I've written before about How to Dump Your Whole Life Policy. However, I still get emails all the time about whether someone SHOULD dump their whole life policy or not. I find it ironic that I often get challenged by insurance agents showing well-designed policies designed to optimize the investing return, but the ones readers send me always seem optimized to maximize the agent's commission. I thought it might be useful to work through a case study of a doc with one of these policies. This email is pretty typical.
Will I Get Any Money Back If I Cancel My Whole Life Insurance Policy?
I'm really new at financial things…[but]…I'm hoping to get some advice. I have had a Guardian whole life policy since May 2010. I pay $1742 a year (so about $9794 total so far). The cash value is $4576.13.
I'm 34 y/o, don't have any dependents, don't mind walking away if that's sensible. I have paid off all student loans, started maxing out solo 401k and back door ira (as of last year), rent an apt, own my car. I have 1 million term insurance for 20 years (2031). Should I surrender or keep my whole life policy? I read your article about how some people perhaps should keep their policy if they have had it for more than 10 years and am wondering what to do with mine.
Also, if I surrender the policy – do I get some money back? Is that what cash value means? I also hear there are options such as a life settlement options or trading it for an annuity.
Negative Return On Investment
I started with explaining how the policy works- i.e. that despite the fact that this doc had paid in $9794, she could now only walk away with $4,576 after 5 1/2 years of holding the policy. Obviously, the return on that is going to be negative. I also explained how if the doc wanted to dump the policy, that an exchange into a low-cost variable annuity, either for a short time period to allow the loss to be claimed or until the value of the VA equaled the basis, might provide some tax advantages.
I also asked some questions making sure I wasn't missing something, mostly about why the doc bought the policy in the first place. I inquired whether there was a need for a life-long death benefit that wasn't obvious from the email. No. I inquired whether perhaps there was a desire to “Bank on Yourself.” Nope. Whether the doc wanted another retirement account or was particularly concerned about asset allocation. No, no. When it came right down to it, the doc really didn't know why the policy was bought. But I knew. The policy wasn't bought. It was sold. I asked the doc to get an in-force illustration to look at and received it shortly afterward. This is what it showed:
How To Read A Whole Life Insurance Illustration
If you've never looked at one of these things before, it's worth a few minutes to understand what you're looking at. The first section describes the policy and any riders you may be paying for. In this case, the doc is paying $32.50 a year for a waiver of premium rider (i.e. if you are disabled and can't pay the premium, the insurance company pays it for you), $64 a year for the right to buy another $100K worth of whole life insurance at some point down the road without proving insurability, $100 toward a “paid up addition” (buying even more whole life insurance) and finally another $1.82 for a waiver of premium on that life insurance. All in, an extra couple hundred bucks a year worth of, in my opinion, nearly worthless riders.
Next is a series of tables. Column one is how many years you've had the policy. Column two is your age. Columns three and four are your premium. Column five is the guaranteed cash value and column six is your guaranteed death benefit. Next we move onto the projected side. Again the first two columns are the premiums and then you see the projected cash value and the projected death benefit. It is possible your actual numbers could be higher or lower than the projected numbers, but they won't be lower than the guaranteed numbers. In my experience, which mostly consists of the last 30 year period when interest rates have been gradually falling, the realized returns tend to be between the guaranteed and projected numbers. I've never been sent an example of a policy whose actual performance was better than the original projected illustration, but perhaps there is one out there somewhere.
Observations and Calculations About Whole Life Insurance Policy
The first thing worth looking at is the type of policy. It is indeed a whole life policy. I find it terribly sad that many docs think they have a whole life policy, when in fact they have a variable universal policy or an indexed universal policy. How can you possibly have made a good financial move when you have no idea what you own? You're not that lucky.
This policy, however, is a Guardian Whole Life 121 Policy. That means you have to make premium payments every year until you die or turn 121. Like with any whole life policy, you could use the dividends to reduce the premium or even use the cash value to pay the premiums, but the illustration assumes that as with most of these policies, the premium is used to purchase “paid up additions,” meaning that the death benefit gradually climbs and if you never surrender the policy or borrow from it, the death benefit will eventually be quite a bit higher than the initial face value.
The second thing I noticed is that the doc thought the premium was $1742. However, with all the riders, including a guaranteed purchase option rider (because of course this doc was going to want MORE of this awesome policy), the total premium was $1941. So in reality, the doc had paid something like $10,913, not $9742. That reduces the return on the first 5 1/2 years of this policy to ~ -25% per year. (If you want to follow along, plug the following equation into Excel)
=RATE(5.6,-1941,0,4576,1) = -25%
The third thing I noticed was the loan rate on the policy- 8%. If your best option for borrowing money is 8%, your finances are in such terrible shape that you have no business buying any type of cash value life insurance.
Next I took a look at the death benefit and what kind of return could be seen on the money if the policy was just held until death. This policy was bought at age 28, the doc is now 34. Life expectancy if you reach 34 is 48 years, or to age 82. At age 82, if all premiums are paid, this policy guarantees a death benefit of $267,960 and projects a death benefit of 506,085. Those represent a return on your money of 3.62% or 5.57%.
=RATE(48,-1877,-4576,267960,1) = 3.73%
Next, I noticed that the “break-even” period for this policy is in about year 18 (guaranteed) or year 15 (projected.)
Finally, I took a look at the rate of return on the cash value, that is, what is the internal rate of return on the policy if looked at purely from an investment perspective. The software used for these illustrations can do this, but I think it is ridiculous that it often isn't put into the illustration, so you have to do it yourself. This particular illustration is a little tricky, in that the premium payments are $1941 for the first 18 years, $1877 for the next 19 years, and $1843 after that. To make things easy, I'll just use $1877 for the longer term projections, but be aware that OVERSTATES the returns on the policy. Let's start with just taking a look at the return until the first premium adjustment, at age 45.
Guaranteed
=RATE(12.4,-1941,-4576, 35991,1) = 2.96%
Projected
=RATE(12.4,-1941,-4576, 39615,1) = 4.18%
Remember this is the return GOING FORWARD from today. Not the return from the start of the policy. The return on the first 5 1/2 years was -25% a year. Now mix that with a return of 2.96 to 4.18% per year for the next 13 years and you'll see the total return for the first 18 years will be a whopping 0.31% to 1.31% per year. Getting excited yet? But wait, there's more.
Surely it will get better over time, right? Of course it does as that heavy commission paid in the first few years is spread out over more years. If we use the $1877 premium figure, and we run this policy out for 50 years, we see an overall return of
Guaranteed
=RATE(50,-1877,0,162583,1) = 2.01%
Projected
=RATE(50,-1877,0,288724,1) = 3.90%
The best policies I've looked at show similar guarantees, around 2%. However, the projected return is usually a little better after 5 decades, sometimes as high as 5%.
Financial Malpractice
Let's step back for a second and think about what this insurance agent did. This agent took a 28 year old physician and sold her a whole life policy. Think back to when you were 28. What was going with you? Well, you were probably a PGY1 or 2. You had a massively negative net worth as you owed hundreds of thousands in student loans. You probably didn't even have an emergency fund and certainly weren't maxing out your retirement accounts. This doc specifically told me she had no dependents (I'm not sure why she needs a million dollar term policy either), she had student loans (back when the policy was sold,) and retirement accounts were not being maxed out until recently. This doc had far better things to do with the money than buy whole life insurance. Let's think of a few:
- Max out a Roth IRA
- Pay down 5-8% student loans
- Save up a house downpayment
- Boost the size of the emergency fund
- Go on a well-deserved vacation
- Upgrade the beater
But what does this “financial professional” do? He sells a whole life policy. Stand up and take a bow. You should be ashamed of yourself. And all for a couple of thousand dollars in commissions.
Should You Cancel Your Whole Life Policy? What To Do Now.
Only some of these figures should matter to the doc now, however. The commissions are all water under the bridge. The way to determine whether or not to keep the policy is to look at it going forward from here. The expected return on this policy over the next 12-13 years is at least 3% and perhaps as high as 5%. You can bump those numbers up a little bit over the longer term. That's not terrible. Keeping this policy wouldn't be the worst thing in the world. The returns going forward will be way better than the -25% annualized returns seen in the past.
However, the people who email me always want a recommendation- should I keep it or not? As you can see, I can't really answer that question for them. If they have no desire for a permanent death benefit, then it comes down to whether they find the return attractive in comparison to other investment vehicles that require them to tie their money up for the rest of their lives. There aren't very many of those, and almost all are sold by insurance companies, so I tend to just look at the expected returns on what I would invest money in that I didn't need for 50 years- stocks and real estate. Are those investment vehicles riskier than a whole life policy? Of course. Do they come with a death benefit? No, they don't. But they do come with expected returns that are typically in the 8-12% range. $2000 a year invested at 3% for 50 years grows to
=FV(3%,50,-2000,0,1) = $232,361.55
$2000 a year invested at 10% for 50 years grows to
=FV(10%,50,-2000,0,1) = $2,560,598.76
There are no guarantees with investing in stocks or real estate, of course, but it's easy to see which approach is likely to end up with the most money after five decades. Should this doc dump the policy? It's up to her. But I would, and then I'd start a website to warn other docs so the same thing doesn't happen to them. Oh wait, I already did that.
What do you think? Have you been in this situation? What did you do with your policy? What do you think this doc should do? Comment below!
I am also a variable life sucker. Even better I rolled a whole life policy my parents bought at birth with a cash value of about 15k into it. Smart. Could have used that for about a million offer financial moves. Only perk I guess is going forward my premiums are pretty reasonable compared to the numbers you often quote on here – though a heavy price for that.
Thanks to you and this site though, my chances of having a “reasonable” return (in 20years) are much higher. I actually read every page, and looked at every investment prospectus. The average expense ratio was nearly 1%! Now, it’s down to about 0.3 in a classic 3 fund index portfolio with a small REIT component.
When setting up the investment part the salesman asked my thoughts and I literally said “oh well whatever you think is best”
Live and learn and read WCI.
Thanks for the breakdown and analysis. I was pitched a likely similar WL plan also as a PGY-2 back before I discovered WCI. The irony is that I was not as financially responsible as the doc in your case study–I just wanted an extra ~$2k a year to spend on vacation so I declined it.
But I agree, I certain didn’t even contribute to my 401k as a PGY-2, nor did I even max out my Roth IRA either. There are plenty of other financial holes to plug up with your earnings during residency than in a cash-value life insurance plan.
Thanks for the excellent breakdown and explanation. If these are such awful policies, why did they become popular in the first place? Was there ever a time when whole life insurance was a good idea?
Well, if you needed life insurance and couldn’t buy term, then you took what you could get. Also, it’s probably smarter than lots of dumber ways to invest. But I think that even before mutual funds you would have been better off with a portfolio of reasonably diversified individual stocks and bonds than a whole life policy as an investment.
Isn’t it also true that whole life policies do better in a bond rally (i.e. falling rates)? Insurance companies do a lot of liability matching which means lots of long duration bonds. In that respect, the massive bond rally of the last 30 years has been a wind at the back of whole life policies. Hard to see that continuing into the future. My guess is that these policies have seen decent absolute returns, but bad relatives returns.
Hard to say. Whole life dividends come out of a black box. They are what the company says they are. They are technically a return of premium, meaning you overpaid for the insurance. But in reality, they come from the company paying out less than they expected due to people dropping their policies or living longer than expected and from the performance of their portfolio, which is primarily composed of bonds. So yes, when bonds do well due to falling rates, you would expect dividends to get a little extra boost, but it’s so complicated you may or may not see that. In the long run, bond investors (including insurance companies) do better with higher rates than lower rates.
I think it’s clear what the doc should do, dump the stupid policy and see make sure no one else falls for this agent’s sales tactics. Just as you would never go back to a doctor who cut off the wrong limb in surgery and would tell everyone who would listen not to let them be your surgeon, this doc should do the equivalent with all her colleagues. At the minimum, leave a negative review about them with the insurance regulatory body and on Google. I’d rather stop pouring good money after bad and just take the loss, chalk it up to an expensive financial life lesson, and move on
They are sold by sales folks. Permanent insurance is still popular. I believe it still beats out term for polices sold. It just varies if they are pushing WL or some flavor of UL on you from time to time.
Funny thing is the way they make WL work better is to create a policy with the least amount of WL in it. WL is so bad that you have to reduce it to the minimum. Thing is you can do even better by having zero WL in your investment.
when is whole life needed other than part of a second to die life insurance policy which is a mix of term/whole
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
That’s isn’t a good purchase either.
Really only purchase if you need or want a permanent death benefit.
Even if such existed in that case then likely no lapse gUL better.
Agree with your conclusions above. Personally, I would ditch the insurance policy and invest. Also, would recommend subscribing to the newsletter of this site and start reading a good generalizable book on this. I like Bogleheads. I understand Jim has a book out as well.
1) Thank you for including excel based formulas! Super helpful tutorial for performing your own analysis in like-situations.
2) The case study is a 34 yo. The comparison at the end there should probably be 30 years for 2000/yr invested (I presume she will not continue to invest 2000/yr after retirement?) not 50 — so a 3x difference rather than a 10x diff. The point is well taken in any event.
Well if the policy is going to require you to make payments after retirement, the proper comparison is to continuing to invest after retirement, no? I agree it’s dumb to buy a policy that requires that, but it’s usually dumb to buy a whole life policy in the first place.
WCI, you’re correct to skewer whole/variable life policies as being poor insurance and even poorer investment vehicles for 99% of the population. However, you undermine your case and, IMHO, your credibility when you exaggerate the policies’ foibles by applying 100% of the premium as the basis for determining the theoretical return on investment. Why don’t you first back out the value of the insurance (i.e., the cost of a term policy that could purchase the same death benefit)? The remainder of the premium should then be the basis for calculating the ROI. Arguably you could back out the “value” of some of the other components, admittedly small to be sure, if you wanted to make an objective comparison.
I disagree. The physician already has a $1 million in term life. She’s been sold insurance she doesn’t need.
That can easily be done (and indeed will make the “return” look better.) But since this purchaser has no need for any significant amount of life insurance (not to mention the $1M term already owned) it seems silly to include the value of the insurance component. But if you want to, then feel free to do so. It only changes the equation significantly if you assume that term insurance is purchased until death.
i bet the insurance portion of the premium is only about $75 to $100 per year. So it may boost the returns about 5%, so a 2.00% return may reach 2.10%.
WCI doesn’t need me to endorse his content/conclusions and applaud his post, but I’m going to do that anyway. Good job WCI!
With regard to Santoki’s comment about WCI undermining his case and credibility, though, I wonder if this criticism doesn’t actually highlight another general common flaw in these products… Aren’t they simply too complicated to understand clearly or model? E.g., the insurance component of the example policy may actually be worth nothing as WCI hints at above. In which case, I would agree that it makes little sense to include an adjustment.
I maybe one of those where a Whole Life makes sense. I have a term policy but it will be expiring and unfortunately life decisions don’t have our retirement account anywhere near where we would like. I have been contemplating “converting” a portion of my term to be whole life.
I used the formulas to look at what earnings could be if I just stuck with the term and was diligent to invest the difference, but with the given time frame (15 – 20-years), it doesn’t look very promising.
I talked with the company that has our Term policy about a year ago and it seemed like I wouldn’t have to go through full underwriting to do the conversion and may even get some “credit” for the term policy. I wasn’t all that serious at that point so will need to do some further due diligence to make sure my recollections are accurate.
Thoughts?
Very bad decision unless your health has changed for the worse.
When you look at the numbers you will notice very little “credit” and in a conversion it will currently take you over 16 years just to break even and that assumes dividends don’t continue to drop which is extremely optimistic.
I agree with Rex. If your retirement isn’t where you need it to be, time to focus on that, not on a death benefit.
I’m trying to figure out what’s going on from your vague comments. You say you have a term policy expiring but aren’t even close to being financially independent. Then you mention that you have a time frame of 15-20 years. That suggests to me that you’re no older than 50. Assuming you’re healthy, you should be able to buy a 15-20 year term policy at age 45-50 that isn’t too expensive.
Now, if you’re uninsurable now, then converting your policy could make sense since you have a life insurance need and have no other options. Be aware that many policies just become annually renewable term after the term expires. So read the options for yours. In fact, it might not even be convertible any more. That option goes away after 10 years on some policies.
Anyway, get with a good independent agent and review your options, project out when you expect to be financially independent, and go from there.
Yes, sorry for being vague. And you guess the age nearly correctly. I am not older than 50. Purchased the Term originally with good intentions. But I will look into its details and also pricing of adding a new one at my current age and look into what the potential costs are for just renewing it on an annual basis. Of course, while I am healthy, it may be best to add a new one instead of counting on being eligible to renew.
Thank you for all of your suggestions. I have some homework to do.
cd :O)
So current term has 12-years left. It can still be converted, but I didn’t ask for the cost. The cost to renew annually when it expires is currently $2000/mo (yes per month). I will say, they were not pushy in any way. They mentioned I could cancel the current policy and start a new term for 25 or 30-years, but I will probably just add a new Term policy and have a ladder affect, depending on Cost.
Feeling little better.
cd :O)
If u didn’t like hearing 2k per month then u won’t like the cost of permanent either…..you should look to lock in term for the period of time you need.
Santoki- good question, and I don’t know the answer myself on how to make it a true apples to apples comparison. Regardless of whether she already had the term policy or even needs life insurance, there is still an economic value to being covered by a policy – she could get hit by the bus on the way to work just like anyone else. I glanced at 30 year level term rates which ran about $200 per year. So should this be broken apart in order to separate the “long-term investment” versus the ” short-term coverage”? Given, that may not change things drastically, but I’m always a fan of getting the numbers out there on level playing field and seeing what the data shows. Your thoughts WCI?
I think it’s reasonable to run it either way, depending on the value you personally place on the insurance.
I agree with Santoki. I ran the same model but backed out the amount I could reduce my term insurance by to come up with the IRR. However, same answer overall as WCI.
First off you don’t have to value the insurance. If I think a happy meal is a poor value and the store says here is a crappy cookie for free then I don’t have to value something I didn’t want.
Now if u want it then fine but back out an appropriate cheap term like from banner and not the expensive term WL companies sell.
I think you are generally right but a few qualms-
8-12% is probably way overoptimistic for future growth- even state pension funds pick about 7.5% (tax free gains which yours are not) and almost everyone with financial sense thinks those are way over optimistic (which is one reason they are all in the hole) in order to not upset the taxpayers and pensioners.
If the person does get a family then the “insurance” part of it is often very important.
The buildup, I believe, is tax free, so if the family inherits the insurance or the payee cashes out I believe they do not pay taxes, whereas most of your investments would so if you are making 8-12% (probably an overestimation) there is good chance you will be taking home even less than that.
But generally you are correct.
I can’t tell what you’re responding to. The original post I think.
Only the death benefit is tax-free. The gains in the policy compound in a tax-deferred manner. If you cash out, they’re taxable. Like with anything, you can borrow against it tax-free (just like your house and car.) Not quite the same as a pension or university endowment.
If you don’t like my assumptions, feel free to use your own. At a certain point of pessimism, the 2% guaranteed (over decades) from the insurance company starts looking pretty good. More details here: https://www.whitecoatinvestor.com/making-different-choices-due-to-low-expected-returns/
No the build up is tax deferred
It’s actually taxed at INCOME RATES if ever surrendered or lapsed and this happens over 80% of the time. The death benefit is income tax free but stocks also get a step up in basis at death. Also every loan in the US is tax free.
Keep in mind that if the economy does less in the future then so too will WL. In fact if we stay low interest forever then you might not get anything from your policy. Guarantee is only as good as their ability to pay.
I assume it’s only taxed as income if the cash value is higher than the basis?
Correct and of course this isn’t that common since people commonly surrender at a loss.
That’s correct. To make matters worse, you can’t even write of the loss like a more traditional investment (unless you do an exchange to a variable annuity.)
There is a reason why doctors are consider dumb money. Whole life insurance is an excellent product if you invest in CD’s/bonds, and or any investment that pays interest in taxable accounts. Yes, people who buy CD’s are investing.
As for all of you who keep saying invest in stocks, you will change your tune during next bull market. Slaughter of the lambs.
Many times diversification = diworsefication
dedicating non equity portion of investment into properly structured whole life insurance is an excellent move for many
People lose a lot more on WL then even those who invest poorly. Almost 1/3 of people surrender WL in the first few years and get practically nothing in return. Much worse then any market drop. Agents seem to give the worst investing advice and don’t even know the stats on their own products.
Not an agent
Whole life insurance beats many investment, and on risk adjusted basis even equities. Far superior then bonds/CD’s’, etc.
I disagree on all counts as I find whole life insurance to be an asset class not worthy of inclusion in my portfolio and most others.
It doesn’t beat CDs or a typical bond for short term needs. For example, the return on the first year of a whole life policy is probably -20-40% when a CD is paying 2%. The CD clearly wins.
When you include the risks of poor short term returns, dropping dividend rates, getting bad financial advice from the guy pushing the product, changing your mind on your investing strategy etc I find the risk adjusted returns of whole life to be even worse.
Good points, CD’s are typically 1 to 5 year investments. I would think most insurance agents tell their clients that buying whole life insurance is a long term commitment, i.e. 20 years or more. It is not fair to compare whole life to CD’s as they should be held for much different time periods. Even though CD rates are paltry, they are at least positive during their short duration terms where whole life is negative in the first 3-5 years, even for a “properly” structured contract.
A properly structured policy is just one with as little WL as possible.
And even an overfunded policy takes 10 years currently to break even. To reduce that further you would need to make it a limited pay policy. It’s no place near 3 years for a “properly” structured policy.
Depends on if you’re talking guaranteed or projected. I’m pretty sure I’ve seen policies that break even in 4-5 years, projected. 3 is pretty quick, but I wouldn’t say it is impossible.
My point is that even under the best case scenario that Whole Life insurance cannot/shouldn’t be compared to CD’s for short term investment goals. The reason is that as you point out there is a big commission paid and a big surrender charge the first 10 years of the policy. Some agents like to compare rates on CDs to that of Whole Life insurance. Even a 1% 3 year CD will beat a 5% Whole life over a 3-5 year period because there is no surrender or 50% commission being paid out. I was concurring with your post.
I got whole life to protect my family and have a constant premium and maybe get some cash back in retirement.
You’ll probably get those things out of it. However, there are probably better ways to protect your family with a constant (but lower) premium and have more cash in retirement.
What better way?
Family protection with non-increasing premium = 30 year level term policy
Cash back in retirement = Traditional investments preferably invested inside retirement accounts
“As for all of you who keep saying invest in stocks, you will change your tune during next bull market. Slaughter of the lambs.”
Gone through the tech stock crash and the 2008 crash. Everyone else giving away valuable assets doesn’t really upset me. Moreover, even including the crashes I still end up with substantially more money by investing in equities than I do by “investing” in whole life.
Well, up to a point you are correct.
If you needed money in 2000 – 2005, you weren’t happy
If you needed money from 2008 – 2011 your weren’t too happy
Equities have a definite role in ones portfolio, so do bonds and for some, so does whole life insurance.
Nobody here is in trouble with any of that. They rebalance as necessary but that would be about the worst of it. They own an appropriate % of stocks and bonds to fit their risk tolerance and investment horizon. People who cant do that also cant complete whole life successfully.
WL does NOT produce any risk improved returns. First off WL currently IF you include dividends (which by the way are continuing to fall) it takes currently 16 years to break even not including inflation. Every other thing mentioned outperforms that during that time period for the most part especially low risk or “guaranteed”. Less than 20% of people keep WL until to death and this has been shown over the decades by independent groups like LIMRA and Society of Actuaries and failure to do that means horrible return for most. Those few who do keep until death typically have held the policy for 40-50 years. At that point IF you are one of the few to keep it then you likely will get a low bond like return on it. If you are investing over 40-50 years stocks will very likely crush this. Now the risks with WL are related to the underlying investments of the company so these statements about it being better are silly. There just isnt any magic investments int his world. They invest mostly in bonds so you are buying bonds minus huge fees propped up a little by the lapses. They do invest in other stuff but the majority is bonds/treasuries. Thus if you feel negative about bond outlook into the future then you might want to consider this. Insurance companies seem to be recognizing this since they seem to be increasing their percentage of real estate. Thus they are taking on more risk. If you want to see what happens to insurance companies in a very long low risk environment, look at what happened in Japan. Not pretty. Also people arent really getting any diversity by buying WL since they can invest in bonds as well (and likely much more efficiently at this point).
Insurance companies in the US do NOT commonly go under but they do and the stats are that when the state insur assoc has to step in that people are made whole 94% for annuities and 96% for insurance. That isnt the same as federal govt and of course the limits on such protection vary from state to state but commonly 100k of cash value and 300k of death benefit.
WL is so poor returning that the way agents make it return “better” is to create a policy with less WL in it and good luck trying to find ones to do that off the bat (it reduces their commission). They blend it with term and overfund it with PUAs. The fact that you need to reduce your whole life % in a policy to get a better return speaks volumes.
Most folks should not have whole life insurance. Most high earners who are not cavaliers like many on this board and are investors and not gamblers, and invests in treasuries/fixed income assetts most definately should have and will benefit from WLI
The fact that insurance agents oversell this product to wrong folks is not an argument against the product itself. Caveat emptor
The only reason they should have it is IF they want or need a permanent death benefit. The number of doctors and other high earners who are unhappy with WL purchase isn’t trivial (id actually say its most but somebody must be happy occasionally). Most high earners want good advice but unfortunately they get sold WL. I cant name a doctor who hasn’t had it pushed on them multiple times.
With whole life you are investing over a 40-50 plus year horizon. Buying WL as an investment just means you will have lower purchasing power in the future. investing in stocks over that time period isn’t being super risky so please try to not to pretend it. People who are proponents of it just like to pretend you have to be super risky personality. if you want less purchasing power though then have at it.
Buying WL is gambling that you will be one of the less than 20% that will keep it in force. If that number actually “improves” and more people keep it then guess what… dividends and performance falls further. One should probably consider that when determining if the product itself is of value…
There just isn’t magic in this world. Insurance companies buy those same treasuries and fixed assets but have higher costs for your “investment”.
I certainly agree with your first and last sentences!
As I’ve stated before to you Sam, if you love whole life and understand how it works, buy as much of it as you like. I, and many other whole life purchasers, disagree that purchasing a policy with either the equity portion of the non-equity portion of our portfolios is an excellent move.
And I think you need to do some reading up on bulls and bears. 🙂
Another way to withdraw from the policy tax free without taking a loan is to withdraw paid up additions. It reduces the death benefit and cash value of course but not necessary to borrow at 8%
You surrender PUAs and you can’t surrender what you don’t have. They aren’t part of the typical base WL policy. You might have gotten lucky and an agent allowed you to overfund a policy with PUAs but this also has a cost for the rider and load(still much cheaper though than the base WL). You are surrendering without taxes bc there is no gain. IF you are getting dividends from a policy then they can be used to purchase PUAs but it will be a very small amount for a long time.
Yes, the partial surrender feature is nice. But eventually, if you actually want to spend most of the money, it’s either loans with the interest or surrender with the taxes (at ordinary income rates, not capital gains rates)
I will say that I regret cashing out the paid up permanent whole life policy Grand Pa gave to all of us. I used it to pay off my student loans for MBA, and now that I’ve learn all I can studying this product for the last year and a half – I really regret closing it out.
As with anything, purchases are a good plan for some, not for all. I can tell you a lot of sad stories of people who became uninsurable (for about 1,000 reasons) and there was consequently financial hardship for loved ones on their passing. IT ALL DEPENDS FIRSTLY on cash flow.
My preference are the hybrid policies w/LTC options attached. The cost of the waiver of premium for disability is minutia and not germaine to the discussion of value.
Further, I will ASSURE you the agent does NOT make “THOUSANDS” of dollars! (:
Lastly, why is it no one ever complains about the poor “return on investment” with the home owners insurance? (Gee, too bad the house never burnt we never got our value out of it) or their car collision?? Insurance is CHEAP leverage. (By the way, I HAVE had a house burn AND a car totaled. I LOVE the leverage of good quality insurance.) I also appreciate the ability to leave comments here.
Thank you!
Nobody complains about that because it isn’t combined with a side “investing” account like whole life. It’s just pure insurance, like term life or even GUL.
Sam – I assume you mean bear market?
A 500k investment in the S&P with dividend reinvested and quarterly re-balance from 1996 until 2016 returned 2.3 million which represents an 8% RoR with capital gains tax treatment. and that’s with 2 BEAR markets
I know that I will never change the mind of people who hate WL, however, for the sake of bringing a different perspective to people who are open minded rather than only reading here about how much it sucks, there are many living advantages to owning this type of insurance. Most importantly it creates FLEXIBILITY.
#1 – It is a non-correlated asset. Meaning that the stock market has no bearing on the performance of the contract. The market could be down 50% and the WL contract will not lose any money and should go up in value with the dividends.
#2 – No, dividends are not guaranteed, but they have been paid out by the 4 mutual companies for many, many years in a row. These are affected more by the overall mortality of the contract holders than the investment return (although yes, the investment return does play a role).
#3 – Having life insurance (any life insurance, but specifically WL) allows you to spend your money more efficiently during retirement. (As a simple example, and one of many – Imagine your $5M retirement portfolio which you are drawing the “industry standard” 4% a year off of goes down by 25% in a year. Your 4% (or $200k originally) now becomes $150k. What to do? We can either take $150k, and take a $50k loss of income for the year, or we can take all $200 and suddenly our portfolio starts spiraling downward very quickly. Can we take the 50 or even all 200 from a WL policy? Yes. And better yet, we don’t even need to take that much because there are not taxes on it. This allows the retirement portfolio to “regrow” or stabilize.
#4 – The “waiver of premium” is a great investment if you believe in Disability Insurance (which I know you do). If you get hurt and can’t work, is your 401k, or Roth, or IRA or brokerage account going to continue to fund itself? No. The WL will however. This isn’t THE reason to buy WL, but offers another (potentially lucrative) benefit.
#5 – Guardian specifically offers an option to include Long Term Care insurance built into the WL policy. (As far as I know, MetLife is the only other company to also have something similar to this option.) As you are well aware, the cost of healthcare increases every year and Long Term Care facilities are becoming too expensive for retirees or their children to afford out of pocket. This option allows for a policy which was purchased for many other reasons to use some of the death benefit while still living to pay for the care.
There are others, but I will stop there so this doesn’t turn into more of a novel than it already is.
Yes, if you are buying this policy as an “investment” and look at the real returns after 1, 3, 5, 10 years, it will not look good. This is not the reason why these policies should be purchased. (An argument can potentially be made that the overall return once taxes, lost opportunity cost, and everything else is taken into account that WL beats the market, but I don’t necessarily buy that one, and that’s a discussion for another day) If you are more concerned with the 5 year return on something that you are not planning on using for 30 years, that’s a problem in itself and is part of the reason why the overwhelming majority of individual investors make on average only 2% a year when all is said and done. Do keep in mind however, that yes the average return of the S&P is 9+% but the return has been only 2% since January 1, 2000. Also, this particular policy will have a lower ROR because it is a L121. Other policies have better returns, but I can only assume that this policy was sold because the yearly premiums are lower than the other options that have higher ROR.
Yes, part of what I do is sell insurance. No, I don’t think that WL fits everyone. No, I do not think that it should ever be purchased or sold as an “investment”. And no, I absolutely do not want to even consider selling it to you if you are going to surrender it because it will be a waste of your money, my time, and will continue to perpetuate the idea that the benefits are far outweighed by the negatives. If however, you are looking for flexibility during retirement, then WL should become a discussion topic.
Funny also, no one ever complains about the return on investment for home owners or auto collision – never complain that they never got to use them and all that money was “wasted”.
Good comments by you.
That doesn’t apply at all to WL. But by the way the insurance within WL is MORE expensive then term. Given WL is a black box how can one say that?…. Well bc if you look at every decent WL company their term is much more expensive then a term provider such as Banner. They aren’t charging less when they don’t disclose it. And if the compan sells a UL then again the now disclosed cost of insurance is still more expensive. Bottom line it’s a combo of expensive insurance and expensive investments and this leads to poor results.
Wrong on so many levels
First off it’s highly correlated with the underlying investments which are mostly bonds and treasuries. Notice WL dividends continue to fall for over 2 decades. Your comment that it’s not correlated is false. It is extremely correlated.
Notice mortality has improved yet dividends fall so no on number 2 as well although I’m sure it’s possible under some situation for mortality to be the issue. In fact 5 companies in the last year selling ULs (which are very similar to WL so don’t pretend it sent) increased cost of insurance bc the contracts were at the minimum guaranteed interest so they made up for it by increasing COI on in force polices. Ridiculous if you ask me. Lawsuits have been filled but good luck for the policy owners. These people certainly had better mortality then the original projections,
There are so many errors with your retirement piece I could go on all day but bottom line is if I take the money I spent on WL and invest it, I’ll have much more money over those multiple decades and won’t need a loan against my WL policy.
The disability rider only pays if completely disabled…i.e. It rarely pays. You can se that money much more wisely for true disability protection. It isn’t some great free benefit. It’s cheap bc it isn’t very good.
I do agree you sell it. It isn’t about hate here, it’s about the truth.
# 0 Once there is a lot of cash value in the policy there is some flexibility. But early on when you really need it, there isn’t much flexibility. You make the payments or the policy goes away, probably at a loss.
# 1 Manure is also a non-correlated asset. That doesn’t make it a good investment. The problem with WL returns isn’t the correlation. It’s the fact that they’re low. Negative for 5-15 years and probably only in the 3-4% range over your lifetime for a policy bought today.
# 2 I agree that I don’t expect dividends to go away in any type of reasonable scenario, even though they could I suppose in a Great Depression like scenario. What I hate is that people assume the dividend rate is the rate of return on their investment, which just isn’t true.
# 3 I think that’s a lame argument for whole life. If you need “permission to spend” the rest of your portfolio, a SPIA is a much better way to buy it.
# 4 Waiver of premium isn’t free. It’s like an insurance policy. Buy insurance for financial catastrophes, self-insure everything else. If the concern is disability, buy disability insurance. Don’t try to get some sort of disability insurance through a whole life policy.
# 5 I don’t really like LTC insurance, and I certainly don’t think combining it with a whole life policy is a good idea. Most doctors and similar high-income professionals should be able to self-insure LTC. Going into a nursing home isn’t a financial catastrophe for someone with a $3M portfolio.
# 6 I agree the returns do not look good and that is a good reason NOT to buy these policies as an investment.
# 7 If you’re going to use cherry-picked time periods to report on the S&P 500 returns, at least use accurate ones. You seem to have left out the dividends or something. Classic “insurance guy” technique.
# 8 I find it interesting that you assume the policy was bought for lower premiums. I think it is most likely that the policy was SOLD for higher commissions rather than something with a better return but a lower commission. Weird that every time I trot out an actual policy owned by an actual person the agents all say “that policy sucks.” Well, maybe agents should quit selling sucky policies. Just sell the “good ones.”
I don’t think readers will be surprised to learn you sell insurance. It seems everyone who really likes these policies does.
Guys, I’m not trying to convince you to buy WL. For you, it may not make sense, that’s fine. I’m just trying to shed some light for your readers who get no exposure to some of the actual benefits and why it make sense to look at for some people.
I actually like your site, you provide a lot of relevant material to your readers, but when it comes to insurance you have such a blind hatred that you are doing your readers a disservice by not educating them more fully.
I like to consider my hatred as anything but blind. I’ve spent way too much time looking at this product already.
Seriously though, I don’t really hate whole life insurance. I hate the way it is sold, and when sold inappropriately the way it usually is, I hate those who sell it.
Fair enough. And I agree with you there. It’s unfortunate how many people sell it where it doesn’t fit. The compensation structure of the industry and the way training occurs definitely comes into play there. Im sure you don’t need my validation, but keep up the good work on the site.
Can both of you comment on the following:
My doctor partner and I were sold a paclife policy that had a 7-8 year premium of about 25k a year. We are about 50 y.o. and the premiums are now done. This assumes the policy pays the premium from here on I believe and the death benefit was about 1.3 m each. As you can tell, we were blindsided and were not able to contribute to our regular investments/retirement fully because we had to fund this policy which is in a define do benefit plan.
Our “advisor” not only took a big commission (40k!!!) but told us the following:
Once the policy premiums were complete, we could
1. do an asset swap for the cash value of the policy.
2. Retain the full death benefit.
3. Take loans from the policies value and continue to grow the new investment that was swapped at a market rate.
Thoughts on this?
Thanks
On point #3 if you amortize the payments over life expectancy and compare it to a draw down on a portfolio the equivalent IRR would be less than 2% (3% if you live until 100) that hardly seems like a good deal to me. You give up an asset for a guaranteed return of 2%?
On #4 I cant stand that its only if you’re completely disables especially since an overwhelming majority of disabilities are partial (that’s why stand alone DI policies have partial)
Don’t agree with you on #5 at all. My grandmother is a case in point. she actually is exactly the person you describe can self insure. she had 2.5-3 million in assets. had Alzheimer for 10 years. she needs 2 aids at all times and the cost for living at home is about 150k a year. do the math. TG she had a policy. Obviously you must be aware of the company strength and the potential increase in premium (somehow people are o with health ins premiums going up but not this?)
In general i agree the barrier to entry is set very low and therefore most “advisers” are ignorant and greed driven
You take a completely negative view on permanent whole life, as if you were a prognosticator and KNEW beyond the shadow of a doubt that every individual will always be insurable, will never have increased life needs (e.g. children) ?
My first experience with permanent whole life was my grandfather bought each of us 4 kids a paid up whole life (THIS, in my opinion is the IDEAL purchase – on the very young the very insurable and very cheaply!)
Next – I remember my father telling me: “I’m going to borrow on each of your policies to expand my business” HE was the “OWNER” and could do what ever he wanted (I don’t know if he paid back or not).
When I had college loans from MBA, Dad said: “I am going to turn the ownership of the whole life insurance policy over to you – there is cash value in there you can use”. SADLY I did NOT get wise advice when I called the bank, and they let me close it out to get the cash. IF I had merely borrowed, I would still have a growing TAX FREE cash account – darn it.
These last 2 yearsI tried to learn to sell life insurance. I will ASSURE you the agent does NOT make “thousands” of dollars, so you have that incorrectly. There are great hybrid products out there which I LOVE, and can flip into long term care coverage – I endorse BUY YOUNG for those you love, and keep ownership until you decide YOU don’t need access to the accumulating cash value (which, to answer someone’s question above- is, yes, always going to be affected by current interest rates at time of purchase!)
I disagree that insurance should be purchased on young children. Insure against financial catastrophes. The death of a child is a catastrophe, but not a financial one for the typical reader of this site. The “buy it now while you still can” argument is weak since most parents cannot afford to buy enough whole life insurance on their child to meet the child’s legitimate insurance needs later.
Maybe if your dad had put the money he put into whole life policies toward your education you would’t have had loans from your MBA, I don’t know. Whole life insurance is NOT a tax-free account. Stop drinking the Koolaid being served by your employer. The death benefit is tax-free (just like inheriting stocks, bonds or real estate with the step-up in basis) and you can borrow against it tax-free (but not interest free) just like borrowing against anything else.
Um – The WL was a gift from my grandfather upon the birth of each of us. “I” had to pay student loans because Dad ran out of money after paying for all of my 3 older brothers (:
Not drinking no kool aid – I messaged you this on Linked In. Please don’t take such a hard stance that your mind closes.
I have sold very few WL life in my career because of the points you make (again, my passion is LTC protection) – YET, as with ANY product – there is GREAT value that VARIES for each person. I would NEVER ask someone to put more than is reasonable into ANY product. I don’t live to gain wealth, I live to help others. Don’t judge me so snarky.
They can get life insurance with HIV now? One of my friends is a former Marketing Manager for Dave Ramsey, and he hates him. BECAUSE he listened to him and only bought term, he is now uninsurable – for life OR for LTC. They JUST finished paying for EIGHT years of Memory Care for his wife’s mother at $6,000/month and the financial sting has his finances RAW (do you realize how much a NICE Memory Care/private pay SNF can cost?? Um, we are paying $10,000/month for OUR mother – merely high level of care hoyer lift/bowel & bladder incontinent but can still Grand Slam you in bridge)
BACK to my friend – his stress is HIGH because he has NO life insurance to leave and provide for his hard working wife (who now is a 50% risk of Alzheimers herself because her mother had it) –> He is on DISABILITY so can NOT get long term care insurance now.
My POINT about buying young on the very “affordable” and very “insurable” is the protection against this extreme life stress – IF it is grandparents money (that lazy money hanging in CD’s or to “leave to their children”, as my grandfather did for us – what a future gift of protection. I also wish Grandparents would buy their kids (daughters especially) long term care insurance.
An HIV victim can likely get insured now only at a very high premium cost due to underwriting and ratings, and would NOT have been able to at ALL before we found the drugs to slow and cure the virus. Applying at that time in the 80’s would have been a denial. (That is when I stuck myself with an sharp instrument and wondered what the patient had he/she did not know to tell me about…).
Another dear friend, at age 3 his son became forever uninsurable when he had a seizure and is now on lifetime seizure meds… HOWEVER, he had bought a permanent life product for him so his son – down the road – marries? Has children? He will always have something, whose price will NEVER go up, to provide for said wife and children. So unless you are omniscient….
for those who CAN afford it or have GRANDPARENTS willing and able to do the same for their grandchildren as mine did for me – please do NOT have an all or nothing stance on the practicality of insuring the very young and the very insurable.
The life insurance companies aren’t the ones who found the drugs to slow HIV and nobody has yet cured it.
The other points you continue to make repeatedly have already been addressed. A tiny WL policy, while “something”, doesn’t actually come anywhere close to meeting future insurance needs and is a bad reason to buy insurance on a kid.
Making poor financial decisions increases financial stress. If your friend had made a good decision, he would have bought a long enough term to get himself to financial independence, at which point he would no longer have needed insurance to provide for his loved ones.
Please see my question above and comment if yo will.
Our advisor fleeced us and now our current advisors tell us both that for our families, it might be best to ditch the policies and move them into the 401k or such. We are working on the decisions now.
Personally, I want to know all the possible advantages of the life policy and what I can do to either get money to use, or get more retirement value, all the while keeping the death benefit if possible. But, if there is a way which I doubt to take loans off the death benefit, that might be nice as well.
Thanks
You’ve paid $200K into this policy. It seems worthwhile to pay a little more for some really good professional advice on what to do with it. It’s well worth the $100 you’ll pay James Hunt.
If you want to keep the death benefit, you’ll have to keep the policy. Aside from that, the main advantages are asset protection (depends on your state) for the cash value and the ability to borrow against the cash value of the policy. If you value that all enough to keep it, it can certainly make sense to do so at this point. All the low returns/commissions paid are now water under the bridge. Was it a mistake to buy it instead of fund a DBP? Almost surely. Should you ditch it now? Not so fast. Especially if your current “advisors” are commissioned mutual fund salesmen trying to make a buck or even a fee-only advisor earning AUM fees on it.
Great time for a second opinion. Start by getting an in-force illustration.
I’m new to this and most of you points are very good, but it seems you begrudge anyone who earns a living even if it’s reasonable. earning a fee for AUM as long as its reasonable is well deserved compensation for an adviser that took time to learn his field
Wow so mch additional wrong information. To begin with buying it on children is NOT the cheapest. If you understood time value of money and fully underwritten vs child policies, maybe you will understand. This doesn’t even take into consideration how kiddie polices have very limited death benefits when considering inflation even with additional insurance riders, the fees for monthly payments instead of yearly which is common in that situation and the huge lapse rates on those policies.
You also don’t understand how dangerous it is to borrow from whole life early on like for college. Go to bogleheads.org and follow the posts of people who did that. Guess what in a decreasing dividend environment those people are getting notices that their polices are lapsing and they need to up the payments or get a tax bill as the policy collapses. Too bad those agents didn’t explain this ahead of time. Too bad they just got out of college and don’t have much money so are stuck. All loans in the US are tax free by the way. So no you wouldn’t be borrowing forever. Now with that said if one already made the mistake of purchasing WL and its older like more than 10 years then keeping it at least currently isn’t a horrible decision. You can’t get those 10 years back so move forward. Pay yearly. Change dividends to PUAs. Don’t take loans until late in retirement. This reduces risk. To do this though you have to value the death benefit or you will likely fail.
Agents get 75-150% of first year premium approximately. On polices sold to docs, that’s a lot of money.
Finally you also don’t understand the combo products. Do you know why companies are switching to combo instead of straight ltci? It is to transfer back the risks to the clients. Even today one can still get for cheaper a stand alone ltci and perm insurance for cheaper than the combo at least initially ( straight ltci policies don’t guarantee premium rate). These products use the clients money first depleting the permanent insurance before using the insurance conpanys money. I’ll give you a better plan. Buy a good disability policy and invest all the other money in a 3 fund portfolio via vanguard and rebalance once a year.
Fristly, typically the “WL” policies which implode are the VUL’s or the UL’s, there is still extremely sound value (IF you can afford it, e.g. physician not yet married – adopting – who knows what the future holds and the risk of becoming uninsurable is completely real (esp w/ a physician and I have a Pre-Med degree and Dental Hygiene and am qualified to say this – One stick of the wrong needle, for example…(one reason I chose not to stay in clinical)
So, said persons become now uninsurable but have loved ones they are caring for, raising, how to best protect them financially if the event of early demise? Can’t buy cheap term any longer….
Secondly, If WL is so completely stupid and a waste of “investment” money – why do banks and the very rich own a great deal? As in BILLIONS? Are they STUPID? Me thinks now – do you know that when the market crashed in the Great Depression how JC Penny kept his stores going, and his employees paid? He used his CASH VALUE from his many WHOLE LIFE insurance policies.
Thirdly, You dispute based upon the time value of money any spending at all on WL? All per simplified reasons based upon return on investment? Again, I ask – why not dispute the lousy return on investment with the thousands spend on home insurance? ? ? “Pay out” on that (e.g. “return on investment” is a probability of only about I spoke with over 2,000 families helping them to navigate their way (rewarding but extremely stressful). It was an emotional tear down on my part to hear again and again and again families torn apart with: 1) worry 2) stress 3) financial despair over costs…I can go on. I had to quit the job, it was too much.
I believe passionately the greatest risk of all to your retirement finances is a long term care event (Government says the risk is 70% and I believe them, for I also mastered Medicare Advisement and know all those seniors who have to be told by the US Government “No, we don’t pay for the nursing home beyond those days following a 3 day hospitalization in a rehab – typically located in a “nursing home”…which, is WHY, most people learn to ASSUME “Medicare pays” – nope – you become private pay.
Nice web site. THANKS!
tons of misinformation as usual…..
Let me continue to educate you.
First yes WL not any form of ULs will also implode with large early loans in a decreasing dividend environment. Go look it up. Go tell all those people on bogleheads how they must be misinterpreting the letter they got from the insurance company.
2nd no that isnt true about needle sticks. Did you know that people with HIV can now get insurance as well. I guess you didnt know that. Yes people can become uninsurable but if you want to cover that cost then you can still buy term. Guess what most term policies allow conversion. If you want to cover the unlikely situation where you become uninsurable by the time the term runs out then get one that allows conversions through the entire term. Problem solved. Do some more research.
3rd you dont understand why banks have it. Banks have it bc they are required to put money in only certain types of investments. Banks make horrible decisions all the time so using them as an example is pretty dumb. Lets see now a while ago the banks all needed cash quickly… Did they access the cash value in their WL or did they need a govt bail out. Yep the WL was useless to them and they needed a bail out. You also havent researched the great depression. You honestly believe that people affected by the great depression who didnt have money for food had money to keep their policy intact? Nope they lost their money to the insurance companies bc they couldnt keep the polices intact. You some how believed the insurance companies used magic?
LTC is a big issue and unfortunately current plans dont address the main issue for those here which is the tail. The days of unlimited benefit policies with short pay periods are over. Now people are stuck with the stuff thats left. Cash pays for LTC. You can get that many ways. One of which is a ltci policy or hybrid policy. One has to decide which way is best. So far the insurance industry has multiple black eyes on that one. I wont be buying LTCi in any of its currently available forms. It just isnt a good deal.
Oh and if you are trying to get a bunch of people to buy insurance on their kids, please be sure they have adequate insurance first otherwise you might want to up your E&O.
That one was a little hard to follow. But buying whole life for a child to preserve insurability, as noted above, doesn’t work because parents don’t buy enough. That kid will need a $2M term policy later. Whether or not his parents buy a $20K whole life policy on him doesn’t impact his later need for real insurance for a real financial need.
The argument about banks, the very rich, JC Penny etc was addressed in my long post about the Myths of Whole Life (and the way it is sold to unsuspecting clients by people like you). I believe it was # 20 https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
By the way, which states do you hold your insurance license in to give advice?
– You can buy paid up additions
– Put Grandma’s money into a PDA, currently paying 4% to pay the premiums and
– Continue to help the insurance companies with their easy breezy little cash cow “term Life” , of which only about less than 2% are ever paid out – why? they expire then the owner dies (uninsured).
– -> so, you won’t be buying LTC in any of it’s current forms? So you missed out? and YOU made a poor financial decision? (Since you were judging my hard working friend as making poor decisions).
“I” bought the “pays for ever unlimited 5% compound” as ONE of my LTC insurance protections, but “I” know too much about long term care and the cost of living expense – including longevity risk. We will have a decreasing pool of caregivers – cost of quality care will only go up and up – along with our increase longevity
Go visit a couple of Memory Cares in your area, some Private Pay SNF”s THEN go visit a Medicaid nursing home bed and ask about availability BEFORE PLEASE you dain to advise and encourage others to not look into protection against Long Term Care expenses. THEN we shall talk.
Tell me also, since you are apparently licensed to give advice –
what are the six was to pay for a Long Term Care Event?
How many millions would you estimate I need in order to be able to self-insure long-term care? 1? 2? 3? 5? The average stay is 2-4 years. Let’s double that. We’ll say 8 years. Now, the very nice place down the street from me is $70K a year. Yes, I actually called. $70K * 8 years is $560K. I should be able to self-insure that without affecting the surviving spouse’s lifestyle at all. If you cannot, then I suggest buying LTC insurance and hoping the company is still in business when you need it and that the policy actually pays. I don’t care about the other five ways to pay for a long term care event since I’ll be paying cash.
to compare fairly, you should account for the federal deduction for those with Schedule C and state tax credits (in NY state it’s a 20% tax credit). When the co pays, the benefit is tax free.
As opposed to if you pay, you get an itemized deduction of anything over 7.5% of income. Not great.
Also considering how small this policy is for a doctor’s portfolio and returns going forward, I would just keep it. Enjoy the discussion though.
I guess you can add those in if appropriate, but the main reason I don’t buy LTCI isn’t because the price isn’t right, it’s because I don’t need the insurance and the insurance has issues for those who do actually need it.
You have a lic to SELL insurance. That’s what an insurance lic is for. Doesn’t confer much else.
It must be frustrating that people not in the industry know more about these products. Don’t worry this is typical for an agent in my experience.
When the next ltc topic comes up, you can be corrected there too but this no I didn’t make a bad choice. wasn’t of age nor had the means at that time to buy one of those policies. I actually as opposed to you have researched it though and concluded that those policies were good deals. You should consider doing some basic research. This assumes however the insurance companies that wrote them don’t go under which is an assumption I think is reasonable although some of these companies may need further price increases on their other non limited pay policies to stay in business. I believe that will happen although one could argue otherwise. I have visited more nursing homes than you ever will. Let me give you some info, medicaide beds aren’t really any worse. Reason is that ALL nursing homes can be less than ideal. If you have a condition where you are incontinent 20 times a day then you are out of luck regardless of home. If you just barely have a situation which requires nursing home level of care then some homes are better than others. It is your medical condition that will mostly determine your experience. Medicaide has standards and the govt goes after people who don’t meet them. Regular insurance not so much. Still cash pays for ltc. One way is to use a policy. Combo ones are being pushed and straight LTCi bc it benefits the insurance companies. There are many other ways but all require planning. None of the LTCi policies available today are unlimited benefits so you can still wind up on govt assistance.
Good luck.
Over the years I have enjoyed this site, and even learned things or two. However, [ad hominem attack deleted.]
Another think, and look it up, WLI interest has ALWAYS been 30 – 40% higher then moody’s AAA corporate bond yield (please look it up). What that translates into is a much higher return with less risk.
Few days ago Hillary and Bill Clinton released her financials, she has equities, very few bonds and 5, yes five WLI (I guess using whole life as bond substitute). I know [ad hominem attack deleted] they did make >100 million without working in the private sector.
[In the future, please try to make your points without attacking the person you’re arguing with.-ed]
Whole life doesn’t pay interest. It pays dividends, and it doesn’t pay dividends on the entire premium paid, only on what has been allocated to cash value. So having a dividend higher than a particular bond yield DOES NOT mean the return is higher than bonds over that time period. Read this post for more details on a guy who was very happy with a policy he bought at a time of high interest. https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
I don’t really care what Hillary Clinton does with her money. We’re not exactly in the same financial situation. If you have $100M, you can do whatever you want with your money. Those of us with less might actually have to care about the return on the money.
Billary may have multiple WL policies for asset protection, obviously this is speculation but I doubt they bought any of those policies as a strict bond substitute. When you live in the public life and have true, verifiable enemies and you have $100 million in assets then WL may be a great idea for them to protect their money. You can only put so much into qualified accounts and the asset protection limits on qualified accounts is capped. I think I just found a niche that I could sell whole life to and feel good about it, doctors don’t really fall into this category IMHO.
When you look at IRR, you do look at the entire premium paid.
Another error many folk make when looking at returns and this is a big error, they do not look at annual premium a person in 60’s , 70’s, 80’s would have to pay for equivalent term insurance (It is funny how buy the term and invest the difference folks look at the cost of term when patient is in 30’s, 40’s, 50’s) but totally forget it later in life.
At what level of wealth WLI appropriate (as you guys hint it maybe for Hillary b/ she has >100m). 5 mil, 7 mil, 10 mil
Finally, can you tell me what tax rates will be in 10 – 30 yrs for now. What level of income will be protected from inheritances. What mean test formulas will be attached to distributions from retirement funds / annuities / and benefits such as medicare and SS.
I believe WCI is doing disservice to its readers by such one sided negative coverage of WLI.
WCI doesn’t care what you think about what he writes about WLI. Start your own blog about how awesome whole life insurance is.
I actually hate writing about WLI because I get a bunch of knuckleheads in here trying to argue about it and talking about how there can be awesome policies sold to people who really understand them, really need them and really want them but I keep running into owners of WL policies who didn’t understand them, didn’t need them, and don’t really want them once they do understand them. Those folks need help deciding whether to keep their lousy policy or dump it, and if dump it, how to do so. That’s what this post is about.
The reason the BTID folks don’t look at the annual premium for term insurance in their 60s and 70s and 80s is they don’t believe anyone should be paying those because they believe you should be financially independent without a need for life insurance by that age. I’m amazed how hard that concept seems to be for people to grasp. Buy insurance for financial catastrophes. Dying at 80 is not a financial catastrophe, therefore, don’t insure against that.
I believe WCI, usually a cool customer is falling apart.
1.
After admonishing one of the poster, you go ahead and call folks who disagree with you “knuckleheads”
[In the future, please try to make your points without attacking the person you’re arguing with.-ed]
2.
“The reason the BTID folks don’t look at the annual premium for term insurance in their 60s and 70s and 80s is they don’t believe anyone should be paying those because they believe you should be financially independent without a need for life insurance by that age.”
well, many folks would disagree with you. Hell, millions of folks die each year and leave nothing, not even enough money to settle their debts, pay for funeral, property taxes. What planet are you from any way?
Those people can’t afford to keep whole life in force. What planet is it common where someone can’t stash money for eventual death but magically can save fir WL….none….in fact these people who pay monthly get charged finance fees instead of paying yearly and have an even higher lapse rate then those that pay yearly. This would all be on planet Earth.
Rex, WCI says the following:
“The reason the BTID folks don’t look at the annual premium for term insurance in their 60s and 70s and 80s is they don’t believe anyone should be paying those because they believe you should be financially independent without a need for life insurance by that age.”
So if you are in your 60 and 70 and 80 and you are not “financially independent” (that would cover more then half of the population) then do you two fellas believe it would be reasonable to have life insurance?
If so, then in 60’s and 70’s and 80’s do you believe most people could afford to purchase term life. The answer is NO. They should have bough WLI. Don’t you think.
What wasn’t clear. Do you not know the stats on that? No bc the chances of them keeping WL in force is next to zero. WL doesn’t change human behavior. People who don’t save Fail to keep WL in force. This has been studied for over 100 years.
You also do realize I hope that IF more people held on to WL dividends would go even further down.
You were silly enough to think that these non savers actually where in the less than 20% who do keep it in force?
No, I don’t think so. In my opinion, someone who couldn’t save enough to be FI in their 60s-80s probably can’t meet their insurance needs with a WL policy. Despite the high cost, someone who is 60 and won’t be FI until 70 is probably better off buying a 10 year term policy at 60 and investing the difference than a WL policy. Get an agent to run a couple of illustrations and you’ll see what I mean. WL purchased that late in life is even more expensive than term insurance purchased then. Or are you saying someone should magically somehow have the money to buy WL at 20 but yet end up at 60 or 70 without being FI?
thumbs up
“You also do realize I hope that IF more people held on to WL dividends would go even further down.”
Good point. This is one of the most important reason as to why WLI beats bonds regardless of the yield curve trend.
It doesn’t beat bonds. The death benefit is likely to be bond like. Not guaranteed to even beat inflation but illustrated results are typically bond like at eventual death. Even illu results for cash value are much worse than a bond for multiple decades.
No, WLI actually beats bonds, even more riskier ones, even before taking into account annual 48% tax bite for some one in my fed/state bracket. Even before taking into account capital gain tax if you need to sell bonds for what ever reason.
Good luck with that. Its been explained multiple times but I assume you don’t want to get it. Last time. Early on WL has a negative return. A new current policy from one of the best companies will take around 16 years to break even. That doesn’t beat anything. Guaranteed column on cash value never beats bonds. Illustrated death benefits at eventual non premature death is currently around 5.5%. Cash value is less.
“. A new current policy from one of the best companies will take around 16 years to break even.”
Just incorrect statement. Many policies designed to maximize cash value will break even in 4th to 5th yr.
” Guaranteed column on cash value never beats bonds”
Maybe true. However, please go on line and look at actual IRR posted by many insurance companies, mass mutual / guardian, etc. Non- guaranteed portions beat and I mean by large margin beat guaranteed cash value as well as insured value.
You guys are talking past each other. The 16 years Rex is using is the guaranteed column. The projected column is usually less. But it takes a “well-designed” policy (blended with term or with mostly paid up additions) and the projected column to get it anywhere near 5 years for break even. But even a well-designed policy isn’t going to beat bonds for a decade plus at best. So saying “WL always beats bonds” simply isn’t true.
I have and I’m very very familiar unfortunately with one of those companies. Ive seen a lot of illustrations unfortunately since the situation an agent put me made it such that I needed to seek a lot of advice. Funny thing is every insurance person I saw wanted to sell me another WL policy.
Please link us a policy purchased today (so not one from the past) on a 40 year old white male for instance and you can use best rate class that is NOT overfunded and NOT a limited pay policy.
Again they don’t necessarily. A few decades ago a 30 year treasury could get you 15%. Did WL over those 30 years get a similar return on cash value. No it didn’t. Illustrated results today assume dividends don’t go down further. Usually dividends lag what is happening with interest rates by about 6 years or so (both directions). Last year every company except 2 (one of which was a big mutual) stayed the same. Those 2 actual decreased. We probably will get a good glimpse this Nov/Dec about the possible bottom this year or next. Since WL is a black box, you only get a glimpse.
Why would you buy taxable bonds in your bracket?
Your statement is too general. You say “WL beats bonds.” Whether or not that is true in the long-term, say 50+ years or to life expectancy (and I would argue that it isn’t) it certainly is not true in the first decade or two. This was discussed in this post:
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
Whole life insurance is an even worse deal for folks who were unable to build any wealth in their life. As Dave Ramsey likes to describe it, “the payday lender of the middle class.” As a side note for anyone following this discussion, if there actually is anyone other than the participants at this point, buying whole life insurance before maxing out your retirement accounts is truly a terrible decision, rather than a merely bad one.
For Sam, remember the target audience for the site- high income professionals. Most of those, with reasonable discipline, should be able to be financially independent by 60, at which point there is no need for life insurance.
You do realize WL is NOT immune from estate taxes?
You do realize that at least one candidate has proposed getting rid of the tax deferred benefit of WL? Funny how u use tax fear and don’t know this.
People investing appropriately don’t need insurance later in life. Those who do would have lapsed WL.
It isn’t hinted that it’s good at any level. It just doesn’t matter what she does.
You did not answer my questions
Nonsense Mr. Rex, nonsense is all you have t offer
“People investing appropriately don’t need insurance later in life.”
So you are represent the American people. You also know what is appropriate investment for the poor, middle class, rich, super rich and all in between.
“You do realize that at least one candidate has proposed getting rid of the tax deferred benefit of WL?”
Do you realize this mean nothing, absolutely nothing. This idea has been bantered about for decades, and even part of last minute deliberation during Obama care. So, guess what. The politicians, most of whom have WLI, did not touch it. Yes, they increased taxes on other investments. Mr. Rex, do you know that?
Even during Regan tax reform when the introduced the concept of MEC, they did NOT touch current policies, grandfathered in. I am sure you know that as well.
There is ZERO reason to assume tax law changes will favor WL in the future. You try to pretend someone should buy WL bc of concerns of tax laws. In fact proposed changes as I mention are the exact opposite. You also can’t prove that most politicians have WL nor would that matter and no they don’t have to grandfather. Now I don’t think politicians will change WL but I’m not the one trying to scare people into buying it bc of taxes. These are the reasons nobody will play your silly game of pretending future tax rates should be predicted. By the way when taxes have gone up in the past, so have deductions. So your tax scare angle isn’t going to work. I know that over 80% fail to keep WL in force until death. Well studied by LIMRA and society of Actuaries. Funny how you pretend this isn’t the case.
“By the way when taxes have gone up in the past, so have deductions.”
I will give you opportunity to correct this erroneous statement. Also, highlight which deductions go up to offset recent tax hikes (lets just focus on Obama years to keep it simple)
” I know that over 80% fail to keep WL in force until death.”
This statement seems accurate. But it is not a argument against WLI. Would you then suggest that 19% that kept policy in force until death mad the right decision to purchase WLI.
You aren’t trying to keep anything simple or helpful by focusing on the Obama years which is a small segment of time in one’s lifetime or a WL policy but it doesn’t matter, your distractions aren’t going to change the fact that there isn’t a good reason to assume tax laws will change to favor WL. You just put that out there as a scare tactic with no basis.
No unfortunately it wasn’t the right decision for even the minority that keep in force until death. It was for a small % though and not zero. It was the right choice for those who needed a permanent death benefit and prefer WL to some other permanent policy (very rare to need one). It was the right choice for those who wanted a permanent death benefit but realize that they are likely losing money compared to better options but just want the death benefit (also rare). Its okay to want something even if it doesn’t make sense. It was a right or lucky decision for the very small % who unexpectedly die almost immediately after a longer like 30 year term would have lasted but before the superior compounding effect of investing the difference takes hold. Now this is a small window and it needs to be a somewhat unexpected situation since they could have converted a term policy if they became very ill towards the end of the term. The rest……Well when I meet someone who isn’t unhappy with WL (and isn’t an agent or someone who claims not to be an agent but really is or is associated with the industry but fails to mention it), they almost always say to me, I could of done better but its okay. They aren’t mad and if they had to do it all over again probably wouldn’t have done it that way. This is pretty much a rave review for WL. This is a big % in my view although of course ive not met them since they would be dead (I have met people who have had it a long time and I believe are likely to keep until death at that point).
So feel free to create your own pro WL blog and have fun convincing people that the fact that it rarely works out for people isn’t an argument against it. You really need to lay off the Kool aide.
Tim, you make great points. Are you a physician or financial advisor. I have never seen WLI bashers so defensive and they are unable to answer your points.
Rex and WCI, I must ask, as to where the heck do you guys hang out at that you keep running into these disgruntled WLI policy holders?
Rex, I just about fell out of my chair when you write not to focus on obama years as far as taxes are concerned. Brother, he will be president for 8 yrs. This = 13% of average life span once one reaches adulthood. A lot more if one is 50 or 70 yrs old. 8 yrs is not nothing in average human life span
Enjoying the conversation
I just hang out here, reading up on comments on this site, checking my email box, talking to docs in groups I speak to, participating in internet forums etc etc etc. I know you’re happy with your policies, but I don’t think you quite get just how rare you are to be in that position.