My wife and I are both emergency physicians who max out our available retirement plans including backdoor Roth IRAs and are already putting as much into 529s as we would like. My advisor, a CFA, recently showed me an illustration for a 10-pay whole life policy illustration. In researching it I found lots on your site about whole life, but nothing specifically on 10-pay or 20-pay policies and would like to know your thoughts on them specifically. This illustration shows that I would make 10 payments of $20,000 and then at age 70 would have guaranteed cash value of $437,000 and a guaranteed death benefit of $800,000. The projected cash value is $1 Million with a $1.8 Million death benefit. Our actual life insurance needs are already covered with term policies. This is money I expect to leave to the children, but like the idea of being able to access it if necessary. What do you think? Does making a policy “10-pay” change your usual recommendation against whole life insurance for most doctors?
What is 10 Pay Life Insurance?
The returns of whole life insurance can be improved slightly in several different ways. Paying annually, maximizing “paid-up additions,” and paying the policy up in as little time as possible without becoming an MEC by using a 7-pay, 10-pay, or 20-pay (meaning you only pay premiums for 7-20 years instead of your whole life) are all ways to improve the expected return. So yes, buying a 10 pay policy not only avoids life long payments but also improves the internal rate of return of the policy. You simply get to even a little faster. But it is still a whole life policy.
I usually recommend against whole life as an investment or “another retirement account” primarily due to low returns. Since you don't have any need for permanent insurance, you really should be evaluating it as an investment. This is money you want to leave to the kids, but would like to have it available to you “just in case.” So an alternative in this case would be something like very tax-efficient stock index funds in a taxable account. Your kids would get the step-up in basis at death, so the only real tax cost would be the drag from distributions. If we assume you are 35 and will invest $20,000 per year for 10 years and then let it ride for 25 more until age 70, all at an overall return of 8% reduced by 23.8% taxes on the 2% yield, your money would grow to about $1,866,000, tax-free, at age 70.
Let's compare that to the insurance contract. At age 70, the insurance contract is guaranteed to have a cash value of $437,000 (2.59% annualized return) and projected to have a cash value of $1 Million (5.38% annualized return.) Although it wouldn't surprise me if you actually achieved that 5.38% return, I would plan on something about midway between those, about 4%, or $665,000 at age 70. That's about 1/3 of what you would have in the taxable account. If you decided to raid the stash, you could borrow tax-free from the policy but would have to pay taxes if you wanted to spend from your investment. But even after taxes, you would be way ahead with the traditional investment. The death benefit and asset protection features are nice, but certainly wouldn't be worth over a million bucks in opportunity cost to me.
Should You Buy 10 Pay Life Insurance?
I like the fact that the return is a little higher with a 10 pay policy (perhaps 0.5-0.75% higher than a traditional policy), and I like the fact that you don't have to make payments for the rest of your life. But you've still got all the other downsides of investing in a life insurance contract. As I frequently tell people, this isn't the dumbest thing to do with your money, but be realistic about what it is really going to do for you. Good luck with your decision.
[Update: Like most who really examine whole life insurance as an investment carefully, this reader decided to pass on the policy.]
What do you think? Do you have a 7-pay, 10-pay, or 20-pay whole life policy? Why or why not? Are you happy with your purchase? Comment below!
This 75k single pay has 3% floor and 13.5% cap and is indexed to S&P. If the Index performs at 6% every year, the policy will give retirement income of 18K per year starting age 65 upto age 100.
And get this, if 25K extra is deposited, then the index performance does not even matter. its guaranteed to pay out 1M upto age 121 no matter what the Index does.
So 75K will turn into 1M for sure(unlike your 401k without any guarantees), WHEN depends on when you die. Its a WHEN-WHEN situation.
What do you say to that,Mr.Whitecoat Investor.
Please email me the illustration when referencing a specific policy.
As usual, there is critical information missing. Such as the starting age. Again, this is about math and taxes. With enough years, I can make slivers look gigantic.
Ask me what ever you need. starting age is 35.
OK! You are now 35; you see your time horizon going forward as probably another 60 years; you have a family and know that your earning ability, at least for the next 10 years, is critical to their economic well being; you are likely a non-smoker, preferred risk when it comes to life insurance; you have sufficient income or other resources that long term planning is possible. Assuming you are OK with those assumptions, I would have you think about an idea where you commit to buying and owning however much life insurance can be purchased at your age, etc, with $200K for five years. During this span, you are on the hook for $100K, with a lender putting up the rest. In years 6 – 10, the lender puts up $200K per year. $2M has been deposited to the plan, 75% of which came from somewhere else, a non-recourse loan growing at short term interest rates. Meanwhile, the accumulated reserves in the contract are growing at long term rates. Somewhere between years 11 and 15, the loan is re-paid, leaving a pile of money that belongs to you, is growing with no adverse tax consequences, is asset protected, has a death benefit of significance, and can be accessed as a supplemental retirement income tax free. The effect of arbitrage and leverage over the next 30 years will result in more money than you could reasonably accumulate if you were to invest $65K ($100K minus taxes) in years 1-5. Is any of this guaranteed? No, though some features are but how that plays out depends on variables that are not known. Right now private equity has hundreds of billions of dollars looking for a safe place to go and get LIBOR type interest. This option for them is better than a mortgage and far more liquid. Your risk is that short term interest rates will be higher than long term rates over time, which history says is not the case. But you never know… But that risk is somewhat offset by the fact that you now have a large life insurance policy in place, meaning the after tax money you were spending on term can be used for something else.
Cant you a simple yes or no?
I mean, do you agree this 75k premoium IUL is good or not?
I think its game, set and match!
Dr NO. Sorry for my delay; I’m still involved in work that pays dollars.
I think you should move forward with your idea of using $75K to buy something that will result in $1M at age 65. At least I think that’s what you said. That’s about a 7.75% return on investment. Good stuff.
One caveat however. If you buy a life insurance policy with one premium, it becomes, in IRS parlance, a Modified Endowment Contract, or MEC. The rules are than any money coming out first come from gain in the contract, and will be taxed at ordinary income tax rates. Your agent should explain this further.
If you have expectations of using any of that $1M at age 65 as a supplemental retirement income source, or between now and then to replace the roof, for example, it would be the same as having $650K of money in the pot (assuming you are in a 35% combined federal and state income tax bracket) instead of $1M. There is a way around this, but this issue should be part of your calculation before you commit to the life insurance policy.
[Ad hominem attack deleted.] I know about [MEC] and also about Technical and Miscellaneous Revenue Act(TAMRA).
No sir,this contract does not become a MEC unless the premium is more than 91k.
[Ad hominem attack deleted.]
I’m also surprised to hear about a single-pay policy that is not a MEC. A link would be appreciated.
I’m glad you have the ability to remove certain phrases and sentences. They have no place in a forum like this and I apologize for my not being more sensitive to this. Good luck finding exceptions to the MEC rule.
[Response to ad hominem attack deleted.] Where in any of your questions did you assert that this was not a MEC? All you said was a premium of $75K. And for the record, there is no threshold below which a single premium is not a MEC. If I buy a $5000 life policy with one premium, it’s a MEC. Period. Look it up.
You lost me, Dr. No.
[Response to ad hominem attack deleted.]
But even more lost as to this $91k rule. My research (info from Guardian, Investopedia, an advisor who is known as a permanent insurance expert) all suggest that all one-pay policies are MEC’s. If that’s wrong, I’m open to learning the truth and would sincerely appreciate a link to an authoritative source.
Thanks Tony – saw your comment after I wrote mine, but now I feel like I haven’t missed some big secret MEC-melting loophole. And of course, MECs can have their place, just something to be very aware of to make sure your policy can be used as you intend.
Kate – thanks. Depending on how he/she responds, I’m going to ask why bother posing questions in a forum like this if you already know the answers. I’m certainly ignorant when it comes to medical issues but I guess some people are threatened when the answers don’t conform to exactly what they expect. My next step is to put the WCI on my spam list and get on with my life.
I would prefer you unsubscribe from any threads you’re following rather than putting the site on a spam list for emails you signed up to receive. If you need help unsubscribing, let me know.
WCI – I’d rather not use a spam filter; I do think I have some coherent ideas and possible answers to offer, so if there’s a way to remove myself from certain threads, that is a better solution. Thanks.
Look at the bottom of the emails you get about thread updates. There should be a link to unsubscribe. Let me know if that’s not straightforward.
[Ad hominem attack deleted.
Why don’t you three exchange email addresses and send your hate mail directly to each other. If you want to post here, please keep it polite and on-topic and remember this:
http://imgs.xkcd.com/comics/duty_calls.png ]
Professionals taking their time to engage with my questions? He is making money off of this website, for crying out loud!
And he is misleading people!
I’m not sure you three understand who is who here. The website is mine, it is for-profit. None of you three own this website or are associated with me in any way. I think all three of you are financial professionals arguing with each other.
why bother to ask if I already know the answer, tony? To do the same thing you are doing. To educate people without creating a website and writing a book and making money off of it, like you!
MEC thing aside, do you agree that IUL is good investment as well as secure thing to have?
Since you apparently don’t want complete answers, but would rather deal with a simple yes or no, then I will say “No”. It’s not a good investment. But it could be a secure thing to have. That’s because a life insurance policy and investments are two different animals. A buffalo burger and a regular burger are both red meat, are bovine, grill up fine, and taste different. But if you are a vegetarian, neither one is appealing.
If you get back the premiums after a few years(as a loan) and you get to invest them somewhere else and still have all the benefits of permanent life insurance, It cant get better than that!
As someone said, Money should be like a guard dog. After it fetches me the bird I shoot, its ready to go out and get me another cash flowing asset. This IUL is a perfect example of this!
Have a great 4th!
You are either one of the worst kind of insurance agents — or you are someone who has come onto this forum with the express purpose of saying provocative things to make insurance agents look bad.
IUL is a bad thing for most physicians under most circumstances. If someone is an exception, then great for them.
It certainly can get better than that. The time value of money of the premiums paid must be considered. While it is cool to get your premiums back, if those premiums could have doubled in that time period in a more traditional investment, you may not be better off.
NVMD – if you are making that comment to me, I have to wonder why you have MD in your handle as you clearly can’t read English very well. I told DrNO “No” to buying what he was offered. I’ve said it earlier and I’ll say it again, since you apparantly don’t retain info very long: LIFE INSURANCE IS RARELY A GOOD INVESTMENT. IT IS NOT AN INVESTMENT VEHICLE, IT IS A LIFE INSURANCE CONTRACT. I came to this forum thinking my 40 years as a financial professional might be helpful to someone. Over these 40 years, I’ve had occassion to fire clients when they became disrespectful, condescending, second guessed almost every decision jointly made, and became a constant pain in the ass. The reveneue from my activities with them no longer rose to a level that justified my keeping them as a client. You and DrNo have now reached that threshold with me, so to quote a famous celebrity, “You’re fired!”
[Profanity removed.] I am not a doctor as my name implies nor am I a insurance salesman. I am a sophisticated and an accredited investor.
Good for you. And good luck as the years roll by.
Not just doctors but If every American owned a IUL, then all of next generation will be Millionaires but there seems to be a conspiracy to continue the working class.
Yes, if all people inherited a million dollars all people would be a millionaire at some point in their life. I’m not sure I see the conspiracy though.
To WCI – somewhere in this thread you asked if I was interested in a guest post to talk about using pre-tax dollars to buy life insurance. Yes I am and can. How many words? How do I get it to you? Tony
Email it to me as a Word Document to [email protected]. Readers generally want more details than you would expect and they hate salesy talk. More info here:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
Mr.WCI, sorry for some reason I thought this tony guy was you since he replied to my question intended for you. I dont know who he is or this kate and dont have any interest dealing with them. I am a sophisticated investor who thinks IULs have a place in my portfolio and since you think only term policies are good, I would like to compare notes with you, thats all. I can send you specific policy illustrations and if you can teach me a thing or two, I am open to learn. If not, I will know that having a IUL in my portfolio is not a mistake and will sleep better at night. Either way its good.
I saw an IUL the other day that was surprisingly good. I’m not going to be buying it, but I can understand why someone might. Returns are lower than a comparable index fund, but not by as much as I would have expected after looking at equity indexed VAs which have similar issues. Short term returns still suck, just like whole life, but that’s to be expected.
Can you please share the details about this good IUL?
It’ll be in an upcoming post toward the end of the month.
I might argue there is no “good IUL.” Based on questions to my IUL clients, buyers almost uniformly think they are indexed to stock market returns when in fact the indexes exclude corporate dividends. Disclosure of this exclusion is all but hidden in sales illustrations; so are the hedging costs. Such dividends are 1.91% a year at this date for the S&P 500; that’s a lot to give up for high earners who should prefer variable universal life (VUL) whose investment accounts include those dividends. Dollar cost averaging premiums on a VUL offers some downside protection. And one can buy them free of agents’ commissions at TIAA or AmeritasDirect. Buyers in or close to retirement, possibly lacking enough time to recover from bad markets, may better rationalize the costs of downside protection in IUL’s.
Mr. Hunt – I’m inclined to agree with you but if you stay in this thread for long, you’ll discover, as I have, that asking many questions to fully refine what is in a clients best interest will result in very awkward moments; some of the participants get hysterical if you can’t provide a simple “yes” or “no” answer. What is ‘good’ for one client may be bad for another, but that seems to violate the mind set of some participants so be prepared for abuse.
Here’s the deal Tony, and something that those who sell lots of permanent life insurance don’t seem to get. Take a look at all the financial stuff we deal with and consider what’s necessary for MOST people.
1) Most people need a mortgage to be financially successful.
2) Most people need term life insurance to be financially successful.
3) Most people need disability insurance to be financially successful.
4) Most people need investments that provide at least a 3-5% real return to be successful.
5) Most people need to use tax-advantaged investing accounts to be successful.
6) Most physicians need student loans to be successful.
Do most people need permanent life insurance? Nope. Almost no one needs it. Just like no one needs to use junk bonds, options, peer to peer loans, variable annuities etc to be successful. So any discussion of these types of things begins with the fact that it’s totally optional. Now, combine that optional product with an industry whose practitioners only get paid you buy it, and most discussions about it that include said practitioners by definition are going to generate more heat than light.
Is it fun for people like you and me and Mr. Hunt to understand the intricacies of whole life, indexed universal life, variable universal life etc? Sure. But for me it’s just “mental masturbation” (crude term, but you get the idea.) I’m never actually going to buy one of these things. I don’t need it, I don’t find the returns attractive, I dislike the lifelong commitment, and I can’t buy it at a reasonable price anyway due to my bad habits. My income doesn’t depend on whether doctors buy whole life or don’t buy whole life. If someone really understand the product, loves the benefits, doesn’t mind the downsides, is already taking care of everything else he needs to (adequate term life, maxed out retirement accounts for instance) and wants to buy it, then he can buy all he wants. It’s no skin off my nose.
But for some reason, these posts are like a lightning rod for life insurance agents. They can’t resist making dozens of lengthy comments (often dozens per day) for months and even YEARS after a post like this. No one actually reads their comments except the 5 or 6 people who are subscribed to the thread. Look at the length of this page for instance. 122 comments. It would take 3 hours to get to this point in the thread. No one is reading this stuff except for a handful of us who think it’s kind of interesting.
No one may need whole life insurance, but many people would be much better off if they included a whole life policy, particularly some type of limited pay plan from a mutual company, in their financial portfolio.
No advisor would suggest that someone shouldn’t have a savings account because of the current interest rate environment. Most advisers wouldn’t suggest that their clients put all of their money in the stock market or all of their money in the bond market. Life insurance cash values are considered tier one capital by the banking industry. So in essence cash values are cash equivalents and should be compared to cash equivalents. Please explain why it wouldn’t be helpful for most people to have a “tax-free” savings account that earns even the guaranteed rates of 2%. What is the guaranteed rate of savings account or a money market?
Good afternoon Mansa. You’re entering into an ongoing discussion that has been running for over 5 years, is spread over about 20 pages on this site, and will require about 20 hours of reading to catch up on. It involves dozens of readers and insurance agents. I have long ago stopped repeating myself over and over again as it is a poor use of my time. But I would start here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Your question about savings accounts/BOY/IB was specifically addressed in Myth # 12 here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-3/
and in a post about BOY/IB here:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
Your comment about banks owning it is Myth # 20, found here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
Be sure to read the comments on each page as well. If you really have a lot of time, you might read the 900+ comments under this post:
https://www.whitecoatinvestor.com/8-reasons-to-avoid-whole-life-insurance-and-4-reasons-to-consider-it/
Bottom line, if you think whole life insurance is the cat’s meow, feel free to go buy as much of it as you like and sell as much of it to your clients as you like. I think it’s a product designed to be sold, not bought, and that despite its many uses, there is usually a better way for every possible use. For example, getting the “2% guaranteed rate” on a whole life policy requires a multi-decade commitment. If I’m going to commit to an investment for decades, I expect a better return than 2%. If you think the other features of whole life are worth giving that up, go buy some, no skin off my nose.