[Editor's Note: I received this guest post from financial advisor Bryan Kuderna, CFP, LUTCF. Like most of the stuff I see written about whole life insurance, it focuses on the positives and ignores the negatives, so I felt it should be run as a Pro/Con post. We have no financial relationship.]
Pro – Why Would Someone Want to Finance Whole Life Insurance Premiums? — Bryan Kuderna CFP, LUTCF
The Multiple Risks to Real Estate Investors
Money is an esoteric object. Most people are content holding it, clinging to dollars as if they will inevitably be lost like a toddler outside of its playpen. Some more daring individuals cautiously let those dollars wander just down the block into an investment account, going to work but still quickly within reach. Then there is a select group of wealthy people who seem to despise holding cash.
Real estate is the 3rd largest creator of wealth [behind finance and retail entrepreneurs] among the ultrarich, responsible for 163 billionaires (like our President). Such investors obsess over getting multiple uses of the dollar, using the same funds over and over into project after project. They don’t see a dollar being worth a dollar, but rather a dollar that can hypertrophy into a fortune with repeated exercise. Investing in real estate can be a prosperous endeavor, but not one without risks. The bulk of these financial perils stem from the double-edged sword of leverage and illiquidity.
There are a multitude of threats which can seize property — investors favorite asset. Creditors are quick to identify real estate because of its tangibility and value, making it an easy target for creditor claims. Healthcare costs are at the forefront of everyone’s mind these days, and real estate investors must be ready for costs of care like anyone else. The unfortunate loss of a breadwinner can send an investor’s family into a downward spiral even with well-laid plans. An investment partners’ death or disability can suddenly force the surviving members to handle multiple responsibilities, financial and otherwise. Then there is the unexpected downturn in the economy.
Bryan Kuderna, CFP, LUTCF
Last, but not least, Uncle Sam impatiently waits for his stake. The Tax Policy Center estimates that in 2017 there will be 5,500 Federal Estate Tax Returns subject to tax. Considering that an estate does not get taxed until it exceeds the $5.49 million exemption, that means there’s a lot of super rich Americans transferring wealth each year. Tax Payer Relief Act of 2012 allows for “Portability”- the use of a deceased spouse’s estate tax exclusion, making the effective combined exemption for married couples nearly $11 million. Even though this tax will only hit 1 out of every 487 American decedents this year, it should generate $19.9 billion of tax revenue to the US Treasury. Almost all of these returns will possess real estate.
The panacea to any financial problem is typically cash. But the Donald Trumps of the world don’t just horde dollars waiting for a rainy day. So, how does one eat their cake and not get poisoned by it too?
Whole Life Insurance as Leverage
For ages, one of the most popular methods of replenishing lost wealth has been life insurance, particularly Whole Life Insurance. Whole Life typically allows an individual to buy a guaranteed and growing death benefit. The leverage is exaggerated even further via the unique income tax-free treatment afforded to life insurance by our tax code, which can also be estate tax-free if set up correctly [i.e. placed in an irrevocable trust-ed].
Real estate investors have many needs for permanent life insurance. It can serve as the vehicle to cover estate taxes and probate costs for a wealthy family. It’s often the funding mechanism for a buy-sell agreement amongst multiple investment partners; should one pass away his/her surviving spouse’s shares can swiftly be bought out by the life insurance proceeds. The cash values can become a side fund for business operations. Life insurance creates an influx of capital when needed most by a family or business, and creates a multiplying effect of current day assets for legacy purposes.
Q. But How Do I Pay for the Large Premiums?
A. Premium Financing
Real estate investors know they need permanent life insurance, but these masters of leverage often hit a liquidity obstacle in affording big premiums. For instance, a $10 million Whole Life policy for a healthy 55-year-old male can easily cost $400k annually. So what’s the answer? Premium financing has become a prevalent strategy for real estate investors to purchase very large amounts of life insurance in situations which cash flow is limited or restricted.
Who Would Benefit by Using Premium Financing?
As we’ll see, real estate Investors make ideal candidates for premium financing. The target market typically includes business owners who can’t touch working capital without disrupting operations, investors who may have assets that have experienced a down market who can’t bear the thought of selling at a loss, individuals with established gifting programs that large premiums could interfere with, clients with assets whose liquidation could trigger large capital gains or people with appreciating assets who would rather maintain ownership until death to utilize step up in basis rules under section 1014 of the tax code.
How Do I Secure Premium Financing?
So how does one go about securing a legacy for generations using premium financing to purchase their Whole Life Insurance policy? Here’s a quick overview…
Steps:
- Have an attorney draft an ILIT (Irrevocable Life Insurance Trust). This will ensure the policy is held out of your estate, eliminating potential estate taxes, and providing detailed instruction for disposition of assets after your demise.
- Identify a lender. Usually, the lender will be fronting 100% of the annual premium for a term of 1-10 years. On high six-figure premiums, lenders like to see creditworthy customers with net worth well over $3-5 million.
- Have the trustee of the ILIT obtain Whole Life Insurance policy, policies with a focus on high early cash values can be extremely helpful. The importance of having a good credit history and dividend track record of the insurance company cannot be overstated enough. Close the loan with the lender.
- Lender pays the carrier the premium directly. A collateral assignment is placed on the policy to help secure the loan.
- The client can gift cash to the ILIT to pay loan interest (the interest rate is tied to LIBOR and can be variable and sometimes locked), fund additional premiums, or add more required collateral capital.
- Client creates an exit/rollout strategy through GRAT (Grantor Retained Annuity Trust), sinking fund or similar strategy that coincides with the expected loan termination date. Other exit strategies include a “planned event” such as the sale of business, sale of a property, inheritance, or even the use of some of the Whole Life policy’s cash surrender value.
- The exit strategy pays off the loan.
- Upon the insured’s death, the net proceeds are received by the ILIT and paid out accordingly.
The result of this plan is the acquisition of a significant permanent life insurance policy with the out-of-pocket costs (loan interest payments) of a similar face amount term policy. Clients are often advised to use Whole Life Insurance because the dividends from mutual carriers are closely correlated to prevailing interest rates. The rising cash value helps to mitigate the interest-rate risk associated with a variable premium finance loan.
Once interest-rate risk is planned for, the main hazard left with this strategy is the loan termination/exit strategy. Just as a business owner with no succession plan leaves his/her retirement in jeopardy, so does the recipient of premium financing without an exit strategy.
Purchasing life insurance using premium financing is not for everyone; frankly it’s not for most. But for the high net worth individual shying away from large annual premiums, this may be an option worth further exploration.
Con – Is There a Place For Financing Premiums? — The White Coat Investor
Well, we certainly agree about one thing- purchasing a whole life policy with borrowed money isn't a great idea for most. No long-term reader of this blog is going to be surprised to see me writing the “Con” position on this topic. I mean, let's try to think of a way to make a whole life insurance purchase even worse than it usually is….I know, let's do it with borrowed money! Brilliant!
That said, I'll be the first to admit there are some niche uses for whole life, and Bryan's post briefly mentions a couple of them. Remember that one of those niche uses IS NOT for a newly graduated attending owing $300K in student loans to use as an additional retirement fund along with some vague estate planning/asset protection uses, despite the fact that that seems to be the main way they are sold.
Whole Life Making Sense?
So when does it sometimes make sense to buy a permanent life insurance policy? Mostly when you have a need for a permanent life insurance benefit. These can include providing liquidity at death for someone with a large illiquid estate and for business transitions, particularly partnerships where the agreement calls for a deceased owner's heirs to be bought out by the other partners in the event of their death. Of course, this need can often be met with a much cheaper guaranteed universal life (GUL) policy, which typically costs about half as much in premiums as a whole life policy (or even an ultra-cheap term policy sometimes). The downside being there is no accumulated cash value to borrow against during life and the insurance amount also doesn't slowly grow at about the rate of inflation. So the first question is really should you buy a whole life policy at all? The answer, most of the time, is no. But if you're convinced you have a reasonable use for it, then you can move on to the second question.
But Should You Borrow to Pay Premiums?
Assuming a whole life policy is right for you, should you buy it with borrowed money? Mr. Kuderna glosses over all the important details about this in his post and almost makes it sound like a magic solution to somehow create wealth. Last I checked, borrowing money isn't free. There's actually a cost to it. Perhaps an origination fee to the loan, and certainly ongoing interest. Whether those fees and loans are paid now, or whether they are financed along with the rest of the loan, there is a cost there. It's quite possible, even likely, that the cost of that loan exceeds the return on that whole life policy, particularly in the first decade after purchase. A typical whole life policy doesn't even break even on its premiums for 10-15 years. If a policy is designed properly (paid up in fewer years like a 7-pay policy and/or minimizing commissions through the aggressive use of paid up additions), you might be able to shorten that period to 5 years or so.
The typical cash value returns on a reasonably well-designed whole life policy purchased today and held for decades are 2% guaranteed and 4-5% projected. The return on the death benefit is typically slightly better. So if you're paying 6% interest, and even in the very long term only getting a 3 or 4% return on your money, you're coming out behind if there are no other benefits. It's not “whole life for the price of term.” You have to count not only the interest payments (which you do have to cover as you go along) but also the premiums themselves will be subtracted from the death benefit prior to your heirs being able to use any of it. That is going to substantially reduce the amount of liquidity this policy can provide, especially in comparison to funding it with cash instead of borrowed money.
Could It Work For Someone?
So, assuming it is actually costing you money to do this sleight of hand in an effort to avoid capital gains taxes during life and/or estate taxes after life, that cost must be lower than what you are saving in taxes by introducing this complexity into your plan. I'm sure there is someone for whom it would be a good idea to finance the premiums. I can think of a hypothetical business that needs a key-man policy to pay for a buyout but doesn't actually have the cash flow to make the premiums. It's quite a business risk to take on that additional leverage, but it may be better than the alternative of being stuck in business with the deceased partner's heirs. I can also imagine a wealthy retiree who is cash poor but property rich, and with property with very low basis, especially if it has been fully depreciated. Assuming there is also a need for a permanent policy in this situation (in order to split an inheritance without selling the asset at fire sale prices right at death or in order to keep an expensive asset in the family for instance), then this could work out well. Avoiding the capital gains taxes that would be due if a property were sold prior to death in order to pay the premiums could be a substantial benefit worth the costs of borrowing the money.
However, one should keep in mind that over the years, the required interest payments on these borrowed premiums are going to get higher and higher. In fact, just covering the interest payment could eventually exceed the gift tax allowances.
A 10-Year Plan?
At the end, in his discussion of exit planning, Mr. Kuderna seems to be advocating a 10-year plan for this scheme. Not only is the loan to purchase these premiums variable (with no assurance that the dividends will rise accordingly), but if that loan is due after only a decade, you could really be in a fix when it comes due, assuming you're still alive. You'd darn well better have a bulletproof exit strategy, because borrowing against the cash value after only a decade isn't going to be a good one. The cash value is probably going to be very similar to what you owe the bank at that point, leaving you with little cash value and little net death benefit. There's little point to even having a policy after doing that. A 10-year loan just doesn't mix very well with a life-long insurance policy, even if the premiums are only paid over 10 years or less. Now if you know a property or business will be sold or an inheritance will be received to cover that bill, then sure, it could work out okay. But you're not saving the capital gains taxes due on that property or business in that case, just delaying them a few years, which is a much smaller benefit.
The Devil is in the Details
In reality, financing your whole life insurance premiums isn't keeping you from paying them or helping you get the policy at a cheaper price, it is just delaying when you pay them by a decade, and adding additional cost and complexity to your financial plan in exchange for that delay. The devil is always in the details, so if you think this could work for you, you really need to get into the nitty-gritty details of every one of the many moving pieces (loan, trust, policy, exit-plan, tax consequences) of this complex transaction. Complexity generally favors the seller, not the purchaser in financial transactions. I can easily see this scheme being oversold by an overzealous or less than scrupulous insurance agent looking to pocket a $100K+ commission! Certainly, this sort of a transaction would be much less likely to be useful to the typical physician who does not have a lot of illiquid assets and dies with an estate much smaller than $5.5M ($11M married.)
What do you think? Have you financed your whole life premiums? Why or why not? Comment below!
2. Good luck with this step. There are maybe 50 bankers in the country who understand this product from a structuring/financing/underwriting standpoint. Also, it is a disservice to suggest a 3-5 million net worth will get allow one to finance a six figure premium. Cash flow is always an important factor in underwriting a loan, in addition to NW.
3. Your description tells me you have at best a cursory understanding of the how a bank would underwrite and close this type of loan. From a bank underwriting standpoint, high rating of the insurance company are the ‘entrance fee’, but the ‘high dividend rate’ made me laugh. A bank will not underwrite a loan to policy holder with a 50% in equity and 50% in a junk bond portfolio. A bank will not likely even think about underwriting an insurance company portfolio with less than 25% in US Governments bonds followed by a big slug in US Government Agency Bonds. As a policy holder, I would never anticipate a high dividend return with a properly underwritten loan (i.e. inflation after paying loan interest).
4. Yes, a bank will take a policy as collateral and pay the premium. In addition, the bank will also have personal/business guarantees by both the policy holder and the insurance company (hence the underwriting is primarily against the insurance company). Also, usually separate insurance subs (Allstate’s Lincoln Financial comes to mind) are created to house and segregate the insurance company’s investment portfolio.
5. A bank will normally make the insurance company responsible to credit back to the bank the interest owed on the loan versus a ‘gift’ into the trust. Alternatively, the back could hold on the trust’s behalf a cd or mm account that is hypothcathed (sp?) to the bank for interest on the loan. A minimum 5% over collateralization at the insurance company level and a 2% for the policy holder would be a must have by the bank. Bank’s will not structure the loan as 10 year multi-draw loan due to bank reserve requirements on the unfunded portion. Instead, they would do a 364 day with one year term out option. No bank would take 10 year risk on an insurance company, let alone in this structure. The author alludes to the only point where this structure even remotely entices a bank, the fixing the loan. In order for a bank to fix the loan, it along with several dozen other policy holders needs to be ‘aged’ about 18 months before it can be brought to capital markets to be placed. Banks don’t make any money during the ‘aging’ process L+75 doesn’t get anyone excited for the PITA this structure entails for a bank.
First, I am glad you at least posted a “con” part to this article. But I am highly disappointed to see this article in WCI in the first place. As you mentioned yourself, it is a biased article, where you had to write the opposing opinion. If nothing else, the article should have been rejected in the first place.
I was even more disappointed that you have no financial relationship with Mr. Kuderna. At least make him pay to be an advertiser before publishing this garbage. I can only hope you were light on content and this was a last minute filler.
Please no more articles on the pros of WLI. Yes, there are niche cases where it can be a good idea, but they are so few and limited to so few people, that articles like this lend credence to WLI salespeople. Financing premiums is even more niche. I’d bet that it is suitable for less than 0.1% of your readers.
Permanent life insurance is almost always a bad investment. I refer you to your own flowchart – https://www.whitecoatinvestor.com/wp-content/uploads/2015/03/Permanent-Life-Insurance.jpg
I would encourage you to post that link at the beginning of this article with a caveat that permanent life insurance is almost the right decision.
If this is the first link that pops up next time some sucker googles “Financing Whole Life Insurance”, I think WCI will have satisfied his mission.
Exactly. Here’s someone who knows how the internet works.
I need to walk back some of my earlier criticism for running this article. The comments section is excellent.
Yes when people Google, “should I finance my whole life insurance premiums?” and come across the comments, purpose served.
I will also throw in, “should I buy life insurance from my financial advisor?” is also a good Google term. The answer is almost a resounding no. If your financial advisor sells insurance, get a new financial advisor.
As for my thoughts on Kuderna Financial Team? Well, they are a financial advisory owned by an insurance company. Just my opinion, but if any one is considering using them my advice would be – run! Run far away.
And then search on this site how to hire a financial advisor.
I disagree. This article provides an opportunity for WCI to address new marketing strategies for WLI and to make readers aware of the many downsides that are commonly ignored by the agents pushing these policies.
Recently, my group was offered a “once in a lifetime opportunity” to invest after-tax money in a “physician savings after-tax plan” that is “similar to a Roth IRA.” Very few details were given about this plan initially. After reviewing as much information as I was allowed to receive before committing, I discovered that this pseudo-Roth IRA was, in fact, a specialized, “low fee,” variable universal life insurance policy. I immediately did a search on WCI for all of the WLI articles, not for myself, but to prevent my partners from buying a product that they most likely will never need (special circumstances excluded).
These articles are useful to introduce new readers to the many downsides of WLI and the few situations in which WLI is appropriate.
Is this what we call armchair editing?
Pretending WLI doesn’t exist isn’t doing any one any favors. Better to bring it out in the open and talk about the issues associated with it. If people read about it and become educated about it, the vast majority won’t buy it.
But I assure you there are plenty of people on the internet who will Google “financing whole life insurance premiums” and for the first time realize that they don’t want to buy a whole life insurance policy at all after reading this article. Don’t assume that articles published on the blog are only written for long-term readers who have already read the other articles on WLI I’ve written.
I suppose I could have added more links to my old stuff on whole life in the post. I’ll have to get after my new assistant editor about that!
Sorry boss…just threw in a few more links to whole life. Enjoy! (The White Coat Investor’s Assistant)
“Pretending WLI doesn’t exist isn’t doing any one any favors. Better to bring it out in the open and talk about the issues associated with it. If people read about it and become educated about it, the vast majority won’t buy it.”
Agree 100%. And I do appreciate you running the “con” article. However, I feel having this article run on WCI in the first place, gives too much credence to WLI in the first place. Yes, WLI (or permanent) rarely makes sense. Financing WLI is even more niche. But my guess is that anyone who would benefit from this, doesn’t read White Coat Investor.
Mr. Kuderna mentioned, “Most of the whole life policy holders I have met that have policies 20-30yrs old really like their plan. Conversely, almost all of the people I have met that lapsed a policy in the first 10 years absolutely hate whole life (or UL/IUL/VUL, etc.)”
It is worth noting ~80% of people surrender WLI policies (reference:WCI). So ~80% of people hate WLI. I am guessing that a significant portion of the remaining 20% would feel the same way if they truly understood how awful WLI usually is.
So just to make sure there is full transparency, below are a couple verbatims. One from Mr. Kuderna’s own website that is linked above, and one from a previous post by White Coat Investor.
“Kuderna Financial Team is a division of International Planning Alliance, LLC, a General Agency of The Guardian Life Insurance Company of America (Guardian) New York, NY.”
From White Coast Investor: “Don’t Mix Insurance and Investing…Mistaking an insurance salesman for a qualified investment adviser – Everyone markets themselves as a financial advisor or a financial planner these days, no matter what their qualifications. Insurance salesmen, stock brokers, and mutual fund salesmen like to take advantage of the fact that they know just a little more than you. Unfortunately, most of their training is in sales, which means they can make whatever product they happen to profit from look extremely attractive to you. “
Simmer down. It is important to read viewpoints that you don’t agree with. Otherwise, you may suffer from confirmation bias and miss something new and good. Some say you should know the counter argument so well, that you can argue that side even if you don’t believe it. Would it be reasonable add a book to the CFE week that includes a well written treatise on something that WCI community does not believe in? An educated investor must read, by definition, things that she does not agree with. With that said, I see only 4 comments, and I have not had the motivation to read this yet. I will, but it is not high on my priority list given what I know about the topic. My goal will be to study this post with an open mind, but I just can’t help to intuitively gravitate toward the con argument. Again, I think these pieces are necessary so that we can remind ourselves what else is out there.
Excellent point that it is a Pro/Con article. I expect every one to disagree with something in this post, otherwise it isn’t much of a Pro/Con.
I am so glad to see this article. I am appalled that anyone could try to sell WLI with leverage. It is one of the most appalling things I’ve seen in finance. It reminds me to keep my guard up from some of these people in a suit and tie.
I’d like to thank WCI for running this piece. I originally wrote it for fellow industry professionals and particularly real estate journals, so I was surprised WCI wanted the article. However, it’s unfortunate to see some commentators that have obviously had poor experiences in finance. I commend those readers keeping an open mind and staying educated. The Con was fair too. While Whole Life itself is certainly not niche, having been around since the 1800’s with $billions purchased each year, this strategy is niche. So, a couple comments if I may to clarify…
1. Should You Borrow: WCI references 10-15 year cash value breakeven on typical Whole Life, you can’t use a typical whole life policy for this strategy. The high early cash value he later describes is the eligible product. Con discusses Return on Death Benefit slightly better than Cash Value IRR, it’s not until later in life they come close. Also addresses Cost of Loan (interest) exceeding return in 1st decade, not sure how 5-6% assumed interest just on premium amount compares with Death Benefit IRR ranging from 1000% then dropping to teens in first 10 years, again Cash Value is not the concern here.
2. Could It Work For Someone: Importantly reiterates the small segment this is for.
3. 10 Year Plan- fixed loans are available and popular, only variable was addressed.
Why would you send me an article as a potential guest post that would surprise you to see us run?
That’s easy. There’s no downside (it seems like he had already written it for something else) and a small chance that you may accept.
If you reject he hasn’t lost anything and if you unexpectedly accept, he comes out ahead. It’s a no-lose proposition.
I disagree. I think that there has been definite downside. You think that the author wanted to open up a discussion about how awful an investment whole life insurance is? Moreover, throw in the points that you should never take financial advice from insurance salespeople and that Google searches for “Kuderna Financial Team” will likely soon bring up this page within top results, and I am guessing that there are some serious downsides.
Let me state this one more time for Google’s sake:
As per advice on this website, don’t mix insurance and investments. Make sure your financial advisors have a fiduciary responsibility to you.
Just my opinion/review, but Kuderna Financial Team is a financial advisor that is owned by an insurance company (Guardian). It is not in their financial interest to do the best for you. I would strongly recommend that anyone considering them should avoid at all costs. Read articles on this site on how to choose a financial advisor.
Stay away from permanent life insurance.
I’m pretty sure the author exactly anticipated this type of discussion, given all the other stuff on this website.
Considering that others have posted the exact opposite viewpoint from you (i.e., posting it here legitimizes it), I think he got what he wanted.
Whether he should have wanted it, is a different matter. Maybe some people feel that there is no such thing as bad publicity.
This was my initial criticism of WCI running this article – that it lends credibility to whole life insurance. I would have liked to have seen links to WCI’s articles criticizing WLI in the introduction.
But I will say it again – anyone looking for a review of financial advisor like Kuderna Financial Team – stay away. Don’t accept financial advice from anyone working for an insurance company. For that matter, don’t accept financial advice from anyone that sells insurance.
@Bryan, maybe the commentators have had good experiences in finance and can recognize a product that is only sold, and [almost] never bought. That we can hypothetically think of a scenario where some person might benefit from Whole Life Insurance does not defeat a basic truth for literally 99.99% of the rest of the world that Whole Life products are a way to enrich the insurance industry and not the insured.
I have had WLI for years. I am very happy with it. I count it toward my bond allocation. It has done better then all other investment except for stocks. The cash value does not correlate with interest rates, or inflation or RE value. If you are going to buy it, buy it while you are young. I am also heavily invested in munis, but WLI has outperformed them, with zero volatility.
It has also done better then bond / us treasury funds in ROTH. Only exception is PIMCO funds in tax advantaged accounts, but they use leverage and complex hedging strategies, and have been right on the bets they have made. I am always afraid that they will get it wrong someday. Lending club even in a tax deferred account has been disastrous over past 18 months. Peer street investments are having issues due to fire in california (nothing concreate yet)
What year did you buy your policy?
And the same question can be applied to when did you purchase your investment? how old are you? how is your health? and how do you guarantee your investment matures?
It i s a real shame that the article purposely and willfully written with specific end in mind.
You should email the author of the post and complain.
Much of financial planning is about managing expectations. While this article was more about Estate Planning, I appreciate @Sunil’s point above too. I personally have 3 Whole Life policies, to date I have never run to any of my friends bragging about my returns on Cash Value. However, I am very satisfied with the long-term, steady, tax-free growth it offers as a part of my overall portfolio, as that’s what I expect from it. I’ve never been a one or the other (Real Estate vs Stocks vs Whole Life, etc.), but use each for its strengths in a greater plan. As time goes on, I will re-purpose my policies for what’s necessary.
Most of the whole life policy holders I have met that have policies 20-30yrs old really like their plan. Conversely, almost all of the people I have met that lapsed a policy in the first 10 years absolutely hate whole life (or UL/IUL/VUL, etc.)
Furthermore, I have met plenty of people who purchased Real Estate and for for whatever reason had to sell it within a few years, wishing they could have gone back and just rented. Even on a Breakeven Sale Price they absorb a huge loss (i.e. closing costs, property taxes, home incidentals, frontloaded interest accounting for most of mortgage payments, etc.). Again, this is a common error in not managing expectations and future plans. Recognizing this risk and the reality that over time renting is usually “cheaper” than home ownership, coupled with the fact that historically the stock market has outperformed real estate appreciation by enormous margins, has created a VERY small school of thought, “Rent and Invest The Difference”. It’s an interesting parallel, as most wealthy people are homeowners and it is the American Dream, so why do we all aim for this when if you run out any financial analysis it very rarely makes mathematical sense? Because we understand what real estate is and appreciate it for its pro’s and con’s, that finance isn’t done in a laboratory, the same attitude a prudent investor takes with any financial decision.
I think “tax-protected” growth would be a more accurate description. If you surrender the policy, gains not only aren’t tax-free, but you don’t even get to use the long-term capital gains rate on them. The only way to get money out tax-free is to die or to borrow against it, and borrowed money is always tax-free (but not interest-free).
A vanilla WL policy purchased from a mutual TODAY and INCLUDING dividends doesnt break even to year 17 (guaranteed of course is much worse and of course dividends continue to fall and by the way NONE of the mutual companies are increasing dividends for 2018 yet again they fall or if lucky stay the same). If you factored in inflation then its still below water after 2 decades. Its so funny how you pretend you are reaching out to those who have open minds and are financially literate when the people you claim to know who are happy with WL probably dont actually understand how much money/purchasing power they have lost. So you pretty much have the > 80% who hate it because they lapse and the minority who probably dont understand how much purchasing power they have lost. The only reason to purchase WL is IF you want or need a permanent death benefit and thats darn rare. At least now people who might click on your link bc you advertise realize you push WL. That information does have value.
REX, you are just wrong and misleading the readers. Anyone who is interested in WLI, do your research, have an independent review, and determine if it will serve your purpose.
@Charf/MD – can you explain where Rex is wrong and misleading?
Exactly. Over the years I’ve found Rex to be a little on the abrasive side, and certainly no fan of any insurance product, but I don’t recall his facts being wrong.
This most recent comment, however, is a little too broad. There certainly are WL policies you can buy today that break even in less than 17 years. I think the best I’ve seen is 4-5 years. This always involves lots of paid up additions, of course. I’ve certainly seen plenty that don’t break even for 1-2 decades though and Rex is absolutely right that if you add inflation into the mix, it takes most policies over 20 years to break even.
Every time someone disputes that, I have them send me the illustration and run the numbers. Most of the time they run the numbers themselves before sending the illustration, and so don’t bother sending it!
NO i was correct.
Notice i said a vanilla WL policy which is what is sold most of the time. ALL of the mutuals are the same about 17 years or so at the moment. Now there are ways to get the years lower but it has been increasing and there are pros/cons. The ways are as follows: buy what is called a high early cash value policy, a limited pay policy, or a paid up additions rider. These things can at times be done in combination for some as well. Sadly agents wont typically sell anything with higher early cash value because it reduces their commission and the few that might dont always give you all the details. For instance agents wont necessarily tell you that if you pick an early high cash value policy it actually performs worse in the long run for the death benefit and CSV (notice the agent above didnt mention it). They wont outline how the limited pay (such as 10 yr) locks you in and if you chose a different company then you might be able to illustrate an overfunded up to MEC other policy as performing bettter at the 10 year and you could just switch that to paid up. Also companies do not want overfunded sold. Its one reason they reduce the commission and dont really teach it. WL typically on the death benefit is on the low side of bonds. WL companies invest in bonds. They have huge overhead and regulations and this comes out of your pocket. WL companies need the lapses in order to have the few who keep get bond like results.
“Notice I said a vanilla WL policy which is what is sold most of the time. ”
Exactly right. WLI is sold, not bought. I’d be curious how many WLI policies Kuderna Financial Team sold where they have acted as a fiduciary for their clients. My guess is zero, and that most (all?) are Guardian-based.
As Charf/MD said, “Anyone who is interested in WLI, do your research, have an independent review.” I agree. I recommend anyone considering purchasing a permanent life insurance policy (whole life, universal life, variable universal life, etc.) have someone non-biased review the policy (James Hunt @ http://evaluatelifeinsurance.org/ is highly recommended on this site and others). I’d bet 99.9% of the time, the advice would be don’t buy it.
We just disagree. I have small portion of my asset in WLI. I have been satisfied with it. You have different opinion.
My 21 year old daughter (now 25) purchased WLI, 30% of premium was in cash value in year 1, 60% in year 2 and close to 100% of premium in cash value in year 3.
I would tell you the person / service that helped us bind insurance for her, but I don’t want to be accused of promoting anyone.
CharfMD – It does sound like your daughter’s policies are MUCH better than most. If you don’t mind me asking, who’s the policy with? Seems like if you do buy WLI, you should be buying policies like this.
Also – I assume you purchased the WLI policy for your daughter. I assume you did this for as good investment, and not that she needs a permanent death benefit, yes?
Keep in mind he said premium
It’s still underwater for more years
@Rex – Not sure I understand. It is because while there is cash value, there is still the surrender charge? I
He or she didn’t give enough detail but let’s just say premium was 10 k per year. Then after 3 years the CSV is still just 19k even though 30k has been spent.
It is a bank on your self representative out of Minneapolis that helped me. You can google for more information if you like.
As far as it is a investment. I don’t know. It is a life insurance with some unique attributes.
She has been investing in ROTH with money from me since age 18, and now has high paying job / and 401. To me these funds are more like investment. WLI is unique and I don’t want to bore you with why my family buys it.
Oh, yeah, she also has term life for 10 yr, and 20 yr.
You mean 100% of the third year premium, not 100% of the premium in years 1-3, right? Because if not, that might be the greatest WL policy I’ve ever seen.
I think I get it. *Annual* premium, not total premiums paid, yes?
I am still confused. Why would you buy a WLI policy for your 21 year old daughter? Perhaps she has kids that require a permanent death benefit? Is there ever a scenario where buying a WLI policy solely as an investment vehicle for a 21 year old makes sense?
“Is there ever a scenario where buying a WLI policy solely as an investment vehicle for a 21 year old makes sense?”
NO
Yes
Some might have felt the phrasing was purposefully misleading.
Funny thing is it probably could have been set up for 75% in first year which is likely better for bank on yourself but that agent didn’t do it…..
If it is annual premium and not total premiums paid, then it is terribly misleading.
I can’t think of one. I mean, if I’m going to put money into something and leave it there for 60 years, I want a better return out of it than 4-5%.
The problem I think this is trying to solve has other solutions. I figure if I’m a partner in a practice or business I’m gonna retire some day, so a buyout plan for that day and before then term life to buy out your partner’s heirs is probably cheaper. If I own a farm or company bigger than the estate tax exemption I need to slowly let go control to my heirs, and maybe let them sell their shares to their relatives more interested in the business /farm. Maybe a term policy in case I die before the one likely to take over can pay off those wanting to sell.
I think, in fact I know that WLI is not appropriate for 90% of US population. 401 / IRA / 529 are great. I also know for a fact, from first hand experience over the years, that WLI can provide a great deal of value to some. It is just one tool. If you don’t need it or don’t understand it, don’t use it.
If you want life insurance in your 60’s – 90’s, better buy WLI. Term life is a disaster for you
If you plan to change your asset allocation and be more conservative as you age (ie, more bonds), Buy WLI while you are in your 20’s to 40’s.
Type of whole life and how you fund it is very important piece. Get unbiased review before signing the documents.
Simple as that.
Disagree that a plan to change your asset allocation to something more conservative as you age is a reason to buy WLI.
WLI has very poor investment characteristics.
Buy it if you need a permanent death benefit that rises slowly with inflation and you are committed to holding it your entire life.
Lets see, how much has the short and 10yr US treasury provided over past 3 – 5 yrs. Do you know. Half of your readers in later stages of their careers are pulling out their hair trying to figure out what to do with bond portion with expected raising rates.
WLI for most = No
WLI for none = Wrong
WLI for some = absolutely
I think I’d phrase that
WLI for very few: absolutely
WLI for almost nobody: absolutely
No, I like my wording better.
I like WCI’s wording better. I recommend checking out, “Should I buy permanent life insurance policy?” decision tree – https://www.whitecoatinvestor.com/wp-content/uploads/2015/03/Permanent-Life-Insurance.jpg.
Just don’t buy whole life insurance.
I like charf wording the be
“If you want life insurance in your 60’s – 90’s, better buy WLI.”
Who needs life insurance at age 60+ that doesn’t already have it? That’s the beauty of term life insurance, you only buy it for as long as you need it, which is usually your peak earning years when you have young children.
Very naïve comment. Do you have any idea as to how many Americans in their 50’s or 60’s are providing financial assistance to their adults kids, or have young kids lf their own (second marriage, adoption) , or grand kids
Talk about naive. Over 80% fail to keep WL in force. People who don’t have money to pay for those things don’t have cash to pay Premiums. People who pay monthly (ie don’t have the cash to pay those things), have highest lapse rates. WL doesn’t change human behavior.
I disagree very much with Charf/MD.
“Do you have any idea as to how many Americans in their 50’s or 60’s are providing financial assistance to their adults kids, or have young kids lf their own (second marriage, adoption) , or grand kids?”
If people in their 50’s and 60’s are providing financial support to their adult kids, if these kids have some impairment and need a permanent death benefit, they would have bought the policies a long time ago.
If they are looking to leave a legacy for their grandchildren, they would be better off investing independently (step up basis in equities is better than any tax advantage with WLI).
It is naïve of you as well, b/ you automatically assumed that I implied that folks in their 50/60’s need whole life (read my comment). They could do well with term if they can afford it.
Based on lapse rate, obviously, many folks who buy WLI should not have purchased it in the first place. But this is not a sound argument against WLI.
Divorce rate is > 50%. Is this a good argument against marriage? Maybe?
I actually think the very high lapse rate IS an argument against WLI. I think it’s actually a pretty good argument.
You’re right that WLI is a lot like marriage. It’s a life long commitment and it will be very expensive to get out of it.
Yes, indeed. If you cant afford it. Don’t buy it.
Charf/MD – I apologize if I misunderstood that you were implying people in their 50/60’s buy WLI.
When I wrote, “Who needs life insurance at age 60+ that doesn’t already have it?” you replied, “Very naïve comment. Do you have any idea as to how many Americans in their 50’s or 60’s are providing financial assistance to their adults kids…”
It does seem to me that you were implying 50/60 year olds buy WLI.
Also – the WLI policy you bought your daughter – I assume you bought it as a investment and not for the insurance, yes?
I really have to do a DC summary
Good conversation and good luck to all.
None of you has discussed commissions. Have you asked you agent to disclose commissions on any insurance purchase? Would you hire a lawyer without knowing fees before proceeding?
Having a fiduciary advise you on life insurance purchases is always a good idea even if you are just buying term insurance. Jim Hunt, Scott Witt and Glenn Daily are all competent fiduciary advisors. No life insurance agent can be a fiduciary for the simple reason that they owe their fiduciary duty to the companies they sell for.
Current breakeven rates for a Male 44 spending 19,000 for a permanent life insurance policy are 14 years for
whole life with a 500 cash value after one year, 8 years for blended whole life with a 16,000 cash value after one year, and 5 years for universal life with a 17,600 cash value after one year.
You can assume that most of the difference between first year premium and cash value is the agent’s commission. In any event it is not in the policy.
Life insurance agents generally get a finder’s fee for arranging premium financing and that like commissions is never voluntarily disclosed
Chuck. Do you buy your insurance at 5th Ave. “Current breakeven rates for a Male 44” statement is ridiculous.
while one would have to know a little more details about the company and policy…the universal would not break even at 5 years if you considered surrender charges which you should in any analysis especially since all universal policies have more levers for them to change if they want. With WL its pretty much dividends. With standard ULs its interest rate (dividend equivalent sort of) and cost of insurance (which they have increased on people even with mortality improving). If you go into other flavors of UL such as IUL then they can also change caps and participation rates (which they have also been doing a lot of lately) and with VULs they can also increase the cost of different investments or elimanate them as a possibility within the policy so you are stuck with lousy investments.
If im not mistaken some of those guys actually are or have been agents although if im not mistaken they practice a no commission model which is very uncommon.
Rex
Send me your email and I’ll send the illustrations so you can see for yourself
Not sure which product you were talking about.
I’m guessing WCI would be willing. He gets enough lousy ones via email. Of course if you are sacrificing for a lower long term result then it’s not saying much.
The chance of me inviting more hate mail from the insurance industry is very low.
Rex, you questioned the 5 year breakeven on premiums to cash surrender value
It is a non-variable UL product from NML which allows me to reduce the commission to 3%
How many years are there surrender charges and is it overfunded?
ULs look better for cash value early on. It’s bc of how they charge cost of insurance and if overfunded the difference in MEC testing. Many have surrender charges for 10 years or more (not necessary with WL). Now to be fair ULs have a “flexible” premium but nobody should use that flexibility.
Oh and NWM decreased its dividend yet again for 2018. So I’d be careful about interest and cost of insurance assumptions. The performance of NWM policies isn’t exactly stellar lately.
No surrender charges and policy is not overfunded. Of course NML decreased dividend but so did everyone else. The interest rate is only one part of the dividend formula. Mutuals can maintain or increase dividend interest rate while increasing COI charges and expense deductions, Hit me at [email protected] consulting.com and I’ll show you illustration
No Penn Mutual and guardian did not.
Dividend rate is the biggest part of the formula for the dividend. The actual mortality and operating expenses don’t change much. Too bad companies purposefully make it impossible to directly compare companies.
That’s interesting. Kind of like a car salesman that way- you get paid more if they finance.
Why not “term to 95” inside a ILIT instead?
You’re looking at a fixed amount there, but the death benefit of whole life doesn’t really grow that quickly.
E.g. on my plain-vanilla whole life policy ($500,000 face, issued 1984) the death benefit isn’t much over $600,000.
I think you were sold a bad product. It is important to do your research and request unbiased review. I am always surprised when I see how poorly some of these WLI products have performed. Sorry!
“I am always surprised when I see how poorly some of these WLI products have performed.”
I don’t think that anyone else is surprised. WLI is notoriously an awful investment. Read through the comments on other articles about whole life insurance (and universal, variable universal, etc.), and you’ll see that these policies are sold, not bought.
While you can find policies that are better than others, that’s not how this industry works. TIAA Cref might offer a much better policy than Guardian, but I highly doubt Mr. Kuderna or other insurance salespeople give their clients a choice of policies to choose from.
Terrible product sold by terrible people claiming to be financial advisors but do not act as fiduciary.
Nothing surprises me about permanent life insurance any more. Just don’t buy it. Terrible investment.
What research?
Bought for me by parents.
I doubt fancy equity-linked WL policies were available back then.
Plain-vanilla WL policies rely on returns from a bond portfolio, so the very slow growth isn’t a surprise.
And 84 was a pretty good year for whole life. High interest rates back then.
Funny thing is purchasing a 30 year treasury that year beat the heck out of WL. Proponents of WL never seem to want to give proper perspective.
As interest rates rise WL is going to lag just like it did last time. The industry actually capitalized on it by getting people to change to new ULs. Probably going to try it wil IULs this time since so many of those ULs blew up on folks.
“Funny thing is purchasing a 30 year treasury that year beat the heck out of WL.”
Rex, do you think before you write? Did you take in to account impact of taxes?
sure do.
WL is tax deferred and taxes are income instead of capital gains when surrendered which is what happens over 80% of the time. Of course most of those are for a loss and not actually a gain…
WL doesnt really have much tax advantages. Its tax deferred with a step up in basis at death. Stocks get the same step up and highly likely a substantially greater return but are not tax deferred and its very easy to be tax efficient in a taxable account. But even if were to buy that bond/treasury in my taxable, which i wouldnt have, it would likely have beaten WL. I would have purchased it in my 401k and stocks in my taxable (thats probably too complicated for you and doesnt help you sell WL).
I just dont use tax fear inappropriately like many agents.
Just shows how much the overhead of the policy expenses negatively impacts returns.
It’s clear WL really won’t grow in value especially with today’s meager bond returns.
So why not pay for the cheaper “term to 95” inside an ILIT?
Divorcing insurance considerations from the investment portfolio.
I’m not convinced that buying a “term to 95” product is any cheaper than a permanent policy. Plus, there’s the issue of what happens if you die at 96?
Buy term and invest the difference works because you run out of a need to buy insurance by your 60s. Otherwise, it’s not dramatically cheaper to buy term than whole life. Term is cheap because you probably won’t need it. Once it becomes likely that you will need/use it, it won’t be much cheaper than a permanent product.
Also you can’t really divorce yourself from their investments. You really take on the insurance company assumptions when you buy. The guarantees are based on ability to pay claims. A term to age X which is pretty much no lapse gUL should be to beyond 100 if you are going to do it. Just so you know some companies have dropped or repriced these for those exact concerns with low interest.
It also “locks you” into today’s interest rate environment which you have to decide if you want,
Charf/MD
I find your comment about how so many baby boomers are now responsible for their own kids, as well as grand kids very interesting. Any data to show how this tren has changed over past 20 yrs?
I think another factor no one mentioned was fact that older folks are living much longer, and if they are not poor and on medicaid, they too are depending on baby boomers to subsidize their income (pay property taxes, health care costs, home health aid, etc).
So to say that life insurance in later years is not needed just doesn’t seem right.
Even worse reason
Money is needed
You get less of that when using WL
“You get less of that when using WL”
This statement needs elaboration?
“’You get less of that when using WL’
This statement needs elaboration?”
WL is a bad investment. You said older folks need money in later years,implying that they should be buying WL. I believe that Rex is saying that they should be putting their money elsewhere into a better investment so they have more money than they would if they bought WL.
Good rules of thumb – don’t mix insurance with investments. Do not take financial advice from anyone who sells insurance.
The problem is that whole life is not an investment, it is an insurance that will pay off if one dies, and or it could be taped into for its cash value if needed. Return on most “Better investment” from one period to another, as well as when one will die is uncertain. That is why both term and WLI insurance have a role in some people portfolio.
So, don’t buy or invest or call it what ever you will, in WLI. It may very well not be right for you. But don’t be so dogmatic as to why no one should eve have or need WLI.
“The problem is that whole life is not an investment, it is an insurance…”
If we can educate the public that this is insurance, and not an investment and that you should never mix insurance with investments, I think we’ll be in good shape!
Don’t buy insurance from someone calling themselves a financial advisor.
considering that about half of insurance policies sold are permanent, the word isnt out enough yet.
Unfortunately for those selling it, if the word really gets out then there wont be all those lapses and then the return on those who keep is going to be even lower assuming the companies can remain viable which would be a big if in a low interest rate environment (just look at what happened to those in Japan).
My only question is how much financed WLI does the author have? I suppose if lenders “prefer creditworthy customers with over $5M net worth” (how generous of them), probably not so much of it. Financial charade.
So, here are my numbers. over past 3 decades, cash value IRR 6.13 %, Death benefit IRR 7.92 %.
I have same and now by comparison small annual payments I started out with many years ago. Term life premium for similar coverage at this age would be daunting. One thing I have noticed is that recent interest rate hikes over the past year or so haven’t dampened returns.
Serious question for those who know. Is it possible that WLI can provide hedge against interest rate hike?
That’s pretty typical of the ones I’ve seen purchased in the 1980s. I would bet that 30 years from now those numbers will be about 2%-3% lower.
I wouldn’t expect it to function as a hedge against rising interest rates, no. In fact, I would expect dividend rates to drop with rising interest rates, at least for a while, as the bonds the company owns drop in value. Eventually, rising interest rates would increase the dividend rate (I would hope) back to what you were seeing when you bought that policy.
You have a lot of misunderstandings about insurance. You don’t seem to know that the actual cost of insurance within WL company is MORE. Now technically they don’t disclose the COI just the premium but how you actually know it is as follows. First for the mutuals that have performed better with WL they pretty much always have higher term than you will find from lets say Banner or any of the other good term providers at term4sale and by a lot. They aren’t charging less when they don’t disclose it. But still maybe that’s not enough data for you. So for the WL companies that also sell a UL (where they have to disclose the COI), it is ALSO higher than the applicable term. You are just paying the cost of insurance with a more “level” basis with WL. It isn’t cheaper.
In regards to interest rates. WL historically lags by about 6 years. So even though interest rates are slowly rising, WL dividends are still falling (we actually are at a point where its so low its actually dangerous for insurance companies if it kept going indefinitely). Historically WL always looks better is when interest rates are going down. Where it looks the worst is when they rise quickly. This is why so many people got suckered into exchanging their WL to ULs or buying ULs in the past. You have to remember a 30 treasury was near 12-13% 30 years ago (I didn’t look up the exact number). When you weigh this out over your entire non premature life the death benefit is likely to be on the low bond side. The only way to really beat this is to die premature to their rating of your health.
I was going to call you out on your treasury yields (because my recollection was the 30 year peaked at 9%), so I looked it up and found this:
http://www.nytimes.com/1982/02/05/business/record-set-on-30-year-us-bonds.html
14.56% for a 30 year in 1982!
I appreciate your honesty on that.
Just checking back in on this and I think there’s a couple of facts worth recognizing…
1- I saw above we speak somewhat friendly about whole life issued in the 1980’s with some satisfaction at the past 30 years returns and guaranteed payments today. While I agree that most policyholders I’ve met with 1980 issues are very happy, if they look back at their initial sales illustrations they could technically be disappointed. That was a time when “Vanishing Premiums” was often marketed, using dividends to pay premiums (now we have limited pay policies to accomplish that goal when deemed important), and folks had to pay longer than anticipated. Reason being the dividends back then could easily have been in the teens, naturally when rates dropped the dividend moved in tandem and it took longer to offset. Today’s illustrations and dividends are taking into effect rock bottom interest rates, if dividends rise, insurance companies will be very happy (as will banks). Insurance companies, especially Mutuals, hold their bonds to duration (opposed to individual investors). In that sense, interest rate risk is not what the average investor is familiar with from a Wall Street or valuing perspective.
2. If the client has a sensitivity to interest rate/dividend rates, they should look at companies who implement Substitution & Pegging, a process that allows for a much more stable dividend on new policies that encounter lower dividend rates in their early years.
3. While low interest rates are not ideal for an insurance company, it’s not all bad. One mutual this year issued $1.2 billion of surplus notes going out 60 years, that’s a lot of long-liquidity on the cheap for investment purposes. One company has an option to buy on a 50 year lease on one of the most expensive buildings in the country, with a purchase price so far below the market value that on the lease expiration an overnight sale to a lined up buyer can create an instant influx of massive proportion.
4. When discussing all these products it is extremely important to differentiate Mutual vs Stockheld, and Whole Life vs UL/IUL/VUL as it is literally apples and oranges. Even between each Mutual company there is a difference in investment philosophy and business operations. Good point above regarding higher term through a Mutual, at the end of the day all these ancillary product lines are feeding the company’s bottom line. On the Mutua,l the profit (dividend) of course only goes to whole life policy holders.
5. Insurance Carriers do not rely on policy abandonment in Whole Life for revenue, but rather utilizing a “float”. Read up on Warren Buffett and how he accomplished what he has on Reinsurance Companies’ “float”. UL’s are a different story.
6. I’d ask any client harping on returns if they have a bond or fixed income allocation, anywhere- brokerage account, 401k, IRA, pension, etc. If they do, many of the same concerns levied against Whole Life can be seen there (minus the death benefit). Remember, it was Ben Graham (Buffett’s mentor) who said an allocation shouldn’t stray too far from 50/50, granted that’s all been lost in this monster bull market. A comparison to equities again is just apples and oranges.
It’s funny hearing from clients that say there’s no way an insurance company can guarantee the returns it does, while others say these returns are just abysmal. It all goes back to my point of expectations and benchmarks. If WCI is open to a Whole Life and Buy Term Invest The Difference Pro/Con, I would gladly oblige. As that was not the purpose of my article, which was really an Estate Planning topic for Real Estate Investors.
6. Bonds aren’t whole life. Just because returns are similar over 50 years doesn’t mean they’re similar over the first 10. I find WLI a very unattractive asset class for a portfolio as discussed here:
https://www.whitecoatinvestor.com/whole-life-insurance-is-not-an-attractive-asset-class/
Also, I don’t know why anyone is surprised to see a WL policy meet its guaranteed returns. Heck, policies bought today only guarantee a return of 2% if you hold it for 50 years. That shouldn’t be too hard to get.
And no, we don’t need any more Pro/Cons on whole life. All you have to do is mention it in a post and you get 100 comments of Pro/Con below it.