By Dr. Jim Dahle, WCI FounderEvery 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?
First people who change to paid up status DO NOT COUNT AS LAPSE. Im not sure why you would even think that but the policy by definition is still in force. 2nd it is known when people lapse and guess what they almost all very likely lose money because they lapse early. The stats of when are out there by society of actuaries and LIMRA if really interested but no you are incorrect on both accounts. Let me give you another little secret. You know how the IRR on the cash value improves as the policy gets older? Did you know that it actually goes back DOWN as people get around 70. The reason is that few lapse at that point. The insurance company is stuck. They know they are very likely paying a death benefit and that you are stuck with them. They know you cant likely 1035 to a new policy (odds are low on qualifying and having enough time for it to build up). They could easily continue at the same IRR if they wanted to (to reward those loyal customers but of course that takes money away from other policies). The lapses are very heavily weighted to early on and with losses. Yes there are a few who maybe its not a failure but its not many.
It is true that term is also lapse supported. It just doesnt mean anything in regards to purchasing WL. I told you about lapse support so you would understand why it aint likely gonna work even with low or no commission. To date it just is not better. Maybe some day you will be right and that a no commission policy will out perform but so far (and these have been around for over 100 years), that is not true. 99% of those items you mentioned could still be solved with term plus investing. Even when wanting to use insurance, no lapse gUL is very likely a better situation than WL.
(Full Disclosure, I am a Financial Planner that handles Insurance and Investments)
It seems like the you’re biggest issue with WL is when it’s sold as an “investment vehicle”. For someone like myself where it is used for multiple things are you still extremely opposed? My personal policy and the style of policy I usually recommend with whole is not an extremely expensive one but addresses multiple points.
125k of whole life with an Accelerated Care Benefit (Death Benefit can be reduced and used to pay LTC expenses, a hot button issue in my state right now) with the option to be paid up early. It minimizes premium and has multiple functions, and I’m still able to put a majority of my saving/investing elsewhere.
If you have to buy something in WA to avoid the new LTC tax, then maybe that’s an okay solution, but for the most part, I see WL mostly as a solution looking for a problem rather than vice versa.
Ok fair enough. I do think it’s absolutely insane that it was presented/sold to you as an investment. I was told that’s a pretty big no-no.
I guess my view of it for my situation is that it’s a bit of a better alternative. The most basic LTC insurance would’ve been around 70, and term would’ve been about 40My WL premium with the benefit is 150. Seems more effective to just pay that instead of increasing term, and a LTC insurance policy that is use it or lose it and pay 30-40 years of premiums with no benefit if I end up not using it.
Also when it comes to leaving assets to my estate, I’d rather have a life insurance policy that can cover taxes and expenses instead of having to pull from whatever other assets there are.
All personal preference though.
Also, I’m not sure if maybe this was addressed in a comment, but what would be your alternative strategy for having safe dollars to balance out down market years during retirement?
Have you heard of bonds? Way easier to rebalance with than life insurance where you have to either borrow against the policy or surrender it in order to rebalance.
Yes I’m familiar. I believe those should often be included in any financial plan, but with with rates as they are they haven’t been a strong part of my portfolio. From a tax efficiency standpoint, yes I minimize tax burden as long as I hold until maturity, even sometimes before, but that’s not always the case. It does sound like whoever pushed this WL policy on you had a bad product and peddled it as something it wasn’t. With my WL policy I can access my cash reserve without surrendering the policy or taking a loan, and I can access the basis tax-free. However that basis does take some time to build up, and if you take cash out it obviously slows the growth. So definitely not the best asset as far as short/medium term liquidity. It’s unfortunate to hear how bad your experience was and that those are the people that seem to have represented the industry.
First of all, I do help people obtain/buy/implement/I sell these products.
Here to address #10. The article refers to taking 50% of the dividend and buying more DIA. Thats not referring to taking the total income payable and allocating 50% to more DIA, it is referring to a bonus cash payment that some mutual insurers pay on top of a guaranteed income. That component makes up about 25-35% of the total income payable. Electing to use half of that to increase the guaranteed income and the other half as income creates an increasing guaranteed income, as opposed to a flat income for life. There are many ways to slice it up though depending on the goal.
RE: #15 The Methodology section states the term insurance is annual renewable term and is purchased until age 65. I think that is a tad unfair, but certainly not to the level you describe when you say “age 85”.
Thanks for the feedback/correction.
I am glad to know that now I should turn to a physician for insurance and investment advise.
Next, I’ll check with an insurance agent and broker for medical advise.
Actually Jay it’s more if you are a doctor, then you should ask a financially literate doctor for financial tips and referral to a fiduciary financial advisor for advice. If you’re an insurance agent and broker, you can also ask your insurance agent and broker colleagues for medical tips and referral to a good doctor.
Yes, isn’t it sad that people can’t go to an insurance agent or broker and get decent financial advice? Kind of sucks that a blog like this one is necessary isn’t it?
I’ll comment on some relevant parts here.
9. The purpose of illustrations do not by themselves project future returns from the policy, they only illustrate what the returns would be at current dividend scale if it were to stay the same for the life of policy. Obviously, depending primarily on interest rate environment, the real returns can either go up or down. Even after 15 years of near zero interest rate environment, IRR is still around 4.5% with tax free access from top mutual insurers for limited-pay. You cannot project future returns on anything, even stocks.
Your experience likely has to do with the fact that the interest rate environment was declining for the past 40+ years and was near zero for the last 15 years. Thus, the actual returns now obviously aren’t going to match the projected then. The reverse is very likely to be true.
11. Considering that whole life returns are primarily impacted by interest rates, and primarily the returns on long term corporate bonds from that, it is obviously a fixed income replacement for things like bond/CDs. Did anyone ever tell you it can replace stocks/bitcoin/NFT?
12. Not quite sure why you couldn’t understand this. Remember the “3 bucket retirement strategy”? When you use up bucket 1 and 2 because of market downturn, do you just let it sit empty or do you refill it from bucket 3? This is what the article is saying, and that WL returns is likely to be better than bucket 1 and 2, especially considering tax advantage.
16. Your example requires someone to have bought all the fixed income he needs in treasury bond at the highest rate. Even then, you need to look at impact of compound interest in WL and simple interest in bond. 7% compound WL interest over 30+ years will beat even 14% simple interest from 30-year treasury bond, even before taking into account taxes.
Linny,
I’ll comment on your comments.
Illustrations: thank you for acknowledging anything other than the guaranteed illustration is unicorns and fairies. Why bother showing them then? Oh wait, never mind. It’s great sales material for the shell game “look here, not there” ploy. The illustration that SHOULD be shown is how similar products have actually historically performed. But salesmen don’t show that because it’s an inconvenient truth.
Refilling buckets: You don’t have to pay interest on your cash and bond buckets if you cannot fill them. In WL you do — at least until you can no longer make the payments and the policy lapses. With a policy lapse, the “tax free” advantage become an instant tax bomb. During bad markets in a traditional cash, bond, equities bucket strategy, you lick your wounds, rebalance and adjust your spending if the market gods work agains you. If market gods work against your portfolio with WL, you will lose your policy.
The fact that you think the interest behaves differently on various asset classes is concerning. But this is a typical insurance salesman fallacy in my experience. (I can’t even tell you how many times has an insurance guy tried to show me an S&P chart without dividends reinvested to try and convince me I should buy a cash value policy.) If you reinvest your dividends from equities or interest from bonds, it will compound. If you don’t, it won’t. Some WL policies will continue to compound on the full policy amount even after policy loans, but some don’t. “Oh cool”, you say, “I’ll just buy one that does.” But sorry my friend there’s NO FREE LUNCH. The non-direct recognition companies will pay you a lower overall dividend over the life of a policy to make it works for the insurer, not the insured.
If you need (or want) a permanent death benefit, there’s no better product than a whole life insurance policy. But if you don’t need that, then don’t get suckered into buying a crap pseudo-investment from a highly incentivized salesperson. The fact that whole life and other cash value life insurance salesmen don’t disclose their commission to customers puts them on the same level as auto and time share salesmen. At least you know what to expect when you sit across the table from them.
Hi Pat,
Illustrations: It’s not all unicorns and fairies any more than some stock market projections. It’s shown to give prospects some idea of what to expect in terms of growth, and when they understand the foundation is interest rate environment, primarily returns on long term corporate bonds, they can get a good sense of what to expect. Illustrations showing around 4.5% compound returns with tax free access even after 15 years of zero interest rate environment and can still have access to the money pretty quickly? Sign me up. Beats the hassles of doing it myself and very likely to get less than that, especially with taxes are taken into consideration; or worse, paying some “fiduciary” 1% to get 3% fixed income returns after paying taxes on them and having money locked up, as how it was for many people until last year. There are no “similar products” out there to show, maybe there would be if banks out there are willing to give you the profit they make with your money and have it be accessible tax-free, but alas you are out of luck.
Refilling buckets: Policy loans being touted for this purpose are practical wash loans. The returns in the policy will practically keep up with whatever the loan interest is over the life of policy. I am not sure why market gods have anything to do with WL as it is very much unaffected by stock market. If you are talking about having to deplete WL policy due to prolonged market downturn, I am not sure why that is any different than having to deplete cash and bonds; you just have to refill it up either way, except the refilled money in WL would be providing around 5% compound return without tax whereas the cash/bond is unlikely to do so.
With regard to policy lapse risk, it is very easy to prevent for reason above. Even then, the policyowner just had bond-gains tax deferred, which beats paying income tax each year as they accrued.
There is no guarantee that direct recognition will pay higher dividends than non-direct, it has to do with overall profitability of the insurer.
With regard to reinvesting bond interest, that is by definition not compound return. The interest will get taxed each year as accrued so compounding is prevented. Also, nothing stops policyowner from using the cash value to “reinvest” in obvious better returns opportunities, if that’s the game to be played.
You can ask them to disclose commission, but it’s not as much as many think lol. Just happens to be frontloaded. The real money to be made is in AUM for life or charging $10k+/yr for 5 hours of work consisting of Google search and client meeting.
I view dividend-paying WL as not much more than having money at a bank if the bank would give me the profit it makes with my money and have it be accessible tax-free. I think if people view it as such they wouldn’t feel so strongly about it. It’s funny to see people getting excited about a bank offering 4% CD rate and having to pay income tax on it, thinking that there were no costs involved because they didn’t have someone come to their home and handle the transaction when mutual insurers are offering the same or better rates in tax-advantaged fixed annuities.
Dude, no, no, and no way.
Who said anything about AUM? That’s a shell game argument. I wouldn’t pay that either.
Stock market projections are unicorns and fairies too. I said HISTORICAL performance.
Sign yourself up for WL and enjoy earning your undisclosed “frontloaded” commission on your own policy.
I appreciate your well detailed rebuttal.
Linny’s made some of the best comments for the other side here, so much so that the usual attacks against the insurance industry can’t be used.
1) You guys are supposedly doctors, the top 1% of society. So why are you lumping yourselves with the majority of people that lapse their policies because of poor financial discipline.
2)Why do so many people that comment here seem to think they will never need a permanent death benefit? Does no one here want children? Do the parents here feel like all their kids and grand kids need to start from zero and become self-made successful doctors like them? Have you guys never had friends that did have some generational wealth that turned out to be good people that you appreciate having in your life and thus showed you that passing wealth isn’t necessarily a bad thing?
3) The “IRR” of the cash value is negative or tiny after 10 years. Okay, but it’s also liquid on a tax-free basis. And it’s negative or tiny because there are costs for people to make a living and also costs for having a death benefit. If the actuarial table says you’ll die at 87 but you die at 75, the death benefit kicker will turn that 4% IRR to 7% (tax-free) instantly and you won’t show me any bond portfolio that would have had that kind of return for that long of a horizon. That’s called sharing risk with your fellow human. So yeah if you never want to experience a minute of a negative IRR don’t buy this, but if you’re willing to stomach accept it then know you’ll always get that money back eventually when you die as well as tax advantages for the rest of your life. As far as deception goes, every normal illustration lays out the short-term negative IRR problem (whether your policy is designed to reduce commissions as much as possible or whether the product is straight off the shelf.)
Look you guys are doctors. You are smart. But your blind spot is you love to be right and maintain intellectual confidence. Tremendous IQ, but some humility in your emotional intelligence is lacking. For those that felt deceived, felt like they were sold something that they didn’t understand … I feel for you. Perhaps this was the first time that you felt like your IQ let you down. But rather than become insurance industry vigilantes, perhaps it’s time to address why you’re letting that experience completely close you off to being neutral on this particular subject. Do you really think an entire industry is so bad its mission is to destroy people’s wealth and has no benefits? There seems to absolutely be no nuance in any of these discussions. Don’t tell me you’re not emotionally reactive on this issue. Don’t tell me you’re passionate about helping other people avoid mistakes. Don’t tell me your logical rationalization and excel models are perfect and assumptions are free of bias. Just because the insurance sales agents on this chat aren’t as articulate as you and don’t have a mob on this platform as big as yours doesn’t meant you’re always right.
Why do you think a lot of people DO need a permanent death benefit? I can’t imagine that number is higher than 1% or so, particularly among this audience.
Hi Steve, unfortunately I am a victim of whole life insurance and lost $50,000, was in $31,000 of credit card debt after 7 years of trying to fund policies for me and my wife. It was definitely inappropriate for me and my goals and my financial “advisor” told me this was the best way to build wealth. I am much happier and meeting my goals without it, spending and saving more money for my retirement/kids college/meeting spending goals.
My blindspot was not being right and having intellectual confidence. It was being wrong and stupid about personal finance and thinking whole life insurance was appropriate for me. Not the first time my IQ let me down, but definitely the most expensive mistake. That is really the point of not buying it. It is inappropriate for 99% of people. WCI is trying to protect people and doctors who work hard for their money like me and my wife. I don’t think the entire financial industry is bad. I now have appropriate TERM life insurance to fit my insurance needs, true own occ disability, etc, all bought through the good players in the industry. But yes, the financial industry’s main mission is to make profit off it’s customers, and whole life insurance makes a crapload of profit and while also hurting the financial well being of doctors like me and my wife.
It was not fun being in credit card debt. It was not fun fighting about money with my wife because we were supposed to be rich doctors despite making $500,000, we were in $31,000 of credit card debt. And it was all because of putting our head in the sand, trusting a poor “advisor” and buying whole life insurance to meet our financial goals.
My wife and I treat patients with the utmost respect and spare no time. We sacrifice our time with our families, our kids, to treat people like you Steve and your loved ones. I am hurt that the financial industry would affect us like this. we didn’t deserve to be screwed by whole life insurance like this.
Rikki, I read your story on what happened. It seems your situation had more to do with you not being able to make proper decision on how much you could comfortably put in each year till age 65 than whole life screwing you. Just as you would’ve declined a policy requiring you to put in $1M each year til age 65, you should’ve declined a policy requiring you to put in $28k a year til age 65 based on your financial situation, whether income or lifestyle. If you were making $500,000 but had trouble putting in $28k that you knowingly agreed to, I am not sure what whole life had to do with that decision or your $31,000 credit card debt. You weren’t lied to in terms of your obligation and what to expect, just seems like a difference of opinion on financial plan after you discovered “indexed funds”.
Based on your posts on other articles, you seem to like going 100% stocks and then spending practically half your lifetime swapping likely taxable CDs and bonds near and/or in retirement. Others, most if not everyone else but you, and I seriously doubt that because unless one is putting everything they have but their monthly bills into stocks then they aren’t “100% stocks”, like to have a significant amount of money outside of the stock market along with their stock holdings, whether for emergency fund or to diversify, and find the value in doing it through dividend paying whole life that’s designed for it. A well diversified portfolio does not necessarily do worse than “100% stock”, as it allows one to take advantage of the volatile nature of the stock market.
Take my sister, a medical doctor herself. She just added a 5-pay $36k/yr policy to complement her half way through 10-pay policy. For the “cost” of having to deal with only partial liquidity for around 4 years, she’s projected to have around 10 years worth of living expenses/$2M by retirement, not counting her social security benefits, and should have around $100k in tax free income growing each year just from these two policies, again not counting social security benefits then. Assuming of course we don’t come back down to zero or negative interest rate and stay there forever, that’s just the nature of how things work.
That’s just the floor, a strong financial foundation for retirement. She still has money to put into the stock market to push the ceiling. Years from her retirement or during retirement, she can also push the ceiling with the money in these policies, as she goes to bed praying for a stock market crash/correction, which historically occurs multiple times within one’s lifetime, so she can take advantage. Until such opportunities come, she’s content that her money is on its way to do nothing but grow at corporate bond-like returns without taxes.
By all means, get all the max term life and disability insurance that you can get, those are profit makers for mutual insurers that’ll end up with whole life policyowners via dividends. Insurers make a crapload of profit on whole life? How does that work or are we talking something different? Of all the things in the financial industry to get upset about, getting upset at financial institution coming up with a financial instrument where it’s obligated to give you the profit it makes with your money and have it be very accessible tax free, while insuring you in the mean time, makes me chuckle.
Hi Linny thanks for the comments and yes, you are right, I did not know how much I could spend per year- I trusted my “advisor” who said whole life insurance would help me reach all my financial goals optimally based on what I was spending. It was totally my fault for just focusing on treating my patients, and my wife on treating her patients, and not spending one extra second looking into this financial stuff.
But alas, it turns out my “advisor” took a blind eye to the face we could not afford the policies so he could collect his high commission.
Also, your sister, despite whole life seemingly having a great benefit to her, still is not coming out ahead compared to if she had just term and invested the rest in a low cost index funds. She wouldn’t have to be like me and her asset allocation could be 60/40, which historically would give a 7% return, and after 10 years would make her about $500,000 (use FV function in excel =FV(7%, 10, 36000,0,0)). She likely does not have that much cash value in her 10-pay policy even on the optimal illustration. then say she has 20 years more to retirement =FV(7%, 20, ,500000,0) then that’s actually $2 million! And this is just investing the premiums from the 10-pay policy!!! No need to add another 5-pay policy!
So yes, technically it wasn’t the whole life policy but my buddy the biased “advisor” who I trusted to budget for me and tell me what premiums I could afford that brought me to credit card debt, but it sure didn’t help that I was tied to a financial product that you come out negative through the 1st half of the policy and who are required to not miss those huge premiums to make whole life work. Whole life really torpedeoed my financial life. I would have been better off if my buddy sold me loaded, high ER mutual funds, because at least these are not as expensive as whole life. but no, whole life has a high commission, and with its high required premiums, can really screw a doctor who was not financially literate like me.
also, please don’t tell me you sold the whole life to your sister!!!
I don’t really know what kind of financial details you showed to your advisor but if you were making $500K then $28K isn’t that out of bound imo. Ultimately, that kind of thing is up to you based on your financial situation and personal preference.
Yes, I do know about index funds, and she has money in them and will continue to pour money into them. But, while index funds or 60/40 may give that rate of returns over a long undetermined period of time over one’s lifetime, there is no telling what the returns would be within 5, 10 years, or 20 years. You can take a look at multiple times in history, or as recent as early 2000s, when stocks didn’t break even for 10+ years. Like me, my sister is not looking to get maximum gain for 10 or even 20 years, and fully understand that WL isn’t for that, she’s planning for 50+ years of her life and doing it with a plan as I wrote above, which is what I am doing myself. Trust me, index funds will be a big part of it, along with WL.
For the millionth time to the millionth person who keeps bringing up index funds to compare with dividend-paying WL, it is not a stock replacement, any more than it is a bitcoin/NFT replacement, it is a bank/bond replacement. So for someone who’d like to put everything but their monthly bills in the stock market, then WL isn’t for that person, that doesn’t make it “bad” or a “scam”. But just about everyone else has or will have a significant amount of money outside of the stock market for a significant chunk of their lifetime, for that WL can be better. It’s practically a tax-advantaged primarily long-term corporate bond fund + insurer side business profit. Unlike an actual corporate bond fund, one need not worry about the volatility of NAV. Best bonds are long-term and corporate, not short-term and treasury that just about everyone gets themselves into when they talk about bonds. Due to institutional advantages, like longevity and size of the portfolio, mutual insurers are suited for long-term corporate bonds in ways that individuals aren’t. Beats the hassles of rotating CDs and bonds in 30+ years before and during retirement, and paying income taxes on them.
And yes, I “sold” it to my sister the same way I “sold” it to myself, as that’s exactly what I am doing for myself. FYI, I was a practicing attorney who made a career change to financial planning. I am not someone who needs to “sell whole life” to make a decent living. I was fortunate enough to learn about it from a trusted source and then did my own research into it, and found value in it for the fixed income portion in one’s financial portfolio as there are strong fundamentals in how it works as well as strong and long historical performance.
Only an insurance agent would think spending 6% of gross income on whole life insurance is a good move.
I have no doubt that you’re also doing this for/to yourself. I think you’ve now demonstrated what white coat investors are up against–people who will go on and on about how good it is for them, how they sell it to their friends and family, and on and on and on.
That doesn’t really change how it works though. Nor the fact that 80% of purchasers regret the purchase enough to cancel the policy prior to death. Nor the fact that 75% of purchasers regret the purchase. Nor the fact that fewer than 1% of us have any sort of real permanent need for a death benefit.
You’re a true believer. There will be no convincing you that you are a doing a disservice to most of your clients most likely including your own sibling. But we will continue to do what we can to put you out of business.
I meant more than it should be financially sustainable rather than whether one should put a quarter of the recommended 20%+ gross income savings in the fixed income portion of their retirement savings/emergency fund. That is up to personal preference and what the plan is.
With regard to your statistics, unless that is for limited 5-10 pay policies from top mutual insurers, I don’t know how that is relevant to what I am doing for myself and clients.
LIMRA doesn’t break down the statistics, but I assure you that every agent thinks they’re an exception to the rule. It would be interesting to see what the numbers were among your clients after 30 or 40 years, but by the time we know that, it’ll be too late for them and you.
Lol, yes it’ll be too late for us to have to experience the joy of swapping short term CDs and bonds for decades, and paying income taxes on them. That’s much better than letting financial institutions run a long term corporate bond fund so it can give you the profit from it and from its side businesses, and have it be liquid and tax free to use in the mean time. You are a true believer.
Hi Linny, whole life insurance is not a bond replacement. 7 years into my whole life policy I had 180k cost basis, and only 130k cash value to show for it. $50,000 worth of loss!!! I know no bond fund where I lose $50,000 after 7 years!!!
I know there is no convincing you that whole life is a terrible financial product, but I implore you not to sell or promote it. Especially other docs. It hurt me and my wife. We could have been out of med school debt with that 180k, or invested it into a bond fund and not lost $50,000, or put it in our kids 529. Or take that money and pay somebody to take my wife’s call. It is a particularly dangerous evil in that you yourself, a well educated lawyer turned salesperson, can’t see it. The devil takes many forms, and even despite hard evidence in how it torpedoed my financial life and it is not optimal as an investment, whole life continues to do evil. Linny please don’t continue to perpetuate it
Hi Rikki,
You didn’t lose it, you chose to give up on it. You discovered stock market statistics, and indexed funds in particular, and planned to go that route 100%. Your money would’ve become more liquid in time and end up providing tax free compound corporate bond like returns, but you didn’t want to wait for one reason or another.
Really it seems to me that you have a particular preference in how to plan retirement savings that’s more towards aggressive style, which obviously doesn’t have a place for something like WL, and that’s fine if you are truly 100% in stocks, as in putting everything you have but monthly bills.
And it need not be that you are underwater in year 7, depending on policy design and what the plan is. It can be very flexible and liquid. My sis’s 5-pay would have her up around 2% compound return by year 5 and very liquid before then. That’s at the current dividend scale, which hasn’t taken into account the recent interest rate hike and still operating at 0% interest rate environment, but it will in time as long term corporate bonds that insurers are rotating into are paying around 8%, among other things. And as I said, she’ll be praying for stock market crash/correction every night before bed for 50+ years of her life so the tax free compound corporate bond like return is merely going to be the floor. She doesn’t want to be swapping CDs and bonds throughout her retirement, and paying income taxes on them, or deal with NAV volatility for bond funds and pay income taxes on them; nor do I.
Bond fund NAV volatility. Really? That’s how you’re selling policies now? You guys used to use stock market volatility to scare people into buying. Are there really that many people terrified about bond volatility after last year? Really? Sure, it lost 13% in 2022 (worst ever), but 5 year returns are still positive. It’s not like the insurance company doesn’t own those exact same bonds in their own portfolio, they’re just less transparent about it. Hiding volatility is not the same as eliminating it. That bond volatility just shows up in the dividend rate after it’s run through the insurance company’s black box.
Yeah I scare them with stock market volatility the same way you scare them in your articles talking about the need for bonds. Many people would prefer that stocks are the only volatile asset in their portfolio, or that they have at least one asset that they can predictably count on to go up at an attractive rate when everything else is volatile. I personally do. Many people love having the benefit of a corporate bond fund without having to deal with NAV volatility or its taxation structure.
I don’t know what bond fund you are looking at but BND is down 12% over the last 5 years, and it’s just now paying rates that limited pay WLs have been paying even when near zero interest rate environment after 15 years, and without taxation. It doesn’t matter if they are still positive over the last 5 years or 20 years, what matters is that when they need to use it they may need to lock in a double digit loss to do so because of some unexpected event. Bond funds tend to crash with the stock market too.
There is no volatility with WL as it never goes backward once accumulated. You just have a petpeeve with losing access to around 10%-20% of cost basis for 5 years, and that’s fine, many people don’t as they plan for it. For them, that’s a minor inconvenience for the value of having something that does nothing but go up in a compound bond like returns manner without having to pay income taxes on them, especially if they are high income earners.
BND is up an annualized +0.09% over the past 5 years. Go to portfoliovisualizer.com and see for yourself. You are probably just looking at price only returns. (Probably because you either don’t understand how markets actually work, or because you’re used to showing “price only” returns to your victims as a shell game to sell more insurance.) My personal experience has been that insurance agents hate, hate, hate showing interest and dividends.
Now to be fair, I don’t know anyone excited about +0.09% annualized. But at least it’s an accurate calculation and not a figure on a sales brochure marked with an asterisk.
I’m surprised that someone who works in the financial industry would ignore the income from a fund when calculating returns. Really? And then you wonder why it’s so hard to have an honest conversation about your product of choice? 5 year returns on BND aren’t great given what happened in 2022, but they’re certainly not negative 12%. You’re entitled to your own opinions, but not your own facts. If you can’t be trusted on something that simple, why would someone trust you about a life long insurance purchase?
https://www.morningstar.com/etfs/xnas/bnd/performance
Linney says: “And as I said, she’ll be praying for stock market crash/correction every night before bed for 50+ years of her life.”
She better be praying the insurance company loans her own money back to her in time to take advantage of that market crash. (It took 4 months for Ohio National to return my money back to me. By the time I received the EFT transfer, the market had already corrected. )
She’ll also be praying that the interest on the loan she took against her policy to buy stocks during the downswing is outpaced by market gains or she can’t pay it back and her policy implodes. Gosh, I hope she can time these decisions right, or her plan (I mean your plan for her) is in great jeopardy.
You better be praying it all works out perfectly for her, or you’re going to have a lot of explaining to do.
Now I have an honest question. Did you disclose your sales commission to your own sister before she signed on the dotted line? Just curious. Maybe you did even one better, and returned the commission to her?
Hi Pat,
The insurer is only one of two financial institutions to have better financial ratings than the federal gov’t as of a few months ago so I think it’ll be fine.
For the second time, you do understand the policy loan at issue is a practical wash loans, right? I think Jim wrote an article on that. It is extremely manageable to not lapse, especially as some of her normal contribution to index funds will be diverted into the policy. Even if there’s a technical lapse, there’s a grace period to deal with that, and can be done through rebalancing.
With regard to commissions, it’s hilarious that you think it’s a lot so I’ll address it. It’s 15% first year commission and a total of $13,600 over the life of policy. Her $182K total premium should turn to $2.3M tax free by life expectancy at the current dividend scale, which again is based on the current dividend scale that’s still assuming a 0% interest rate environment of the last 15 years so it could be higher. That’s a “high commission” of .0065% of the total gains, less than that if dividends go up as expected.
Do I think I or anyone else can run a fixed income portfolio to get her that return, especially when accounting for taxation and a lifetime of liquidity? Nope. Not for $13,600 fee over a lifetime, or even 10x that. Do you know any advisor looking to handle a fixed income portfolio of someone for a $13,600 fee over a lifetime? I wouldn’t, it’s a complete hassle.
This thread has been a good demonstration of the classic “I’m going to keep talking (writing in this case) until you stand up and walk out of my office” sales technique.
Some people think they can “win” an argument with a whole life salesperson. You can’t. They just keep going around and around and around for as long as you’ll stay there listening to it or until you give up and buy a policy.
Fat chance your sister gets the current dividend scale either. Go ahead. Show us the original and the now current illustration from a policy sold a decade ago. Did that person get the “current dividend scale?” Nope. It’s usually not all that much more than the guaranteed scale. So you can quit using the “current dividend scale” in your arguments. Even the guaranteed scale isn’t guaranteed by anything but the company.
If we’re going to talk about money that isn’t needed for 50 years, then an appropriate comparison would be to stocks or real estate. $182K invested today for 50 years at 10% will grow to be $21 million. 10X+ what that whole life policy will be worth. Plus, $2.3 million in 50 years at 3% inflation is only going to be worth $501K. 50 years to turn $182K into $501K. Hard to get very excited about that. And that’s the guaranteed scale.
Keep selling. I’m not buying. I wouldn’t be surprised if your sister stops buying too when she realizes what you’ve sold her.
Yes, Dr. Dahle is 100% spot on. These arguments with insurance sales folks cannot be won, not when their whole livelihood and/or justification for past deeds depends on it. I do hate it when they get the last word though, which keeps me coming back for more.
Alas, I shall let it go though. If a reader made it this far into the comments, there’s enough evidence and information for them to decide the merits of Linney’s arguments for themselves. Before I go though, I’d like to hammer my point home one last time. Reader, a 15% sales commission for any investment is a certain Death Sentence for that investment’s ability to grow you wealth.
Linney, I am impressed with your creative sleight of hand commission calculation that completely ignores the time value of money. From your answer, I’ll assume your commission of “.0065%” (LOL!) is a “No”, you did not disclose your sales commission to your own sister. Very sad indeed…not even to your own family.
Peace.
Lol, who’s selling what? I am just replying to multiple people after they commented on my post. I did say I was a practicing attorney, so I do like to go back and forth in good spirits.
Wow, you mean to tell me that 15 years of near zero interest rate environment resulted in people not getting the dividends as projected 10 years ago? I am shocked. You can reread my OP addressing some of your points on why that may be.
Who said it’s money not needed for 50 years? She should be using it shortly when there’s a need or opportunity. It’s not either WL or stock/real estate, it can be both or all three, as I’ve said before.
Hey Pat,
Feel free to reply back when you find an advisor who’s willing to professionally manage fixed income portfolio over someone’s lifetime for a lump sum of $13,600, with time value of money and all included.
With regard to your post about “15% sales commission” being a death sentence for it’s ability to grow wealth, that just shows you don’t know how WL is structured. Anyhow, it’s the value that matters, not fees/commissions. Fees/commissions only matter if the value of what you are getting can be replicated effortlessly and/or cheaper. Have fun rotating short term CDs and treasuries, and paying income taxes on them, for what’s practically half your lifetime.
My sis knows I made a commission on that and we don’t see it as an issue, and I am not legally allowed to rebate the commission. She didn’t think to ask me what the commission is so I didn’t think to tell her, though I wouldn’t mind doing so. Do you have a habit of telling your patients what you make if you do certain procedures without them asking?
hey Linny, I was forced to give up on it as I said because I could no longer afford the premiums. going into credit card debt to fund $28,000 of whole life premiums you would agree doesn’t make sense. And my “advisor” peddling whole life didn’t exactly budget the best for my 2 newborn children, the purchase of my house, and the ongoing student loan debt payments after I had bought the policies. This is huge danger in whole life- the premiums become a liability on your balance sheet, otherwise the whole thing falls apart/you don’t get close to the returns on the illustration.
I would have been better off in a bond fund. As my expenses started going up with my kids and buying my house and the all the other stuff my buddy didn’t account for in future budgeting because he just wanted to collect his $28,000 commission, if I had been in the bond fund I could just stop dollar cost averaging into the bond fund.
Hey Rikki,
That’s why I don’t tend to like policy designs longer than 10 but some people do like and plan for longer than that.
Sorry, it didn’t work out for you. Best of luck to you with your financial plan.
omg- shorter policy designs have higher premiums that are not invested and if got forbid some sort of emergency comes up that goes beyond your emergency fund, you might not be able to afford that higher premium that is not spread out longer. Please don’t hurt any more people with whole life.
The premium can be whatever one wants it to be, what you say doesn’t matter unless one is aiming for a particular permanent death benefit.
I and everyone I work with can plan and deal with a partial loss of liquidity of around 5%-20% for 5 years so we can get tax-free corporate bond like returns and don’t have to spend practically half the lifetime swapping short-term CDs and treasuries, “high-yield” savings accounts etc… and pay income taxes each year, especially those at high income levels. If that’s not you, then that’s fine. Many people see it differently.
You’re a true believer. God help your family members and friends. I’m sure your pushing had nothing to do with your sister “adding” a policy to the one she already had. Why don’t you share her email address and we’ll send her a few links….
My whole life policy net IRR after 8 years is now +2.4%. If I would have bought term and invested the difference in BND or VTEB my IRR would be still be negative.
That’s actually a really good return for a whole life policy at 8 years. Many have not even broke even by that point. It’s actually so good I’m a little skeptical. Most illustrations I’ve seen don’t hit a return like that for perhaps 20 years.
I think any relatively short period that includes 2022 is going to look pretty bad for bonds. Morningstar today reports TBM has had -5.52% 3 year returns, 0.04% 5 year returns, 0.87% 10 year returns, and 2.57% 15 year returns. That’s all due to losing 13% in 2022. If you take that year away, everything looks dramatically better. For example, 9% returns in 2019 and 8% returns in 2020.
At any rate, you can’t invest going backward, only going forward and the best predictor of future returns of a high quality bond fund is its current yield. For TBM, that’s currently 4.91%. That’s higher than I’d expect from a typical whole life policy.
Glad you’re happy with what you have.
The dividend for next year has already been announced, so the IRR after year 9 will be 2.8%, and 3.3% after year 10 at the current scale. The cash value is compounding at a rate of about 5.75% annually going forward at the current scale. The company has announced internally that the dividend will likely increase in 2025 if interest rates hold. “As our reinvestment rates are rising in the current environment, we would anticipate an increase to the interest component of our dividend scale in 2025 should rates remain unchanged.”
Your inability to think clearly when it comes to dividend-paying life insurance is glaring, especially since you seem to have strong nuance in just about every other financial topic, such as the need to not be “100% stocks”, the value of having professional management in a bond fund, the impact of taxation etc.. Seems you don’t have a crystal ball for anything except when it comes to whole life. But I guess you covered yourself with “a typical whole life policy” disclaimer.
Limited-pay dividend-paying life insurance from top mutual insurers was already projecting close to around what BND is giving out today even when the interest rate environment was practically zero for around 15 years. How would what is primarily a treasury bond fund beat out what is primarily a corporate bond fund and supplemented by insurers’ side business profits, even before taking into account the compounding tax advantage? Mutual insurers are giving around that BND rate for their version of CD, and they do that because they can get higher rates elsewhere. When they do, they have to pass on the profit back to policyowners via dividends tax-deferred, ready to be used tax-free via practical wash loans.
For many readers here, the current BND rate is probably around 3% net after taxation.
Linny,
I included my Ohio Nat. Inforce Policy Illustration table on my ACTUAL whole life policy for you to examine. The illustration was generated 7 years into the policy. The whole life policy would have finally broken even in year 15 had I not surrendered it. The great returns you claim on your policy seem to be missing from mine (and every other policy I’ve seen). Linny, what do you think? Was this a good policy? By the way, these are the non-guaranteed numbers. The guaranteed numbers are worse.
Preferred Non-Smoker (issue Age 36)
Contract Premium: $4304/year
Starting policy year 7.
Illustration generated October 2022; Policy written December 2015
NON-GUARANTEED
[AGE] [DIVIDEND] [CASH VALUE] [DEATH BENEFIT]
43 0 23,585 422,239
44 0 28,817
45 0 34,088
46 0 39,489
47 1 45,034 422,254
48 3 50,723
49 5 56,609
50 7 62,687
51 10 68,948
52 12 75,389 422,349
53 15 81,984
54 17 88,730
55 20 95,610
56 23 102,590
57 26 109,688 422,599
58 29 116,896
59 33 124,263
60 36 131,782
61 40 139,420
62 44 147,152 422,9888
63 48 154,930
64 52 162,740
65 77 170,605
66 154 178,583 423,603
Hi Pat,
Whether a policy is “good” depends on the purpose of setting it up. If your purpose was to use it as a fast liquid account to be used throughout your life then no. You would’ve known that by looking at the illustration.
If it was to have supplement income during retirement, then yeah it could’ve been. Ohio National turned out to be a bad choice for you as it became a victim of a historic 15 years of near-zero interest rate environment that took its toll on its ability to generate competitive returns, especially since it was too small to diversify as the top three.
Yes, of course, the guaranteed numbers are worse. No one is touting the guaranteed number for its rate, it’s there to make sure it doesn’t ever go down. By law, the insurers cannot have a high guaranteed rate even if they want to or it’s not a life insurance policy.
PREMIER PLUS (Issue Age 35)
Contract Premium: $20,000/year for 10 years.
NON-GUARANTEED CURRENT DIVIDEND SCALE
[AGE] [CASH VALUE] [INTERNAL ROR]
36 $14,812 -25.94%
37 $31,981 -20.10%
38 $50,981 -15.10%
39 $71,840 -10.20%
40 $94,619 -5.38%
45 $224,524 2.13%
50 $293,009 3.67%
55 $382,790 4.24%
60 $497,406 4.51%
70 $828,814 4.75%
80 $1,367,387 4.84%
90 $2,203,921 4.85%
Got it. So a whole life insurance policy is good as long as it’s set it up properly and underwritten by an insurance company that won’t become a victim of unfavorable interest rates.
Too bad I’m not an insurance agent, because otherwise I may have known better. I was offered only one policy from one company, and was told it was literally “Whole life insurance is one of the best assets an individual can own”. I saved the email. Even if I had options to select from, I wouldn’t have known which policy is “proper” for me, nor which company is too small to diversify.
And therein lies the WCI take on whole life insurance. “Improper” policies are sold to physicians more often than not. So even if not all policies are junk, most actually are. Without a fiduciary standard requirement from insurance salesmen, there is no real legal recourse for those of us sold policies improperly.
What is “good” depends on the purpose. I am sure you saw the illustration and you got it thinking it was “good” for you based on whatever he said. Now you see/hear something that you may like “better” and have regret, the same way someone with a 50% stock winner having regret over not getting into a 100% winner. Many people like to pay lower amounts over longer period of time and forego early liquidity, and people like me like to pay a lot of amounts into shorter period of time.
You got unlucky, the same way someone who had a bad initial experience with stocks got unlucky. Now you can take advantage of what you know now, or enjoy the lifetime joy of swapping CDs and Treasuries, NAV volatility in a bond fund, and paying physician-level income taxes each year, like many people going to end up here.
While WCI does hate the fact that “improper” policies are sold, they also don’t seem to be fans of “proper” policies. There seems to be a belief that they can cut out the middleman and “invest like the insurance company” as if they would actually end up running a tax-advantaged long-term corporate bond fund that’s also supplemented by institutional business profits. In reality, just about everyone here is likely to end up doing what I said above for their fixed income. Those to me seem to be fundamentally inefficient for high income individuals. My sister, who is at 41% income tax bracket for federal, state, and local, would need to get close to 9% interest from a bank/bond every year just to match that 4.85% compounded tax-advantaged return. As interest rates have gone up from zero, the dividends will follow up so should end up higher.
Not sure you’ve seen this:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
Yeah Linny I would have to agree with Jim that there are appropriate good policies for whole life insurance as he outlines in his blog post. all docs who hate it are the ones who it was sold inappropriately. that being said Jim cogently outlines that whole life insurance is in no way the most optimal way to save money and draw money down in retirement after tax. You really need the insurance part of the product in order for it to be optimal for you. As Jim outlines, if you have an estate inheritance problem, “keyman” insurance for your company, or a disabled child, these are appropriate. Otherwise a lot of the tax benefits, etc in the future for growing your money is eaten up in fees.
Can be appropriate would be better said. Just because someone has an estate tax problem (I expect to, but don’t have a policy) or needs keyman insurance (it can often be done with term) or has a disabled child (again, many with disabled children don’t have a permanent life insurance need), doesn’t mean they NEED a whole life policy.
Hi Rikki,
I only advocate on use of whole life for fixed income planning. It is not the “most optimal way to save money” if you include the stock market, but for the fixed income portion then it is fundamentally better than what people typically end up doing, especially for high income individuals, which is the lifetime joy of swapping CDs and Treasuries, or dealing with NAV volatility in Treasury bond fund like BND, and paying physician-level income taxes on them each year. I can avoid that all for the “high cost” in partial loss of liquidity for around five years.
“Fees” and “Commissions” only matter if the value isn’t there. The value is there if you can’t replicate it effortlessly or can’t get it cheaper elsewhere. In terms of managing the fixed income portion as efficiently as possible, there is value in having dividend-paying whole life. Sure, without the fees and commissions where everyone works for free, then maybe I can get .5% more on my money than what the insurer would provide me, but I wasn’t going to end up getting elsewhere the earnings of what’s practically a tax advantaged compounding corporate bond fund that’s also supplemented by institutional business profits and liquid to use throughout my lifetime. So to me, there’s value such as the fees/commissions don’t matter.
Despite people touting their “100% stock portfolio” as if they were putting everything they have but monthly bills into the stock market, everyone ends up with a significant amount of money elsewhere throughout their lifetime, as they should. For that, it would be more efficient in a properly designed whole life policy.
Hi Linny i definitely disagree with putting whole life as a bond alternative. There is significant risk of not being able to come up with cash to afford the premium with doctors like it was for me and my wife. I would have been better off in a bond fund (BND is not a treasury bond fund but a total bond fund, btw) where if I can’t afford the premiums of a whole life policy b/c life happens (in my case 2 kids, lifestyle inflation with a big house and mortgage, and still having student loan debt), it’s not so detrimental if I am investing in a bond fund. I was 7 years into my whole life policy and I still had not come out even. A short term treasury fund would still be super safe (even last year a short term treasury maybe lost only 2% despite incredibly fast rise in interest rates) and now with higher interest rates the yield even on short terms treasuries are reaching 5%. And yes, it may get taxed, but whole life insurance I would still have to borrow against it and the interest rates can be high.
In the end it is a terrible product except for maybe the 1% of the population, if that, that Jim identified in his post. It is not efficient in any way to have as the bond portion of your asset allocation or to save money for retirement given those fees that go to salesmen and the insurance company. you’re right, they don’t work for free and I have to pay them, whereas the entities I buy bonds from work to make me money b/c they have to pay me back interest for use of my money. Fundamentally, whole life can never come out ahead of a corporate bond fund like you say.
Hi Rikki,
I mean bond alternative in terms of its fundamental lifetime performance. What you say about not being able to come up with the money can be worked around or minimized, whether by doing a limited-pay like a 5-pay where the policy can be sustained after just 2 annual payments and/or designing it with PUA so only half or less is required. If that doesn’t work for you, then yeah perhaps you are better off with $BND or swapping CDs and Treasuries throughout your life, and paying physician level income taxes on them each year. But let’s not kid ourselves that your fixed income portion would end up more efficient in the long term.
BND is 67% Treasuries, it is primarily a Treasury bond fund.
The policy loans being touted are practical wash loans where the dividends and loan interests practically wash each other off. The loan interest is linked to Moody’s Average Corporate Bond rate, which is also the foundation of the dividends, it is not something that can be arbitrarily set high by the insurer.
WL can come out ahead of a corporate bond fund, assuming the individual would even risk getting into one given how it can be volatile and correlated to negative events like the stock market. That’s because there is no impact from taxation every year, which is a big drag, especially for high earners, and WL also gets dividends from the earnings of the institutional businesses that the insurers run. The fundamental essence of using a life insurance policy as a saving vehicle, or even investment vehicle as in the case of VUL, is that for the fees you give to the insurer, the insurer will take away what is the biggest fee you’d face in life, which is taxation. Fixed income doesn’t get favorable tax treatment as with stocks.
To match that 4.85% current projection even after 15 years of near-zero interest rate environment, a person like my sister would have to get around 8.5% interest from a bank or corporate bond every year for the rest of her life. She’s not going to, even if she wants to take the risk and deal with the hassles of it. She’d rather deal with loss of partial liquidity for around 5 years.
If you know of a primarily corporate bond fund that’s tax-free and does nothing but go up, you may have found something better than WL for fixed income in terms of lifetime performance. Feel free to let me know.
I disagree that it’s “fundamentally better” for fixed income. It’s different. Some people value the ways in which whole life is better than bonds. Others value the way bonds are better than whole life. Similar long term returns? Sure. Similar short term returns? No way. Bonds don’t require you to be healthy and let you go SCUBA diving. Dramatically lower fees and expenses. No interaction with an insurance company and its agents (which I find to be very unpleasant). Now if you don’t care about any of that other stuff and you really value what whole life can do, then sure, knock yourself out. Get a good policy that you really understand how it works and you’ll likely be happy with it. But most docs who buy whole life policies aren’t happy with what they bought once they found out how it works.
Hi Jim,
I meant “fundamentally better” in terms of lifetime fixed income performance. Yes, it may not be suitable for people who have horrible underwriting ratings or those who cannot qualify, I meant it generally for those with normal ratings or higher. For those who can’t qualify or have horrible health ratings, the trick is to do it with viable others with whom they have an insurable interest.
My info is for those who can get normal or better ratings and who believe that they can end up with better lifetime fixed income performance by lifetime swapping of CDs and Treasuries, HYSA, or $BND, because of the “fees and commissions” associated with it.
In terms of short term performance, yes WL is not for those looking to maximize fixed income returns within 5-10 years. For that, they should get HYSA, CDs, Treasuries, or perhaps a MYGA at the insurer I have my policy with so they can be a profit source for my policy dividends. The IRR for 5-pay could’ve been higher by year 5 (around 3% taxable) depending on the person and amount when the interest rate was low but it went up too much too fast.
I think most Docs would like a policy like I illustrated, Pat seems to have conceded.
Yea, if you only look at one aspect and handicap the other option, it’s easy to choose a winner. Long term whole life returns may look good compared to treasuries and CDs, but maybe not quite so good compared to corporates. But if you’re looking for the highest return over 50 years, it’s pretty artificial to only consider bonds and whole life. If I’ve got money I don’t need for 50 years, I’m not putting it in either.
If you used other aspects of the “investments”, you would find different winners.
Has a death benefit: whole life
Better tax treatment if not held to death: bonds
Better short term returns: bonds
Fewer fees: Bonds
Easier to qualify for: bonds
Easier to use to rebalance: Bonds
More likely to keep you from bailing out of stocks in a downturn: bonds
More flexible contributions: bonds
Easier to buy without interacting with an insurance agent: bonds
Can be indexed to inflation: bonds
See what I mean? One is not clearly better than the other. It depends on what you care about.
Plus there is your massive conflict of interest. I have met almost nobody in 12+ years of doing this that really loves whole life insurance as an investment but doesn’t sell it.
Unless individuals are getting tax-free corporate bonds, the tax drag can make corporate bonds less than WL returns, especially for high income earners. Not to mention the risks and hassles of dealing with them, which is why people typically get satisfied swapping CDs and Treasuries.
I don’t know why you keep talking as if cash value can’t be touched for 50 years, it can be very liquid. WL will do better than that 20% bond portion that you have and will have for decades into the future.
With regard to the comment about conflict of interest, there are people who don’t sell it yet promote it.
https://seekingalpha.com/article/1002461-dividend-paying-whole-life-insurance-the-alternative-fixed-income-vehicle-part-5-of-5
https://r0k.us/insurance/vp/visibleLife.html
Dr. Wade Pfau, PhD, CFA, retirement scholar, also doesn’t sell WL but promote it for retirement.
With regard to people who sell it and promote it, that can just be that they sell it because they think it brings value to people, rather than to swindle people for money. You can tell which by seeing whether they themselves put money in WL, and I am very sure just about all of them who are financially able do have money in WL.
I told Wade when I interviewed him a few weeks ago that there were a lot of folks like you out there using his work to inappropriately romote whole life to people. He wasn’t thrilled about that. He thinks he can look past his massive conflict of interest in that regard. I’m not so sure. Feels like his finger is on the scale when he does the calculations as Allan Roth pointed out (i.e. he used treasuries even though the insurance companies are using corporates. If he’d used corporates, he would have drawn the opposite conclusion. Garbage in, garbage out.)
WL might do better than bonds after year 20 or so, but it won’t before then. Maybe that’s a trade you’re willing to make. Lots of people aren’t.
At any rate, this is all academic fun. Back in the real world, this is what’s happening to doctors (from an email yesterday):
He seems super glad he bought that instead of bonds. For every client you think you have that loves what you sold them, there are a dozen who are pissed about the crappy policy they now own and are stuck with (or will lose gobs of money to get out of.)
Lol, how am I inappropriately promoting WL? Even Pat is likely pondering whether he should get one again after seeing the information I provided, instead of having to look forward to the lifetime joy of swapping CDs and Treasuries, HYSA, or BND, and paying physician level income taxes each year.
Wade said he got himself a whole life policy for retirement planning after he did the research.
I am not sure what Allan Roth is referring to about using Treasuries instead of corporate bonds. If it means Wade used Treasury returns for those who do it without WL then that’s reasonable since that’s what people overwhelmingly do for their fixed income. With the impact of taxation and not having the benefit of insurer’s institutional business profits, I doubt people putting up with the risk and hassles of corporate bonds would fare much better.
About WL needing to wait 20 years to beat bonds, not necessarily…
SELECT PREFERRED (Issue Age 30)
Contract Premium: $50,000/year for 5 years.
NON-GUARANTEED CURRENT DIVIDEND SCALE
[AGE] [CASH VALUE] [INTERNAL ROR]
31 $0 -100.00%
32 $62,330 -37%
33 $127,081 -15%
34 $193,803 -3%
35 $266,291 2.11%
36 $277,921 2.66%
37 $290,256 3.01%
38 $303,605 3.27%
39 $317,746 3.47%
40 $332,736 3.62%
50 $537,684 4.33%
When taxes are calculated, my sis would beat bonds by year 6 even at today’s rates. When rates were near zero, make more by year 5.
Can’t say this enough, these are all at the current dividend scale, which is overwhelmingly still operating under the impact of 15 years of near zero interest rate environment.
That is an IUL, I do not promote it, and neither does any of the top 3 mutuals.
I promote low cost indexed funds for stocks and customized dividend paying life insurance for fixed income planning (to have at least around 5 years worth of living expenses by retirement age), and how to play a game of yoyo between the two before (buy the dip) and during (volatility buffer) retirement.
My clients tell me that they wish they met me years ago. I don’t know why I should feel anything for what others do, especially for promoting something that I do not.
I’m glad you and reportedly your clients are happy with what you’re using. I hope I don’t hear otherwise from any of them.
Holy crap Linny! just look at what your saying with this example policy. Whole life was sold to me like you were saying, and it screwed me. In this sample policy there are significant negatives:
1. you are 100% negative return the first year!!!! and don’t come out even until year 5
2. dude $50k a year!!! that is a huge ask! your sis would not be paying her 7% student loan debt to fund this thing???
3. what if she couldn’t keep up with the premiums those first 5 years of the policy?
4. you’ll have to pay interest if you want tap into cash value
5. bonds are usually kept in tax advantaged accounts, so no tax drag
6. wtf do you mean lifetime joy of swapping CDs and Treasuries, HYSA, or BND??? bonds are supposed to dampen volatility in your asset allocation so you don’t sell equities. whole life is a very expensive way to do that, and very risky if you can’t afford the premiums in the first few years of he policy due to unexpected expenses, or more expensive if not paying off high interest rate student loan debt which is common among doctors.
Linny, I know it’s hard for you to understand when your income depends on you not understanding it, but whole life insurance is an evil product no matter how you swing it unless you need the insurance piece, and even then there are some caveats.
I wish salespeople like you and my high school buddy would listen to all us doctor victims and stop selling whole life. I am asking you please, from the goodness of your soul, stop hurting us doctors. Any many of the doctors that you have already hurt, they don’t realize you hurt them.
1. You are conflating temporary loss of liquidity with “negative return”. If I do private lending to someone and loan out $100, am I “100% negative return” just because I don’t yet have access to the money? Who cares about not breaking even until year 5, it’s part of a lifelong financial process. There is no guarantee that you’d break even in 5 years or 10 years with stocks/bonds etc…
If you want guaranteed returns within 5 years, come get a MYGA at the insurer I have my policy with and be a profit source for my policy dividends. If you can’t manage temporary loss of partial liquidity for lifelong financial planning, then yea don’t do WL. Many people don’t have that issue.
2. That’s not my sis policy numbers. Whether the amount is high is relative to one’s financial situation. Do you save/invest only after student loans are paid off? There is value in trying to do both at the same time, which you may not agree with but that’s ok.
3. It’s a non-issue as much as worrying about not being able to keep up with a 30 year mortgage after a year or so and having to eat up the cost of closing etc.. People don’t tend to have a mental fear over it as long as the amount is manageable. But to your question, a 5-pay can be self-sustaining after 2 payments.
4. For the 100th time, it’s a practical wash loan. The lifetime growth in the policy will practically keep up with loan interests over the life of the policy. You can keep the policy alive by just paying the principal. But it is recommended to pay the interest too, instead of doing things like CDs or HYSA, since not paying means missing out on a return that’s equivalent to a tax-free loan interest percentage.
Ie: If the loan interest is 5% then the policy growth is fundamentally going to be around 5%, paying off the loan balance is going to get 5% tax free return on that amount, which for high income earner like my sis would be equivalent to getting close to 9% at a bank.
5. That depends on the options in the tax advantaged accounts, account size, and which accounts you are referring to. There’s also a possible issue with not being able to refill these accounts when depleted during decades long retirement.
You talk as if you or many others here would never be caught having to pay income taxes on earnings from HYSAs, CDs, MYGAs, $BND etc… in your lifetime. Very likely chance that it will happen.
6. Not sure what you mean by expensive, other than temporary loss of partial liquidity for a few years.
Lol, you do remember that I told you I was a practicing attorney who made a career change to the financial industry, right? I don’t need to be promoting WL to make a living, nor does Wade Pfau, this individual here who wrote a detailed 5-part report (https://seekingalpha.com/article/1002461-dividend-paying-whole-life-insurance-the-alternative-fixed-income-vehicle-part-5-of-5), or this guy who wrote it (https://r0k.us/insurance/vp/) and many more etc…
You don’t know as much as you think you know about WL, nor do many people who seem to hilariously hate it. Saw some posts recently where people were promoting MYGA but not WL, hilariously not realizing that MYGAs are profit sources for WL dividends if from mutual insurers or for stock dividends if from public insurers since the insurers make profit off the spread elsewhere, ie: corporate bonds which typically have 3%+ spread. But hey, at least they don’t get ripped off by WL fees and commissions, even if they miss out on the insurer’s profits.
Pat went from being so sure about how “15% commission is a death sentence for that WL’s ability to grow” to now realizing it can be “good”. I like Pat.
WL is so bad that Congress had to limit how much money people can put into them by killing off single-premium WL in the 80s.
This conversation is a great demonstration of why it is impossible to convince the guy trying to sell you whole life insurance to knock it off. The only way to “win” an argument with a whole life agent is to stand up and walk out of his office. Until then he’ll just keep trying to sell it to you ad nauseum.
yup, seriously!
1. I don’t think I’m really conflating a liquidity premium for a negative loss. I am just comparing if I had a bond fund in my asset allocation vs. whole life, which you propose is a better bond fund replacement. If I “invest” in whole life $50,000 year 1, but then have an unexpected emergency and need that $50,000 back, it’s totally gone! whereas in my bond fund if it were a short term treasury then it is almost guaranteed to be around $50,000 that I get back.
2. most docs early in their career yes pay down debt as well as invest, but their investments should not have a $50k per year committment. whole life demands that you pay premiums, and even then you don’t get positive returns for at least 5 years as you illustrate in your example policy. if I were just investing in bonds, there is no committment to keep paying, and every dollar I pay immediately figures into the bond portion of my asset allocation so if stocks tank, I am more inclined to stay invested.
3. at least with a mortgage, I am living in a house. with whole life, I get coverage that would have been cheaper using term and an investment that has negative returns for the years at the start of the policy.
4. yes, borrowing from whole life is a wash loan, but stille eats into your overall return of the policy! in bonds, I don’t need to pay an interest rate on my money!
5. the majority of workers in this country, including docs, will have access to 401k/403b and Roth IRA. these accounts have can grow to millions because of compounding, and with the bond portion of your asset allocation you can easily buy or sell and get dividends without tax consequences. no need to “refill” these accounts, given they are meant to spend out of during retirement.
you’re right I don’t know everything about whole life, but I do know for a fact that it cannot beat low cost index fund investing in retirement and taxable accounts when building a retirement nest egg.
I wish I could make you understand so salespeople like you stop hurting doctors. I would hope that your sense of morality would open up your ears and deconstruct the story that you have rationalized to yourself that whole life is good. Whole life is evil, and that behavioral bias that you are falling victim to is called “rationalization.” You are very smart, and it is found that very smart people it is extremely difficult to break that rationalization bias.
btw I think you misread Pat
1. I mean WL can be a bond alternative as the money gets rotated in. If you have a mental fear of that process, then it’s not for you. WL can be around 80% liquid the next day. It’s not comparable to a bond fund the within short period of time, I am talking about better long term efficiency.
2. I didn’t say that new doctors should be putting $50k/year. The amount should be one that’s comfortable to the person, depending on their financial and personal preferences. Yes, it requires making payment for at least 5 years, many people don’t have that problem and I don’t. If you do, then it’s not for you. Maybe petition Congress to bring back single premium whole life to have tax benefits again.
3. You would be living in a house by renting too, with no risk of losing out thousands in closing fees etc… if job is lost in a few months/years. But you or most people don’t live with such mental fear, as long as the amount is reasonable, and that’s great.
4. It eats into the returns the same way your bond returns would be eaten into if you take out an amount and spend it. I think you need to read Jim’s articles containing info on “non-direct recognition”. Even direct recognition isn’t necessarily bad after certain years.
5. People do not put everything they have but monthly bills into retirement accounts. 401K/403b are merely tax-deferred to be taxed as ordinary income taxes at distribution, and not everyone has great fixed income options in their plans.
If you somehow never end up having to pay income taxes on fixed income interests, congrats. My money is on you ending up paying them, and have already paid them, at physician level income taxes.
I never said WL would beat low cost index funds on its own.
Lol, right, like Wade Pfau is hurting people, or those two people who made detailed report on WL, or this CFP with 15 years of experience in the industry who wasn’t a fan of WL before but ended up making a video “Everything I learned about Whole Life Insurance was Wrong” https://www.youtube.com/watch?v=X-V7YQAJ6Fc.
Again, it may not be for you based on your personal preferences, mental fear of temporary loss of partial liquidity etc… but it isn’t “evil”.
Yep, Linny definitely misinterpreted me. I surrendered my 2 WL policies sold to me by a salesman as slick as ol’ Linny. The only regret I have was to buy them in the first place. I’ve paid attention to this thread b/c I’m interested in preventing others from making the same mistake and getting hoodwinked into buying a WL policy. I’ve spread the word and successfully ‘saved’ a few colleagues from a similar fate. By the way, the red flag in dealing with my own insurance salesman was when he tried to sell me a THIRD policy by stating it was “better than doing a back door Roth IRA” and I should prioritize more WL over the Roth.
We can question Linny’s motives, but to an insurance salesman, the solution is always more insurance. That’s what I learned from my experience.
As a surgeon, I acknowledge that I am susceptible to the same degree of incentive bias when recommending surgical intervention. I therefore work hard to check my bias at the door when counseling patients. All we can hope for is that Linny and others like him do the same. Sadly history has proven otherwise.
This is my final post here. [ie. the equivalent of walking out the salesman’s office].
I am not here to defend the practices of the agent you dealt with, or those in general, just to show you why many like it even if you don’t. Unfortunately, WL is a financial instrument that has half-truths and variations depending on policy design and company selection, so many like it while many don’t, while many who don’t like it end up being confused about others who like it.
Don’t take it from me, go read up the links I posted, or talk to some of the many doctors on this site who have expressed that they like it. Or do some thinking, in terms of fixed income, do you seriously think you can outdo what is practically a tax advantaged long term corporate bond fund with no volatility and supplemented by institutional business profits of the mutual insurer who has obligation to give the profit it makes? I don’t, nor do I want to take the risks or hassles, so I put up with the “high cost” of temporary loss in partial liquidity for around 5 years along with many other people. That’s all this is.
Or don’t.
Best of luck in whatever you do.
Many? I bet you can’t list 5 docs on this site happy with their policy.
I bet he can list more than 5.
Your poll in this article on whether people regret their WL purchase has 679 votes saying they don’t regret it, surely at least five of them are doctors? https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
DoctorDividend posted here in another article a while ago, he’s the one who made the Seeking Alpha 5-part series on dividend-paying whole life.
There are two more just in Rikki’s “Is WL a scam?” article.
Do you really think I can’t find 2 more?
I saw your interview with Wade Pfau, and contrary to what you said about how he wasn’t thrilled over how people like me are improperly promoting dividend-paying WL, it seems he agrees with me that it can be a great bond alternative as he himself is using it for the bond portion of his portfolio.
A corporate bond like returns without corporate bond like taxation, volatility, risks, and hassles, that’s all this is for the high cost in loss of partial liquidity for around 5 years, for those fortunate enough to get one.
I suspect most of those 679 are insurance agents. Maybe some voting more than once. I suspect polls that only included doctors would look a lot differently.
I’m not sure using projected numbers is very fair. My expectation of actual returns from a whole life policy would fall mid way between the guaranteed and the projected scale. Maybe that’s a byproduct of the vast majority of my investing career being during an era of falling rates, but that’s certainly what I’ve seen. Yes, they usually beat the guaranteed scale, but not by much.
It’s “fair” if one accepts the projection for what it is. Projections are based on the current dividend scale, which is based on the insurer’s current ability to generate earnings, which is based primarily on corporate bond rates, which is based primarily on the interest rate environment, and backed up by surplus reserve that’s worth about 15x of dividend payout amount for the insurer I use.
Before the interest rate hikes from zero, the insurer I use for my policy was earning over 4% in its general account even after 15 years of near zero interest rate environment, and supplemented the dividend with institutional business profits for an additional 1.25%. The projection is not a random number, it is backed by a strong foundation.
Whether the insurer matches, beats, or falls short of the projection has generally been the result of the interest rate environment. To predict that is to say one has the crystal ball on interest rate direction. If I was a betting man, I would not bet on the interest rate going back to zero and staying there for the rest of my life. If it does, perhaps the projection won’t be met, but even then earning 3-4% tax-free is better than earning 0-2% taxable like what people were doing until recently.
I’ve seen a historical study of a policy that was initially projected at 4% and ended up around 6%. So it is possible, and it is the result of the interest rate environment.
it’s easy to disagree with assumptions and write blogs trying to discredit something by putting study in quotes and assuming ulterior motives.
Do you think the doctor/blogger will ever actually reproduce the study with corrected assumptions that he thinks are more realistic and shows any sort of improvement?
the doctor missed the point of how including these assets allows for managing retirement income during market down turns. which will happen – even if the doctor treats volatile market returns as if it is the same as a constant guaranteed interest rate.
“Well, let’s say one investor makes 8% a year” this begs the question…for how long oh, he said 30 years….the average 30 year CAGR is 7.12%.
Why only 30 years though?
if you retire at age 65, you should have a 47 year working life
Given the insolvency of social security You should have a 55 year working life till age 73.
wait, we care about returns after retirement too…or else the 4% myth wont work. So shouldn’t we look at CAGR across say a 68 year period, starting work at 18 and dyeing at age 86.
so why 30 years? seems kinda cherry picky.
the CAGR for the S&P since 1 Jan 1928 to today is 6.17% and the average CAGR for every 68 year period available is 7.12%. But aren’t we always told that past performance is not an indicator of future results?
Ask the people who planned on retiring in March of 2009 how they felt – the market was at the same value as April of 1997. 12 years flat. Did they have time to just wait for the market to come back?
Going in to april of 1997 the CAGR since inception was 5.73%…..in march of 2009 the S&P was at the same level….a CAGR of 4.89%. and in 10 years they’d seen zero growth.
You’re entitled to your own opinions, but not your own facts. And there are so many falsehoods in your post it’s hard to know where to start. Are you actually defending the “study”? Really? Why? I think readers of these comments might be wondering what you do for a living, because I think most will suspect what I do, that you sell insurance and use this “study” to do so.
At any rate, the CAGR for US stocks can be calculated for just about any time period using this handy calculator.
https://www.moneychimp.com/features/market_cagr.htm
1 Jan 1928 to 1 Jan 2025 shows me a CAGR of 10.19%. I don’t know how you’re getting 6.17%. Even if I adjust for inflation it’s still 6.94%. Oh wait, I think I found your problem. Nobody told you about dividends. It’s 6.18% without dividends. Guess what? Stocks pay dividends and only insurance salesmen ignore them when they calculate returns.
Should we do 1997 to 2010 now? (Speaking of cherry-picking, March of 2009 is a pretty cherry-picked date don’t you think?) That’s 5.68%. Not bad considering the period ends near the trough of the Global Financial Crisis. Not sure why you think that would be “zero growth”. If you really want a lousy time period for the S&P 500, why not cherry-pick 2000 to 2010? At any rate, people who retired, even in 2000, are doing just fine.
https://www.bogleheads.org/forum/viewtopic.php?t=237334&start=1150
If they started with $1 million, they had $867K left at the start of 2024. And given 2024 returns, have even more now.
I love that you’re arguing that Social Security is somehow going away. Go ahead and list the 60 senators that will vote to get rid of it. Go ahead. I’ll wait. Oh, you found 2 or 3? Yea, that’s about all I could find too. It’s not going anywhere. It’s not that hard to fix anyway. Social Security may change a little but it’s hardly going away.
Thanks for stopping by to chat with “the doctor.”
[Ad hominem attack deleted.]
unfortunately I’m living proof of how terrible whole life insurance is. Got sold a policy by my high school buddy who worked for NWM and said whole life insurance was awesome to meet my retirement goals. 7 years into the policy my wife and I were in $31,000 of credit card debt trying to pary $28,000 in yearly premiums. My wife is also a doctor. How are 2 doctors in $31,000 of credit card debt under a CFP advisor? Answer- because of stupid whole life. Whole life enriches the sellers, and I can never make back that $50,000 I lost (Cost basis at 7 years was $130k, and I had paid $180,000 in premiums!!!!). I would have been better doing term and investing the rest! Can you imagine the growth of that $50,000 if invested in a total stock market index fund! ok, I would have gotten appropriate term which maybe it would have been $40,000, but still a lot of money was lost to whole life. Now that we got rid of the policy, we are actually meeting our financial goals and saving more money for retirement investing in low cost index funds. all I wanted was to not have to worry about my finances and retirement and just focus on my patients. Whole life insurance ruined that for me and my wife.