Dissecting the Ernst & Young Insurance Products in Retirement Study

August 21, 2021 MST

Every few years a financial organization, often a life insurance company, commissions a “study” that shows whole life insurance is awesome. The motive behind these studies is usually pretty obvious. The most recent one going around is done by Ernst & Young, a company that consults for insurance companies. Here's what their website says:

“Our global team of professionals combines industry knowledge and technical experience to help with your most pressing issues. Whether through our tax and audit advice or our innovative advisory services, we help insurers explore M&A strategies, adopt new business models, develop new products, embrace technology, optimize customer experience and address shifting workforces.”

Conflict of interest? Of course. The most “pressing issue” for companies selling whole life insurance is that people are wising up to the fact that almost no one needs these policies and once they understand how they really work, few people want them.

As expected, the “study” comes out with some very pro-insurance recommendations. The study purports to determine whether adding whole life insurance and a deferred income annuity will “add value” to an investment-only strategy. They compare five strategies to one another:

Investments only
Investments plus term life insurance
Whole life insurance plus investments
Deferred income annuity plus investments
Deferred income annuity plus whole life plus investments

If you've seen a few of these, you won't find the conclusions surprising. Here is the overall conclusion:

“Our analysis shows that integrating insurance products into a financial plan provides value to retirement investors. Insurers can use these products to strengthen their relationships with investors and seize upon the possibilities in a marketplace that has proved challenging.”

Yea, the retirement savings marketplace is challenging to insurance companies because they're trying to convince people to buy their policies as retirement accounts, and they simply do not work as well as traditional investments inside tax-protected accounts.

Do You Believe the Study's Conclusion?

Call me cynical, but I've run the numbers enough times myself that I'm a little skeptical of their conclusions. Maybe it's because the “study” itself basically looks like a brochure for a whole life insurance policy. I mean, who puts a picture of a family collecting pumpkins into a real study?

While most people only read the conclusions of any study, anyone who has spent any time at all studying evidence-based medicine knows the real information is in the process and assumptions sections of a paper. Let's take a look at it and see what we find. Luckily, it doesn't take that long to read the entire 18-page study since it has so many glossy photos, fancy charts, and case studies any prospective buyer could relate to in it. It helps if you start at the end and just look for the fine print, which is really the only part of this sort of thing worth reading. Let's list out all the problems with the study.

18 Problems with the Ernst & Young Insurance Products in Retirement Study

#1 Ridiculous Advisory/Investment Management Fee

The best way to make whole life insurance look good is to tack a bunch of fees onto the investments you are going to compare it to. In this case, they used a 1.25% advisory and investment management fee. Now the industry average is 1%, but no informed consumer with enough money to consider whole life insurance should be dumb enough to pay that. And they certainly don't want you to compare whole life insurance to investments without a fee. How much of a difference does 1.25% a year make? Well, let's say one investor makes 8% a year and another makes 9.25% a year, both investing $50K a year for 30 years and then letting it run for another 30 years. The 8% investor ends up with $5.66M after 30 years and $57M after 60 years. The 9.25% investor ends up with $7.14M (26% more) after 30 years and $101M (78% more) after 60 years. That's a pretty big difference and obviously a pretty significant assumption. But wait, there's more.

#2 Ridiculous Equity Turnover Ratio

The study also used an equity turnover ratio of 25% in their assumptions. We're not talking about the inherent annual equity turnover in a mutual fund (which is < 5% in a total market index fund). We're talking about selling the entire taxable portfolio every four years and realizing the capital gains on it. Now I know that due to our charitable giving that I can invest our taxable account in a VERY tax-efficient way (we NEVER pay a realized gain, actually deduct losses every year, and flush capital gains out of the accounts by gifting appreciated shares), but 25% a year is ridiculously tax-inefficient. Of course, that's going to make the investment comparison look bad. But wait, there's more!

#3 Ridiculous Equity Dividend Rate

Dividends make a taxable investment less tax-efficient, they basically function as a mandatory, taxable return of capital. The “study” uses a dividend rate of 2.5%. That doesn't seem crazy until you realize the dividend yield of a US total stock market index fund as I write this is 1.37%. Yes, almost doubling the assumed yield is going to have an effect on your results. Yes, that effect is also to make the investing comparison look bad. But wait, there's more!

#4 Initial Taxable Equity Basis

Here's another hilarious finger on the scale. The assumption is that you are starting with a taxable investment account that already consists of 50% gains. That's right, before it grows at all it's somehow already had 100% in gains. That means when you sell it, you'll pay more in taxes, again making the investment comparison look bad. The basis in my taxable account is far closer to 100% of the portfolio value than 50%, and I'm already financially independent! But wait, there's more!

#5 High State Tax Assumptions

In the study, they assumed a state income tax of 6%. Now you'll obviously pay more than that in California and New York, but you'll pay a lot less in many states, including 0% in seven to eight states (NH only taxes interest and dividends). Only 18 states tax ANY income at more than 6%, and since only nine states have a flat income tax, due to the way tax brackets work, most people in those states don't have an effective tax rate of > 6% on their state income taxes. Again, this makes investments look worse than insurance by comparison.

#6 Weird Tax Assumptions

I find it bizarre that the people in their examples only pay 15% on their capital gains but somehow have enough money to have an estate tax problem where they owe 40%! None of the case studies have anywhere near enough money to have an estate tax problem under current law. Why are we even talking about estate taxes? If you're going to include a tax assumption, how about you tell us what tax rate you applied to the retirement account withdrawals? Nope, wouldn't want to do that. Because that makes a huge difference in a study like this. I'll bet dollars to donuts it was too high.

#7 Black Box Insurance Products

So what insurance products do Ernst & Young compare these investments to? They don't tell you! They call it an “industry-representative whole life illustration” and an “industry-representative product” for a deferred income annuity. Basically, they're saying “just trust us”. Forgive me for wondering if those are the products most frequently sold to consumers using this “study” to convince them to buy. They certainly don't include the illustration or even the name of these products in the study. Maybe they don't even exist. But of course, they are using the healthiest person they can find to buy the policy. No tobacco use, no risky hobbies, no medical problems. Wouldn't want to do anything that would make insurance look worse, like using the average policy sold.

#8 The Whole Life Policy Is Managed

In the appendix, we learn that “Premiums are level until age 65 when the policy goes paid up, lowering the base face amount to what is supported by the cash value”. This isn't a bad idea for someone using their policy as a retirement account, but in my experience, very few permanent life insurance purchasers are serviced in this way by agents. The agents aren't even in business anymore by the time those who bought policies from them need to make these changes in retirement. If you go to a new one to help you, how are they going to get paid for that? They're not; they're going to try to sell you a new policy!

#9 Some Wacky Stuff with Projected Policy Performance

One of the more interesting things they do is use a dividend interest rate model to adjust the projections in the illustrations. What good are the illustrations if we can't even use them to project future returns from the policy? Why do they need to be adjusted? Now I'm no actuary, but I'll bet this adjustment makes the insurance product look better. They also start with the “projected” column in the illustration, not the “guaranteed” column. In my experience, the actual returns usually fall between those two numbers, so using the projected numbers is another thumb on the scale.

#10 Weird Reinvestment of Income Annuity Proceeds

You can't make this stuff up. “In retirement, we assume the investor takes 50% of the dividend for retirement income and allocates the remaining 50% to purchase more DIA with IIP.” So despite buying an income annuity, presumably for retirement income, you're not actually going to spend all that income. You're going to buy even more income annuity with half of the income. You'd have to ask an actuary how that affected the study, but I've got a feeling it makes the insurance look better.

#11 Only Replaced Fixed Income with Insurance Products

As you dive into the “case studies”, you see that they didn't replace the equity investments with any insurance products. They only replaced bonds with insurance products. Obviously, they're going to compare a lot better when you only compare them against the lowest returning part of the portfolio.

#12 The Investor Pays Back the Whole Life Policy

You can't make this up, but it's obvious why it is in the fine print. “The investor is assumed to repay the policy loan once their portfolio recovers sufficiently from the down market.” The study is both counting the “income” (money borrowed against the policy) and the full face value of the whole life insurance as part of the legacy, because you're going to pay the money back somehow despite the fact that you already spent it on living expenses.

#13 Bizarre Investment Choices

The first case study is a 25-year-old couple making $80K a year and saving 20% of it, or $16K a year. For some bizarre reason, they put $14,400 into a 401(k) and spend $1,600 a year on a whole life policy instead of putting more money into the 401(k), potentially getting a match, or even using the Roth IRAs available to them. I've run the numbers six ways to Sunday and never, ever, has whole life insurance policy performance come anywhere close to what you would get with a tax-protected and asset-protected retirement account. It's not even close. Choosing to buy whole life over maxing out available retirement accounts is dumb. This couple is supposedly going to have $61K in today's dollars in retirement income. In 40 years. Once you apply inflation for 40 years to those tax brackets, the tax rate on that income will be minuscule. Their standard deduction will probably be $61K in 40 years.

But wait it gets worse, supposedly the best results come from putting 50% of their savings into whole life insurance. I'd love to see the work behind this one, but of course it isn't included in the “study”. I guess there wasn't enough room left after they put all the glossy photos in. But seriously, a 25-year-old couple is supposed to put 50% of their savings into whole life insurance? And that is supposed to provide the most income and the most legacy 70 years later? Give me a break. And besides, up above they said they were only putting “bond money” into whole life. Are you now telling me you're recommending this 25-year-old couple have a 50% bond portfolio? This is all getting more bizarre as we go.

#14 70-Year Time Horizon

The first case study also uses a 70-year time horizon. You have to use these long time horizons to make whole life look good, because it looks absolutely horrible for the first decade or two when returns are negative. But the truth is that 70%-80% of whole life policies are surrendered within the first 30-40 years, many at a loss. In fact, 1/3 are surrendered within 5 years. Seems silly to do 70-year projections on something that on average people only keep for 20 years.

#15 No Discussion of Cancelling Term

A major problem with most of these “studies” is that they assume the person who buys term and invests the rest keeps that term life policy until they die at age 80 or 90. The whole point of buying term and investing the rest is to save money on insurance and use that money to invest or spend. So when you hit financial independence, you cancel the life insurance. This “study” never indicates when the term life is canceled, which leads me to believe they ran their figures with it never being canceled. Obviously, the cost of term life at age 85 is going to eat up an awful lot of that retirement income.

#16 “Whole Life Beats Bonds”

They make the outlandish claim that whole life insurance performance beats bonds. That's not actually true. If you look back to the “golden age” of whole life insurance, policies bought in the early 1980s when interest rates were sky high, you can see that people had returns of 7-8% on their policies over the next few decades. But 30-year treasury bonds bought in the early 1980s were yielding 11-14%. Even in 1994, you could still buy an 8% 30-year treasury bond. Whole life didn't outperform bonds and it still doesn't especially in the first decade when they have negative returns. They just expect you to believe them when they tell you it does. They even try to explain why:

Participating insurance products tend to outperform fixed income because mutual life insurance companies, as institutional investors, have access to asset classes that individual investors do not. (This is a lie. Look at the portfolios of insurance companies—they're mostly filled with the same boring old bonds Vanguard bond funds buy on your behalf. The vast majority of what they buy you can buy, too, without any issue at all and avoid losing their cut of the return.)
These companies also have professionals managing their assets, which has been proven to provide value for fixed income. (Not true, index funds outperformed actively managed funds, even in fixed income. See the chart below for details.)
Whole life tends to provide superior returns over fixed income in long-run scenarios due to the combined effect of the guaranteed growth of cash value and dividends. (No, that's not really true either as we discussed above with the best whole life policies ever sold.)
Using whole life as a volatility buffer improves returns because the investor does not have to sell and realize losses on their investments. (During a market downturn, you can sell appreciated bonds instead of temporarily decreased stocks just as easily as you can borrow against whole life.)

Lie, lie, lie, lie. None of it is true. Whole life does not beat bonds. It certainly does not beat them in a retirement account. And it doesn't even come close to beating them except in the very long term in a taxable account of someone in high brackets.

#17 No Discussion of SPIAs

Want guaranteed income in retirement? Buy a Single Premium Immediate Annuity (SPIA). No reason to buy a deferred income annuity at age 55 if you're not going to start spending for another decade or more. Better to leave that money in higher returning investments until you need to start getting guaranteed income. Want to solve for the highest possible income? Invest aggressively until age 70 and then put all that money into SPIAs. You'll have dramatically more money to spend.

#18 No Significant Difference

Despite all of the advantages given to insurance products in this study, if you look at the results they all look the same. Retirement spending for the first case study couple ranged from $61K-$66K. Amazingly the less you spent on insurance products, the less money you ended up with. But if you think your life is significantly better and worth dealing with the hassle of not one but two complicated insurance products for 70 years for an extra $400 a month, I've got a bridge to sell you. I can't believe with all the help they gave the insurance products in this “study” that they couldn't make a larger difference than that. I mean, look at the effect of that 1.25% advisory fee alone on the $16K this couple invested per year for 40 years. It's a $1.6 million difference. That's $65K a year in additional retirement spending. And we're bragging about winning by $5K a year? The difference in their study was not significant, but you'd never know that unless you combed through the results with a fine-toothed comb. The conclusion does not match the results.

If they had explained more of what they were doing, I'm sure there would be even more to criticize about this sales brochure masquerading as an academic study. They have truly tortured the data until it confessed. But given we're now approaching 3,000 words in this blog post, it's time to wrap it up.

The bottom line is that this EY Brochure is not a study at all and it should not enter into your consideration of buying whole life insurance or an annuity at all. If you need or want whole life insurance, and truly understand how it works, then go buy some. Same with annuities. But don't let an insurance company-funded study convince you that you are likely to come out ahead of a buy term and invest the rest approach to investing. If you will do that, you are likely to reach retirement age with FAR more money, and I assure you that having more money at the time of retirement will allow you to generate more retirement income and/or leave more money behind to your heirs. Buy insurance for the guarantees when you need or want the guarantees. Otherwise, avoid it.

What do you think of the paper? Why do companies put these easily debunked studies out? How many people do you think were convinced to buy whole life insurance by this paper? Comment below!

97 comments

1 Will | August 21, 2021 at 1:45 am MST

Awesome and thoughtful analysis. I knew it was gonna be an especially good post once I read “I mean, who puts a picture of a family collecting pumpkins into a real study?”

2 PrudentPlasticSurgeon | August 21, 2021 at 3:09 am MST

Amazing…just amazing 😂😂😂

3 KFM | August 21, 2021 at 4:50 am MST

New WCI feature – instead of journal club, financial product brochure club

SC | August 21, 2021 at 11:01 am MST

Ha, I would totally join and then I might actually read for journal club.

4 Markie C. | August 21, 2021 at 6:24 am MST

KFM, great idea about brochures.

Thanks, Jim for an amazing post. A great public service if you can keep even one person away from these products.

5 FactorFan | August 21, 2021 at 7:14 am MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Your bias when it comes to insurance products like life insurance and annuities makes your point of view less interesting. When you want to justify your point of view about paying off the mortgage instead of investing in equity index funds, you point out the uncertainty of the equity premium. When you want to justify your point of view to avoid well designed life insurance and fixed annuity products as safe long term accumulation vehicles that can be competitive with short to intermediate term bonds, you point to the equity premium and ignore the fact you hold a substantial portion of your portfolio in bonds. Just wish you were more open minded to the nuance that you know exists.

The White Coat Investor | August 21, 2021 at 8:23 am MST

And yet here you are still not only reading my point of view, but taking the time to comment on it. 🙂

The criticism is probably fair. Talk to NML if you don’t like my attitude toward life insurance as an investment. If they’d quit selling whole life inappropriately to doctors just like they did to me as a medical student I might not be so fired up about it. But you’ve got to admit, this brochure masquerading as a study is terrible, no?

FactorFan | August 21, 2021 at 10:26 am MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

I like your point of view on most topics! You do a really good job, so don’t get me wrong. We agree that doing business with NML for insurance or EJ for investments is likely to be FAR from optimal. But just read the other comments and you can see that you’re shaping people’s perspective to automatically jump to conclusions about insurance products and anybody who sells them. The insurance industry and their sales force deserves much of the bad rap it gets, but if these products are appropriately positioned as long term diversifiers to other safe asset classes like short term taxable fixed income they can be attractive on a relative basis. So perhaps we could say this topic is, well, nuanced.

Niraj Pahlajani | August 21, 2021 at 12:48 pm MST

I agree Factor Fan, in the era without guaranteed pensions, people wanting guaranteed income to cover minimal retirement expenses might choose a deferred income annuity for a portion of their portfolio, which grows the benefit at a slow rate over 10 years before retirement. This gives them more comfort to take risks with the equity side of their portfolio. It’s part of a risk tolerance equation and not a total return strategy. Bonds may not perform as well as expected. No one can predict if current low interest rates are here to stay (then bond funds are safe) or if they will correct to historic numbers (then bond funds will lose value). It’s not appropriate to compare returns of 100% equity to equity + safer alternative when the investor is looking for safety and less risk. More appropriately if the comparison is fixed income via bond fund vs deferred annuity, then there is a value to the guarantee.

FactorFan | August 21, 2021 at 1:48 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Dr. Jim, are bonds currently a part of your long term asset allocation plan? And no, 5 or 6 decades isn’t required. My whole life policy is in year 6 now returning 5.7% annually and will have a 3%+ net IRR after 10 years and 4.7% after 20 years. I’m happy with that compared to buy term and invest the difference in short term taxable bond funds.

The White Coat Investor | August 21, 2021 at 3:11 pm MST

You are imprecise in your words. You mean you have a 5.7% yield on your cash value. The return is the IRR. The reason the IRR is lower than the return is because the dividend is not applied to the entire premium. You are also using projected returns for your 10 and 20 year IRRs, not the guaranteed scale. Chances are that your returns will be closer to the guaranteed scale than the projected one if you are like most buyers.

If you’re happy with your policy, keep it. No skin off my nose. I simply want everyone who buys one to be happy with it, and for anyone who isn’t going to be happy with it after they buy to not buy it in the first place.

FactorFan | August 21, 2021 at 4:11 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

What I said is factually correct. My net return on a year by year basis at this point is approximately 5.6% per year when I run a current in force illustration. Cash value at end of year minus annual premium paid divided by beginning of year cash value. I’m not referring to the dividend interest rate. The illustration actually adds this year by year return column along with the cumulative IRR since inception numbers.

I’m already IRR positive in year 6, and by year 10 I’ll have a net cash value IRR on total premiums paid of 3.2% based on the current dividend scale, and 4.7% after 20 years. 5.5% after 30 years.

Yes, the dividend scale may drop, even several times, and still result in better expected returns than short to intermediate term bonds. That’s even true if I run the illustration with no dividends…which is about on par with gold bug level pessimism.

I think the appropriate benchmark is short to intermediate term bonds because of the volatility associated with long term bonds, but even long bonds: the current yield on the 30 year treasury is 1.87%. Vanguard’s forecast for US aggregate bonds over the next 10 years is 1.9%. Both are pre tax yields, and therefore well below 1.5% after tax for most of your readers. I bonds are attractive at the moment though, but obviously the long term returns of I bonds depend on your view of expected inflation.

The company I have the policy with has a flyer titled “illustrated vs. actual performance” showing an actual policy issued in 2005 has the exact dollar for dollar performance as was originally illustrated from 2005-2018 because they had no change in the dividend scale. They’ve had a small dividend scale reduction since 2018 due to the decline in interest rates, so the net cash value IRR after 16 years is 0.07% less than originally illustrated. I’d have to imagine they created the flyer based on comments like you just made.

What I shared is data for my own policy, and this is from a blog post from another source: “The policy purchase took place about 10 years ago. The dividend rate at Penn Mutual declined from 6.34% at inception to 5.75% today. The most dramatic change took place just this past year. The real IRR achieved on this policy from inception is 5.11%.”

Implying that insurance companies will get you in the door and then drop the dividend rate like it’s a teaser or something is silly Dr. Jim. Based on that logic, Vanguard does the same thing because the yield on the total bond market fund has dropped substantially from what it was years and decades ago. Interest rates are the biggest driver of dividends on whole life policies, and obviously they’ve declined dramatically over the years, so what else would you expect?

I don’t see what the problem is based on what I’ve just shared? I understand that most of the policies you come across are crap sold by salesman who pretend they are financial advisors. That’s not what I own.

The White Coat Investor | August 21, 2021 at 5:37 pm MST

I disagree with your use of the phrase returns. That is not the way any sort of investor ever thinks about return. They don’t take some of the money they put into the investment, throw it away, and then calculate the return on the rest of it. At any rate, post your initial illustration and your latest in-force illustration if you want to show what the returns are. Then everyone can calculate them.

It took you six years just to break even on this policy you love so much. Meanwhile, every other asset class (including bonds) had solid, positive returns. So even if you have decent returns going forward from here, you’re starting out with a smaller asset total.

And yes, I agree with you that most policies are crap designed to maximize the commissions. But I don’t think much of even the best ones and those are the ones I’m talking about when I discuss whole life as an asset class.

Like I said before, if you like your whole life policy go ahead and keep it. It doesn’t bother me. But don’t come here and try to convince me it’s something most people ought to buy. I disagree with that.

FactorFan | August 21, 2021 at 7:59 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Return for the next year example:
End of year 6 cash value: $153,670
Annual premium: $25,000
End of year 7 cash value: $187,230
Return for the year: 5.57%

It’s similar to this every year going forward at the current dividend scale.

IRR example:
$25,000 invested at the beginning of every year for 10 years
Value at the end of 10 years: $299,970
IRR: 3.29%

If we agree that this is mathematically correct, then please re-read my prior comments because the other data points I mentioned were calculated the same way. I’m interested in points of view different than my own, which clearly you passionately hold because of what you’ve seen happen to others. I respect that. But as an individual I don’t care about any other policies that people have bought, I care about the one I own.

I’m not trying to convince you of anything, what’s there to gain from that? I’m more interested in challenging my own well researched conclusions. I’ve learned a lot of good ideas from you and appreciate what you do. If you don’t want to engage anymore, that’s fine. Not interested in an argument, interested in the truth.

O'Pinion | August 21, 2021 at 8:51 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]FactorFan,

In accurately calculating your return on your policy, it is critical to include the entire premiums paid into the policy annualized over the life of the policy. Otherwise, the math is meaningless.

Your annualized return on your policy after 6 years has been: 0.69%
Your annualized return on your policy after 7 years will be: 1.69%
Your annualized return on your policy after 10 years, you have correctly calculated at: 3.29%

3.29% isn’t too bad if you need the life insurance benefit at that time in your life. I’m ‘stuck’ in a whole life policy because I’ve become uninsurable for a term policy. Thus, I need to keep it. If I had received proper advice, I’d have gotten a term ladder in my early 30’s before I became uninsurable.

If your policy behaves anything like mine, the GUARANTEED overall rate of return actually gets WORSE as the policy matures. After year 10, the non-guaranteed return on mine hovers around 3% for the life of the policy.

Now, what is very relevant to the discussion is that you have already purchased the policy and have 6 years of sunk costs and horrible returns on it. What’s done is done. And although mathematically you’d have been MUCH better off properly investing your premium dollars instead of buying this policy, moving forward it may make sense for you to keep it. I had an independent policy evaluation and ultimately that’s what I have decided to do, for now. In the future, I may dump it when I no longer need/want a death benefit. I hope this makes sense.

I’m sure you are aware that you can use the Excel Rate function to easily calculate the returns; =RATE (nper, pmt, pv, [fv], 1)
Present Value 0
Future Value 153670
Annual Payment 25000
Years 6
Return 0.69%

Present Value 0
Future Value 187230
Annual Payment 25000
Years 7
Return 1.69%

Present Value 0
Future Value 299970
Annual Payment 25000
Years 10
Return 3.29%

FactorFan | August 21, 2021 at 11:08 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

The guaranteed column on an illustration assumes no dividends. Ever. The mutual insurer I chose has paid dividends every year for over 100 consecutive years. It’s such a pessimistic assumption it’s almost irrelevant. State insurance regulations require it to be shown as a worst case scenario.

The non guaranteed column is not a random projection, it’s the current dividend scale. If the company held the dividend scale constant every year, you’d get exactly the illustrated performance. See my prior comments with historical data.

You make the assumption that I didn’t know the policy would be exactly where it’s at today when I bought it 6 years ago. There’s no surprise, and therefore no need to figure out what to do now. If anybody’s time horizon is 5-7 years there is no debate that whole life is unsuitable. Since day 1 I’ve planned to hold my whole life policy my whole life, just like my index funds in my retirement and taxable accounts.

I will take systematic withdrawals in retirement by converting the policy to reduced paid up status and switching the dividend option to cash and also taking out accumulated dividends if I want or need. That’ll be returned to me tax free up to my basis, and after that I can decide if I want to continue to take taxable dividend withdrawals or switch to loans depending on my tax bracket each year.

The relevant time period for measuring realized returns is the expected holding period. With the data I’ve presented, I’m interested in hearing someone’s best argument for buying term and investing the difference in bonds because I find my whole life policy to be quite attractive to that alternative.

O’Pinion | August 22, 2021 at 12:20 am MST

The various state insurance commissions can’t even prevent insurance companies from insolvency.
https://www.nolhga.com/factsandfigures/main.cfm/location/insolvencies/orderby/date#sort

I’m glad you seem to know what you purchased and are happy with the product. As for me, I was “sold” the product and never would have purchased my policy had I been knowledgeable at the time of purchase. Shame on me for being gullible.

I can palpate your confidence in the dividend payout by your insurance company. That’s great for you. As for me, I have no confidence at all. Insurance companies have never been stressed by the prolonged low interest rate environment like they have over the last decade and a half. We will have to see what happens with the dividend situation, but nothing would surprise me. As for my whole life insurer, Ohio National, after over a century of great performance, their credit rating was recently downgraded, they stopped paying tail commissions to their agents, and earlier this year were acquired by a Canadian for profit corporation (no longer mutual company status) due to poor balance sheet performance. This is in spite of what my insurance salesman sold me with: “Ohio National has paid dividends for >100 consecutive years, even during the Great Depression .” Again, we will have to see what happens, maybe they still will, but I don’t have nearly as much confidence as you that no dividends is pessimistic to the point of irrelevance. Maybe I wouldn’t worry as much if I was very old or ill, but I may live another 60 years and it’s distressing to me that my entire policy is riding on the performance of single company (as is yours). Looking at the big picture though, dividends or not, the illustrated returns on my specific policy disappoint.

But I’d imaging what gives the WCI community the most consternation is when you make claims that your year to year “net return is 5.6 percent”. Even if it’s accurate, it’s misleading. No one in the finance industry calculates net returns in that way—by ignoring the premiums paid in prior years—unless they are selling you something. It would be analogous to hiring a new employee to your company and then attributing the year’s productivity of the entire company to that one new hire—ignoring the fact that you have a full workforce that should also be productive.

So again, it sounds like you are happy with your policy, fully understand what you purchased, why your paying for it, and how it fits into your plan. Hooray. I’m with Jim Dahle on this one.

FactorFan | August 22, 2021 at 1:05 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Annual premium: $25,000
EOY 7 cash value: $187,230 (IRR 1.69%)
EOY 10: $299,970 (IRR 3.29%)
EOY 20: $835,220 (IRR 4.67%)
EOY 30: $1,751,300 (IRR 5.02%)

Correction: I previously stated the yr 30 IRR was 5.5%, but that was my error in looking at the current year return column, meaning, the return in year 30 would be 5.5% based on the current dividend scale. That will change over time, no doubt.

About 90% of my total asset allocation is equity index funds, real estate, and business interests. Again, I setup the policy as a long term alternative/diversifier to buy term + high quality bonds. I’m interested in hearing points of view in favor of buying term + high quality bonds relative to my specific policy data provided.

The White Coat Investor | August 22, 2021 at 1:32 pm MST

I think O Pinion explained it pretty well.

I agree with you that your final returns are probably going to be better than the guaranteed scale. However, based on past experience, they are unlikely to be as good as the projected scale. They will likely be somewhere in between. Long term? Probably 3-4% nominal. And that’s on a good, well-designed policy designed to minimize commissions and maximize returns. And the crummy returns are pretty heavily front-loaded, so you’re past the worst of it already. Going forward it will do better than it has done in the past. It’s a different decision of whether to keep a policy versus getting it in the first place.

If you’re happy with that, then enjoy your policy. I’m so much happier when someone who bought one knew what they were getting, actually wanted it, and still wants it a few years later. That’s unfortunately a pretty rare occurrence. About 75% of policies purchased by white coat investors are regretted and something like 80% of all policies bought are surrendered prior to death. In my opinion, it’s not a great idea to start with, most of the actual products sold are terrible, and the way the product is sold is egregious.

FactorFan | August 22, 2021 at 2:39 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

I already provided actual historical data to the contrary of what you’re saying Dr. Jim so if you’re going to ignore that and repeat your previously formed opinions then I guess that means this conversation is over.

It’s always easier to see blind spots in others than ourselves, and this is a clear example of experience bias. Human nature wins again, oh well. I still appreciate what you do, we’re 90% in agreement when it comes to optimal financial decision making. Cheers!

The White Coat Investor | August 22, 2021 at 3:58 pm MST

No. Your data demonstrates exactly what I’m saying as I thought Opinion explained. After six years, you’ve put in $25K a year. And you have $153,670 dollars. Your return on that money over six years is

=RATE(6,-25000,0,153670,1) = 0.69%

Now you haven’t shown us the original illustration you were given, so it’s hard to say if that was closer to the original guaranteed scale or the original projected scale, but it’s pretty darn hard to argue it’s a great return. Per Vanguard, 5 year annualized returns for the following assets classes were:

Federal Money Market Fund: 1.06%
Total Bond Market Fund: 3.11%
Balanced Index Fund: 11.80%
Total Stock Market Fund: 17.39%
Small Cap Value Index Fund: 11.40%
Total International Stock Market Fund: 9.86%
REIT Index Fund: 7.14%

Even leaving the mutual fund world, we can look at some alternative investments over the last few years.
GLD: 5.43%
GBTC: 105.62%

So here you are arguing you have this awesome investment, this awesome asset class, and yet your investment has the worst return of pretty much everything. I can’t even think of an asset class with a worse return over the last 5 or 6 years.

“But it’ll be better going forward,” you say.

Well, I should hope so. It couldn’t perform much worse compared to other investments.

So let’s look at your projected scale since you refuse to reveal/even look at the guaranteed scale. You say in a year your cash value is projected to be $187,230.

Assuming the insurance company can meet it’s projection (actually fairly unlikely given the historical record for these, but whatever), the return of your investment over the next year will be:

=RATE(1,-25000,-153670,187230,1) = 4.79%

Assuming you get that $187,230 (again, not a given and in fact unlikely) that will bring your annualized return up to

=RATE(7,-25000,0,187230,1) = 1.69%

I would argue that every point I have made still stands. You made a lousy investment you probably shouldn’t have made 6 years ago. But it may very well make sense to keep it at this point.

Hope that helps. And again, I’m glad you’re happy with your choice. And I agree it’s not a terrible whole life policy. But it’s beyond me why you think you had such a great investment over the last six years when the data now clearly demonstrates that you bought the worst investment.

O'Pinion | August 22, 2021 at 4:20 pm MST

I think he answered your inquiry clearly and respectfully. I understand that you don’t like his answer. But I don’t see his response as an indictment of you or your specific policy. He clearly prefers bonds, you clearly prefer your life insurance policy. Asked and answered. What’s there to converse about? However, if I can try and speak for Dr. Dahle (forgive me Jim), his disdain for whole life insurance is born out of the junk policy he was sold and the average junk policy like mine, sold with empty promises by a career insurance agent preying on my ignorance.

My policy NON-guaranteed IRR:
Policy year 5 = -19.46%,
year 15 = 0.68%,
year 30 = 3.33%,
year 50 = 3.95%,
year 70 = 3.84%

If I die at age 100y/o, my NON-guaranteed death benefit IRR over 65 years of owning this product = 4.01%– and that’s with paying $10,000 in annual premiums (and possibly tail commissions) throughout my entire life. Maybe my social security can cover my annual premiums so my policy doesn’t lapse.

FactorFan, let me ask you this. If you owned an average policy, such as mine, would you still wonder why Dr. Dahle and the WCI community GENERALLY recommends to buy term and invest the rest?

It’s fair to recognize that we all have blind spots, just don’t forget your own. Your posturing on this forum makes me wonder if you sell insurance for a living. Do you?

FactorFan | August 23, 2021 at 11:25 am MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Most products in this space are very mediocre and so are the agents who sell them so don’t get me wrong that you’re understandably experience biased. But I feel that experience bias is causing you to not listen to what I’m saying.

Specific example: A whole life policy issued from Penn Mutual 10 years ago optimized for cash value growth has realized an IRR of 5.1% today. That’s 0.3% less than the original illustration, and I’ve shared Penn’s dividend history since 2005. Not 3-4% over 5 or 6 decades, and not slightly better than the guaranteed column. Are you listening now?

A proper comparison might be buying 30 year term and invest the difference in a high quality bond fund like BND since whole life is an ultra conservative product. If we wanted to compare to equities, we’d use VUL, and for the record I haven’t found a single VUL (or VA) that is better than investing in a taxable account when you TLH and donate highly appreciated shares as you advocate. Still listening?

Since 2011, BND has a CAGR of 3.4% (not a knock at all against BND, it did it’s job like it always does/will). Buying 30 year term and investing the difference in BND would’ve had a net IRR of about 2.3% after 10 years when I pull up 30 year term quotes on term4sale and back out that cost. Less than 2% after factoring in taxation on the dividends.

The only time someone should buy whole life like I did is when they are very healthy, have maxed out all retirement accounts, need the life insurance in the first place, and would otherwise invest the difference in bonds. That’s my situation! Still with me?

This whole life policy is now earning 5.5%+ on a year by year basis going forward. Vanguard’s 10 year forecast for BND is 1.9% pre tax and pre cost of term insurance. So the spread is likely to continue to widen. Hello?

No, this isn’t my policy anymore we’re talking about. No, mine isn’t projected to be quite as good after 10 years. But if we use my IRR numbers of 3.3% after 10/4.7% after 20/5% after 30 the conclusions are the same. Are they not?

When I did my homework at the time of purchase I found Penn way more competitive and that’s why I bought it. Mass Mutual was a somewhat distant second. Northwestern Mutual wasn’t even in the ballpark and still isn’t. I share your disdain for that company.

My contract was originally projected to have an IRR at this point of 1.1% vs. 0.7% to answer your question. Not at all a surprise given what rates have continued to do for 40 years now and maturing bonds fall off the books.

I also don’t like how insurers make it difficult to find historical results, but I’ve seen it on occasion. A 10 pay policy issued by Mass Mutual in 1980 on a 50 year old nonsmoker male was originally illustrated to have an IRR by 2017 of 4.1% and the realized result has been 6.1%. This was a standard issue policy, and as someone who understands these contracts well I’d suspect it would have been closer to 7% if well designed. About on par with the aggregate bond index over that time period when adjusted for term cost. Not just slightly better than the guaranteed column. The truth is kind of nuanced, isn’t it?

O’Pinion | August 23, 2021 at 11:55 am MST

FactorFan,
Congratulations on your insurance purchase. I’m glad you love it so very much and wish I could say the same about mine.

I think I might start calculating all my investment returns on a “year by year” basis. It’s funny math, but sure makes the returns sound great.

FactorFan | August 23, 2021 at 12:22 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

O’pinion, do you want to know why it’s relevant? Because at every point in time with every financial decision we make we should continually evaluate what we are doing relative to the best alternative. I’ve made it crystal clear that if I didn’t own the whole life contract and keep putting $25k per year into going forward, I’d probably buy a cheap term policy off term4sale and invest the difference in a high quality bond fund. I’ve backed up my analysis with data, not just opinions O’pinion.

At this point I’d probably buy I bonds instead of something like BND, or maybe a combination of the two and also VWIUX b/c of my tax bracket. None of those options look like a great idea to me when my whole life contract is producing what it is. I’m still a preferred risk, so I’m not stuck like you are and I’m sorry about that.

I also clearly shared the IRR numbers since inception to date and going forward, so if you have nothing further to add that advances this discussion then please don’t. I’m primarily interested in Dr. Jim’s opinion because I respect the heck out of what he has to say overall but I think he’s overly biased on this subject matter due to past experiences of his own and others and I’m curious to see when presented with new information if he’ll at least give me a Jack Bogle to Cliff Asness like nod of approval in that “of all the hedge funds I’ve seen yours is the one I hate the least.” LOL. Jack is one of my personal heroes as well by the way.

If I have any agenda at all, it’s to challenge my own analysis and maybe just a little bit to open up Dr Jim’s mind by making him realize he’s talking with someone who knows what they’re talking about vs. the brainwashed insurance agents who I see often lurking the comments.

The White Coat Investor | August 23, 2021 at 1:51 pm MST

So do you sell insurance or not? You seem to be dodging the question O Pinion asked.

The White Coat Investor | August 21, 2021 at 1:37 pm MST

I’ve discussed elsewhere why I don’t find whole life insurance to be an attractive asset class, even when compared to bonds. It’s kind of silly to compare 2 year bonds to a policy that must be held for the next 5 or 6 decades don’t you think? Just compare the return over the first 5 or 10 years and it’s pretty obvious they are very different things even if long term returns may be similar.

FactorFan | August 23, 2021 at 3:16 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Not dodging anything Dr Jim, I didn’t see his question. Yes, I have an insurance license. I’ve sold a total of 2 whole life policies in 9 years plus the one I own, and I’m posting anonymously. If you think that invalidates my point of view, the math I’ve presented remains and I’m genuinely curious of your response to the data I presented for my own financial planning purposes. This will be my final post, I’ll give you the last word. Keep up the good work, as I said, I’m a fan of what you do.

O’Pinion | August 23, 2021 at 3:35 pm MST

I might feel slightly more favorable about my own whole life insurance policy if it was also paying me a sales commission. Too bad you didn’t disclose that from the very beginning.

FactorFan | August 23, 2021 at 4:22 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

$5,473 in year 1, and an average of about$1,000 per year thereafter. Not irrelevant, but if you’d add that to the IRR it barely move the needle. Substantially reduced commission when you build the policy for cash value.

The White Coat Investor | August 23, 2021 at 4:30 pm MST

Figures. Classic story for someone coming on here. This is about the 15th time it’s happened on this blog over the years.

I think my work here is done.

Nick | July 29, 2022 at 7:49 am MST

[Ad hominem attack removed]

Rikki Racela | July 29, 2022 at 10:24 am MST

Hi Nick unfortunately I am not one of those people, and likely not many on this blog. I am happier that I am out of my whole life policy as I have crawled out of $31,000 of credit card debt trying to service the $28,000 yearly whole life premiums and after 7 years my cash value was only $120k and my cost basis was $170,000. That’s right, I lost $50,000 and was in credit card debt. Whole life insurance kills wealth. Now that I have surrendered it I have seen real growth in my portfolio and networth, and now that the market is down, I am happy I’ve lost money because I can tax loss harvest and buy more stock on sale, and know in the future I will meet my retirement goals.

Whole life insurance is not secure! it caused me to be in credit card debt just to keep up with the premiums.

6 Will | August 21, 2021 at 7:20 am MST

Awesome and thoughtful analysis. I appreciate the attention to detail with the numbers — may seem like nuance but it makes all the difference. Thank you for all you do for physician personal finance.

7 Will | August 21, 2021 at 8:41 am MST

In my opinion, this post should be a candidate for one of your best. I say that not only for the manner in which you methodically dissect the BS of this “study” but also because your unveiling of such is emblematic of your personal financial journey and the foundation behind starting the WCI in the first place in enlightening others.

Nicholas | August 21, 2021 at 10:07 am MST

Agreed.

8 Drex88 | August 21, 2021 at 9:28 am MST

Great Article, I don’t know how you find the time. Very informative, great read it all makes sense. I be passing around to all my friends. Does it ever make sense to put one of these poor products in a qualified (Defined Benefit)? A family member did this 20 years ago and it makes no sense.

The White Coat Investor | August 21, 2021 at 9:57 am MST

Not really.

Rex | August 21, 2021 at 11:18 am MST

Not really is an understatement

It’s a horrible idea

The death benefit is no longer tax free unless you buy it out of the plan which is insanely expensive.

You also can’t roll it into an Ira so you are forced to surrender or buy it out in most cases.

So all the usual negatives plus a bunch more.

Drex88 | August 21, 2021 at 1:07 pm MST

That’s what I thought, Thanks for the rely.

9 SC | August 21, 2021 at 11:03 am MST

Reading this rant really made my morning. It’s one thing to skim the study and scoff with disgust (me), but quite another to put together a figurative dissection of the whole thing and tie it together in a gloriously ranty post. Kudos!

10 Afan | August 21, 2021 at 11:22 am MST

Great article.

This nonsense from E&Y seems identical to a “study” conducted by Wade Pfau. Same absurdly high expenses on the investments, same assumptions in favor of life insurance at every turn. As I recall, Allen Roth called him out on the report. Pfau responded by reducing the investment expenses. Still higher than what a rational person would pay but less than the nosebleed levels he used initially. Having done that, surprise!, life insurance underperformed the portfolio without insurance.

Interestingly, although Pfau still shows the original, shill-for-insurance study on his site, somehow the update does not appear.

I think the point about professional investors is that they can do sophisticated things like pumpkin futures.

Manish | August 21, 2021 at 1:24 pm MST

I often find myself agreeing with Wade Pfau on a number of topics but found this one about whole life a little puzzling. Do you have a link to their discussion or more information about the recalculated findings?

The White Coat Investor | August 21, 2021 at 1:41 pm MST

I totally get why it makes sense to add a SPIA to a portfolio to improve efficiency and security of the spend down plan. But I draw the line when people try to throw whole life in there too. It’s just really, really hard to argue buying something with such low returns decades before makes sense. It doesn’t matter how much less volatile the returns are when you start with 1/3 the money!

Pfau really feels run out of town on a rail by the Bogleheads after all that whole life stuff. I do think he really does believe it is a good addition though. Hard to tell if it’s just the Upton Sinclair thing though.

11 FactorFan | August 21, 2021 at 2:55 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

“It’s just really, really hard to argue buying something with such low returns decades before makes sense. It doesn’t matter how much less volatile the returns are when you start with 1/3 the money!”

Then why do you already have 20% in bonds for the next 5 or 6 decades?

The White Coat Investor | August 21, 2021 at 3:16 pm MST

Look, buy whatever you want and go on your merry way and I’ll buy whatever I want and go on my merry way and we can both be happy. You need to worry less about what is in my portfolio and more about what is in your portfolio. I feel like you’re feeling bad about what you’ve bought and feel some need to justify it to some random blogger on the internet. If that’s not the case, then quit doing it.

But if you want to talk about my portfolio, my bonds provide a positive return right from year one, are very liquid, do not require me to pass any sort of physical exam, do not require me to pay a commission, do not require me to pay for a death benefit I don’t need, and don’t require me to have anything to do with companies that sell crummy whole life policies inappropriately to doctors. That’s why I like them.

O’Pinion | August 21, 2021 at 7:00 pm MST

Amen on that last paragraph. Quite possibly my favorite retort you’ve ever penned.

12 Scott Moore | August 21, 2021 at 3:08 pm MST

Jim,

I am amazed that you are able to keep your basis closer to 100% than to 50% in your taxable accounts. I am definitely closer to the 50%. Total first world problem, that I’m glad I have, meaning that my portfolio has increased in value above my contributions over the last 10 years. This might be a possible blog post in the future, but what are strategies for keeping your basis high in your taxable accounts. I pay tithing with apreciated stocks, but I don’t seem to be raising the basis of my account much. Any suggestions would be appreciated.

Thanks,
Scott

The White Coat Investor | August 21, 2021 at 3:17 pm MST

Give more to charity and you’ll have higher basis. 🙂

It also helps if most of your account represents savings and not earnings because you put a lot of money in there in the last few years.

Naturally, that % varies and gets lower when markets are doing well. If I looked right this instant, I might even be closer to 50% basis, dunno.

afan | August 22, 2021 at 8:34 am MST

I think Jim has explained how he keeps his basis high. I don’t remember whether there was a post specifically on it, but he has said that he flushes out his gains through charitable contributions and the money in his taxable account mainly consists of savings from earned income.

Pfau also sought out the BEST life insurance policy he could find and compared it to what he considered an AVERAGE investment cost. His “average” was absurdly high. More important, if he wanted to compare the two options, why not do BEST to BEST or AVERAGE to AVERAGE? That was not intended to be a fair comparison going in. It was an thumb on the scale in favor of life insurance.

Those who want to find the discussion, search for his name on bogleheads. I do not recall Roth joining in that thread but his name was mentioned.

13 East Tennessee MD | August 21, 2021 at 5:04 pm MST

Great point-by-point analysis. If it saves one person from buying one of these, it was worth the time to write it. Small correction to #5: Tennessee’s tax on dividends and interest is completely phased out as of the 2021 tax year.

The White Coat Investor | August 21, 2021 at 5:30 pm MST

Cool.

The White Coat Investor | August 21, 2021 at 5:38 pm MST

Glad to hear your taxes went down a bit. It was always a bit of a funny tax.

Rikki Racela | August 21, 2021 at 11:23 pm MST

Ha- wow, I live in NJ- taxes on income, interest dividends, even inheritance! I hate NJ ;( I am now going to move to Tennessee!

Great post Jim and unfortunately I fell victim to buying whole life by finding articles like this that reaffirmed my confirmation bias when I googled info about whole life insurance when I bought it in 2012. Do you know if Ernst and Young not only puts this biased crap out, but also does SEO in order to reinforce confirmation bias on future victims when they google, “Should I buy whole life insurance?”

by corollary, can you and WCI use SEO so would be victims will be led to this post instead? or is Ernst and Young, NWM and other insurance companies too powerful and rich where they can buy the best SEO and this post will never get listed when googling about whole life?

The White Coat Investor | August 22, 2021 at 1:40 pm MST

It is very difficult to rank highly for a term such as whole life insurance. Lots of people spending a lot of money to rank highly for that term. I’m not even on the first five pages for that. But if you Google “whole life insurance scam” WCI is the third hit.

Yes, we do all we can to optimize our SEO including hiring somebody this year just to do that.

We’re also already ranked # 6 for “Ernst and Young Whole Life”. # 5 too for a Forum discussion last March about it back when I wrote this post.

14 bob | August 22, 2021 at 7:09 am MST

One of the best articles I have ever read!!!

Can you write something like this on a study that compares actively managed funds vs index funds?

afan | August 22, 2021 at 8:44 am MST

Standard and Poors issues a SPIVA report several times a year. It indicates the fraction of actively managed funds that have trailed the indices. Active always does worse.
This is also a topic of extensive study in the academic literature. I am sure there are over a thousand papers.
One to consider is the Fama and French “Luck vs Skill” study. Very rigorous analysis of the performance of active funds. Worth a read and not too mathematical although it does require going through it carefully. They conclude that there is probably a very small subset of active managers who beat the market. However, the number is so small, the noise in the data so high, and human management careers so short that they could not distinguish the luck from skill. They said that, among the small number of managers who beat the markets, the vast majority of them were simply lucky. Due to the issues mentioned, they could not tell which ones were actually skilled, they were lost in the luck. There opinion that there were some who were truly skilled came from the observation that the small number of winning active managers was slightly larger than it should have been if there were none with skill.
Of course, and as they discussed, this places great weight on the reliability of the data and analysis. F&F have been at it for a long time and they know the pitfalls as well as anyone so they had confidence that they accounted for all the known considerations.

The White Coat Investor | August 22, 2021 at 1:36 pm MST

Thanks for your kind words. You might enjoy these posts:

https://www.whitecoatinvestor.com/avoid-actively-managed-mutual-funds/

https://www.whitecoatinvestor.com/active-mutual-fund-managers-not-getting-any-better/

https://www.whitecoatinvestor.com/people-still-believe-in-active-management/

https://www.whitecoatinvestor.com/10-reasons-invest-index-funds/

15 Afan | August 22, 2021 at 3:21 pm MST

It is a shame when you consider what might have been. WL could be a good product if they got rid of the huge commissions.

Imagine if the companies would cooperate and sites like zander or termforsale listed no-commission policies by payment cost and surrender cost indicies! Quick and easy to compare offerings and no need for a salesperson. Sure, there would be ways to play games with guaranteed rates and interest charged on policy loans. But consumers would have a chance to find the best policy for them. Absent the hugely negative returns of the early years, some would benefit.

But this would require the insurance companies to quote their WL policies upfront and compete on price. The agents would go nuts, since this would be aimed directly at their incomes.

One can hope some brave company might do it.

The White Coat Investor | August 22, 2021 at 4:02 pm MST

I disagree. The commissions and costs and the way it is sold is only the icing on the cake. The problem IS the product. It is a product very few people actually need. Who needs a life insurance policy that pays out for their entire life? Almost no one. So you’re starting from a flawed place. From the very beginning it’s a product designed to be sold, not bought. That’s why the only way to sell it is by offering huge commissions.

FactorFan actually does have a good whole life policy. Most don’t break even until 10-15+ years. But it’s still a whole life policy at the end of the day. He’s happy with it, so that’s all that really matters. I could care less if people buy them. I just want them to know and understand what they are buying BEFORE they buy it. And in my experience, few do. And then once they understand what they bought, they don’t want it.

FactorFan | August 23, 2021 at 2:02 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

Just saw this comment and there’s not much I disagree with. I think whole life is potentially a good fit for long term cash accumulation based on very select criteria:

1. You currently need the life insurance and are a preferred risk. If you need it, but aren’t healthy, don’t bother. Too much drag on the performance in most situations I’ve seen. You should still probably have term insurance too in most situations.

2. You’re maxing out retirement accounts already so the only option is now taxable accounts.

3. You actually have a well thought out asset allocation plan and you’d likely buy bonds in that taxable account. Whole life like I own can be competitive long term relative to buying term and investing the difference in high quality bonds. Still best to probably think of it as a diversifier instead of a replacement to bonds in a taxable account though. And don’t buy it unless you’re committed to holding for the VERY long term similar to the mindset you need to have with index funds.

4. You know how to build a competitive policy from a competitive mutual insurer to maximize performance, or you know an insurance agent who does. Most don’t. That’s not right…almost none do. Thou shall never do business with Northwestern Mutual.

How many people fit this criteria? Maybe 1%? I’m admittedly a 1%’er. They do exist, but very rare. I might slowly and very gradually be able to moderate Dr. Jim’s opinion over time so he hates whole life less, but if we want to use the rule of thumb to “just say no” I can’t say I disagree!

The White Coat Investor | August 23, 2021 at 2:09 pm MST

Do you sell insurance or not?

Afan | August 23, 2021 at 2:55 pm MST

The absence of an answer implies FactorFan is honest enough not to lie and claim they are not an insurance salesperson.
A straight answer would be more transparent.

I don’t know whether FF has truly found a policy as good as claimed. A post of the illustration and annual performance pages, personally identifiable information redacted of course, would go a long way. Still had surrender charges and poor returns in the early years. The better returns illustrated for a few years reflect the choice by the insurance company of how to stretch out the dividends and yield over time. That does not mean that the policy has turned the corner. Just that it was structured to do better over this period. Yet more behind the curtain deals.

To get returns comparable to term over any given period, one must compare after tax surrender cash value. Pretending that money subject to both costs is comparable to money subject to neither is misleading.

As I said, I can imagine that the tax deferral could be worth the fees and cost of insurance, if the costs were low enough. Still not clear whether this, so far hypothetical, policy has gotten there.

Back to Pfau. If you are interested in an economist’s opinion on retirement planning, try reading Zvi Bodie. He is big on TIPS and does advocate for true inflation adjusted annuities, if you could find one. I have hardly read all is papers but I have not seen him push whole life insurance.

16 Afan | August 23, 2021 at 10:28 am MST

Given that most efforts in this direction fail, I agree we are not likely to see it. But the tax treatment of life insurance cash does have value. If you could get a bare bones term policy combined with a low cost bond portfolio and a no-loss guarantee that would be worth paying for. It might even be worth keeping once the need for a death benefit went away. The determining factor would be cost. If there were no surrender charges, the insurance component were fairly priced and the investment charges were low enough, then the tax benefits could outweigh the fees. Operate the bond portfolio for under 5 basis points, comparable to a competitive bond fund, for example. No commissions. No surrender charges. Use derivatives to provide the guaranteed returns. The difference from individuals doing it themselves, besides expertise, economies of scale and the ability to distribute risk across many account holders would be the tax treatment.

There would be a cost at which this would be worth it.

Even the attempts to bypass commissioned agents have generally sold through AUM planners. That justs shifts who is getting paid. Direct to consumer low load cash value insurance seems to be a difficult business.

If there were sites that made for easy comparison of standard policies, that might change. As it is, companies have an entrenched way to do business and little pressure to change. Many companies have more death benefit in force with term than with WL but make most of their profit on the cash value products.

17 Afan | August 23, 2021 at 3:47 pm MST

When an insurance agent buys a WL policy can they put the commission into the policy? Effectively reducing their upfront cost and increasing the cash value? Or just take it as income and use the income to pay the premium?

If everything is as reported, it suggests a policy could be worth having, provided you could buy it without paying a commission. Most people do not have that option.

18 FactorFan | August 23, 2021 at 4:52 pm MST

[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

This person has an insurance license and 0.008% of this person’s income over the last 9 years has been from the sale of 3 whole life insurance policies. Context is relevant.

The White Coat Investor | August 23, 2021 at 5:04 pm MST

Nobody likes a sockpuppet. You wasted a lot of my time pretending you just wanted to learn. It’s not appreciated. Go sell your wares elsewhere.

Insurance agents are not the target audience for this blog. They are the subject matter. If I have to teach you how whole life works, there’s a serious problem in your profession.

afan | August 23, 2021 at 5:34 pm MST

The context here is how an insurance salesperson benefits from the commission on a policy they buy, as opposed to consumers who do not get to keep their commission.
Do you know the answer to my question?
What happened to your commission when you bought the policy
1. There was no commission, so your cash value went up more than it would have for someone who paid a commission?
2. The commission was put into the policy, so you had a higher cash value than would someone for whom the commission was paid out to the salesperson.
3. You paid a commission, it did not go into the policy but the insurance company paid it back to you. In which case, you could use that money to pay life insurance premiums.

In all three scenarios, the policy is better compared to buy term and invest the difference than it would have been if you were not an insurance salesperson.

I do congratulate you for acknowledging what was appearing obvious. Some salespeople just clam up or stop posting once asked.

19 Rex | August 23, 2021 at 5:35 pm MST

If you want to see the “best” from a cash value perspective for Penn Mutual or any other than look here.

https://theinsuranceproblog.com/penn-mutual-whole-life-policy-historical-performance/

The idea that any WL made closer to 7% over the last 10 years is garbage. That agent almost certainly knows that.

If you want to know where even those guys think the next 10 years will go (and they are very very pro WL).

https://theinsuranceproblog.com/what-can-you-expect-your-whole-life-insurance-rate-of-return-to-be/

Its frequently a bad decision even when getting such a policy. They by the way dont necessarily perform better over the very long haul for death benefit. The agent for some reason didnt want to mention that nor that the difference from original illustration continues to get a lot worse over the next decade and beyond.

I should add that beyond falling dividends, there are other reasons these are going to produce worse. All of the companies have made it harder/more expensive to over fund by either changing the load on PUAs, reducing the amount you can over fund, created little rules where if you miss a year then you cant add it back later, cost of PUA rider and or combinations of the above.

Also if interest rates stay low then ohio national wont be the last to have serious problems. Penn frankly could be around the corner. Nobody knows for sure but they are also sort of small. If interest rates rise fast, then WL will lag so badly that your savings account will beat it. Big reason people dumped their WLs in the 80s. If they rise slowly, hard to say. Bottom line is even long term, it isnt guaranteed to beat bonds and it might not. It was easier to appear to beat bonds on the way down of interest rates. The reason i have to say appears is because nobody got the high 30 year treasury returns of the 80s in their WL. But of course rates arent static either. Agents like to show historical data without putting it in context.

FactorFan | August 24, 2021 at 7:11 am MST

Rex, you bring up several valid points that advance this discussion. Thank you.

Afan, yes you still get paid a commission on your own policy and yes you can use that to pay premiums although it is considered taxable income.

I never said anything about WL producing a 7% IRR after 10 years. You can easily review what I said if you’d like.

When a policy is built for cash value, the death benefit IRR is typically less of a priority. There are tradeoffs in policy design.

Penn Mutual has reduced their dividend scale by about 0.5% (so far) since I bought the policy. There’s no doubt that could continue to decline and probably will considering the rate environment we’re in. My policy originally illustrated at a max of about 5.8% IRR and that’s now about 5.2%. It’ll be 30 years before it gets to that net IRR because of the front end expenses, if it ever even does.

You’re right that newly issued policies have more restrictions and aren’t as attractive as older policies like mine. It’s a very specific individual in a very specific situation that makes WL a potentially good alternative to buying term and investing in bonds.

You’re right again in that there’s absolutely no guarantee even a well designed WL policy like mine will outperform bonds. But if rates rise, intermediate term bonds will also likely underperform a savings account with potential for capital losses along the way depending on the duration. With my WL contract I don’t have the capital loss risk (although default risk) so I could always exchange the policy for a 3 or 5 year MYGA or just dump it entirely and realize a taxable event if it made sense to do so.

I think the proper perspective for a decent WL contract like I own is as a competitive alternative to buy term and invest the difference in bonds and that’s what I wanted to hear competing arguments to. But it’s a very boring product that requires Jack Bogle level patience and a certain level of faith that the insurance company you’ve chosen will make good decisions and treat policyholders fairly. Almost nobody should buy it.

Rex | August 24, 2021 at 4:10 pm MST

Its pretty straight forward to know that using WL wont be a good idea instead of bonds. How would i know that… Well because the industry has tried and tried to create evidence to prove that over and over again just like in the above cited “research”. Their most aggressive attempt was when they hired Wade Pfau. He created a white paper (it would never be accepted in a real peer reviewed publication bc of the below) where he tried to show that using WL would provide superior retirement income. Guess what. When you look at the article and the discussions on bogleheads.org, it becomes clear that he had to use excessive fees, assume that the illustration would work out as illustrated (even though for the last 30 years that has never happened) and that nobody lapses but everyone still got the illustrated results. He actually participated in that conversation at bogleheads. He revealed that he got the costs for the investments came from the insurance industry (which are way out of line and not based on some research that shows they are appropriate costs to use) and that he used the best illustration they could offer (mentioning he wasnt sure how someone could necessarily get the same WL policy). He said it was important if you took his advice that you didnt lapse (some how he decided he was never going to try to account for the fact that 85% of people lapse). He was asked to show the results with a boglehead approach. So guess what. It never happened. If he could never produce evidence that a WL policy would be a good addition even with the full backing of the insurance industry, you arent going to be able.

So no your benchmark isnt appropriate to answer your question. None of the reasons i would purchase bonds apply to WL. It has already been discussed WL does not produce positive results for minimum of 7-8 years. Thats a non starter period and it isnt even guaranteed that it will in 7-8. I cant trade WL or change my investment decisions any day of the week. I am stuck. Buying WL is like becoming married. In this case though its like deciding to get married to someone who is an abusive bipolar alcoholic with a criminal record for mass murder. Yes there is a small chance it might work out as a happy marriage but odds really are against you and you should avoid it.

I should mention though in regards to other comments that purchasing a No commission WL does NOT produce better results. If you look at a company like USAA or other such, their products do NOT illustrate better. The reasons why this doesnt work are complex and arent 100% known but keep in mind that insurance has huge other costs for compliance beyond the agent commission. Also as the IRR would rise, the lapse rate likely would fall somewhat since it would look great. Thing is the lapse rate is absolutely necessary to the returns with WL so it will inhibit further growth and the IRR will need to fall. Industry average is around 85% lapsing so they have a big head start. Also the agent is actually reducing commission by overfunding a policy. And while that does allow more cash into the policy, these policies do NOT necessarily perform better over the long haul. In the end the total return of these products is the death benefit since the cash value is part of the death benefit. If you keep a policy in force until death (a necessity for any of the meager benefits) then this matters.

The White Coat Investor | August 24, 2021 at 6:15 pm MST

Do you have a link to the Bogleheads discussion?

FactorFan | August 28, 2021 at 7:14 am MST

“So no your benchmark isnt appropriate to answer your question.” What is?

20 afan | August 24, 2021 at 11:59 am MST

Boring is good.
It is just the cost.

With WL, you have guaranteed big losses early. Buy term and invest the difference in bonds does not have the initial loss. WL might be worth it if one could buy without the commission.

That early loss puts one behind. It takes years to catch up. Depending on the behavior of the markets and your company, one might never catch up. Bond investments will be either diversified to mitigate credit risk, or all in federal securities to eliminate it. WL is undiversified bet on the fortunes of one company.

Remember that one has to compare the after tax surrender value of the WL policy to the bond investment in term. Ignoring that makes the return on the WL policy look better than it is. One might well have to give up 40% of the return on the policy to taxes. With the bond fund, the taxes are already taken out, so there is no big hit when one cases in.

Yes, one could borrow money out of the policy but one could borrow against the bond holdings with the costs of the WL policy. Typically, the interest rate will be considerably lower than that charged inside the policy.

Do you know of any company that sells WL without commissions? That would be the place to look for the best policies.

FactorFan | August 24, 2021 at 3:22 pm MST

I haven’t seen any commission free WL products, only UL & VUL and fixed & variable annuities.

21 Afan | August 24, 2021 at 4:27 pm MST

That alone might be a strong argument for a no load UL over WL. If the UL was funded to guarantee it would remain in force, similar to WL, then it perform better. At least it would not have that huge early loss.

For that small group of people who need a cash value policy, a UL without load would have to be pretty bad to be worse than loaded WL.

22 afan | August 24, 2021 at 9:23 pm MST

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=321648

Pfau did reference an exchange he had with Allen Roth, who called him out for his “study”. In his response, Pfau re ran the figures, reducing the investment expenses from a high AUM fee plus high mutual fund expense ratios down to 0.18% expense ratio with no advisor fee. Most bogleheads would not consider 0.18% a reasonable fee for a broad market cap weighted index fund, stock or bond. But that was the closest Pfau was willing to go. Guess what? Term plus investment was better than using insurance products.

23 afan | August 25, 2021 at 10:00 am MST

“FactorFan | August 23, 2021 at 4:22 pm MST
[WCI Disclosure: This commenter is an insurance agent who sells whole life insurance for a living.]

$5,473 in year 1, and an average of about$1,000 per year thereafter. ”

For someone who is not a commissioned agent, I suppose the only way to get that same $5,473 upfront and $1,000 per year thereafter would be to find a no-load WL policy, if such a creature existed. Then they could keep those cash flows in the form of lower premiums.

I have to second Rex in that the industry would not have to resort to these wade Pfau and E&Y marketing pieces if a straightforward legitimate study would support the claims.

Bogle did not have to use any handwaving to show that lower costs were better. Or that broad market index funds beat active management. Just present the fact and let consumers decide.

24 Chris | August 26, 2021 at 10:02 am MST

What concerns me most is that Ernst & Young isn’t some sleazy insurance broker. They’re a huge, respectable (?) international company and one of the “Big Four” accounting firms. I’d expect something like this from Slick McGee’s Whole Life Emporium (“We Worry About Your Money So You Don’t Have To!”). I think it shows deep the greed runs through the entire financial services industry. Not just limited to EY or insurance; as we all know there is plenty of greed on the investment side too, with commissioned advisors and such.

afan | August 26, 2021 at 4:29 pm MST

You see why WCI is so skeptical of WL insurance. If deception at this level is a routine part of the sales pitch, the product must not be so good.

25 afan | August 27, 2021 at 11:20 am MST

“purchasing a No commission WL does NOT produce better results. If you look at a company like USAA or other such, their products do NOT illustrate better. ”

I am sure this is true. Since I am not in the market, I am not going to bother getting quotes for WL from multiple different companies to compare to USAA.

The fact that they do not pay commissions, if that is true, would not require that the policies are better. It just means that they could be better, because there is one less expense. But they could charge the same prices as a commissioned product and simply keep the cash.

That is why the product needs competition. If companies were forced to improve the deal for customers, then one might see prices go down, cash values go up, surrender charges go away or some combination of these. As it is, if they don’t have competition in no load WL, then they can price it like a load policy.

The tax advantages are worth something, It just seems impossible right now to get the costs down to the point that those advantages survive the expenses.

Rex | August 27, 2021 at 2:22 pm MST

Maybe i wasnt clear about why it is very unlikely to work out better. The current returns (3-5%) are lapse supported. And that is with 85% of people lapsing the policies. So while maybe in a fictional world, a no commission WL would produce better, it wont in todays world. As a made up example. I produce a super low fee/no commission WL. I start giving out 10% returns on the product. What happens? People dont lapse. This will force me to reduce the dividends or go under. As i improve the performance, fewer lapse which further inhibits my performance. In the end, if i had absolutely no costs what so ever then i cant really do better than bonds plus lapse support. In the end, i will be forced to get closer and closer to the other companies. Little changes in lapse rates make huge differences. Its the major reason LTCi went to pot. Do you what they used to model their original lapse rates? Whole life (im not joking). Can you see why the companies are going back to what they call hybrid LTCi policies? The deferral is worth very little in todays world given the ease with which one can invest tax efficiently. Many decades ago, WL did have a place. You couldnt invest broadly or efficiently. Now a days. Not really. As i also mentioned, overfunding actually does decrease the commission (by about 75% on complete overfunding) and the product still doesnt necessarily produce better in the long run. In the end, i doubt you will ever see a big push for WL to go this way. Sure there will be some attempts here and there on the fringe but it is a product sold and not purchased. There is plenty of competition already. They dont really care for the cost of the agent either. They just cant get around it.

afan | August 28, 2021 at 9:35 am MST

Good points, bur note that term insurance is lapse-supported as well. That does not mean it is a bad product. It does not mean that all those people who lapse their term policies were ripped off.
Lapse, by this measure, is not limited to cash value policy holders who sacrifice all their money by dropping out with little or no money. Someone who holds a policy for many years, accumulates a large cash value and surrenders it to take the money would also be classified as a lapse. Those who go to reduced paid up status may also be counted as a lapse.
If you buy a long term bond, then sell it before maturity, that does not mean you were ill served buy the purchase.

I am absolutely not defending WL or any other cash value insurance. In general, they are bad deals. They are typically terrible deals if held for a short time and are usually bad even after longer times. For the small set of people for whom they make sense- those with business needs or rarely estate planning for a permanent policy-the best policy would be the least bad. Assuming they can count on being able to afford the premiums long term they will only lapse if at the time that turns out to be better. They should look for the best performing policy over time
It is apparently difficult to find a WL policy that does not include a big loss to commissions. If it were possible for the customer to keep that money, it would be better than if they paid it.

The White Coat Investor | August 29, 2021 at 5:36 pm MST

WL doesn’t make sense to lapse late. Far better to borrow against it at that point. Somebody really hates it to lapse it after 30 years.

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Do You Believe the Study's Conclusion?

18 Problems with the Ernst & Young Insurance Products in Retirement Study

#1 Ridiculous Advisory/Investment Management Fee

#2 Ridiculous Equity Turnover Ratio

#3 Ridiculous Equity Dividend Rate

#4 Initial Taxable Equity Basis

#5 High State Tax Assumptions

#6 Weird Tax Assumptions

#7 Black Box Insurance Products

#8 The Whole Life Policy Is Managed

#9 Some Wacky Stuff with Projected Policy Performance

#10 Weird Reinvestment of Income Annuity Proceeds

#11 Only Replaced Fixed Income with Insurance Products

#12 The Investor Pays Back the Whole Life Policy

#13 Bizarre Investment Choices

#14 70-Year Time Horizon

#15 No Discussion of Cancelling Term

#16 “Whole Life Beats Bonds”

#17 No Discussion of SPIAs

#18 No Significant Difference

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