Menu

Inappropriate Whole Life Policy of the Week

Home Insurance Inappropriate Whole Life Policy of the Week

  • The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

    From another reader:

    I’ll give you 5 guesses to figure out which company our advisor worked
    with, but you’d only need one (Northwestern Mutual). This advisor had
    been working with a good friend & mentoring physician. That is how we
    became introduced. He got his hooks in me during MS4 year, and then
    when my spouse and I returned from residency (two doc couple)
    we both joined up. That misstep resulted in each of us being sold $2MM
    whole life policies, getting disability insurance with NM (he even
    convinced us to drop my spouse’s policy with MassMutual from medical
    school/residency), and setting up Roth IRAs and 529 accounts through
    him that all had 5%+ front load fees and high ER funds. Of course, no
    other options were presented, and we assumed that this was how
    everyone operated.

    Unfortunately, the reader referred his mom to this “advisor” too:

    I was floored that she had a whole
    life policy. After digging around, I see that he sold my mom (newly
    widowed and with two grown, self-sufficient children) a whole life
    policy (100k), a 20 yr term life policy (100k), and long-term care
    insurance (all bought in 2007). Additionally, he had her open a VA in
    an Individual Retirement Annuity, two different investment accounts
    within living trusts and a Roth IRA. These retirement accounts have
    12-18 mutual funds being utilized in all of them. Every fund has a
    relatively high ER, and some look like they have back end penalties
    for withdrawal.

     

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #41119 Reply
    Liked by Craigy
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

    Here’s another couple way behind on their retirement savings who were sold whole life policies on their children:

    By the way, I did further poking around, found your “Behind on Retirement” post, and especially took a look at the accounts we have been paying into for our (now) adult kids. Small cash value life insurance policies, and one ed IRA left for the last child in college still. ..And the life insurance policies for adult children seem to be inappropriate, so I am thinking of cashing those in as well

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #41120 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6177
    Joined: 01/12/2016

    I know this is how it is, but dang these stories get me fired up.

    #41127 Reply
    Liked by Craigy
    Avatar artemis 
    Participant
    Status: Physician
    Posts: 588
    Joined: 12/02/2016

    I was both hoping and dreading an update to this thread.  $4k a MONTH in premiums?!  That’s insane!

    At least you know from these emails that your message is getting through to a lot of people.  By warning naive people away from these policies and directing them to reputable fee-based financial advisors for their financial advice, you’re doing the medical community a great service.

    #41137 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

    Here’s another one (technically an IUL) on the forum now too:

    I am in my final year of residency and then doing a fellowship after this.  On the smart side both my wife and I have ROTH IRA which we max out every year.  My current situation does not offer a 401k.  I have an IUL policy for my wife which I’m into for almost three years now.  Annual premium of $5400 per year, cash accumulation value of a little over $8200, but cash surrender value of $0.  I guess this means that if I walk away now i’ll get nothing.

    That’s right. An IUL for a resident. Can you imagine? This agent and his company just stole $16K from a RESIDENT.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #41141 Reply
    Avatar trixie449 
    Participant
    Status: Physician
    Posts: 7
    Joined: 04/03/2017

    Can I add my story as yet another cautionary story?  I’m 36 and have been contributing to my VUL for a complete 4 years. I was sold this policy by my financial advisor after finishing residency. Annual premium is $42,000, current account value is $131,000, net surrender value $113,000, death benefit is $2,250,000 (increasing yearly). I have no need for a permanent death benefit. I have buyer’s remorse big time. And the $55,000 loss really hurts. Trying to plan my exit strategy.

    Thanks WCI for helping to get the message out there.

    #42293 Reply
    Liked by Zaphod
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011
    Here’s another:
    Two and a half years ago, a couple of different insurance agents hit me up to overfund a universal life policy.  Two years ago, I decided to do it, to the tune of $2,500/month.  About 4 months ago, I discovered your blog, and have read several posts that I wish I would have read two years ago.  I know it’s not a great investment.  It’s designed for me to put in about $182k over ten years.  I’ve attached their projections, assuming 6.5% average return.  I’m at the end of year 2, and my cash surrender value right now is about $34k.
    I realize now that this is not a good deal.  I have no use for a permanent policy.  But I’m about $60k into it, and if I cash out, I’d get $34k, and take a $26k bath.   I read your post https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/, and think that maybe preserving my loss through a low-cost VA may be a good option.  But part of me feels like the staying with it, because of the sunk cost and because of the hassle of taking a loss.  I’m about 1/3 of the way “there” (plan designed for me to pay about $180k over ten years, then “self fund.” Haha.)   And it comprises only about 15% of my portfolio, and that percentage will keep falling as I put a greater percentage of my future funds in other investments.
    I’m good at budgeting and saving a large chunk of my income, I balance my portfolio, and I keep tabs on where money is.  But analysis beyond simple calculators isn’t my strong point, and I’m not sure how to analyze the situation numerically and make reasonable assumptions, so I thought I’d ask:  WWTWCID?  (You know, What Would The White Coat Investor Do?)
    Another interesting thing off the illustration is it was supposed to be worth $38,100 after 2 years, but it didn’t even perform that well.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #43019 Reply
    Avatar janettebournes 
    Participant
    Status: Physician
    Posts: 191
    Joined: 03/05/2017
    #44305 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

    Got another one today. A PA not maxing out retirement accounts. He’s 13 years into his whole life policy, just now breaking even with much angst about whether to dump it or not.

    Meanwhile, he has student loans, a home equity loan, not maxing out retirement accounts, could really use that $6K a year premium for other stuff.

    I think what happened to me is even worse than what happens to residents, because at least their income will exponentially increase in future years allowing them to rapidly make up for lost time, whereas mine was low at the time and quickly plateaued over next several years where it will stay more or less for the duration of my career (which I’m fine with but helps illustrates the near criminal nature of my past “Financial advisor’s” deception).  
     
    One of the reasons I am finally writing to you is because I am often paralyzed by indecision even when I think I know what the right thing to do is financially.  I am a huge proponent of you and your mission and tell every student I come across, and everyone else who brings finance, up about you as often as possible.  Unfortunately, I find myself not always willing/able to follow your advice.  Now many years into my reading your blog, I hope that by finally getting the nerve to reach out to you personally it may give me the courage to make the move I should have years ago and that’s to secure term, Dump the WL and move on…I think.  Re-reading some of your old posts recently I feel the analysis paralysis setting in again and I really don’t want to make a bad prior decision into a worse one by mishandling my next moves.  

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #44322 Reply
    Avatar neurosurgdoc1984 
    Participant
    Status: Resident
    Posts: 3
    Joined: 05/13/2017

    I am confused as to why “whole life” is always a bad option. The only people it seems to make sense for are extremely high earning professionals who max out Roths, regular IRAs, etc. I am by no means an expert, but my understanding of whole life policies (which isn’t a very accurate term as there are different types of whole life policies) are the following:

    (1) You usually break even around the 11 year mark

    (2) At some specified point you can pull 100% of the cash value out of the account

    (3) Withdrawals are tax free

    I guess you can put the money in a brokerage account and gamble with it and possibly do better, but you also get taxed to death on that, which is not awful if you are a low earner, but if you are up near the 1% you are paying a substantial amount of money to Uncle Sam so unless you crush the market (which I am not smart enough to do) or get lucky it doesn’t make as much sense to me to put all that money in a brokerage account. Of course the brokerage account money is fairly liquid, but long term (talking decades) it doesn’t sound like a horrendous deal to have whole life (and I am talking about the highest tax bracket earners, which are most physician families).

    It seems that the reason to have whole life policies is as a legal way to try and decrease tax burdens for high earners, especially later in life. And as well all know Uncle Sam is our biggest enemy as physicians.

    We all have 2 buckets of money post-retirement:

    – Taxable (IRA, brokerage accounts, rental properties, etc.)

    – Non-taxable (whole life, Roths)

    Please correct me with numbers if I am wrong! I am not particularly well educated on these issues and would appreciate clarification if any of the above are wrong.

    I would definitely agree that whole life policies make zero sense for someone earning less than, say $150k / year because more traditional ways of saving are better options in terms of returns, but for those of us making, say $400k / year, whole life seems like a reasonable option to me (???).

    #47819 Reply
    Avatar MaxPower 
    Participant
    Status: Physician
    Posts: 352
    Joined: 02/22/2016

    You’re already paying taxes on the money you waste on premiums for whole life policies though, right? And at your highest marginal tax rate to boot.

    It’s true that some taxable investments may require payment of tax, but if you’re smart about it you can really minimize it. My taxable investments are in muni bond funds, since my bond options in my tax deferred accounts are lousy.

    Have you read any of the many posts on why whole life is so terrible written by WCI?

    #47821 Reply
    Liked by Zaphod
    Vagabond MD Vagabond MD 
    Participant
    Status: Physician
    Posts: 3471
    Joined: 01/21/2016

    ^^

    Wow, it looks like the NWML guy really got you to drink the Kool-Aid. This is not my area of experience (WCI is The Man for debunking the WL propaganda), but I will focus on just one statement you made.

    “You usually break even around the eleven year mark.” and therein lies the problem. The Whole Life plans are so bloated with sales charges that it is impossible for the poor schmuck who buys the policy to come out ahead by taking advantage of all of the tax, estate, and other goodies that are promoted when these policies are sold. If you could buy Whole Life as a “no load” product, with a reasonable expense profile, perhaps high earners could take advantage of the product. But you can’t and I can’t.

     

    "Wealth is the slave of the wise man and the master of the fool.” -Seneca the Younger

    #47824 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1396
    Joined: 03/27/2017

    I am confused as to why “whole life” is always a bad option. The only people it seems to make sense for are extremely high earning professionals who max out Roths, regular IRAs, etc. I am by no means an expert, but my understanding of whole life policies (which isn’t a very accurate term as there are different types of whole life policies) are the following:

    (1) You usually break even around the 11 year mark

    (2) At some specified point you can pull 100% of the cash value out of the account

    (3) Withdrawals are tax free

    I guess you can put the money in a brokerage account and gamble with it and possibly do better, but you also get taxed to death on that, which is not awful if you are a low earner, but if you are up near the 1% you are paying a substantial amount of money to Uncle Sam so unless you crush the market (which I am not smart enough to do) or get lucky it doesn’t make as much sense to me to put all that money in a brokerage account. Of course the brokerage account money is fairly liquid, but long term (talking decades) it doesn’t sound like a horrendous deal to have whole life (and I am talking about the highest tax bracket earners, which are most physician families).

    It seems that the reason to have whole life policies is as a legal way to try and decrease tax burdens for high earners, especially later in life. And as well all know Uncle Sam is our biggest enemy as physicians.

    We all have 2 buckets of money post-retirement:

    – Taxable (IRA, brokerage accounts, rental properties, etc.)

    – Non-taxable (whole life, Roths)

    Please correct me with numbers if I am wrong! I am not particularly well educated on these issues and would appreciate clarification if any of the above are wrong.

    Click to expand…

    Based on the other thread you created, I suppose you could cash out your 401(k), pay a considerable chunk of your residency income on child care (despite a non-working spouse?), and buy a whole life insurance policy.  That just doesn’t seem like the wisest combination of choices.

    I suppose if a whole life policy is a good idea, then you should buy the biggest one you can find.  Sure, the break even point is 11+ years by your assumptions (or 16-17 years based on the guarantees that Rex cited).  The math suggests that you’d be better off maxing out your 401(k), 403(b), 529, HSA, doing a backdoor Roth, contributing to a taxable brokerage account, investing in real estate, and doing Roth conversions during sabbaticals, teaching years, early retirement, etc.

    If you do choose to cash out your qualified funds and go the whole life insurance route, please post back in 10 to 15 years to let everyone know how that’s working out for you.

    #47974 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1536
    Joined: 01/08/2016
    I guess you can put the money in a brokerage account and gamble with it and possibly do better, but you also get taxed to death on that, which is not awful if you are a low earner, but if you are up near the 1% you are paying a substantial amount of money to Uncle Sam so unless you crush the market (which I am not smart enough to do) or get lucky it doesn’t make as much sense to me to put all that money in a brokerage account.

    Click to expand…

    Bold added by me for emphasis. This sounds like insurance salesman talk. I’m not accusing you of being one, but perhaps of regurgitating their pitch.

    If you believe investing in a taxable brokerage account is gambling, then you [should] believe all stock and bond investments are gambling regardless of the asset location. Sure, there is volatility, but reward tends to be commensurate with risk.

    As Rex pointed out, a taxable account, when done right, will not be heavily taxed. I have a 7-figure taxable account, and my tax drag is about 0.57% in peak earning years as an anesthesiologist in a high tax state. When I retire and income drops below $250,000 a year, tax drag will be in the range of 0.3% to 0.4% depending on where we live. If we keep taxable income under $75,000 (not hard to do without a job), the taxable account can act just like a Roth account. Qualified dividends and LTCG are not taxed in the lowest 2 tax brackets (10%, 15%) under current tax code. See the taxman leaveth for more info on a tax free retirement.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #48032 Reply
    Liked by Hank, Vagabond MD
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

    This week’s sample:

    Both my wife and I are 1 year in to our whole life policies – each are $500k policies. Our premiums are $5500 each, with a $3500 rider. Our 2nd year’s premium is due this month. We make about $250k per year combined, but we have NOT taken advantage of my 457b or a 529 for our 2 kids.

    I’m thinking of biting the bullet, and taking the $11k loss – I’m guessing you’d probably agree.

    Once more, whole life policies sold to someone who isn’t maxing out retirement accounts or even saving for his kids’ college.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #49672 Reply
    Liked by Craigy

Reply To: Inappropriate Whole Life Policy of the Week

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear