I had a question by email recently:
I am working with an insurance advisor and I’d like your advice. He was highly recommended to me and he has been very forthright with me. He has not been pushy or salesly in any way and I feel that he does have my and my family’s best interest at heart.
I have a young son who has a severe case of autism. Before I was referred to this individual I had made the decision to implement life insurance and then I reached out to him for help. He reviewed all my options as it pertains to products: term, UL (all different kinds) and 10 pay whole life.
I have decided on 10 pay whole life. I read your opinion on whole life and obviously it isn’t positive, but please follow my thought process and please tell me if you agree. With my family situation, my insurance has to be permanent. I am only 40 and I do make a high income, but that is somewhat new so I don’t have a huge amount of assets yet that would take care of my wife and son if something were to happen to me.
I don’t like term. I am very healthy and I don’t think it would pay a claim even if I got a 30 year term so that left me with guaranteed UL and 10 pay whole.
The annual premium for the 10 pay is $35,000 for $1,000,000…I researched the whole life company’s dividend scale and it seems reasonable—it is Guardian Life. The cash value is projected to break even in 10 years. I am going to implement something permanent. That is not a question for me. I can afford to do it and I want something there forever for my son. Am I wrong in my thinking? I know you don’t like whole life and the people who sell it, but this is not about the agent—he has been unbiased in his assistance. He has really just educated me. This is my decision. I just would appreciate your unbiased opinion for my specific situation.
I thought there was a lot to discuss here! First, I wanted to point out the issues raised by the email. Then I'll discuss the fact that just having a disabled kid does not mean you have to buy permanent life insurance. Finally, I'll discuss how to properly buy a whole life insurance policy if you cannot be dissuaded!
Insurance Agents Recommend Insurance Products
Perhaps what I found most interesting in this email was the following:
“I'm working with an insurance advisor….he has not been pushy…[and has] my…best interest at heart….he reviewed all…options as it pertains to products: term, UL…and whole life….it is Guardian Life…I know you don't like…the people who sell [whole life] but this is not about the agent–he has been unbiased…[and] has…just educated me…I …would appreciate your unbiased opinion.
First, this is not an “insurance advisor.” There are insurance advisors (not very many, but a few) who charge a fee to evaluate your insurance. They do not sell insurance. The reason why is that you cannot give truly unbiased advice about a product you are paid a commission to sell. So this is an insurance agent or commissioned salesman. You must ALWAYS keep that in mind.
It's okay to buy stuff from a commissioned salesman (I have one on my own staff who sells ads to insurance agents) and it is okay to get information from them, but when it comes to whether or not you should buy the product at all, their “advice” is less than reliable.
Of course, they're not going to be pushy or salesy. You know why? Because nobody (especially doctors) likes buying stuff from people who are pushy or salesy! They've learned it doesn't work. If they want to sell anything successfully, they've got to learn to at least not appear pushy.
Second, the agent also truly believes he has your best interest at heart. That's why they're so successful. They really do believe in their products! If they didn't before they signed on with the company, the company-furnished sales training will usually convince them. The emailing doc felt like the agent discussed all the options but the only options he listed were insurance products. Well, when all you have is a hammer, everything looks like a nail.
So yes, he described to you all the insurance products he could sell to you and let you choose between them. What he did not discuss is that you may be able to meet the need you are most concerned about with something that IS NOT AN INSURANCE POLICY!
I think the emailer has some doubts about what he is writing, almost as if he is trying to convince himself of what he is writing. But if he truly believed the agent was unbiased, why would he be emailing me? It's like the people who email me to ask about the advice their financial advisor is giving them. Why pay someone thousands of dollars a year to give you advice and then email some yahoo on the internet to check on it? There's only one reason–you're worried you're not actually getting high-quality, unbiased advice. And you're usually right to worry. By the way, I have a whole list of financial advisors and insurance agents whose clients don't email me to see if they're getting good advice.
Why Just Having a Special Needs Kid Is Not Enough of a Reason to Buy Whole Life Insurance
There is this idea out there that having a disabled child means you need to buy whole life insurance. The agents are more than happy to not correct this idea. But it doesn't actually stand up to reason. Somehow, the emailer has already been convinced that he NEEDS a permanent life insurance product (“my insurance has to be permanent”) just because he is 40 without much in the way of assets and has an autistic child who will presumably need financial assistance the rest of his life. I reject the premise.
What you NEED is money to take care of your child. Where that money comes from is completely immaterial. It can come from a job, investments, or an insurance policy. I assure you that your kid truly won't care. So what is the best way to absolutely ensure that money will be there? Well, it depends.
Right now, when you're 40 and working and saving and don't have much in the way of assets, the best way is to use a term life insurance policy. It's very inexpensive, perhaps 1/8th or even 1/20th as much as a whole life insurance policy. That lower premium leaves you more money to save and invest.
But what about after the term runs out? This doc is actually fairly unlikely to die before age 60 or 70, that's the reason term life policies are so cheap–because most of them never have to pay out. So how can the doctor possibly take care of his autistic son AFTER the term runs out? Well, that's where the investments come in.
Despite having little in assets at age 40, combining a little bit of financial literacy and discipline with his high income should result in the doctor becoming a financially independent multi-millionaire at some point in his 60s. He will then have enough money to take care of himself for the rest of his life. The difference between that sum of money and an amount required to take care of both him for the rest of his life AND his autistic son for the rest of his life is actually very small, especially if combined with a trust and/or an income annuity of some type. Let's run the numbers to demonstrate.
This doctor is planning on buying a 10-pay whole life insurance policy with a face value of $1 Million and an annual premium of $35K for 10 years. With whole life, assuming you reinvest all of the dividends, the death benefit actually rises as you go along at some amount usually a little less than the rate of inflation. Let's call it 2% a year. So after 30 years, there is a death benefit of
=FV(2%,30,0,-1000000) = $1,811,362
the year the doctor turns 70.
Let's take a look at the alternative. Now, unlike many who mistakenly buy whole life insurance as a retirement account, this doctor actually has a need for life insurance. So, for an honest comparison, we should subtract out the cost of a term policy before doing our calculations. According to term4sale.com, a healthy 40-year-old male can buy a 20 year, $1 Million term policy for $542/year or a 30-year policy for $1,105/year. Let's use the 30-year rate in our calculation.
Let's assume you spend the exact same $35,000 per year for either whole life insurance or term life insurance plus enough investments to provide AT LEAST as much as the whole life insurance death benefit, which we have seen is $1.8 Million. So you have $33,895 to invest each year for ten years, then you let it ride. Let's assume you earn 8% nominal on the investments since we've already adjusted the whole life policy for its death benefit increase over 30 years. How much will you have after 30 years?
After ten years, you will have:
=FV(8%,10,-33895,0,1) = $530,304
After 30 years, you will have:
By using the term policy and investing the rest, you leave your child an additional $2,471,724-$1,811,362 = $660,362, 36% more. And that difference continues to grow the longer you live. In fact, you can carve out that same $1.8 Million to leave to your child and use the rest yourself if you like!
But isn't the whole life death benefit tax-free?
It sure is! But SO are the investments thanks to the step-up in basis at death. Same-same.
But I thought permanent life insurance was needed if you have a special needs kid?
Why? Is there some assumption I made that you don't agree with? Is there some other thing you want that policy to do besides provide a big fat death benefit? In fact, I would argue that right now this doc likely needs a life insurance policy LARGER than $1 Million, and simply cannot afford to buy it as a permanent policy. He can only afford it as a term policy.
Do ANY people with special needs kids need a permanent life insurance policy?
Absolutely. Imagine you are retiring primarily on a pension and social security and don't really have much of a nest egg. When you die, what is that kid going to live on? The pension is gone and so is the social security. That person is a great candidate for a permanent life insurance policy. In fact, a spouse in the same situation may also be a candidate unless that pension is structured such that it will at least pay out something for the remaining spouse. But if you're retiring on a $3 Million nest egg? Chances are you'll be leaving behind more than $3 Million for that kiddo.
Anything else to know about caring for special needs kids after my death?
Another great new account called an ABLE account is a tax-protected investing account somewhat similar to a 529 but designed to help disabled folks.
You are also likely to need a trust and trustee of some sort to manage the assets of the disabled person, whether you fund it with investments or life insurance. Another great option may be an income annuity, essentially buying a pension for the disabled person.
How To Structure a Whole Life Policy Properly
Now I don't spend a lot of time on this blog talking about how to maximize the benefits of a whole life insurance policy. However, that is not because I don't understand HOW to maximize the benefits of a whole life insurance policy, despite being frequently accused of such by true fans of this product. It is simply because even with the policy ideally structured, I still think most people ought to avoid the product.
80% of whole life purchasers surrender their policies before death, often at a loss and usually because they are unhappy with the performance. They have a poorly structured policy and they didn't really understand how whole life insurance policies work, with negative returns on the cash value for 5-15 years and low returns even in the long run.
A poll in the White Coat Investor Facebook Group revealed that 75% of doctors who had actually purchased a whole life insurance policy regretted their decision. They do so for all kinds of reasons that you can read more about, but it usually boils down to the fact that the policy was sold to them inappropriately by a very effective salesman.
Let's take a look at this particular policy. It's a 10 pay policy from Guardian. Chances are very good that this particular doc can have a better policy designed for him. How do I know that? I know it because the true believers in whole life insurance, those who pore over these policies looking for the very best ones, rarely use a Guardian policy. Those are typically sold by relatively captive Guardian agents. Guardian disability insurance is a pretty good product, although sometimes overpriced. I would not extend that same compliment to their whole life insurance products. The main issue the Guardian policies have is that they are direct recognition.
Direct Recognition vs Non-Direct Recognition
If I were going to buy a whole life insurance policy, and I am not, I would buy one that is non-direct recognition. The reason for this involves what happens when you take out a loan against the policy. With a typical direct recognition policy, when you “borrow money out” of the policy, the policy stops paying dividends on the money you have borrowed out of the policy. Seems fair, right? I mean, you're using the money elsewhere so why should they keep paying you dividends on it?
But what if they did?
You'd take it, right? Well, that's what a non-direct recognition policy does. Companies like Ohio National and Lafayette offer non-direct recognition policies. Companies like Guardian, Northwestern Mutual, Security Mutual, and Country Financial do not.
If you combine a non-direct recognition policy with a policy that has “wash loans,” it gets even better. With a wash loan, which often only starts after a number of years in the policy, the loan rate is the same as the dividend rate. So you might pay 5% on the loan but that money is still earning a 5% dividend, so the loan is not only tax-free (like all loans), but also interest-free.
Now, in the case of the emailer who truly is buying the policy primarily for the death benefit and not to borrow against it himself, it probably doesn't matter. But having the flexibility to use the policy for your own purposes in case you change your mind (or heaven forbid your autistic child dies before you do) seems like a good thing.
Shorter Pay Periods
Pay Annually
With most life insurance policies, the price is higher if you pay monthly or quarterly versus annually, so pay annually. Yes, there is an opportunity cost there, but considering the rate investments with a guaranteed return are paying these days, it is usually worth going to annual payments on all your life and disability insurance policies. If you can't afford to pay annually, you're probably buying too large of a policy anyway.
Maximize Paid Up Additions
Perhaps the largest expense in a whole life insurance policy is the agent's commission. This can range from 50-110% of the first year's premium (now you know why he was working so hard to sell it.) The best way to reduce this commission is to reduce the size of the regular policy and increase the size of what are called “Paid Up Additions (PUA)”. The commission rate on PUAs is much lower than the rate on the vanilla policy, allowing more premium dollars to go toward the cash value rather than commission. It basically boosts the return on the policy a bit. If you're buying a whole life policy and the agent isn't talking about PUAs, you're buying the policy from the wrong person and probably the wrong company. Doing all these things likely results in a policy that breaks even in 5 years instead of 15, has slightly higher long-term returns on the cash value, and is far more useful if you choose to borrow against it down the road.
I have no problem whatsoever with someone buying a whole life insurance policy so long as
- They can afford to do so without sacrificing more critical financial goals
- They understand exactly how a whole life insurance policy works
- They have structured the policy properly for what they wish to do with it
Unfortunately, that's a tiny minority of the doctors I have met who have bought whole life insurance policies. More likely they didn't know how these policies work, didn't buy one that was structured well for what they hoped to do with it, still had student loans and a mortgage, and weren't even maxing out their retirement accounts when they were sold a policy. Remember that buying a whole life insurance policy is like getting married. It's either “til death do you part” or it's going to cost you a lot of money to get out. So when you shop for one, treat it with the same care and effort you would use when searching for a spouse. This should not be something purchased on the spur of the moment without extreme amounts of due diligence. If you're not willing to do that, you have no business buying one.
Certainly, there is no reason to buy one just because you have an autistic child.
What do you think? Do you have a special needs child? Have you bought a permanent life insurance policy? Why or why not? If you are happy with a WL policy you bought, how did you structure it? Comment below!
Just a shout out to what WCI says about how this policy is being sold. These agents go through a 6-week training. I personally know some who have gone through the training. They’ve specifically said “no one likes to be sold something so you always need to frame the story to get them to a place where they think they’ve decided it is best for them.” THEY’VE DECIDED. It never seems salesly if the agent is good and trained. Another reason why they are so good is because of what WCI says-they truly believe their products work! If they didn’t you’d hear it in their tone. Their calls are recorded, and if their supervisors notice the tone those agents are fired. So the only way to do this is to have this belief you tell yourself that you are helping people. You can’t change their mind.
They don’t need to fire the agents. They’re all commissioned. Those who don’t sell don’t get paid and quit.
Practical and thorough response. I think the most important takeaway from this post is that it’s easy to be convinced that someone is acting in your best interest, even when they aren’t.
I have a special needs child and if I die today or even in the next 10 years, my nest egg would not be large enough for my wife to live on for the rest of her life and would not provide enough for my special needs child to live on for the rest of her life. I do have term life insurance in place for my wife that will expire when I am 65, I am 52 now. My nest egg should be sufficient for my wife by the time I am 65. With that said, I decided I needed something in place that would take care of the needs of my SN child in the event of my death now. Also because my crystal ball is cloudy and I have no idea what my financial future looks like 10, 20 or 30 years from now I needed to purchase something that would guarantee my SN child was taken care of for the rest of her life after me and my wife are gone. After researching several options, I decided on a Second To Die insurance policy. The policy pays out to the beneficiary after the second spouse dies. The part that was most important to me was the policy pays out the same amount if me and my wife die today or at any point in the future. My goal was to make sure that no matter what happens to me and my wife now or in the future that my SN child would be taken care of, with no financial burden left behind for her brother, or other family members or caretakers. if you are in a similar situation, I would research Second To Die insurance. To clarify, I am not a doctor and I don’t sell insurance, I am just a husband and a dad doing the best he can to take care of his family.
Glad you’re happy with your policy. In many ways, covering this need this way is exchanging the ability to leave more money to provide for your child with a guarantee. If you understand the tradeoff and want to make it, I see no problem with doing so.
Thank you for the reply WCI. I should also point out that I also contribute a nice amount each month to The ABLE Account. If I live a long time and continue my contributions to ABLE my SN daughter will have plenty however, if I die early, the Second To Die policy will insure her good care. In a perfect world I will live and have a nice income for many more years with the ability to invest in ABLE however, being that I don’t know the future, the insurance allows me to sleep better at night knowing she is covered in any event.
I totally understand why one would buy an insurance policy. I’m simply suggesting it didn’t have to be a permanent policy since you’ll presumably at some point have a big huge nest egg that will support both you and her indefinitely.
Your money, your choice of course.
Really great post on why you don’t need whole life insurance for disabled children.
I’m curious, how did you find details on the mechanics of whole life? Did insurance agents teach you or did you find some manual on whole life insurance?
Bought one and watched what happened. Looked at illustrations of others. Talked to hundreds who have owned them. Argued with dozens of agents over the years. etc
That’s a great point! When doing my research people would say things like “if you are healthy you have a _% chance of living till you’re 80 years old” and you will have a large nest egg at that point based on blah, blah, blah to leave to your SN child. The reason I purchased the insurance was for that small % of chance I don’t make it and don’t have the nest egg to leave behind. I wasn’t willing to take that chance however small it may be. The risk is too large and the cause way too important to leave to what actuaries and mathematical and statistical computations say about how long I may live. I appreciate the article greatly, and agree with everything you said but for me, after much thought, I feel I am better diversified and have my daughters future better served using ABLE and the insurance. Great article and very informative as always, thank you!!!
Fair enough. It certainly provides that guarantee.
Good points and the math is sound. My only thought would be to emphasize a special needs trust. You did mention the need for a trust briefly. It doesn’t really matter how you fund your legacy either through life insurance or investments if you end up costing the child government benefits. What matters most is that the child keeps those funds and continues to receive government support.
Thanks again for the great content.
No problem with a trust. This post is about what you fund it with.
Classic opinion of insurance being an investment. Glad to read in the comments that there was some discussion about a SN trust. Keeping money available but not owned or bequeathed to your SN child is critical. Once assets are owned, benefits and services that the then adult child may need for the life could be eliminated. In the original posts plan, the situation screamed for trust planning to be done, not an overly expensive whole life. However, the critique is missing the mark, yes investments will out perform insurance. The buyer that went with a second to die strategy is spot on, coupled with a SN trust, that plan is solid. A single person could replicate with a universal life that focuses on death benefit and not cash value, fixed not variable. Ideally this is a need where a term for life style policy makes perfect sense. Consumers need to stop treating insurance as an investment and investors need to realize that time is both a gift and a curse to the comparison between insurance and investments.
Justin – very good point and for anybody reading this post that has a SN child, a SN trust is a must!!
I suggest you have your daughter deemed disabled by social security before she is 22. She could receive SSI as early as age 18 or 19 and you can set aside that money for longterm if you don’t need it. Importantly, she enters adulthood as a disabled adult child (DAC). There are many protections for DACs, including: (1) SSDI which is not needs based (as opposed to SSI); (2) medicare eligibility (as opposed to medi-cal/medicaid); and (3) and she will continue to receive your SSA after you and your wife are gone. Also, some employers have pension option electing reduced monthly payment in exchange for continuing annuity for DAC’s lifetime.
John Ravits – you seem very knowledgeable about special needs. I own a company and would like to know more about employer pension options and annuities for DACs. How can I find more info about that?
Excellent points.
I am not the one to ask about employer pension plans, sorry. I work for a public university and will have access as an employee to a state pension, which has choices that include spouse and other dependents as continuing annuitants.
Thanks John!