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.

life insurance for disabled

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:

=FV(8%,20,0,-530304,1) = $2,471,724

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

The OP was looking at a 10 pay period. This is a pretty good thing. Shortening the pay period shortens the commitment to fund this policy. I would hate to find myself still working later than I want to in order to pay premiums on a life insurance policy I probably didn’t even need. Or worse, having to surrender the policy because I can no longer afford to put $35K a year toward it. But why stop at a 10 pay? You can get a 7 pay policy and be free of that commitment in just 7 years. You can’t really go shorter than that without some financial shenanigans because then the policy becomes a Modified Endowment Contract that you can no longer borrow against tax-free. Shortening it also improves the overall returns on the policy because you get the cash value in there faster.

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

  1. They can afford to do so without sacrificing more critical financial goals
  2. They understand exactly how a whole life insurance policy works
  3. 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!