what the next imagined problem was going to be. Thankfully we survived it (literally).
An agent is talking to me about a rider that can attach to a whole life policy to increase cash value for borrowing purposes thus acting like an investment called “Bank on yourself” Are you aware of this concept? Any thoughts?
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
can of worms = opened. See the link above with 200+ comments.
Just say no, David.
Never heard of it. 🙂 Just kidding. Read the post Mr. Keller linked to. If you have a few extra hours, read the comments below the post.
In short, it’s not the dumbest thing in the world to do, but I’m not doing it. Its downsides outweigh its upsides for me. It certainly isn’t half as magical as those pushing the concept seem to believe.
I think the one issue that you gloss over if the possibility that the estate tax rate is subject to the political whims of Washington. Whole life insurance inside of a Crummy trust is also “insurance” against the possibility of the policies of wealth re-distribution that one of our 2 political parties favors strongly.
It is not inconceivable (especially when the bill for ObamaCare comes due in a few years) that estate tax rates could be increased and the estate tax exemption decreased. In such a situation, the death benefit from a whole life policy would be outside the estate and could be used to pay estate taxes so that heirs can maintain inherited assets without being forced to liquidate them to pay the estate tax.
Perhaps this is a scenario that you envision for the select few that you feel may benefit from a whole life policy, With today’s rates, this would be a couple with an estate valued at more than $10.8 million. However, there is no guarantee (especially with the outrage against the “1%” in today’s political environment) that estate tax policies will not change in a way that will make many more current physicians glad that they have permanent insurance outside of their estates to protect their hard-earned assets for their heirs.
I agree that a life insurance policy inside an irrevocable trust reduces the size of your estate and that for a few people under current law, that is a good use of a whole life policy. If law changed dramatically, that number would go up.
Bear in mind that if the law changes, it won’t happen suddenly and many of those who would then be interested in whole life insurance would probably still be insurable. If not, there are other ways to reduce the size of your estate- like putting standard investments into an irrevocable trust.
There are far too many myths regarding whole life to address in this article. However, I’d like to set the record straight on “borrowing” from a whole life policy. You aren’t paying interest on your own money when borrowing from a whole life policy. You are borrowing money from the insurer and you can pay the interest or not pay it. Whether or not you choose to pay the insurer interest on any money they loaned to you out of their general account depends on a variety of factors.
To the naysayers who say whole life isn’t a great place to accumulate wealth I’ll pose the following question. What rate of return net of taxes, fees, expenses, over 25-30 years do you think you will achieve with a typical 60/40 asset allocation? If history is any guide then my participating whole life policy with paid up additions beats you. I have achieved a cash on cash 5.96% ror on my Guardian Life policy that was purchased in 1988. My death benefit has increased by 40% and I was covered for waiver of premium the entire time. I also avoided paying premiums for term insurance and was able to recapture those wasted dollars and invest in an after tax account that has grown at right at 8.68%. So, my blended ROR has been higher by 70 (.70%) basis points. Please explain to me how that’s a bad deal. I’d love to know how that compares to your own asset allocation. I seriously doubt you achieved risk adjusted returns anywhere in the same neighborhood. In fact, I suspect your nominal returns weren’t much better if at all. The folks at Dalbar have some very interesting FACTS to back that up. Your real returns(net of tax and inflation) don’t come anywhere close to my blended return which is sitting at almost 5%. The sharpe ratio on that is above 1. My volatility has been significantly less than anything a 60/40 asset allocation not to mention what an all equity portfolio would have had. I haven’t suffered nearly as much from variance drain as you smart people and I sleep well at night. Finally, I will be able to annuitize my equity portfolio at retirement and have a much higher and more reliable stream of income than anyone on this thread without market risk. My life insurance will replace the assets I annuitize and leave my estate whole and leave my spouse and children a nice nest egg when I’m gone. The last thing I want to leave them is a massive tax liability which they will be forced to deplete whether they want to or not. Good luck with traditional planning. You are going to need it!
As near as I can tell, I think your lengthy comment is directed at me so I’ll respond. For those later reading this conversation, we should probably state a couple of relevant facts up front:
# 1 Mr. Palmer is an insurance agent. Like most fans of whole life insurance, he sells it for a living.
# 2 In 1988, Mr. Palmer could have bought a 30 year treasury bond yielding 8.95%. No insurance physical required. So, he basically paid 3% of his potential return (a return that was essentially guaranteed by the full faith of the US government, not an insurance company, I might add) for the insurance component.
I’ve discussed the issues with the DALBAR study elsewhere. The most significant is that “investor returns” should underperform “investment returns” in a rising market. That’s just math. And since the market usually goes up, that’s the usual case. And at any rate, it’s not like investing in whole life insurance somehow forces good behavior better than a more classic portfolio. If you can stay the course and make monthly contributions for 30 years with whole life insurance, you can do the same with a balanced mutual fund.
If you love your whole life insurance policy and it’s meeting your financial needs, then I’m happy for you. But if I were going to invest money for 30 years, I would have been more aggressive with it. For instance, the CAGR for the S&P 500 with dividends reinvested from Jan 1 1988 to Dec 31, 2015 is 10.29% per year. Yes, there would be some fees, taxes, and expenses, but they would certainly be less than 4%. I could have also easily covered the cost of an equivalent 30 year term policy over that time period.
I’m not sure why you think a traditional portfolio can’t be annuitized at any given time. I would have assumed an insurance agent was more familiar with the concept of a SPIA.
You’re clearly a huge fan of life insurance to meet all or most financial needs. No surprise given that you’ve been selling it for decades. I don’t expect to convince you otherwise. That’s why you’re not the target audience of this website or this post. The target audience is the doctors in your Mississippi community who might fall for your silly arguments due to a lack of knowledge of how whole life really works.
[Ad hominem attack deleted.]
The rate of return on whole life isn’t just the presence of the cash value although a properly designed participating policy that endows should return no less than 3% to 6%. Six percent would be a stretch but it’s possible. I’ll stay conservative call it somewhere in the middle around 4%. Where could you reasonably expect to get anywhere close to 4% net of taxes, fees, or expenses in any vehicle much less something as vanilla as whole life?
If you think domestic equity returns are going to be anywhere close to the last 30 years then I’ll suggest you go see someone in your profession. By all means go ahead and take the medicine they prescribe.
McKinsey and Company just produced a really great report and so have UBS, Credit Suisse, and others. Jeff Gundlach, Carl Ichan, and some of the greatest investment managers in the business have already made comments about real US equity returns being closer to 2%-4% over the next decade.
Those guys aren’t exactly cheerleaders for whole life either. I personally think a globally diversified portfolio can produce 6-7% but that’s most likely going to come with a lot of volatility. If you understand how mean variance effects most investor’s returns then you are looking at a drain on total return by 35 and maybe as high as 50 basis points(half a percent). Look at yields which are low by historical norms. Dividends reinvested have produced over 70% of the total return of the S&P 500 since 1973. It’s even more of the total percentage for the DOW going back to 1914. So, you know it’s pretty reasonable assumption that the compounding effect of dividends won’t have anywhere close to what they have done over the past 100 years much less the past 40. So, that means more of a portfolio’s return will have to come in the form of price appreciation. So, if we look at forward P/E ratio’s with the most optimistic assumptions and assume that they can remain elevated and not revert to their historical mean and you are still left with abysmal returns for the next decade. That’s why Jeff Gunlach is predicting 2% real returns for US equity over the next decade.
I’m not a whole life apologist. I look at the numbers and they tell me that returns will probably be lower going forward. How much is anyone’s guess. I also look at capital preservation and the risk/reward ratio of stocks as well as bonds and at the moment it’s bad bet for both in stocks. Sovereign bonds won’t return much if anything but you won’t lose your principal.
So, if you are getting ready to retire how do you go about producing a reliable and predictable income stream that you can’t outlive? If you are mixing stocks and bonds and drawing down using the old 4% rule then good luck. You’ll probably be fine if you die prior to life expectancy.
If you are within 10 years of retirement and are following conventional wisdom(which is pretty much all I can see parroted here) it’s going to be a minor miracle if you reach anywhere close to where you thought you would be.
If you don’t follow conventional advice and do proper planning with a few adjustments along the way then you could still have the retirement that you pictured. If not plan on working till 70 like the last doctor client I brought on board to rescue him from folks who’ve ripped the poor guy to shreds.
He bought the myth of term and invest the rest and it didn’t work and I’ve never seen it work for those invested “the rest” in public companies.
I’ve worked with over 700 individuals in my career and the only folks that I’ve seen who took convential wisdom and made it work were frugal super savers.
Those same people don’t spend money unless it’s absolutely necessary in their golden years either. That’s a miserable experience and it’s depressing to watch even from the outside looking in.
If that’s what you want your retirement to look like go for it. Or, if you like to gamble with your lifestyle which most of you worked hard to achieve then go for it. If not, by all means get a second opinion. I used to think doctors were intelligent but I have found out there’s a limit when it comes to matters of finance. P.T. Barnum was right(you know the whole sucker born every minute quote) because I’ve seen more doctors suckered by Wall St. than any other professional group
of people.
If future equity and fixed income returns are lower (and they may very well be) the returns of whole life will also be lower. If equity returns are 2-4% real, whole life returns are likely to be 0% real. The lower the returns, the more an extra 1% in return is worth, with or without volatility.
It is also important to bear in mind that while long-term whole life returns probably will be something like 4%, it takes sticking with the plan for 30-60 years to get that. Returns for the first ten years may very well be negative. With many policies, even 20-30 year returns are less than inflation.
As far as producing a reliable income stream with your portfolio, you don’t need a whole life policy to do that. A SPIA does it just fine and in many ways, far better than a whole life policy.
I find the returns of whole life unattractive for the lengthy time period required to hold the investment. If I have to tie my money up for 50-60 years, I expect a lot more than 4% in exchange.
Who is investing their money for accumulation 50 years in the medical profession?
I want to absolutely clear that it’s the marriage of investments with the stability of whole life that creates synergy and flexibility for retirement distributions. You must do both in order for this type of plan to make sense for anyone. So, I’m not anti-investment. I simply believe having a foundation of assets that can’t be destroyed and replenishes one’s estate at death creates tremendous impact on how people chose to live in their golden years.
From a pure numbers perspective it creates better risk adjusted returns and has a much higher probability of success vs. a traditional plan. That’s just a fact. You don’t have to agree with me. Go ask older physicians who purchased participating whole life if they regret their purchase? See how they are living retirement vs. those who chose to allocate most of their retirement in public equity markets. I’m not talking about folks who built businesses and sold them. That’s an entirely different matter.
I have a physician client who built a large practice which eventually merged with two other similiar practices. These three physicians(especially one of them) were very entrepreneural and reminded me more of businessmen than physicians. They built this behemoth into highly successful specialty clinic(s) which they sold for $80 million dollars and kept the real estate and the company who bought their clinic(s) is still paying a pretty penny in rent to their real estate holding S-Corporation every month.
The biggest problem with annuities(other than bad products) is without a permanent death benefit in place that increases with age most people forgo using them or chose to annuitize a smaller percentage of their assets than they could otherwise.
I have seen it cost people hundreds of thousands and in some cases millions of dollars of retirement cash flow depending on a variety of factors.
Have you tested your implied Rate of Return on your retirement assets from a cash flow perspective vs. the implied yield on insurance guarantees?
If you don’t know what I’m saying that’s fine. I’m not trying to win here. I’m trying to help folks make educated decisions about their money. If you have tested the two even using historical returns which I think we both agree would be overly optimistic given today’s interest rates I think you would be shocked that insurance guarantees are within 100-150 basis points depending on what age you run your life expectancy out to.
So, I’m just asking why take the chance for an extra 1-1.5% that may or may not be there? You must really enjoy gambling with your money?
There are times to take all kinds and indeed many risks but it’s never prudent to take unnecessary or uncompensated risk.
There’s still a need for a long term equity portfolio to hedge against loss of purchasing power. I think that’s why you think whole life is a bad deal. I think you believe whole life is a drag on asset performance.
That’s where we disagree because I would still purchase whole life even if it produced a 1% rate of return. I wouldn’t be happy about it but it’s still the best way to guarantee the highest implied yield for cash flow in retirement.
That’s what most people are saving and investing for anyway.
Otherwise go ahead and spend it while you are making it and enjoy life. I have two clients who know they are giving up a lot in retirement to have the life they want to have while they can still physically do all the activities they love. I have no problem with it as their advisor(in fact I’m somewhat jealous). They skydive, rock climb, and travel the world. Last year they went to Australia and New Zealand. This year they are headed to China, Vietnam, and Thailand.
They still save but nothing like they could if they decided to quit doing some of the things they love. I told them it’s a trade off and as long as they are fine with the play now and pay later retirement then I’m perfectly fine with their decision. We have them loaded up with Disabilty, Long Term Care, and deferred annuities. We have some whole life in place but mainly deferred annuties with cola(cost of living adjustment) riders.
They have agreed to work longer and forgo social security as long as possible. They will definitely take an income hit at retirement but we haven’t put a dime in a qualified plan so none of their social security will be taxed and their house will be paid off. We have insurance to cover their biggest exposure which is long term care. The policy they bought from me 10 years ago is contractually paid up(it was a 10 pay policy) and it’s with a AA+ carrier that’s 166 years old.
I think as they enter their early sixties they may decide to slow down some of their travel and they will probably downsize their residence. That’s also going to help them quite a bit.
There’s no such thing as a perfect plan but there are plans that are highly inefficient and inappropriate to meet the the expectations. Many of them might not give people enough money to meet their basic living requirements.
It will take a couple age 65 that has 50% chance at least one of them will live to age 91 over $1 million after taxes(in today’s dollars) to eat three meals a day, pay utilities, property taxes, and other basic living expenses. Think about that for a moment.
Wow! You’ve really shown your cards there. You’ve advised clients to buy whole life, deferred annuities, and long-term care insurance and not put ANYTHING into a qualified plan. I’m not sure any further response is necessary to any of your other arguments. That said, if someone wants to put 5-10% of their portfolio into gold, whole life insurance, or some other asset class I don’t think worthy of inclusion in a portfolio, no big deal. Moderation in all things.
It doesn’t make sense for this client to defer income in a qualified plan. We ran the numbers and he’s better off paying the taxes now vs. later.
If he was 10-15 years younger I would’ve recommended he put money into a SEP-IRA or Solo 401(k).
The problem is he would need to generate almost 9% ROR for it to be worth pursing at his age.(that’s using today’s tax rates). I’m sure with 19 trillion of debt taxes will probably drop in half over the next decade(sarcasm). He didn’t feel confident he could do that well over the next 10-15 years.
I don’t give generic advice. It would be like a doctor writing a prescription without running any tests or at least asking the patient a detailed list of questions. That would be malpractice and I’m not a big fan of that way of conducting business.
I’m sure you don’t give “generic advice” but I’ll bet if we look at all your clients a very large percentage of them own whole life policies or annuities.
You’re almost surely giving bad advice to this doc who reportedly makes a ton of money now, won’t have much income later, and has nothing in tax-deferred accounts. He might be able to defer money at 40% now and pull it out at 0% (first $20K or so), 10% (next $18K), 15% (next $56K), and 25% (next $75K.) It’s a pretty awesome deal to put money in while saving 40% and then pull it out at 0% later. A doc with no tax-deferred accounts has really missed out. And that’s not even looking at the issues with the fees and low returns associated with insurance-based investing products.
Even if you’re afraid of future taxes being somehow astronomical, there’s no excuse not to at least do a Roth IRA before a bunch of insurance products.
We are looking at possible Roth through the back door strategies. This guy was burned in the market late 90’s(he was heavy in the NASDAQ) and then again in 2000-2002 in Large and Mid Cap US Equity.
He got torched again in 2008(his comments). With all of that being said he’s had a 6% CAGR over that time horizon.
He’s been a client for 11(insurance only) years but he always said he had an investment guy(turns out it was him). He finally divulged that information two years ago. I got boxed in as “the insurance guy” which I can’t stand because I do comprehensive planning and most of my clients own term and DI before we talk about anything else. I have never sold a whole life policy to anyone that I’ve done a complete plan on the front end right out of the gate.
If people lapse a policy then it’s the most expensive policy known to man. If someone can’t commit to properly funding their whole life policy I refuse to sell them a policy for two reasons. It’s a horrible buy for them as a consumer and it hurts my renewal income. The carrier I use for my whole life with slap you in the face if your persistency drops below 90%. That’s why I still have 94% of my whole life book of business inforce. Also, I don’t sell whole life to everyone who is breathing. I think everyone should own some whole life(my personal opinion and experience) but it requires dicipline and a long term commitment. I disagree with having to pay premiums for 30,40 much less 50 years. We overfund all of our whole life policies so you are looking at 20 years at the most. We also build one year term insurance equivalent to the cash inside the policy value so the death benefit and cash are returned at death in the first 15-20 years of the policy.
We usually take this option off policy’s at around 15-20 years into a contract because the extra funds in the policy have purchased enough paid up insurance to keep a nice spread between death benefit and the cash value. After all it’s life insurance first and foremost. It’s the very last bucket we pull money from in retirement and that is usually in years like 2008 when markets are down.
This particular client is self-employed and that makes his situation different from most of the people I work with in the medical profession. We usually recommend that higher income earners participate in a 401(k) or any company sponsored qualified plan at least up to the match(that’s a no brainier).
I have a 94% persistency among my clientiele that own whole life which is about half of the folks that I serve.
Also, we write a fairly large percentage of No Lapse GUL (usually second to die) for our HNW client’s who need life insurance for estate planning purposes.
This gentleman and his wife have both said they really don’t want to suffer another downturn because they don’t have a decade before retirement. He’s almost 58 and she’s 57.
The only way I can safely get anything close to the income they need by 67(his planned retirement date). Is using a combo of DIA(Deffered income annuity) ladders, period certain annuities, and FIA’s with withdrawal benefits.
He’s convinced he will be in at least a 28% effective tax bracket in retirement if he contributed to a solo 401(k) based on RMD’s alone.
I usually recommend that our younger self-employed folks that would have fit this client’s profile put some money in a qualified retirement plan and HSA if they are eligible. His age is the thing that really is working against him. We have found for compounding to work in a person’s favor in a qualified plan they will need at least 20 years to make the strategy viable.
He has an old IRA from a SEP that has several hundred thousand already in the account. He quit putting in new money in 2010. He started buying real estate and he’s been pleased with both commercial buildings he owns(one of which includes his office). He purchased both with loans but he bought both properties at a significant discount from their appraised value. He has them on a 15 amoritization with a five year call.
He changed the loans to another bank last year and he has 10 years to go but he has them financed at 3.25% for the next five years and then he may decide to pay them off or if rates are still attractive finish out the last five years with his banker. He plans to lease both for income at retirement. He has the other building in great shape with super tenants who have been in the building for 6 years and they just renewed their lease for another three years. His biggest concern is renting the building where his office is located.
He may sell both and 1031 exchange to buy another property he wants for recreation. I told him that’s fine but make sure it fits the criteria for a 1031.
It’s not your typical plan but it fit the bill for this client and his risk profile so we went ahead.
We will start doing Roth conversions at 59 1/2 on his old SEP-IRA and use a bracket bumping strategy to pull as much out without killing him on taxes.
We went ahead and put $125,000 into a QLAC which he can defer all the way to 85. At his age it compares favorably to a laddered tips portfolio(we added a cola to the QLAC).
I’m hoping to get him to reconsider having exposure to equities at least on his old SEP-IRA once we start doing the Roth conversions.
He really needs it for later down the road to guard against inflation. We will usually split the conversion amounts into three different strategies and convert the one with the largest gain and recharitize those that experience losses. It at least give us some tax arbitrage doing it that way.
As I said before every person who walks into my office isn’t sold a product. They are being sold a solution to a real life need. That being said my experience has taught me that most people can’t stick with traditional financial planning and concepts like Modern Portfolio Theory.
Traditional financial planning can and does work for those who have time on their side. It also works for frugal super savers. Those are the only two groups that I’ve seen make those plans work.
It’s extremely difficult to get young adults to understand why it’s so important to start investing early.
Also, it’s a very rare thing to see people who are consistently saving 30% or more of their take home pay.(they are who I call super savers).
I always find it interesting that insurance agents who come here comment about how they’re a “good” insurance agent, never sell policies requiring premiums for 50 years, always overfund, don’t sell it to everyone, never have anyone surrender it etc. Yet then I find my comments sections and email box full of clients who not only get sold whole life policies they don’t need, but get sold whole life insurance policies primarily designed to maximize commissions.
I’m not sure I can comment any more on your particular client. The facts on the client seem to keep changing. First he didn’t have any qualified accounts, now he does. Since I don’t have access to the facts, no point in commenting more on them other than to say this, perhaps the solution to fear of market losses, as Phil Demuth said, is to get a grip, not flee into low returning insurance-based investments.
As Bill Bernstein said:
I didn’t put the qualified plan in place.
I never said the gentleman didn’t have a qualified plan. I said we weren’t putting one in place.
I have over 40 million in AUM. It’s by far the most profitable and consistent income for my firm. So, I really hate it when people decide to move over a $500,000 IRA for fee based asset management.
I have set up SEP plans, 529’s, SIMPLE’s, UGMA’s, UTMA’s, Solo 401(k)’s, company sponsored 401(k)’s, etc…etc…
I only started doing company sponsored 401(k) plans two years ago. I had been referring that business out to another boutique shop that does a fantastic job and I have close association with them.(they have never paid me a dime). I have sent them several company sponsored 401(k) plans that now have between $2,000,000 all the way to $10,000,000.
They have sent me referrals for some of their clients who needed life insurance for estate planning.
I doubt you will find many “insurance guys” who have many AUM clients and those who do outsource everything to a third party. I have a CFA that I pay to go over every new client account we onboard for fee based management. He does quarterly calls for every client and we do annual reviews in my office with both of us and my clients.
I do security analysis on each account myself. I have even priced individual bonds for thinly traded issues. Everthing from a General Obligation for a small municipality to a Revenue Bond for an Airport authority.
So, yes I really want folks to load up only on whole life. Whatever you know everything and I’m an idiot. Your hubris is appalling and off putting. I read your comments about investing $150,000 a year and I call total b.s. on that.
You are a typical hand to mouth doctor who has all of his money tied up in qualified accounts and bounces checks at the country club.
I’m glad you feel good about your practice. I find your hubris also appalling. Your ability to interact appropriately with others is also pretty iffy. You seem to have mistaken this website for a public sidewalk, when in fact, it is far more equivalent to my living room. You show up on my website, post comments longer than the post itself, insult me, tell me I’m wrong when it’s obvious to everyone who doesn’t sell life insurance reading these comments that I’m not, and now try to start some kind of weird penis measuring contest about my income and savings rate.
That’s hilarious that you think I’m a hand to mouth doctor, that I bounce checks at the country club, and that I can’t possibly be investing $150K a year. I’m sure the regular readers who read this will be rolling on the floor laughing at you. You are aware this website had revenue last year of a half million and that I practice medicine full time, right? I invest $150K by April. Last month I made $90K. My monthly expenses, not counting taxes, charity, and savings, are about $10K. It’s not hard to invest $150K with income like that. I’ve been very blessed that way and I’m grateful and try to pay it forward. But I hardly need to make stuff up to make whole life insurance look bad. It does that all on its own.
I’m now tired of interacting with you (like dozens and dozens and dozens of agents over the years who have posted similar comments.) You’ll find that future comments from you on this website will be blocked. Have a nice life. One of the purposes of this website is to keep doctors from going to see “advisors” like you who sell them whole life when they could better be using their money elsewhere, so you’re obviously not the target audience anyway. And please don’t switch to email, Twitter, or Facebook like the other guys either. I’ll block you there too.
“You are a typical hand to mouth doctor who has all of his money tied up in qualified accounts and bounces checks at the country club.”
LOL. I am sooooo glad that you got in that zinger! Please don’t delete it as an ad hominem attack, WCI.
I think there is just one thing to do: Call in Mrs. WCI for her patented saying stat!
She laughed and said, “It’s like a religion for those whole life guys, isn’t it? They’ve just totally bought into the dogma.” She is also wondering which country club we’re going to join.
RE myth #9: My kid will go to college next year. I wish to maintain eligibility for Financial Aid. If I have liquid assets, I need to put them somewhere, where I can get at them easily. I know my husband and I can add $6500 each to our Roth IRA’s, and get it out easily. If we have more liquid assets than that, perhaps Whole Life would be a good place to park it, and borrow from? Wouldn’t the interest rate be less than that of most student loans?
The interest rate might be lower, but the all in costs probably won’t be. Plus then YOU’RE borrowing money instead of the student. I think that’s a bad idea.
I believe that we should only have to pay income taxes once, and that afterwards we should take advantage of the benefits that the US tax code allows us so that we may accumulate all the wealth we wish to accumulate completely off the radar screen of the Internal Revenue Service for income tax purposes.
So many are hung up on what they think whole life insurance is that they won’t ever be able to see why it is as it is and how it does what it does and most importantly, what it can do for you while you are alive. So many are so stuck on what it is called that they never allow themselves the intellectual pleasure of understanding what, in its essence, it is.
Albert Einstein said that “compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” What is not understood by most folks is that a properly understood whole life contract is the embodiment of this wonder: The uninterrupted compounding of interest without a tax liability attached to it. Whole life insurance is the greatest financial invention ever to issue from the human mind. It is firmly rooted in math and science, and it is immune to fads and manias and bubbles.
Yes. I sell life insurance. Big policies to those with the capacity to understand the power of compound interest and the desire not ever to have to file a tax return in retirement. They know, or at least are open minded enough to learn how wealth and money truly work.
Owning whole life – as much as they can get of it – is one of those things that the wealthiest 2-3% do that the 97% do not. If I had to choose between retiring on a $1,000,000 401(k) or a whole life contract with $1,000,000 in cash value it would be no contest: The whole life contract will generate up to 3 times the cash on an annual basis and it will do so without a tax liability and nor will it trigger a tax on your social security. Your 401(k) withdrawals, on the other hand will be dwarfed by the cash flow provided by the whole life contract and may very likely subject up to 85% of your social security to income taxes (if you are already retired this amount will be found on line 5b of your tax return – the goal should be to make that line read “$0”).
Yes, I “sell” life insurance. But I’m not your typical life insurance “salesman.” I believe in the product because it allows me to achieve for myself and my clients what I believe is the only proper financial goal: To retire without an income tax burden and with an annual cash flow equal to or greater than what we enjoyed while we were working.
I understand and accept that many do not and will never believe what I believe. I understand the anger and frustration of the many who were sold not only whole life policies but also many other insurance products that turned out not to be appropriate or didn’t perform as the agent had represented the policy would perform. Years ago, before I came into this business, I myself had fallen victim to some very poor advice about life insurance. Years later I discovered the truth. The truth moved me to change careers so that I could teach others what I have learned so that they could achieve what I know can be achieved through no other means.
I believe that 98% of the people licensed to do what I do don’t understand the product and what it can do for themselves and their clients. And since the licensed to sell it professionally don’t understand, how can we expect the public to understand? But then here we are again, with 98% not knowing that it is actually in their best interest to do what the 2% do – own a properly designed whole life contract that will maximize cash flow, minimize the death benefit, while remaining with the IRS’s definition of a life insurance contract.
Most agents do try to maximize the death benefit relative to the premium. It has been said they do this to maximize commission. I do not believe they do this to maximize their commissions. I believe they do this because they believe that is what the public wants. Afterall, how many here would think that a policy that cost $20 per $1000 of death benefit was a better value than a policy that cost $50 per $1000 death benefit? Probably all of you, because the former is “cheaper” than the latter. Looking for term insurance? By all means – go price shopping. There is no reason to pay more for it than you have to pay. Looking for a whole life contract designed as the wealthiest 2-3% of Americans want it designed so that it completely takes your wealth off the radar screen of the IRS for income tax purposes? You had better make sure you have the right agent. This is not the time to go bargain hunting, especially as what looks cheap will prove dear and what looks dear will eventually prove to be wonderfully and efficiently inexpensive.
I understand and fully accept that many will never believe as I believe. And that’s fine. But some will, and I post this for those that do: If you want the retirement that I know you want to have, please do not dismiss the power of a properly designed whole life insurance contract to get you there. There is a reason a very well-known Silicon Valley businessman is pumping $1.2 Million dollars per MONTH into this “bad investment.” And it is not that he needs the death benefit. It is because of what this contract will return to him as a result of the uninterrupted compounding of interest without a tax burden attached to it. Ultimately, he is doing it so that for at least part of his life, he will enjoy true financial freedom: A tax free cash flow that will last as long as he lives without any fear of ever running out of money in retirement. Can your 401(k) or IRA do that? Not likely (I do not mean to imply that you shouldn’t invest in a qualified plan. And if your employer offers a match, at the very least invest up to the match).
At any rate, that is what I “sell.” I put “sell” in quotes because once someone gets it, there is no selling whatsoever. Everyone who get it, does it. EVERYONE. It is that simple. If you don’t get it (and that’s okay – not everyone does), there is nothing to discuss. I don’t try to “close” such people. I don’t ever “close” anyone. We simply don’t believe the same things about wealth, money, retirement, and true financial freedom. I have never sold anyone a life insurance policy because he or she felt it was needed. You see, if you believe what I believe about wealth and freedom, if you understand the math and science behind how to achieve it, then you will want it, and you won’t care what it’s called.
Owning whole life – as much as they can get of it – is one of those things that the wealthiest 2-3% do that the 97% do not. If I had to choose between retiring on a $1,000,000 401(k) or a whole life contract with $1,000,000 in cash value it would be no contest:
I’m a 1%er. I no longer own whole life insurance and am richer for it.
$1M in a 401(k) is still pre-tax. To compare apples to apples, you would need to compare to $650K in a whole life policy and anyone who takes a $650K WL policy over a $1M 401(k) is an idiot unless they’re on their death bed.
You seem overly focused on taxes when you should be focused on after-tax return. When you do that, whole life doesn’t look like nearly as good of an investment as a typical stock/bond/real estate portfolio, especially in a tax-advantaged account.
At any rate, that is what I “sell.” I put “sell” in quotes because once someone gets it, there is no selling whatsoever. Everyone who get it, does it. EVERYONE. It is that simple. If you don’t get it (and that’s okay – not everyone does), there is nothing to discuss.
That’s a bunch of crap. I certainly understand how this works and I’m not doing it. Your argument must be that I don’t “really get it,” but that’s just a circular salesman argument. Reminds me of the Upton Sinclair quote:
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
No problem. You understand that part of what life insurance does and what it can do that you choose to limit yourself to understanding. But the criticisms and characterizations of whole life that you have put forth on your blog are based on an incomplete, everyday understanding of life insurance, particularly of whole life. May I explain?
Like I said, you clearly don’t believe what I believe. Yes, I am focused on taxes. But more than that I am focused on controlling my money rather than allowing it to be controlled by the government, the banks, and the Wall Street brokers. I am focused on maximizing how much spendable cash will be available throughout my life and the lives of my clients rather than merely the size of the pile from which that cash will be drawn. It is easy saving a big pile of money. It is far more difficult making sure you don’t run out of it on the other side of your working years.
You and I very likely agree about a great deal when it comes to money and investing. Probably 90% or better. But we do not and likely will not agree about the true value of what a properly designed whole life contract can do for someone. That’s fine with me. It should also be fine with you.
I will happily admit that life insurance does not have a terribly appealing rate of return on the face of it. I would also suggest, however, that where your money is is more important than rate of return. I know you won’t agree. Many people do not. But again, those who understand why I have come to believe what I believe come to agree with me. People who believe what you believe will be attracted to you and what you do.
Most criticisms (in fact, nearly all) leveled at whole life is based not on a properly structured contract, but rather a contract designed to maximize death benefit, minimize premium, and as a result yes, such a scenario maximizes agent commissions.
Let’s look at a quick example. There is a difference of magnitude between a policy with a $500K death benefit properly structured and a policy with a $500,000 death benefit structured as it is typically sold to the public. For example, the premium for a properly funded $500K death benefit whole life contract for a 36 year old male, standard non-tobacco, for example, would buy a $1.2 million dollar death benefit for the same individual if is structured as such policies are usually structured when sold by the vast majority of agents and advisors.
On the other hand, a properly engineered whole life contract in this example would have a cash value greater than the premium contributions by the end of year 10, and no further premiums would be required for the life of the insured, as the cash value and death benefit continue to grow for a lifetime with no market risk, no sequence of returns risk, the growth will be tax-deferred and distributions will be tax-free so long as those distributions are taken in accordance with the tax code. If the policy owner wished to accumulate greater cash value the policy could be structured so as to require no further premiums after 20 years, or at age 65. This is math and science. And any discussion of it should refrain from passionate assertions and reflect that fact, in my opinion. This is math and science. Everything I say can be proven mathematically.
As to commissions, in the case of typically structured whole life contract maximizing death benefit while minimizing premium, a contract with a $10,000 annual premium will generate a commission for the agent of between $8000 and $9000 in most cases depending upon the carrier, risk class, and age of the insured. In the case of a properly structured whole life contract, the agents commission on the same $10,000 annual premium would be between $3000 and $4500 based on the same variables. I do not believe that most agents selling typically structured contracts are doing so in order to maximize their commissions. I think they just do not know what is best for their clients. I would also add that the sales commission is paid by the company, not the client. There will be no commission slip generated for the client because it is not paid by the client.
I can actually agree with many of your criticisms of whole life when it is understood that it is whole life as it is generally understood by the public and the financial entertainment industry. But those criticism fall moot when brought to examination against a comprehensive understanding of the product.
So your argument is that I don’t understand whole life insurance because I don’t like it. That’s B.S.
“I am focused on controlling my money rather than allowing it to be controlled by the government, the banks, and the Wall Street brokers.”
You mean you would rather an insurance company control your money. A WL dividend is a black box at the mercy of one company. An index fund provides a market return not controlled by any one person or company. It’s pretty obvious to anyone who doesn’t sell whole life insurance which is better.
“I am focused on maximizing how much spendable cash will be available throughout my life and the lives of my clients rather than merely the size of the pile from which that cash will be drawn.”
It is easiest to maximize spendable cash by having a huge pile by having high returns. If you wish, you can then purchase a SPIA with that pile whenever you like. That approach will lead to far more “guaranteed spendable cash with no risk of running out of money” than using whole life for 6 decades. Run the numbers. It’s very obvious, despite what your insurance company sales training taught you.
“we do not and likely will not agree about the true value of what a properly designed whole life contract can do for someone….I will happily admit that life insurance does not have a terribly appealing rate of return”
Yup. A lot of agents who wander in here to “correct” me don’t realize they aren’t my target audience, they are my subject.
“Let’s look at a quick example. There is a difference of magnitude between a policy with a $500K death benefit properly structured and a policy with a $500,000 death benefit structured as it is typically sold to the public.”
I agree most policies sold are terrible. However, I would not describe the difference between a good policy and a bad one as an order of magnitude. The improvement is slight. Granted, it should be done if you’re going to buy one of these, but it doesn’t somehow change the fact that it is an inappropriate product for the vast majority of people, including high income professionals.
“On the other hand, a properly engineered whole life contract in this example would have a cash value greater than the premium contributions by the end of year 10”
I love that you think breaking even on an investment at year 10 is awesome. That pretty much demonstrates to readers everything they need to know about how you and your industry work and think. As noted many times elsewhere, distributions are tax-free but not interest-free as after principal is withdrawn with a partial surrender, you are borrowing against the policy, not withdrawing from it. You can borrow against your house and car tax free too if you like. Big whoop.
I also love that you think the commission isn’t ultimately paid by the purchaser like every other commission in the world.
All of your great arguments have been debunked dozens of times on this site already over the last 8 years. At the end of the day, we’re still left with a product that you admit has terrible returns and that you admit is usually sold inappropriately.
You can keep going if you like, and I suspect you do given the length of your previous comments.
I’m good leaving right there. You’re no more my “target” than I am yours. I just wanted to offer a view to balance the information you are providing. I understand that you sell your financial planning course for $499, and to think that you feel you can teach any and every consumer everything they need to know about life insurance in 5 minutes and 46 seconds struck me. Carry on, and good luck with you business
I’m not sure your fellow agents feel the same way as many certainly “target” me.
I don’t think the information I’m putting out needs “balance.” It’s already balanced. The only folks who think it isn’t are just pissed that I think they’re doing most of their clients a disservice by selling them their favored product. You know what’s not balanced? The crap you guys are putting out on your websites downplaying or not even mentioning all the stuff I’m writing which you admit is true. In fact, lots of you actually come up with a new name just to hide the fact that you’re selling whole life insurance.
At any rate, I think 6 minutes is plenty of time to teach everything a typical doc learning basic financial literacy needs to learn about life insurance. Let’s see….
1) Buy $1-5M of 20-30 year level term insurance from an independent agent if anyone else depends on your income
2) Don’t buy whole life insurance
Yup, that’s pretty much it. And that only took 15 seconds. The rest of what I have to do regarding life insurance is clean up your messes and point out how your industry is routinely deceiving doctors to sucker them into whole life insurance policies they don’t need, and once they understand how they work, don’t want.
I had been notified that there is a reply to my comment above but I do not see the reply here.