When I originally started this series, it was intended as a stand-alone four part series, not an ongoing series. However, it seems that my blog is an absolute magnet for whole life insurance salesmen and I continue to have dozens of comments and emails on the subject every week. I've noticed a few new myths that agents are using to sell this stuff (and argue with me) and will add them to the list in this post. There are lots of new readers since the series originally ran back in December, so to get you up to speed I recommend you read parts 1-4 first. [Update! Now there's even a part 6!]
Myth # 19 Life Insurance Should Not Be “Rented”
This one is pretty easy to see through, but you still see agents using it frequently. Since everyone “knows” that it is better to own a home than rent one, the agent says something like “You wouldn't rent your home for the rest of your life would you? So why would you rent your life insurance?” Basically, the agent is referring to the fact that if you use term insurance after age 60 or so, it becomes more and more expensive each year, just like renting a home. But unlike a home, you don't need life insurance after you become financially independent. When you only need a home for a year or two or three, it is a better idea to rent than to buy. When you only need life insurance for a decade or two or three, it is also a better idea to “rent” than to buy. The opportunity cost of “ownership” is simply too high.
Myth # 20 Banks Own Life Insurance So You Should Too
This is a frequent one heard from the Bank on Yourself/Infinite Banking crowd. An underpinning of this school of thought is that the greedy banks are taking over the world so you should only do your financial work through the trustworthy insurance companies. To be honest, I don't have massive distrust for either one of these industries. Both industries have mutually-owned options (mutual life insurance companies and credit unions) where, like Vanguard, the customers own the company. The agents like to point out that banks actually own whole life insurance as part of their “Tier One Capital,” the money used to determine if the bank is adequately capitalized or not. This is somehow to make you fear that the banks know something you don't, like the financial world is about to implode and any of those using banks instead of insurance companies for their financial needs are going to go broke. Tier One Capital is a measure of a bank's financial strength. Banks use less than 25% of their Tier One Capital to buy single premium whole or universal life insurance on a group of employees. The bank owns the policy and is the beneficiary. When the employee keels over, the bank gets the cash. The bank is buying the policy primarily for the death benefit, not because the return is particularly high.
Tier One Capital is highly regulated and it is difficult for a bank to include riskier assets such as common stock(aside from that of the bank, which makes up most of Tier One Capital) and REITs in its Tier One Capital. When you are stuck choosing between low-risk/low-return investments, then you can understand why a bank might consider something like cash value life insurance with part of that money. However, individual physician investors investing for retirement have fewer restrictions on their investment options for their retirement. Most of them have significant need for their retirement money to grow. The returns available with cash value life insurance generally are not high enough for them to reach their goals. Even so, consider what a bank does with most of its Tier One Capital- it buys the only stock it can, it's own. If whole life insurance was so awesome, you'd think the bank would use all of its Tier One reserves to buy it. In short, doctors aren't banks, so doing what banks do isn't necessarily smart.Tier One Capital is highly regulated and it is difficult for a bank to include riskier assets such as common stockMyth # 21 Corporate CEOs Own Whole Life Insurance So You Should Too
Agents, particularly of the Bank on Yourself type, love to point out that the golden parachutes for many highly-paid CEOs include cash value life insurance policies. However, just as the financial situation of a bank is dissimilar from that of a physician, so is the financial situation of a CEO making $10 Million a year different from that of a physician. When you're making a gazillion dollars a year, rate of return on your money becomes much less important and thus the benefits of whole life (asset protection, tax, estate planning etc) become relatively more important. It isn't that returns on whole life magically get better. Again, if you are in a position that you only need your long-term money to grow at 3-5% nominal per year, then feel free to invest in whole life insurance. Most of us, however, need higher growth. Remember that a doctor making $200,000 per year and a CEO making $10 Million per year are in very different financial circumstances and what works fine for one will not necessarily work well for the other.
Myth # 22 Banks Failed During The Great Depression, but Insurance Companies Didn't
This myth again preys on the fears of a global economic meltdown. In 1933 there were two holidays. The first was a “Banking Holiday” in which the banks were closed for 10 days as sweeping regulatory changes took place. The second was an “Insurance Holiday” in which for a period of nearly six months you could neither surrender your cash value life insurance policies for cash, nor borrow against them. Aside from this holiday, 14 percent (63 companies) of life insurance companies actually DID fail during The Great Depression. In fact, if they would have actually marked to market the bonds and mortgages they held, they would have ALL been insolvent. Reforms were put in place during The Great Depression that fixed many of the problems leading to bank failures and the banking holiday. However, these reforms were never put in place for insurance companies.
Myth # 23 After-Tax, Whole Life Returns Are Better Than Bond Returns
This one usually goes like this. “If you can buy a bond yielding 5% and are in a 45% marginal tax bracket, the after-tax yield on that is just 2.75%. A whole life policy with a “tax-free” internal rate of return of 5% is better.” This is an apples to oranges comparison. What is the 1 year return on that whole life policy? 2.75% sounds a whole lot better to me than a -50%. Even at 10-20 years, the bond is still way ahead.
I wrote about a physician who was pleased with his 7% return on his whole life policy bought in 1983 (don't expect to see that again any time soon). Except that he could have bought a 30 year treasury that year yielding 10.5%. 10 years later, as his whole life policy is breaking even and interest rates have dropped, the bond purchaser has not only already more than doubled his money just from the coupon payments, but the capital gains on that bond added another 50% to his return. That investor would have done even better purchasing equities in 1983, the start of an 18 year bull market. A bond, which can be sold any day the market is open, simply cannot be compared in any fair manner to an insurance policy which must be held for life to have any decent kind of return. Besides, most physician investors can hold taxable bonds inside retirement accounts instead of a taxable account anyway. That retirement account not only provides for tax-protected growth like a whole life policy, but also a tax-rate arbitrage between your marginal rate at contribution and your effective rate at withdrawal, further boosting returns.
Now, if you really understand how whole life insurance works and you think its unique features outweigh its significant downsides, then feel free to run out and purchase as much as you like. It truly does not bother me. I do not make any money if you buy whole life, nor if you decide to buy something else. However, if you are like most, once you understand it, you won't buy it and in fact, if you already have, you'll probably be looking for the best way to get out of whole life insurance. Don't feel bad. 80% of those who purchase these policies surrender them prior to death, 36% within just five years. You've got to ask yourself why so many people who were apparently intending to hold this product for the next 40 or 50 years suddenly changed their mind. I'm sure it has nothing to do with it being inappropriately sold to the financially unsophisticated by insurance agents facing a terrible financial conflict of interest with their clients. Whole life insurance is a product made to be sold, not bought. It is a solution looking for a problem that exists for very few, if it exists at all. Check out Part 6 here!
What say you about these five myths? Are there any I haven't yet hit in this series? Comment below!
Let me add another myth I’m tired of hearing. “Taxes will be higher in the future”.
I’m amazed these whole life people can predict the future. What they conveniently forget to tell you is how much those fees are.
Hopefully your blog will make sure no physician ever buys a whole life policy. They are all rotten to the core.
That would be a good myth. Perhaps if I get around to a # 6 in the series. I don’t think I feel quite as strongly against whole life and its salesmen as you do. While I think it’s rare that whole life is the right solution, I’m not willing to say it NEVER is. I’ve met a few docs who are happy with what they got out of their policy. They went into it with their eyes open and received the low returns they expected along with the various benefits of whole life.
Very good article. I like your breakdown of each of these myths. You can always invest your money in a 401K, get a good return by buying the vanguard low fee bond and stock funds, and get a match and borrow with no documentation etc. Again good job on writing this article. I have a good friend who sells insurance and even he told me stay away from whole life – now that is a good insurance agent.
Very nice post, Jim. I just posted this weekend on my site how the financial services industry uses bogus analogies all the time to convey powerful sales messages. As a former representative at a broker/dealer, I had to endure training sessions encouraging advisors to use these type of persuasive tools to grow my business. It is really pathetic. I could never bring myself to use the inane and ridiculous comparisons that are used to mislead consumers about the value of services or products.
There are most likely some more myths out there. But regardless of the deception, intended or otherwise, a definitive “against” or “for” is inevitably, self-defeating. If you assume the primary reason to own whole life is to insure against a financial loss upon the death of the insured, then you are only willing to accept part of the story. I simply ask you to accept there are other valid reasons to own a whole life contract.
One example is the person with plenty of money, in their 60’s, with a penchant for CD’s. A valid alternative is a whole life contract, with long term care riders, that effectively leverages the amount placed in the contract. When taken out to mitigate LTC costs, it is tax free. If the insured dies without exausting the available reserves, the death benefit is tax free. If the insured changes their mind and wants to take a world tour with their $100K or so, they can get it back with no penalites, save whatever it might have earned after-tax in their CD.
Another example is someone successful, living on less than what they earn every year. If they chose to take a salary deduction, and the company qualifies, there is a program out there that will throw $3 into the pot for every $1 the employee defers during years 1-5. At some point, typically in years 10 – 15, the $3 loan will be repaid from cash value, leaving a net amount available for long term care, annual supplemental income, or a death benefit. Is it guaranteed? NO. Is it statistically probable? YES, just as the expected return on a Vanguard long term tax exempt muni fund. You can’t predict the ROI unless you know when the insured will die. But die they will. In the meantime, you have a pot of $, leveraged and with positive arbitrage working tax free on your behalf, covering risks that might or might not appear, except death. You can’t do this without a permanent life insurance chassis in the mix.
A blanket denial of whole life as a potential solution to a problem is as misleading as trying to talk someone into paying premiums for the wrong reasons.
Tony,
Just out of curiosity, what is your commission when you sell a whole life policy?
you asked about commissions. Some contracts I’ve sold have paid me 80% of the first year commissionable premium. That’s not the same as the gross premium paid by someone to own the contract. Sometimes for every dollar that is commissionable, $5 goes in that is not commissionable, like when you are trying to get as much into the contract as soon as possible. That happens sometimes when someone thinks they might be sued and wants their cash to be asset protected. I might be sharing the commission with other agents, who have brought me into the mix to fine tune the solution to adequately satisfy the client. Sometimes I’ve shared it with the attorney who brought me into the mix because he knew I’d ask thousands of questions to make sure an insurance solution was in the clients best interest. I know you’re looking for me to give you a ginormous number but it done right, it may not be there. But you get paid for knowing where to hit with the hammer, not that you own a hammer.
Your first example (that whole life is somehow an attractive asset class) is covered in myth # 5 here: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/ and expounded on here: https://www.whitecoatinvestor.com/whole-life-insurance-is-not-an-attractive-asset-class/
Your second example is a “pet use” of whole life you’ve mentioned several times now in comments. Why don’t you send me an illustration for a policy designed for this and we’ll do a pro/con post on it.
“A blanket denial” is a straw man argument. I’m pretty careful to avoid saying that whole life is NEVER the right solution. But it almost never is. For every use of whole life, there is usually a better way to meet that financial need. That’s the point of this series.
Tony, how often do you as an insurance agent tell a physician sitting in front of you that you think whole life is not a good idea for them?
How about me — 48 y.o., $2.5 million in assets, income northward of $500k, a $6 million term life that lasts until I am nearly 60, no debt other than my house mortgage, kids done with their education and no debt, only surviving parent with plenty of money and good LTC.
I am probably better off financially than many physicians my age, and yet there us no way for me to see that spending 10’s of thousands a year on whole life makes sense, esp when I have no idea whether I will be able to sustain an income that lets me pay a $30-40k premium every year.
As noted above, my situation is in no way comparable to a CEO making $10 mill/yr. And yet I have never had a financial adviser who sells whole life do anything but try to convince me that I absolutely needed this “rich man’s Roth” that CEO’s supposedly use.
And if uts a bad idea for me, I woild think it would be an even worse idea for physicians younger and less well-off than me.
I don’t even know why product salespeople are called ‘financial advisers’ – they are not by any stretch. No reason for physicians to ever go to see a ‘financial adviser’ who sells insurance. Financial adviser has to specialize in comprehensive financial planning, and be compensated with hourly/flat fees (and not by commission or asset-based fees). You will never have a flat fee adviser sell you anything if you don’t need it. If I want my client to have a specific product (term life, disability, SPIA, etc.) I will go to a broker I trust who will sell them this specific product and nothing else (or I will find an online broker who has the best product available). There are very high quality brokers that specialize in disability insurance for example, and I would want one of them to sell the right product to my client, but I wouldn’t want this broker to be the ‘financial adviser’ for my client because they are not fiduciaries and they do not specialize in comprehensive financial planning (and their investment management skills may be very much sub-par because their specialty is selling insurance products, not managing portfolios or doing tax planning).
In two cases, I was dealing with the firms that had been chosen to work with 401K plan at my place of employment. I am not sure how it is that firms that sell insurance products get chosen to administer 401K plans. Surely there has to be a better way.
Well, there should be a better way, however in many cases small to mid-sized employers are prayed upon by broker/dealers and insurance companies. They view the employer-based retirement plan as a venue to sell other products and services. These are the type of firms that, at least historically, have dominated this space in the market. (I know, I worked at a large carrier for 18 years.) Unfortunately, many of the decision makers are influenced by the representatives that can provide a solution for their plan – they do not verify, or even think to ask, if they will be selling the plan participants any additional products or services. One way they can do this is to simply demand that no other revenue be generated other than advisory fees that are strictly tied to assets in the plan – and write it into the contract with the advisory firm. This will exclude, for the most part, broker/dealers. However, this would need to be raised by someone involved in the decision making process with enough savvy to push for it and also some awareness of some alternatives that can still service the plan.
Well, this firm is not acting in any fiduciary capacity for your 401k plan, that’s for sure. This is a rule, not an exception. This may not be an insurance company at all. Instead, they use their 401k business to try to steer plan participants to their ‘financial advisers’. This is a clear breach of fiduciary duty (if they were bound by it, which they are not). I know several large firms that do that kind of stuff.
The only way to avoid having things like this happen is to hire an adviser who acts in a fiduciary capacity (as an ERISA 3(38) fiduciary). As a 3(38) fiduciary I would not allow anyone to do anything of the sort. For smaller plans it may even be possible to offer individualized advice so that advice is provided by a financial adviser who’s a fiduciary. It would be ideal to hire a local or remote flat fee/hourly financial adviser who can come in (or skype in) and do educational seminars and/or offer individualized advice to plan participants. Given how much money is in retirement plans, I wonder why more plan sponsors are not hiring fiduciaries to provide advice to the plan sponsor and to plan participants. The cost savings can be staggering, given how much bad advice is provided all around.
The key is to have an independent fiduciary, not someone who works for the company which provides the plan. This is true for retirement plans as well as for financial planning/investment advice – your adviser should be independent without any affiliations so that they can steer you in the best direction rather than to their broker/dealer or their firm’s products.
Konstantin,
I am a CFP, and whole heartedly agree with you about how agents and brokers say they are “financial advisers”. Sadly, most of the public does not understand the difference. In my opinion, true advisers serve as a fiduciary, which legally requires that we put our clients’ financial interests above our own. Agents and brokers fought hard to retain the much lower “suitability” standard, where they only need to make sure to product suits the client, but is not necessarily the best solution. These people tarnish the whole financial industry’s reputation, and people get so scared they end up doing nothing.
Not everyone wants or is cut out to handle their finances without guidance. Some just hate it, no matter how hard they try. So a good, qualified, fiduciary financial planner can be quite useful. Others are DIYers, and that is great. So yes there are good financial planners, but you need to do your homework to find one.
Sorry this took so long to answer: I just found your question. But you have given me enough info to focus on an answer. You say you earn $500K/year. Can you live your life on $400K? If you can, are you interested in an idea that results in your taking a salary cut of $100K for 5 years, causes your employer to use that money, along with another $100K from another source for those 5 years, and then applies $200K/yr for years 6 – 10 ( a total of $2M, 25% of which is yours) to a special life insurance contract? You can’t really answer that because you don’t yet have enough information. But I can tell you that if you take the $100K each year and pay taxes, etc., you’ll have about $65K to put to work. For you to achieve the same results starting at 65 with that $325K will pale in comparison with the tax free income stream you’ll get from this life insurance contract. I don’t care when you die, but die you will. You may have long term care bills to pay, your may not, but if you do, the leverage effect of getting them from this contract far exceeds what will come from you checking account, leaving more for your children and grandchildren. Have I tried to sell you a life insurance policy? No, and I really don’t care if you do or not. Because I’ve learned over the past 40 years that every ‘No” gets me closer to a “yes” when it’s explained properly, introduced in an appropriate context, is part of an overall plan to get you where you and your family want to go. If what I show you resonates, you may want to stop contributing to a 401(k) plan because A. you are limited annually to a little over $50K; B. you are going to get taxed on that money sooner or later, C. I’ve shown you how to benefit from $100K (or more) that will never be taxed if you work it correctly, D. improves the bottom line of the organization you work for, which may be your own clinic, a hospital, etc., E. replaces some or all of that $6M of term you are paying for with after tax dollars, F. frees up the $50K you are putting into your 401(k) along with some of what you have to add to the pot for your employees; G. introduces an element essential to your financial freedom, which allows you to focus on good patient outcomes and whatever else is important to you because your financial life is manageable and rational.
Wow, that’s a lot of selling right there. This financial product you’re selling apparently has no downsides at all.
Wow. I think you are serious?
One other thought that helps to sum things up: If the commission on Whole Life and Term were the same, I wonder if that would change the overselling of Whole Life? Yup.
I’m not sure it’s the % that makes a big difference, it’s the premium. Since WL costs 10X more than term, the commission is going to be 10X.
I recently had a financial advisor try to sell me this, calling it variable cash-value life insurance. They argued that it was a tax shelter and claimed a 7-8% return. They said that it could be invested in more funds such as dimensional funds, and this resulted in the higher rate of return than traditional whole life. Is there any truth to those claims? I am already going to max out my 401K and roth conversion so the funds put into this would otherwise go to a brokerage account invested broadly in the market.
thanks
Variable universal life insurance is a different beast than whole life, with even more moving parts. Most of these policies really suck due to high fees and terrible investments. There are a few that I would call “good VULs” which use investments such as Vanguard and DFA. These MIGHT work out better for you than investing in a taxable account. The thing I like about them is that they address one of the biggest issues with whole life insurance- the low returns. The thing I don’t like about them is you still have lots of insurance-related fees, you still have a life-long commitment, and they have even more moving parts than whole life. The link Rex posted is about indexed universal life, yet another different beast. I wouldn’t use that. The devil on those is in the details. I wouldn’t feel any pressure to use an insurance based investing solution. I don’t use one and I’m doing just fine. A taxable account isn’t necessarily the terrible option it is portrayed to be by insurance salesmen. These posts may help:
https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/
https://www.whitecoatinvestor.com/what-happens-when-ogres-and-trolls-mate-aka-variable-life-insurance/
https://www.whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/
A good advisor won’t push you into a good VUL policy, but might offer it as an option if you intend to save a big chunk of money in a taxable account instead. If someone is pushing this instead of a Roth IRA or 401(k), you need a new advisor.
I believe that simple products are always best. While there may be circumstances when creative use of insurance products can achieve specific goals, this is (exactly as Jim says) a set of isolated cases that might result from a good adviser finding the right opportunity to use the right product.
If you want to create your own ‘infinite banking’ portfolio after tax, my favorite is to use individual municipal bonds. Historical returns on municipal bonds beat Whole Life or any other type of fixed life insurance returns, and they are transparent and easy to purchase/sell.
I do see some types of insurance products that have Vanguard/DFA funds. There are always issues with having large after-tax portfolios inside variable annuities and other insurance products. My question is, why not simply have a tax-managed portfolio in an after-tax account? The proof is on the product salesperson to show that variable insurance products are better than after-tax investing given one’s specific financial/tax situation. This is part of comprehensive financial and tax planning, and I would venture a guess that none of those who sell these products do any type of analysis that’s truly required to show which approach works best.
See my answer above to NVMD. Granted, there are “advisors” all across the country, working for Wall Street firms who are fighting tooth and nail not to be held to a fiduciary standard. Those of us who are fiduciary advisors, resent that they continue to be allowed to call themselves advisors when in fact they are factory employed salesmen. But I’m probably not going to win this war. Some of those folks will tell you they are only interested in what is in your best interest, but when push comes to shove, their employer wants no part of that. In most cases, if the client makes money, it’s an incidental benefit.
Noob might want to read this
http://insurancenewsnetmagazine.com/article/illustrated-promises-unmet-expectations-2533
Shows u how often that illustration will work
Actually that link covers the returns on VULs as well.
Sorry, I thought that was the IUL study. To be fair, those returns include all VULs, not just the “good ones” with Vanguard/DFA funds.
Correct but the bottom line is that the illustrations greatly over estimates returns even in a potentially ok or good VUL bc they use a constant positive return when in reality that never happens. This can make VULs a real big problem since if you have negative years during retirement when you are accessing income(which you will) then the CSV can crash at a time when the cost of insurance (which typically isn’t even shown at the guaranteed values) is going up. At least in a taxable, you can tax loss harvest. In a taxable, you just have less money. In a VUL, you also have a risk of losing the death benefit and all of a sudden having all gains taxed as income.
It really comes down to whether the additional costs and risks of the insurance outweigh the additional taxes paid in the taxable account. Don’t get me wrong, I won’t ever be buying one of these, but it’s hard to say that NOBODY should ever buy one. Nor is someone likely to really be hurt if they just adopt the philosophy of never mixing insurance and investing. Those for whom a good VUL might be appropriate should be making so much and have so much that this (taxable vs VUL) is a relatively unimportant decision.
A few years ago i was comparing an insurance product called “return of premium” to a conventional term policy. The idea of this product is you pay all of your premiums for say, 20 years, and at the end if you didnt die or miss a payment you get it all back. Much higher premiums than the standard term policy with same benefit. By my math the product was a bad deal assuming at least 4% growth on investing the money saved with the standard policy premiums.
I’m not surprised. I’ve generally found it to be a bad deal too. https://www.whitecoatinvestor.com/return-of-premium-is-not-a-free-lunch/
In a capitalistic, free enterprise society, buyer beware is a time honored mantra. True, there are some rules and regulations, but the players are always ahead of the game. If this truly bothers you, then all you can do is maintain a very cynical approach and keep trying to find someone with whom you can discern an element of knowledge, trustworthyness, and faith, and hope to hell it lasts. The role I’ve chosen is to be as knowledgable as possible, and work for only what is in the clients best interests. But you won’t be convinced of that until years have passed, and then the opportunity to start all over again is gone. Sooner or later you have to make a decision based on what is in front of you, otherwise you’ll dither till the cows come home, which is not an acceptable outcome either.
Alternatively, you can stick with simple, easy to understand investment and insurance products that don’t require a lifetime commitment in order to have any degree of success. Neither personal finance, nor investing, has to be complex to be successful.
I love your passion for this topic. I agree with you that the insurance industry (and investment advisor/securities industry) is full of individuals that misrepresent the products that are used. However, I don’t think most of them do it maliciously. Instead, I think it is a continuation of the culture that was created a long time ago in an industry that deals with money as problem, the product and the prize.
Becoming a worker in the industry has a low barrier of entry and very little formal training needed to understand how these products work let alone work together.
Unlike an engineer, attorney or physician such as yourself who had to spend years studying, taking tests and interning in order to become a licensed practitioner, the financial services representative who is a life insurance agent, registered representative, general securities representative or investment advisor representative has to pass a couple exams that they can study for over the weekend in order to hang a shingle on their wall and say that they are in business.
Websites like WebMD provide a lot of information to the average person who are now issuing self diagnosis to themselves, their family and their friends. If people who read this stuff are convincing, those who listen believe them in their assessment. After all, They end up sounding just like a doctor! Sometimes, this has catastrophic consequences that could have been avoided had the “patient” just gone to an actual trained doctor.
I read where you learned a lot of the information you know about finance and you do. I hesitate to say that reading these sources makes you an expert in financial planning or life insurance though. Instead, I feel it is more akin to a person like me reading WebMD and calling myself a Doctor. Or Jenny McCarthy telling people not to get vaccinated because she somehow knows that vaccinations cause autism?!? That being said, I am not going to claim that a person needs 3 years of residency after 5 years of school to understand finance. They do however need to know what information to look for to ask the right questions. Your site has a lot of buzz (PR:3) with a lot information. Doctors and other investors visit this site all the time and from some of the comments trust what you say. You have no monetary incentive to push anything so that validates your opinion. Some of this information is good but some misguided based on your personal experience.
I am in the business of helping people invest. I have a series 6,7 66 but I don’t have them placed with a broker dealer or RIA. I find the fee’s I would need to charge worthless for the most part and don’t want to pretend I have some type of clairvoyance in predicting the future. I do however, make money selling life insurance, disability and long-term care insurance because they handle financial risks that the average investor can not retain themselves.
Last year my clients who had an investment portfolio with the same beta as the SP 500(based on 30 years back testing; less beta using 3 and 5 year slopes) earned a return of 52%. The SP 500 only returned 32%. The portfolio I create doesn’t have a normal distribution standard deviation curve associated with it either. Instead the portfolio is constructed so it the curve is positively skewed. The worst return my clients could have experienced last year would have been -15%. This is the position many of them have taken this year as well. This means if something in the world “went crazy” and the market plummets by -50% like it did at one point 2008, then the worst return these clients will have this year is -15%. If the market goes up 10, 20 30%, then they will get these gains.
I use over funded mutual whole life companies as the base in this strategy were a client will end up with 30-50% of their networth in this financial tool. I will also use over funded fixed UL insurance as well and I give this percentage as a generality not an absolute. That is because over funded life insurance is the only fixed income financial instrument where the the interest rate risk is transferred to a multi-billion dollar third party who is in the business of managing risk.
We are in a low rate interest rate environment. I read somewhere in a post that life insurance companies “will get crushed” if interest rates increase. The last three times rates have increased significantly causing bonds to fall in value by more than 20%(in the late 60’s early 70’s right before and when Nixon took the US dollar of the Gold Standard and the stagflation that occurred in the late 1970’s from oil embargos)life insurance companies provided a positive return to their policy owners cash value. Mutual fund holders who retain these risks will see losses that could take years to recapture.
The dividend isn’t “magic”. It is much easier to see how it is computed than accounting tricks that publicly traded companies use to smooth out their earnings and pad their balance sheets. Whole life companies own other businesses like mutual fund companies (MassMutual=Oppenheimer; NYLife=Mainstay) they earn money on their investment portfolios from the contributions made by their owner/policy holders (billion dollar portfolios), they pay out insurance benefits and spend money running the business. The money that is left after all these debits and credits are considered is known as the surplus. This surplus has to go to the owners…the owners are the whole life policy holders.
If interest rates sky rocket, it can be assumed that the equities boom caused by easy money will be over and equity prices will plummet. The investor who buys no load mutual funds doesn’t have a limit to the amount they could lose if this happens in both stock and fixed income funds. They just have to have faith to ride out the storm in their portfolio even if they see their portfolio plummet and not sell out of fear. Life insurance policy holders have transferred the risk to an insurance company…a company who’s business is managing risk.
The strategy I talked about earlier using life insurance that had a 52% gain last year takes about 10 minutes a year and 4th grade math to manage once a person understands what to do. Wall Street firms only make <$30 year implementing the strategy on portfolios less than $1.5M. They will never promote a strategy like this because they aren't in the business of being altruistic, they are in business for making profits!
You have a first amendment right to freedom of speech if you want to continue slandering the product but I believe you want to provide sound information to your readers. Right now, on the topic of life insurance you are only providing half truths based on your limited knowledge.
You also have a right to ask me questions, disagree with me or call me a clown if you like as well. I believe used life insurance is an amazing financial tool and it can not be duplicated by a "DIY" investor. It has to be acquired from a life insurance company.
I look forward to seeing your response and would really like to know if you understand what I did to get those returns for my clients. It isn't that difficult to understand. If so what is your opinion on how you would make it work better by not using whole life or fixed universal for a portion of the portfolio. What are the risks if there is a better way? I sure have not found a way to make it better by not using life insurance and I spend 60 hour a week in this business. Your profession is an ER doctor which i will never claim to be no matter how much WebMD I read or "House" episodes I watch but again, I really don't think finance is nearly as difficult to understand.
Like most insurance salesmen, you’re continually selling, selling, selling. Instead of just saying what your secret strategy is, you instead spend 1345 words selling to them. You could have submitted a lengthy guest post in that time that educated readers on how to get 52% returns while only risking a 15% downturn.
I have no doubt you believe life insurance is an amazing financial tool. I also agree that finance is not nearly as difficult to understand as medicine. But here is the issue with what you say. Either you’re the only person out there using this amazing financial tool to give people these amazing, almost riskless returns (because I keep hearing from docs who are sold cash value life insurance who are certainly NOT getting these returns you claim) or you’re full of hot air. I can’t say which. Perhaps you have found some great way to use life insurance that no one else has found. But forgive me if I’m skeptical given my previous interactions with insurance agents.
Why not instead of alluding to your secret technique, just explain it and let readers evaluate it for what it’s worth?
“Salesman” you say. I teach and I am only compensated when I can show value to the person I am presenting to who take action an implement my suggestions. I put my “money where my mouth and mind is.” I teach people how to use a tool they do not understand how to use and I like to have all of their advisors involved so everyone is on the same page and nobody feels “sold”. Sometimes, new information comes up and the strategy is changed this way too. Sometimes more insurance, sometimes less, sometimes a different type. That is what I do!
I wasn’t direct in my last post because I wanted to see if you knew how the returns I am “claiming” (it is true and the positively skewed yield curve is the reason) using a portfolio that has 30-50% of a persons investing assets in Whole life. If you did, I wanted to see your rebuttal. It was that simple and there doesn’t need to be name calling. If you really don’t know, I will show you and you will see a new way position money that you never thought of.
When you own a stock or a bond directly, it provides zero additional benefit to the owner (unless you own Ford (F) and you get Z plan pricing. I think Warren Burrets Berkshire Hathoway gives you a discount on GEICO if you own it too).
A person invests their capital for it to go to work and make additional money period. Risk management is the key to financial success.
We can not control what the markets are going to do. This is your thesis and why low fee no load mutual funds are the way to go. As John Boogle says, “let the markets do their thing.” I agree 100%!
However, when an investor places their money in life insurance and doing so does not decrease the long term return the investor receives, then many of the arguments against why it should not be used (low investment return, takes to long etc etc) is lifted. You just need to know what other tool to use to participate in the market and earn the returns. Again, it is simple and you are right nobody I know or heard of has ever put 2 and 2 together. The benefits life insurance provides all become additional attributes the investor receives that add value their current method of investing does not.
What I am doing with life insurance will change your opinion on it as a place to store cash. It really is just as simple as Vanguard or MF’s (I use ETF’s and MF’ss of Vanguards as part of the strategy as well as SPYders) but the insurance just reduces a number of risks (both investment and to an individuals comprehensive financial plan). I would love the opportunity to talk to you about it and prove the 52% return with a “predetermined” amount of risk (not “no risk” as you said to get these returns). Knowing the worst case scenario when the financial markets are falling apart helps an investor “stay on course”. Having 85% of their money in a liquid position allows the investor to “be greedy when others are fearful” as they aren’t fully invested or “all in” which is what the financial industry wants to spur demand for stocks sold in the secondary market.
Life insurance companies are a form of investment bank that provides financing to industry. The more money positioned with them means the more they have to lend and the Investment banks like Morgan Stanley, BOA and UBS don’t get to underwrite as much (ie – make as much money). Of course they are going to do their best to get people to buy stocks and bonds outside of life insurance. They are competitions that doesn’t earn a profit for shareholders.
I really think that you want to help people with this blog. New information can shift the paradigm you are in. I do make money placing (or selling if you prefer) insurance when people see it as logical and best choice. I love to talk to a persons accountant, attorney or other advisor as well so that I can hear them all say “I never thought of it like that” or “I didn’t know that” and watch them verify what I am saying.
Let me know if you are interested? The best case scenario for you is that you can continue trashing life insurance and write a new article about this “quack” in Orlando who claims to earn 52% in a portfolio using that horrible financial instrument known as whole life insurance. The worst case scenario for you is that you have to write an article that says “all previous articles I have written about whole life are not correct, I was under informed.”
Seems the risk is on me as it is my lively hood and your hobby. I do respect the work you do with this blog. I do however see it as misinforming the public from what I know and want to share with you.
Let me know…Kevin
Feel free to share it. You’re doing a lot of typing without actually sharing what you purportedly want to share. As near as I can tell, it’s buy a bunch of cash value life insurance plus a bunch of options. Lots of additional expenses with both. I guess the proof is in the pudding as to whether the additional costs are worth the additional benefits. As I said in my email, why not send me a copy of your book, or at least explain your secret method here for all to see. Worst case scenario, you look like yet another whole life salesman commenting on the blog. Best case scenario, you get lots of business from your revolutionary investing method.
Agreed – Here is a link to the book.
http://decisiontreefinancial.com/comfort-investing-book/
Here is my popular video that gives a metaphor on financial planning:
https://www.youtube.com/watch?v=g6tHPtzhC0c
I made a second version of the video that is linked inside this one that you can watch too. I continually referred to this metaphor when I taught a 10-hour course on financial planning at Kennedy Space Center for NASA employees who were leaving as the Shuttle program ended as well teaching an adult eduction class on the topic at The University of Central Florida.
Readers need to know then that I aced the 10 hour CFP exam in 3.5 hours (60-50% failure rate), could retake and ace the Series 7 today hung over with one eye open (60-65% failure rate) and I have a Series 66 (IAR) which I admit I would need to study for again if I needed to take the test because it has nothing to do with planning…but so what?
The point isn’t to brag, but instead that all this glorification of “fee based advisors” as being these pious ethical practitioners who have somehow placed themselves on a higher plateau by charging a fee is garbage! In reality it isn’t hard to be a fee based advisor…they are for the most part (this is not an all inclusive statement) not that special and they are generally not that pious. As a matter of fact, I think most are very weak because many lack the ability to have their clients follow through.
Maybe I can write a blog for your readers about this topic. It is a completely different perspective than the one investment companies who make $billions for their owners want the public to believe. Regardless of the method, money is made by someone. Vanguard is no different either but I agree with you that the lower the fee that provides no additional value (key point) the better when investing directly in stocks and bonds.
Options and Life insurance have cost but those costs transfer the downside risk away from the investor while still allowing for all the upside potential when things go great. There is tremendous value in that fact especially in a world where the monetary system is based on a “pyramid scheme” of debt based money which is destined to collapse from time to time! Owning Mutual funds keep the downside risk with the investor which everyone discovered in 2008 is not a good thing!
Our agenda’s have the same objective; protect and grow the wealth of those who seek our guidance…I just chose to represent a different way of doing it and making a living not because I get to earn “high commissions”, I do this because I know it is superior model that also empowers people to gain control of their lives.
I will enjoy talking more with you because, as I am sure you can tell, I am passionate about this topic and have A LOT to share.
Take care
If you think Vanguard is no different from any other investing company you really don’t have a clue about their business structure.
I vehemently disagree that getting advice from a commissioned salesman is just as good as getting it from a fiduciary, fee-only advisor.
Lots of good things happened to me in 2008. Mostly I got to buy shares in thousands of companies at a serious discount compared to what I paid for them in 2007 and 2013.
So did my clients in 2008 and 2009. I know Vanguard is a Mutually owned investment company. I understand their structure. When I wrote that I was trying to say they do nothing to manage systemic risk making them the same as the others. I did a bad job of that in the previous comment. Remember, I use them too. They have a good inexpensive commoditized product that works better over time than more expensive alternatives.
The fiduciary advisor can analyze what I am suggesting a person do with part of their investment portfolio. That is done in the book so I guess you could pay them to check my math….No problem.
Of course, it really supercharges a plan when other synergies can be realized with the insurance. This is done on a case by case basis. It is better to work with a person’s accountant or attorney though as the involve work in these area’s. Fee-only planners can’t do this work and will just tell the person “go see your lawyer or accountant; here is the bill.”
The life insurance companies lawyers and accountants will work with these advisors to make sure what needs to be done is done right. That is also part of the value life insurance brings and it comes with the policy for FREE! The policy holder is the owner after all..it affords certain privileges….although stock companies like AXA, MetLife and Prudential will do this for policy owners too. I am sure they have the best in the world at what they do.
A person doesn’t have to charge a fee to be a fiduciary. A fiduciary is innate; it is ethical. Why do you think I don’t use my IAR??? Because as a fiduciary, I felt guilty that I was ripping people off charging them a fee. I came to the conclusion that the commissioned products solve problems the best too. Why should a person be charged a fee when that is the case??
Let’s talk after you get my book and read it.
Take care
“Supercharges”…..”synergies”….”comes with the policy for FREE!”
I’m not even sure you realize you’re still selling. It’s like it’s ingrained in your ability to communicate with others.
If cash value life insurance were so awesome, an army of commissioned salesmen wouldn’t be required to get people to purchase them. How can you explain the fact that millions of people own shares of Vanguard index funds despite NOBODY selling them? In my experience, the best products sell themselves. They’re bought, not sold.
WCI,
I have read the last few posts with interest because I work with Decision Tree Financial and have a couple comments.
• Products that are not sexy and are continually misunderstood and misrepresented will never sell themselves even if they are in someone’s best interest.
• All the various media outlets, TV, magazines, internet sources continually sell investing to the public as a necessity, or by appealing to greed. After time this selling drives people to take action. Smart (usually independent – not working with an adviser) investors default to Vanguard because they do eliminate worthless fees. Vanguard does take advantage of the media’s selling. And yours.
• Whole life insurance is a product and it cannot be discussed without making various general points – both positive and negative about that product. This is just a discussion, or debate if you prefer. Actually selling, or placing a policy for someone requires a lot of specific information to determine if a policy is even appropriate. After that the type of policy, other policy design features, as well as what to do with other monies in the plan are determined. That is not being done on this website.
As far as selling: you are already completely “sold” on the topic and through your website are continually “selling” your point of view at your understanding. Most of what you write throughout this website is accurate however you are missing the big picture of how different financial products can work together.
Do you really know enough about each of your readers to diagnose their finances with such absolute certainty? I do not.
Yes, there is a vast conspiracy out there to keep people from buying permanent life insurance. Everyone is out to get you. Last I checked, for-profit insurance companies were in the same business (making money) as for-profit investing companies.
Of course everyone’s situation is different and should be analyzed carefully prior to deciding what investments and insurance products to use. However, in my experience, those who sell insurance believe nearly everyone will benefit from owning permanent life insurance. I disagree. I think it is a very small percentage of people who need or even want these policies once they understand how they work. The main issue with them is they are an insurance policy that sells a type of insurance, a permanent death benefit, that almost no one needs. Buying insurance you don’t need isn’t smart.
If you don’t like my point of view, there is nothing stopping you from starting a website and expounding continually on how awesome whole life insurance is. Why so many insurance agents feel a need to leave lengthy comments on this website is beyond me, but I’ve been getting dozens of them a week for years now. I almost never get doctors writing me to say they’re sure glad they bought a permanent policy. Instead, I’m continually getting complaints about how they were sold a policy inappropriately and requests to help them decide whether or not to surrender the policy they wish they had never bought. The ratio is probably 99 to 1. What does that tell me? That tells me that these products are dramatically oversold. Can’t blame the salesmen; they’ve got kids to feed too.
I always enjoy coming back and checking out the comments on the whole life articles! The back and forth with Decision Tree Financial was especially entertaining. I could sense the salesmanship oozing from his comments as was noted by WCI several times. A visit to the website and a quick search of the man behind it shows that he is not just any salesman, but a salesman of salesmen so to speak. He has a site called Easy As Pie which is entirely devoted to multilevel marketing! He’s no doubt an enterprising individual trying to make it big, but I doubt many WCI readers will jump at the chance to use whole life insurance to play the options market. But you can’t blame the guy for trying. My dad always said, “if you throw enough (fecal matter*) against the wall, sooner or later something is going to stick!”
I was looking for a decent life insurance but I was really confused how to find one. After reading your article i found the way to it. I also created a blog to help other people.
myth 20: If banks only buy whole life for the death benefit…… why not just buy term?
myth 21: A gazillion dollars a year is your number for when someone should consider a fixed vehicle as part of their portfolio? very interesting…. What happens to that not so savvy physician who loses premium in the market because they were chasing higher rates of return? I would bet with age you will begin to understand the importance of fixed vehicles. You have a laughable faith in this country’s stock market. 5% (higher in some cases you keep lowballing it) in a whole life might seem attractive to someone who has been burned in the past and lost premium.
Myth 23: “What is the 1 year return on that whole life policy? 2.75% sounds a whole lot better to me than a -50%. Even at 10-20 years, the bond is still way ahead.” WRONG!!!!! Your worst work yet. Why in gods name would you ever compare bonds and whole life returns in their first year? Completely irrelevant. Both vehicles are designed for the long term.
You still fail to understand and acknowledge custom whole life. One that you can pay up with a single premium, in 5, or in 10 years and never pay another dollar in premium again. Not all whole life products take 2 decades for the investment to catch up. a single premium custom whole life completely destroys your bond argument. Next….
I’m not sure what you mean by “losing premium” in the market. Premiums are generally used to purchase life insurance contracts.
I agree that you have to be okay with the terrible “short-term” (first 10-20 years) returns of whole life policies to purchase them.
The issue with single premium whole life is that it becomes a MEC, and therefore a terrible plan for retirement funds.
When I say premium I just mean your own investment dollars that you fund financial vehicles with, whether that be an insurance policy a retirement vehicle or an investment. It’s just easier to use one term across the board for readers. My point is, yes, there is no arguing potential rates of return are better in the market or in other investments, my only point is that the risk is greater. Although you may consider yourself to be a fairly savvy investor with a lot of product knowledge and someone who does a lot of research, not everyone is, nor do they intend to be. There are obviously plenty of success stories in individual situations where people invest at high risk and see high returns. There are also plenty of people who have gotten burned WAY worse in the market than a cash value insurance policy would allow. 3-5% isn’t so bad if someone got crushed or made a bad move and lost half or all of their initial investment. The problem I have is when you write “debunking myth” articles and all of that nonsense you make this one particular product out to be some type of rip off scam.. It’s not a scam.. It’s actually a very simple concept. It’s going to get you a, well, decent to some rate of return if you compare it to other fixed vehicles (way better than CDs, comparable to bonds after tax) and provide you with the peace of mind that there is no risk of losing what you put in (in time), and if god forbid you pass on before that happens, your family will get a death benefit that is much much larger than your investment, regardless of when that happens. You can go off on 100 tangents with cost comparisons and formulas for weeks talking about how other investments will get you higher rates of return and that’s great because I agree with you, what I will say though is that it’s not guaranteed and not everyone is as confident in the market or personal investment endeavors. There are some instances in which I think traditional whole life makes sense, but majority of the time my recommendation ends up being a custom policy which can be guaranteed paid up (or guaranteed popped) in the number of years the client chooses. The reason being is that by the time a traditional would make sense, they would have to have enough of a net worth to maximize a lot of other options first, and by that time they will usually be financially comfortable enough to fund (at the very least) a 10 year custom, which is a stronger cash value product. We usually end up looking at a 5 or 10 year custom wrapped with some front end term to avoid mec and maximize cash value ASAP for maximum flexibility. The policy is completely paid up by their expected retirement age and the term will decrease yearly as the children become more financially independent. No more premiums and even more cash value growth than traditional whole life because it’s front loaded. Even if it is not a huge amount of insurance, at least there will be a certain number in dollars that will be guaranteed for life to them that will not have to worry about ever being insurable again for, god forbid an extreme medical situation happened where it then becomes too late for them to leave a legacy.
You need to do a little more research on how Mecs work and can be avoided. It is a non issue if the policy is created properly. It can always be avoided by wrapping a small amount of term into the permanent insurance that dwindles off in a certain number of years. Certain riders allow for this. Obviously, the 1 year custom is harder to turn into a non mec than a 5 year, etc because you need more term.. The mec is usually no longer an issue at all from a 10 year custom on even without a term rider (you can choose the number of years) and you will begin seeing growth on your premium in the year after it’s paid up. Works nicely for people in their 40s that still have young children who don’t qualify for the Roth and have consistently maxed out other retirement options over the years. I would gladly email you an illustration.
For the record, Custom whole life pays almost half in commission as what traditional whole life pays depending on the number of years the custom is set for. Many of my clients understand that and appreciate me for it. Also for the record, I will remain anonymous to avoid potential speculation of bias and incentive.
As for your stance on permanent insurance, there is plenty to elaborate on why you don’t think a death benefit is necessary post retirement. If someone is leaving a legacy behind and is financially independent (meaning either, A. they could still easily pay for a whole life premium without affecting their lifestyle in the least bit, or B. They funded a 5 or 10 year custom while still working and didn’t have to pay another dime into whatsoever after retirement), then why would they not leave behind an additional, I don’t know, just for argument sake well say an extra 1 million dollars to their heirs that they paid maybe 1/5 of that for tops? Unless I’m not understanding you correctly, that stance is completely hypocritical because in essence you’re saying you don’t need insurance because you’ll have enough of a legacy built up by retirement but then in your article you talk about gazillionaire CEOs having whole life policies bc of how rich they are and not many people make that kind of money. Obviously in your opinion they have built up enough of a legacy to not leave anything additional behind, no?
That’s a 989 word comment, about the length of most of the posts on this site. I’m not sure why those who sell life insurance are so wordy, but it seems a common theme on these comment threads. I probably ought to be using my time to do something more productive, but let’s take a look at your comment instead:
1) Only an insurance agent would use the word “premium” to refer to investment dollars.
2) I agree there is no arguing that returns are better in the market, especially when using tax-protected accounts.
3) I agree that poor investors could be better off in permanent life insurance (or even stuffing money under their mattress) than in the market. I don’t agree that the solution is to put their money into permanent life insurance or stuffing it under their mattress. The solution is to teach them to not be poor investors.
4) 3% IS bad. At 3%, your money isn’t growing after inflation. Even at 5% (optimistic for most whole life policies, even after decades), your money is only doubling every 36 years on a real basis. Low returns absolutely do matter. It means working longer or spending less now or spending less later. It matters.
5) Permanent life insurance isn’t likely to do better than CDs. The only way to say that is to compare apples to oranges. You can get a 5 year CD paying 2.3% right now. What is the 5 year return on a whole life policy? It’s less than zero. So CDs win. To get a decent rate of return on whole life, you need to hold it until death. 50, 60, 70 years or so. What does a 50 year CD pay? If you could get it, it would probably pay pretty well. A 30 year treasury, even at our current historically low rates, pays 3.5%.
6) Whole life isn’t a scam, as long as the investor understands what he is buying. He is buying an investment that will have a negative return for 7-15 years, requires ongoing payments, at least for the first decade or two, and must be held until death to provide a return in the 3-5% range. If he’s fine with that, then go ahead, buy as much as you want. But I find that when people really understand how whole life works, they don’t want it.
7) Just because you’re selling your clients a policy with a lower commission than some other policy you could be selling them, doesn’t mean you’re doing them a favor.
The vast majority of investors, including physicians, do not need whole life insurance. Once they understand how it works, most don’t want it either. It takes an army of salesmen to sell it to them. 80% of them get rid of it before death, usually turning potentially low returns into terrible returns. Every agent who comes on to this blog seems to think it isn’t HIS clients who are buying it inappropriately nor HIS clients who are surrendering these policies (1/3 within 5 years while returns are definitely still negative). But the fact remains, SOMEBODY in the industry is selling a heck of a lot of these policies to people and destroying a lot of people’s wealth by doing so.
Sorry about the long post. You are so wrong conceptually in some places its hard to not go into detail. Again, 3 posts in you still are not understanding how custom whole life works and refuse to acknowledge it. 50, 60 or 70 years or death to get a decent return is not only wrong, its not even close. First of all, 5% ROR is not out of the ordinary to get in a whole life over a span of 30 years. Ive actually seen close to 8% on more than one occasion. Second of all, if you die before the CD matures, does your family get a death benefit worth close to double of the money you’ve invested into it at the time of your death? you would have to buy a term to cover the asset in order to fairly compare it to a whole life. In order to do that, you would have to add up all of the term premiums annually, and then subtract that from what the cd is worth. It comes no where close to what a front loaded whole life policy would get you.
10 year custom whole life for a 46 year old, standard rating, non mec:
initial deposit: 200,000 into a Premium Deposit Account (Allows for an additional 4 percent annually on the initial premium until it has paid the policy completely)
year 10 (Age 56): Cash value = 233,195 Death benefit = 534,347 (Already made money back plus 33,195, Haven’t paid a dollar into it in 10 years.)
Year 20 (Age 66): Cash Value = 400,837, Death benefit = 700,656, (Haven’t paid a dollar in premium in 20 years, doubled initial investment in cash value and DB is worth almost 4X your investment)
At the 20 year point its already “worth it” investment wise, taking into account the death benefit attached if you pass before you can use the cash, or if you passed during the 20 years because of the death benefit left to family.
now we get to 50? 60? 70 years…. (its actually laughable that you thought it would take this long to see a decent return… what illustration were you looking at?!?!)
Year 50: Cash Value: 1,302,817, Death Benefit: 1.4 Mill (Haven’t paid a premium in 50 years and have made your money back in cash value almost 7 times… at this point he could withdraw a million dollars for himself, Fly around the world 5 times and still have a death benefit of about 400k to leave to his family.
Not sure if you have out for someone maybe who burned you that is in the business or something but if your going to speak on specific products, please be qualified in doing so… take a course or do some more research. There is too much volume on this site for this amount of misinformation.
Please delete the standalone comment that is the same as this one, it was intended as a reply. Thanks
If you wish to talk about a specific policy, please email me the illustration. Assume a 30-35 year old healthy male.
Regarding the illustrations I’ve looked at, I’m not even talking about the guaranteed returns. Those are only 2% after decades….
Can a policy be designed to have a slightly better return? Sure. BUT NONE OF THE DOCTORS WHO SEND ME THEIR POLICIES TO LOOK AT HAVE BEEN SOLD THOSE. They all seem to have policies designed to maximize the commissions to the agent for some reason.
Can you give an example? How can an agent design a policy to maximize his commission?
@DR No
Traditional whole life pays out higher commissions than custom whole life. The less number of set years in which premium is paid, the less the commission for the person offering it
Don’t obsess over commissions though, someone with a decent book of business will not stress over 10% difference in one policy, or one policy at all. I personally would much rather do my best to educate the client on many different options (fixed, variable and other), and leave an appointment feeling like the plan is something the client 100% understood and was on board with rather than just maximizing commission. Sometimes the plan includes life insurance, sometimes it doesn’t.
@WCI
Thats a shame, seems like you guys have dealt with some bad apples. If you’re going to even bother looking at a whole life illustration, make sure it is from a mutual company (policy owners own the company, no stockholders are paid dividends), and make sure that company has some consistency being listed in the top 100 of the annual fortune 500 (Stronger companies typically give out higher dividends at a more consistent rate). I will design one tomorrow front loaded with OPP and a term rider to maximize cash value in the early years and email it..My goal will be to show you gains before 10 years, and double your investment at 15 in cash value. Probably still won’t be particularly mind-blowing to someone getting 12.5% in peer to peer lending, but paired with a nice death benefit may be a little more attractive than what you’ve seen.
I agree there are ways to improve the returns (although the improvements are small). I wish agents would use them when selling policies.
Some policies pay more in commissions than other policies. “Paid up additions” pay commissions at a lower rate than the bare bones policy etc.
Also… Have seen this a few times on your site… you keep with the “almost nobody needs a permanent death benefit”… please elaborate.
There isn’t much to elaborate on there. If you can cover the period of time prior to financial independence/retirement with term insurance, then you don’t need permanent insurance. There is no need for the death benefit.
There is plenty to elaborate on why you don’t think a death benefit is necessary post retirement. If someone is leaving a legacy behind and is financially independent (meaning either, A. they could still easily pay for a whole life premium without affecting their lifestyle in the least bit, or B. They funded a 5 or 10 year custom while still working and didn’t have to pay another dime into whatsoever after retirement), then why would they not leave behind an additional, I don’t know, just for argument sake well say an extra 1 million dollars to their heirs that they paid maybe 1/5 of that for tops? Unless I’m not understanding you correctly, that stance is completely hypocritical because in essence you’re saying you don’t need insurance because you’ll have enough of a legacy built up by retirement but then in your article you talk about gazillionaire CEOs having whole life policies bc of how rich they are and not many people make that kind of money. Obviously in your opinion they have built up enough of a legacy to not leave anything additional behind, no?
I’m not sure you’re understanding me. First, few of my readers can “easily pay whole life premiums” without it affecting their lifestyle in the least bit. There’s only a limited amount of money for all of us. We can spend it on our lifestyle, we can give it away, or we can invest it. If there was money I didn’t want to spend and didn’t need to invest, I’d give it away, not buy unneeded life insurance with it.
This idea that “you paid maybe 1/5 of” assumes the reader has no concept of the time value of money. Tell you what, why don’t you give me $10K and in 60 years I’ll give you $50K. Deal? No? Why not? Oh, because that’s not actually a good return on your money, is it? (It’s 2.7% per year.)
If I were a gazillionaire CEO, I wouldn’t buy whole life. If you want to, knock yourself out. I don’t find it a particularly attractive investment.
No point arguing in two different spots, but here I was not talking about it as in investment I was saying if you died before you could use the investment, your family is getting exponentially more than what you had put into it. 10k for 50k in 60 years is absolutely no where to be found in any plan design i have created, and I’m yet to see any fixed product perform that poorly including any whole life, so I’m not sure where your getting at with those figures. The biggest problem I have with your blog is these made up, out of thin air figures of absolutely horrible returns. Where are these numbers coming from? You must have been shown some pretty awful illustrations.
No point arguing at all. Were you expecting to convince me that whole life was some awesome investment? Good luck. You know I’ve owned a policy, right? I had a -30% return after 7 years. Seriously. It was terrible. Sold to me by a friend. Tens of thousands of doctors have had the same experience. Sorry if my “high-volume” site is starting to cut into your business. That’s actually the point.
I understand thats your point, thats my problem. I think your particular bad personal experience may be clouding your ability to portray the product objectively.. That being said, you will have to trash quite a few more financial vehicles to cut into my business, some which you have already endorsed, so I think ill be ok ;).
If there is such a policy where you put relatively little in and get a lot out — guaranteed as long as you see it through to fully funding it — then the only way the numbers can work is if the insurance company counts on a lot of people signing up for this permanent life insurance, paying some premiums, and then dropping it. It would require built-in actuarial data (which I am sure they all have) demonstrating a consistent drop-out rate. Term life insurance companies accomplish this by having a limited term. Whole life policies apparently accomplish it by having people drop out.
There is simply no way that an insurance company can take those premiums (minus the sizable up-front commission), invest them, and make enough money to be able to make the kinds of huge death-benefit pay-outs down the road being described by some in this thread, and still make a profit as well (which the insurance company has to do).
It would be a whole-life insurance company’s worst nightmare if everyone who signed up got one of these really favorable policies and actually kept them until payout, it seems to me.
I think it was Dr. No who claimed that everyone could leave their families as millionaires (maybe multi-millionaires) if they would just would buy these policies. But if everyone actually did it and saw it through to the end, the millions couldn’t possibly happen, since insurance companies don’t have magical money trees to get extra cash for the big payouts…
What really happens is that we doctors get suckered into making a few years of big premium payments, then for one reason or another can’t or won’t continue. Works out great for the insurance companies
NVMD, Its true for every investment. Stock markets need continuous buyers for it to go to new heights. Social security system needs new young workers to pay to retirees.
Every investment is a Ponzi scheme. Dont you let anyone tell it isn’t!
Stock markets don’t need continuous buyers to go to new heights. For every buyer there is a seller. As a business becomes more valuable, the shares of its stock increase in value. As it makes profits, it kicks out dividends. That doesn’t require any buying or selling for that to work.
Really? Thats your understanding of stock market? As business becomes more valuable, the stock prices increase in value? Automatically? Even if there is no one to buy?
If my stock increased to $50 from $10 because that company became more valuable and there are NO buyers at $50 and I really needed to raise cash, do you think I would hold on or sell them at whatever price there is a buyer for?
I guess the next thing you will say is that a company does not need customers to sell goods to and generate a profit:)
Why would I say that? Does that make sense to you?
Real estate for the rents, bonds for the coupons, stocks for the dividends. The value of a stock/business is the discounting of future dividends/profits. As those profits climb, the value of the business climbs.
You buy stocks for the long term. If you are in a situation where it is temporarily impossible to get a fair price on that stock/business (consider Sept 08 to Sept 09 for instance), you need a plan to be able to get cash from somewhere else in your financial plan. Perhaps an emergency fund, the bonds in your portfolio etc.
If a stock is worth more to you than to a potential buyer, then you keep it. If it is worth more to the buyer than to you, then you sell it. But over the long run you can ignore what Bogle calls the “speculative return” as it averages out to zero.
If Doctor No’s understanding of how stock returns work reflects the typical insurance salesmen’s, then I wouldn’t be surprised why most call it gambling or refer to it as a casino. Complete ignorance. He acts as if stocks price appreciation is completely based on capital appreciation through buying and selling. If there were no more buyers, the company would eventually generate excess cash to a point that they would be continuously distributing dividends to the same fixed set of stockholders year after year. With increasing earnings, those people accumulate way more cash than the capital appreciation. Doesn’t sound like a Bernie Madoff to me.
Interesting insight. Have seen some huge payouts myself, some celebrity clients have policies so big that they have to be split 5 ways between companies, because when they die the one payout is comparable to a fiscal year lol. Becomes too risky for the company for reasons you mentioned. If some of these guys think whole life is a poor investment when the policy is in place, try lapsing a policy… holding on then surrendering when you make your money back is actually worse for the company and better for the client. Most companies offer both term and whole life. They make a ton of money on term (think about living through a big term policy) and lapsing whole life policies. All that being said, some of the big insurance companies have 30+ billion in surplus dollars as “just in case” money to protect against things like that. Must be nice.
Given that pretty much over 80% of people lapse/surrender these “investments”, the return should be higher than any other investment. Just shows how much goes out in commissions and fees as to why it is that this doesn’t happen. It’s also why you can’t find any independent group recommending it as an investment and we see so many attempts by insurance agents to pretend it’s a good investment.
Decisontree Financial, Kevin Wenke and Paul Beavin
I bought your book “Comfort Investing” and am trying to reach you regarding the concept. Why dont you answer or post here? Is your goal only to get people to buy the book?
Dr.No
Interesting comments Dr. No over the last couple days. You can reach me here (407)288-8922
Paul
Just want to share this. Again, I am just an investor who happens to be sophisticated/accredited and NOT a doctor.
http://indexuniversallife.net/267/the-401k-versus-the-iul-part-one/
http://indexuniversallife.net/241/the-401k-versus-the-iul-part-two/
Or an insurance salesman.
Via email:
Dr. No, to make whole life work, the vast majority pay in for awhile then drop out, getting zero in return. Neither SS nor the stock/bond market are like that.
Your claim that everyone in America could all be millionaires if only everyone buys whole life sure does sound Ponzi to me
You are 30 now and from what you said here, you have bad habits. Maybe commitment issues etc. When you are 40/45 and married with kids, your emotions will be different. You will want to leave a legacy for your kids. What if you die before your 401k can be million to pass on? This whole life insurance is kind of reverse engineering. You set it up so it will pay out a legacy even if you die a lot sooner than you think. In those dying moments, there will be peace in your mind and a smile on your face knowing that even though you could not build your 401k to your required level, this whole life policy will take care of your desire to pass on something to your kids. Thats the way to look at it.
No, the bad habit is rock climbing.
I’m 11 months away from being 40 with kids. I doubt my emotions will be different. I plan to leave a legacy to my kids. I don’t need whole life insurance to do that.
If I die before my 401(k) can be a million…oh wait, too late, I’m already a millionaire. But if I die before I could build my 401(k) to my desired level, then my LARGE TERM LIFE POLICIES will make up the difference. Why is that so hard for a whole life salesman to understand? Term life + portfolio = all the money my family and I will ever need. When portfolio = all the money my family and I will ever need, there is no longer any need for the life insurance. There is no life-long need for life insurance. You can leave plenty of money behind with no life insurance in place at death.
In their dying moments, no one has peace in their mind or a smile on their face. Have you ever watched someone die? I do it all the time. None of them are thinking about life insurance, I assure you. Most of them aren’t thinking at all, and those who are are thinking about oxygen.
If you love whole life insurance, buy it. I’m not going to stop you. But don’t pretend it’s something it isn’t. It’s a good way to leave a guaranteed amount of money at your death, which is probably less than you would leave if you had invested those dollars in more traditional investments instead.
Would you mind sharing the details of your portfolio? It will b helpful for lot of people here.
It’s been discussed many times on the blog. Here are a few places:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
https://www.whitecoatinvestor.com/evolution-of-the-white-coat-investors-portfolio/
https://www.whitecoatinvestor.com/qa-on-my-portfolio/
If you are 40 and are already a millionaire, what are you doing preaching non-millionaires not to buy whole life? This is for people who are not millionaires.Not every doctor is a millionaire and many will have bad habits other than rock climbing to be able to get insurance later on.
How long a term do you buy? 10, 20, 30 or upto 100? That’s money thats down the drain! again for non-millionaires.
I am not talking about accidental deaths in ER.
I am not yet a millionaire, but I did choose to buy term life insurance rather than whole or universal. I have a 20 year, 2 million dollar policy for which I will pay a total of $25,000 in premiums over the course of the term. I don’t view the premiums as money down the drain, either. It is money I pay to purchase security for my family in case I should die before reaching financial independence. After 20 years, I should have more than enough saved to meet our needs going forward. When the term is up, provided I’m still alive, the insurance company and I can both part ways happy. They will have the premiums, and I will have enjoyed the benefit of their promise to provide financially for my family had I passed away during the 20 year term. I don’t see any need to make it more complicated than that.
The key word here is “view”. Of course you dont view it that way.
After 20 years, you SHOULD have more than enough saved. Again ‘should have’ is not same ‘have’. Its for those people who want to save enough inside the policy and who want to leave a legacy for their children, rather than kicking them out at 18 and let them go through the same life’s routine.
Any way you want to view it, a death benefit costs money. No insurance company will ever provide them for free. I am simply buying the exact benefit I want over the exact period of time that I want it. As for my legacy for my children, I am accumulating assets in their college funds as well as (gasp!) a taxable account that they can one day inherit in addition to whatever may be left in retirement accounts. I would much rather save in a taxable investment account than an insurance policy. They are a fantastic way to leave a legacy, whether it be to heirs or charity. WCI has a great article on taxable accounts as well.
Every doctor can be a millionaire by following my advice to avoid things like whole life. You buy a term for the period of time it will take you to reach financial independence. For the typical doctor, that will be 20-30 years from graduation. It’s not “money down the drain.” It’s money used to protect your family for 20-30 years.
If a physician doesn’t have the earnings or financial discipline to make himself a millionaire a couple of times over by the time of retirement, he is almost certainly not well-off enough or financially disciplined enough to follow through on the payments of a high-priced whole life policy. And he will probably end up raiding the cash value and his kids wouldn’t see much of it anyway.
By the time people who are buying these policies actually die, inflation will have rendered a million dollars even more average than it already is. If someone has, say, 3 kids, and the policy is for one million and they get it in 2040 — it will hardly be a life-changing windfall.
In order to be able to buy a policy that would truly be life-changing for one’s children, it would be a very high-priced policy, and again, someone without the financial discipline to sock away a couple million in assets by retirement probably won’t be able to keep up with the premiums on such a policy and they will join the 80% who let it lapse. They certainly won’t have saved up a couple hundred thousand in cash to fully fund some fancy version.
I carry a $5 million term that will last me until I am 60. If my assets aren’t enough to provide for my wife at that point (my kids will be on their own), that means I’ve been financially irresponsible.
The real legacy that I hope to leave my children from a financial standpoint is what my parents left me: An example of a strong work ethic, personal frugality, and disciplined saving and investments. Inherited money can be lost in one way or another (and money left to kids who are chronically broke is usually gone within a few years, leaving them still broke), but good financial habits are something no-one can take away from them.
If there is some cash left for my kids when my wife and I are both dead — that’s a bonus. I expect to have some cash as a bonus when my parents both pass on, but I’m not counting on it — retirement can be expensive.
The idea that you will want to give most of your money at death is bogus and only pushed by insurance agents. Instead of getting joy 2 seconds before you die, give money during your life. Both your loved ones and yourself will greatly appreciate this and the much better returns on your investments which means you will be giving them more money. Again the proof is in the pudding that almost nobody does keep these things in force until death. Its a product that’s been around forever and still fails over 80% of the time.
My favorite one is when you’ve explained why you don’t need the death benefit for your family, and you don’t want it as an investment, the salesman pulls out the charity and/or church cards. The “retirement planning” book I was given by a “financial adviser” was one long infomercial for whole life. There was a whole chapter that played the religion card — Jesus wants you to get whole life insurance so you can leave a bunch of money to him, I guess.
I’ve read and heard so much that I can’t remember where it was, but I encountered an insurance guy who basically said, “weeeellllll…, I GUESS if you don’t have a passion for any charities or causes…”
I give as I go along. My charities are 100% certain to get what I give them. With the average whole life policy, there is a 20% chance that they will get something, and an 80% chance that the money ends up in the pockets of the insurance company instead.
One final question before quitting this forum. What will happen if you die in the same year as a market crash?
your 401k gets wiped out 50% to 90% in a market crash and you die with a look on your face that clearly says “if only I had time for a market recovery” 🙂
All the best folks and Docs! Keep doing your good work! Adios!
If I die before age 60, my family gets a $5 million dollar payout — much more than they could ever get from any whole life policy, certainly with me at that age.
If I die after age 60, my house will be paid for, I will have other income generating real estate, and those will comprise over half of my assets. I always keep a cash reserve with enough to live on for a year or two so I wouldn’t touch my taxable stock portfolio and would only take the minimum required out of my tax-deferred portfolio. Furthermore, I will have shifted, by age 60, to probably 50/50 stocks and bonds.
The net hit of a 50% drop in equities would, after age 60, mean perhaps a 10-15% drop in my net worth.
By contrast, if I had whole life instead of term, my family would only get a million dollar payout prior to age 60, and after age 60, the other assets they would inherit would be considerably less because the whole-life policy wouldn’t be worth as much as what a regular investment in the stock market of those gargantuan premiums is on track to make me, even with below-average stock performance.
Your point?
Again the keyword is “will have” which is different from “do have”.
Obviously, we come from different realities, with different investing skills. Lets just agree to disagree.
Peace!
Unfortunately that really isn’t possible since the facts are that to get anything like the illustrated lousy returns of whole life, one needs about 80% of people to fail. Also with whole life you have to take into consideration the possibility that the insurance company wont make good on their promises. When the state guaranty assoc has stepped in, published stats show that the client was made whole 94% of the time with annuities and 96% with insurance. If the client was below the typical guaranty levels which vary but around 100k of cash value and 300k of death benefit then the client was made whole pretty much 100% of the time but of course we are way beyond those values. Bottom line is this isn’t an issue where the facts allow one to agree to disagree.
Haha, this guy’s a classic salesman. Do you even understand asset allocation and basic risk management?
Sorry, Dr. No. You cant both hypothesize a sudden crash on the day I die and then also deny that stock levels will rise at historical rates until the crash.
A crash means that the market was high before that.
Besides, my family will be inheriting stocks and bonds (in that portion of my portfolio). Even though I wont be around to wait for the market to recover, they will be. They will know not to sell low and they will know to wait it out. They will either have $5 million to get them through the slump if I die before age 60 or $100k cash in today’s dollars of emergency funds plus bond funds that will have preserved most of their value, if I die after age 60. And income generating real estate. And my wife will have SS and my kids will have jobs.
Agree to disagree? Of course, but there is only one reality. You just have to be willing to see it. You have a ways to go before you become the sophisticated investor you claim to be.
The important thing is that doctors know to avoid whole life and not fall for the song and dance routine
Dear WCI
My wife and I are physicians and were talked into a 10-year-pay whole life policy through Mass Mutual. I have been paying on it for one year and would like to salvage my investment the best way possible. Our annual premium is currently $80,000 and we are paying monthly. I am dumping my “financial advisor” and will be managing investments on my own from now on.
I am thinking of cutting the policy in half ($40,000 annual premium) so that I can pay the entire premium without fees. As mentioned, we are with a mutual firm and have the pay-up additions in place. We currently do need life insurance for my wife (I am not insurable) and we are maxing out all of our retirement accounts (401k and back door Roth IRA). Do you think this is the best option if we are comfortable with this as a “fixed income” segment of our portfolio? If I cash out after the first year I loose $50,000 to our “advisor”. I may consider that if cutting the policy in half will trigger a Modified Endowment Contract for the IRS as we will no longer have the tax-advantaged benefit.
Thanks in advance for your help. Too bad I did not find this site last year when I was being talked into snake oil.
Wow, $80K a year! That’s a monstrous premium, even for a two physician couple.
I have one concern about you dropping the policy- the fact that you say you’re uninsurable. Is the policy on her then?
The fact that you have a huge policy doesn’t actually change the math. Unless you want a permanent life insurance policy for the rest of your life, now is the time to get out. Certainly the return would be better if you were paying annually.
But with such a large sum of money, it’s worthwhile getting several different opinions. You might try evaluatelifeinsurance.org where James Hunt can give you his opinion for a small fee. He posts here from time to time. You might also try an independent agent and talk about your options such as exchanging it into another permanent life insurance policy (perhaps a much smaller one), into a VA or into LTCI.
Try not to think too much about the water under the bridge at this point. That isn’t coming back.
The key words in your post are “were talked into.” If you really feel that way — that given the chance for a do-over, you wouldn’t buy this policy — then you need to ask why you would think about keeping it, especially since you would only lose $50K (compared to losing a whole lot more if you decide to drop it later)?
To absolutely be sure you can count on coming up with $80K every single year (or even $40K) for 10 years is no small thing. And if you have $400K sitting in the bank ready to pay the whole thing up, is the future death benefit you would receive worth forgoing average gains in a standard portfolio over the next few decades? Would you need a death benefit for yourself all the way until her death? If not, can she get a generous term policy for the period of time you do need a death benefit?
There are a lot of questions that go into deciding on specifics of life insurance contracts. My wife and I spent a lot of time crunching numbers and looking at our family’s future timetables before settling on an amount of term life insurance 10 years ago. I am insured to a hefty amount because of our financial obligations and the fact that her income is quite small compared to mine. We chose not to insure her, since it didn’t make financial sense to do so — my financial situation wouldn’t be appreciably different without her. (My life would be a mess without her, but you can’t buy insurance for that).
Your situation may be different, but for most people, insurance decisions need to be driven by one’s need to be able to count on a death benefit — how much, for how long, etc. Most insurance salesmen, in my experience, try to talk us into these horrendous whole life policies by mixing what should be a pretty straightforward calculation that can be done with pencil and paper with complex ideas about “investing.”
It’s not an investment, it is insurance. Insurance is a vital part of most doctor’s financial planning for a couple of decades (but usually doesn’t need to be beyond that.) Isolate your choices to highly specific decisions about the need for a death benefit, and the decision (along with the help of an impartial adviser) may get easier.
Thanks for the replies –
I have a pre-existing condition and we were expecting our first child when we signed the policy. Bottom line is that we got duped and neither of us would have been suckers for this on our own. We were recently married and wanted a third party to help us make investment decisions instead of just me. I was more concerned with removing a point of contention in our marriage then I was with making sound financial decisions.
So now I am considering one of the following:
1) Cancel the plan, eat the $50,000, and take out a term policy on my wife for a lesser amount while investing the remaining money in tax advantaged accounts.
2) Change the policy to a lesser death benefit and “overfund” it for investment purposes just below the point of triggering an MEC. This will increase my “investment” gains and still provide an adequate death benefit.
3) Do a 1035 transfer of the whole life policy into a deferred variable annuity (Vanguard) and take out a term policy on my wife for the death benefit. I am not familiar with this option, but would only likely consider this if it minimized my loss over canceling the policy outright.
Thoughts ?
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
This is a great site. A few years ago, I inherited about 870,000. It’s a life-changing experience that will make my retirement years golden. I had to pay some taxes and did a little bit of fun stuff, and I’m about 18 months from millionaire status in my 40s. I’m not a doc. When I got the money, I pulled it away from my parents’ financial adviser, who wanted to put it in a fund of funds and promised me 3 percent. I made the mistake of going with somebody from Northwest Mutual, who billed himself as an adviser, but was constantly pushing whole life. I had to pull money from him when he tried to get me to buy 200,000 of whole life with a 1 million dollar payout. He couldn’t tell me why I should do this. When I die, hopefully in my 80s, I’ll be worth just under the 5.25 exclusion. I’m a PhD geek with DRIP calculators and have been doing income investing. He just said, “Don’t you trust me?” The answer of course is no. I ran screaming after he pulled this stuff. Keep up the good work here. It helps when doctors do this.
Congratulations on your inheritance, but more on your becoming financially savvy. While I hate to advise people to distrust others, a little healthy skepticism can be very valuable.