By Dr. Jim Dahle, WCI Founder
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.
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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!
Funny how now 8 years is a lot of time when a whole life policy currently with illustrated non guarantted results takes 16 just to break even….
I am not a financial advisor. I am in health care like most on this board.
Rex, I agree the policy illustrated is piss poor. But, again you pain with a mighty broad brush.
When I said 16 years, I’m talking about a new vanilla policy bought today from a “good” company. A “bad”policy bought today is even worse.
Policy for my grandson has positive cash at end of 5th yr (few buck more then premium). So “bad” policy is bad, and “vanilla” policy is not so good, then by your definition there has to be a better policy. Right. So why don’t you stop focusing on bad and vanilla policies and focus on good ones that get the job done?
no I actually always use the best companies as an example. I dont actually cherry pick bad companies or situations. I am talking about buying a company from one of the big mutuals and using current illustrations. so not even saying focus on guaranteed column only. It will take 16 years to break even and that assumes dividends don’t go down further which frankly is a big if. When I say vanilla, I am talking about a strictly WL policy since that is what this post is about and what is sold 99% of the time. Yes this one sold in the blog is even worse then what I’m talking about since I don’t use the extreme negative situation. What you are likely now talking about is where an overfunded policy might get to. Overfunding is nothing more than limiting the amount of trash you purchase (which is WL). You reduce primarily commissions in doing this which is one of the reasons why these polices aren’t commonly discussed. There are several methods to doing this but its commonly either a PUA rider and/or adding in term (which is funny since the agents here like to bash term but need it to be a big part of this equation). There is no doubt overfunding is better in the long run for the client. But what you have done is created a situation where you purchased the least amount of WL possible. Thing is that you can do better by buying no WL at all. Talking just in a taxable account, there are now a days very tax efficient ways to invest in index funds that will very likely produce substantially better returns over the long run without all the other issues or concerns about failing with a WL policy which actually has the worst tax situation when not kept in force until death and again very few people do keep it. It isn’t by accident in my view that agents rarely sell over funded polices and that companies don’t train their agents to do it. They train them to sell regular/vanilla whole life polices. IF you could create a situation where all they did was sell overfunded polices then this would be very bad for the companies and very bad for dividends. There is no magic in this world. Even currently insurance companies are starting to feel substantial pressure from the low interest rate environment. Some have stopped selling or repriced their no lapse gUL. Some have even increased cost of insurance on in force policy holders which is ridiculous in my view. With WL they don’t disclose COI but the same pressure applies to them. WCI has a whole post on overfunded polices where he asked an agent to supply the best return I believe for a 40 year old person. Its been discussed. Agents like to pretend there is something magical going on but there isn’t.
I would love to quit focusing on bad ones, but those are the ones that seem to be sold most frequently. I don’t even think most agents can tell the difference to be honest.
“Thing is that you can do better by buying no WL at all.”
That is why I have portion of my investment in equities, portion in RE, bonds and some portion in WLI. I have been through many seasons of investment, and seen good and bad days. In the long run equities will do very well, but since I am a human and not a chart, things have and continue to come up that requires money and I cannot gamble most of it in stocks.
“Some have stopped selling or repriced their no lapse gUL. Some have even increased cost of insurance on in force policy holders which is ridiculous in my view.”
This is not the case with WLI, guaranteed
Actually that’s not true. While I’m not advocating this site, the insurance pro blog did a segment on increasing COI and mention that it has happened in WL. You can argue with them in it.
Whole life isn’t diversification by the way. You are just buying mostly more bonds.
“Whole life isn’t diversification by the way. You are just buying mostly more bonds.”
Are you certain about this statement.
Lets see:
1. WIll your bond portfolio go down, like in 2013. Answer is yes. Not WLI
2. Will you be taxed at marginal tax rate if you own bonds. Yes. Not the case with WLI
3. Can you sell appreciated bonds without capital gains tax. No
4. Can you take a loan against your bonds. No
5. Can you avoid obama affordable cae act taxes with bonds. No
7. Can you do efficient inheritance planning with your bonds. No
8. What happens if you die with bond portfolio. You get what you got. Your progeny will cuss you
do to tax consequences
You make a killing sooner you die while owning a whole life insurance. Pardon the pun. I already know your response, so I will reply after the formality of reading it.
Yes Sam those poor points have been addressed many times on many WL threads. I’m done educating you. You didn’t even know COI can increase. You just don’t know the product you push.
Premium of whole life do not increase, and you are confusing COI with hybrid insurance products (I have on of them too , as WLI gets sweeter as I age, VUL doesn’t).
After reading your response in detail, reader will come away with impression that there is a better way to write WLI if you know what you are doing and/or if the agent is will to write a policy to maximize cash value. In fact an agent with whom you have relationship will do that and take a lot less commission (I and my family have done it for years with agents)
So, you and WCI need to stop bashing WLI. Instead you need to do a blog for those who want to purchase WLI as to how they can get the best policy. Maybe have an agents perspective who is willing to work with your readers, etc.
Such a tiny percentage of docs ought to be buying these policies I’m not sure that would be a useful post. More than likely it would convince a bunch of people who shouldn’t be buying any WL policy at all to buy one.
But finding an agent “willing to work with…readers” wouldn’t be hard. That’s pretty much all of them.
Oh geez. This one has to be responded to. I’ll use your numbers.
1. Your investment goes down immediately with WLI. Try cashing out your policy after 1-10 years if you don’t believe me.
3. If you surrender your WLI policy with a gain, you’ll pay even MORE than capital gains tax rates. You’ll pay ordinary tax rates.
4. Sure you can. You just pledge them as collateral like a WL policy. Think margin loan.
5. See # 3 above. PPACA taxes apply.
7. Sure you can. Step-up in basis at death if they’ve appreciated.
8. What tax consequences? They’re exactly the same as whole life insurance- the heirs get it all income tax-free. Estate taxes probably don’t apply either way, and if they do, they apply exactly the same.
I’m also curious to hear about an insurance company increasing the cost of insurance on a guaranteed universal life policy. That isn’t what you really meant to write is it Rex?
In a whole life insurance policy, this sort of stuff would have to show up eventually in a lower dividend rate.
Sorry that wasn’t clear
It’s two separate things
For gUL repricing
For standard UL increase COI on old in force beyond the scheduled for increasing age. They did this on policies with 4-5% guaranteed interest.
i probably should also add that it “might not matter with no lapse gUL”. Remember we are talking about COI and not necessarily the premium. With the no lapse gUL, there is a rider that in essence if the shadow account of cash value goes to zero that the policy still remains in force as long as premiums are paid on time. So for the great majority of people who purchase no lapse gUL (sort of term for life without any expectation of cash value build up), any increased COI wouldnt be a big issue. Now with regular old ULs, this is definitely a black eye for the insurance companies. People who bought them thought they were getting true guarantees on interest rates but really the insurance company decided that they could make up for those strong guarantees by pulling another lever (COI). I dont consider that appropriate. Why even have a guaranteed interest rate if you are going to pull stunts like that? There are people suing about it but its not so easy to beat a big company with deep pockets.
I never said premium. I said cost of insurance. This is why on rare occasions you might see a situation where the dividend rate stay the same but the actual dividend go down. Please visit the site I mentioned if you don’t understand.
You should read more. He has evaluated and blogged on overfunded policies. He got the policy illustration with the help of an agent. I’m correcting wrong information but agents and the like I’m sure would consider it bashing. Yes the best way is to buy the least amount of WL unless you need or want a permanent death benefit understanding the costs and alternatives. For most that will be no WL.
Rex, thank you for you opinion / feed back
Jim,
I totally agree with where you are coming from in not wanting young people to get sucked into these expensive whole life policies. That being said my experience is somewhat different ( at least I think so) and the math that I have done says my best use of the WL policy has turned out better than I would have suspected knowing what I know about them.
You see my policy was taken out in 1973 as a 65 life policy initial DB of $15,000 and $278 per year cost. At about year 36 (2009) the results were DB now worth $71k, total cash value $41k. Close to about a 7% return (6.96) for the $10,000 total dollars spent. This is where I decided to see if I could use the cash value to fund both this life insurance as well as a LTC policy by using a 1035 exchange of the cash value of the WL to pay the premiums on a new LTC, thus avoiding the tax bill of cashing out the policy.
After paying the premiums on the LTC policy for about 4 years and the WL policy for about 6 years the WL policy is still growing and is at $49,000 cash value with DB of about $74k.
As a point of reference the LTC policy premium being paid from the WL is now at $807 per year and adds a possible maximum LTC benefit of $160k. All premiums are paid by the WL, so I have no out of pocket expenses for these two policies.
Note: this is not something that I believe can be replicated in today’s low interest rate environment, so I am not suggesting it be a reason for buying WL insurance, but it may be something to be considered before taking a big tax hit by cashing out one of these older policies.
Jim
“this is not something that I believe can be replicated in today’s low interest rate environment,”
I have multiple WLI, and at much larger values. I can tell you that the one I took out in 70’s. 80’s, and 90’s have done very well, and most important of all, I have ued cash in them for many things such as college tuition, weddings and loading up on stocks when market crashed.
Now as to your statement, it is all relative. If interest rates are low, then they all low FOR ALL INTREST BEARING INSTRUMENTS. All timings being equal, even now properly written WLI will beat its competition.
30 year Treasures at the time of his purchase were 8% and this wasn’t the high during his period as they went up to mid double digits.
All loans in the US are tax free.
Rex, are you and WCI same person?
Which insurer in your opinion has the best WLI product?
Do you recommend any agents one can contact as well
Thank you
Definitely no
We have never met.
While I don’t recommend WL except if you need or want (understanding costs and alternatives), you need to provide more info and it actually changes. What you do is get illustrations from all the big mutuals and other companies of interest (for instance sbli is sometimes liked). It almost always should be overfunded up to MEC level. You have to decide if you want to go limited pay and if you are definitely taking loans or maybe take loans. Examples of how that is important are:
1. A company might have the best guaranteed return after x years but another company illustrates better. Need to decide if you value guaranteed more or not.
2. Limited pay doesn’t always get the best results long term but it might be easier to know you have the cash for this. For instance you can overfund a 100 pay blended at times and change it to reduced payed up at let’s say 20 years and illustrate better results than the 20 pay.
3. Taking loans is always at a cost. Some companies have better loan terms. They almost always have lower dividends. If you look at illustrations and one has more cash in it at retirement then that doesn’t mean you will definitely “access” more cash.
I don’t know any of the agents here but my guess is that they would be afraid to screw you over bc someone like me might figure it out. You might not get the absolute best but again best can vary on goals but doubt you get “the worst” policy. This is just my guess.
Rex – who are you?
May I link in with you? I have been struggling to understand the industry of WL – Worked for a Mutual WL company this last year, but only did so for their pricing on LTCi. They just increased their pricing with gender rating, so I am disconnecting.
My Linked In profile is:
Carole B Starr AS BS MBA Retirement Planning
WL is almost like annuities. You can read and read and there are those who hate (but, in my opinion they don’t understand that there ARE good annuities out there – Eg Social Security is an “annuity” , and – who doesn’t look forward to THAT “guaranteed paycheck for life” – it all depends, of course on what is “suitable” for your circumstance…
And then there are the naysayers on WL. A close friend of mine was once a National Account Manager for Dave Ramsey – hates him now for…he took his advice on 2 life issues: “Only buy term” and “Only buy long term care insurance when you are 60” < I think Dave has been sued over this "Financial Peace" advice for his building here in Franklin TN has changed it's name! Why would you take out the name "Financial Peace" unless you have been sued?
SO – in this gents case….he became completely uninsurable with life OR with long term care…his wife's mother spent 8 years in Memory Care PRIVATE PAY (no LTCi) at about $8,000 per month and, she also works in the Senior Living Industry now – so….they GET IT. His STRESS is
he is now completely uninsurable for both long term care insurance (cervical neck issues) AND also, for life (heart issues)
he worries so much about providing for his wife (note: if you have a parent with Alzheimers' your risk is 50%)
I am not asking for "him" (obviously) but trying to learn how to educate others about this basic tenet:
Insure your self when you are young and insurable for very few to nil can predict the future. Everything costs SO much less, when you are young and insurable.
I don’t think you’re interpreting the scientific data on Alzheimer’s genetic risk factors correctly.
Hey Doc. I worked as an expert senior living advisor attending alzheimers org seminars, visiting memory care – advising over 2,000 families (It was so stressful – pretty much 100% of my callers were stressed, disorganized, exhausted – well, pretty much like an ER right?
So – there is a genetic link (I loved genetics during my pre-med degree!) So – simple math: One father One mother – if one has it, you’ve got a 50% chance of risk.
Here’s how high the risk is that millions may be faced with those $8-$15,000 per month bills (Eg Balitimore Memory Care private room much more $$$ than a semi-private Memory Care room in say Mississippi);
From Alzheimers.org:
Of the 5.4 million Americans with Alzheimer’s, an estimated 5.2 million people are age 65 and older, and approximately 200,000 individuals are under age 65 (younger-onset Alzheimer’s).
One in nine people age 65 and older has Alzheimer’s disease.
By mid-century, someone in the United States will develop the disease every 33 seconds.
These numbers will escalate rapidly in coming years, as the baby boom generation has begun to reach age 65 and beyond, the age range of greatest risk of Alzheimer’s.
By 2050, the number of people age 65 and older with Alzheimer’s disease may nearly triple, from 5.2 million to a projected 13.8 million, barring the development of medical breakthroughs to prevent or cure the disease. Previous estimates based on high range projections of population growth provided by the U.S. Census suggest that this number may be as high as 16 million.
I would call this high risk. An amazing blessing is that the industry is not “yet” screening with underwriting questions: “Do you have a parent with….” I just can’t believe they are not doing this – yet. Genetic testing is also on its way.
In our case (Dad was an oral surgeon and put 1st son through Duke and Georgetown, the other boys through college etc etc – in other words the high end client you speak of
The market crash hurt his net worth at one point –
then they both move into Assisted Living for functioning people for many years (he shuffled and his long term memory was fried -but he still remembered all of us and could grand slam you in bridge – mom’s short term memory was fried but ditto on the bridge) Cost so very reasonable: $3,500/month for about 3/4 years – lost Dad and mom goes for emergency gall bladder surgery –
Now, due to bowel incontinence/bladder and hoyer lift we have her in a beautiful Memory Care (ice cream parlor with juke box in the foyer for when grandchildren come etc etc) the cost is $10,000/year. She is in her 4th year and – darn it – running out of money. Back when I tried to talk my 3 brothers and their “financial planner” into doing a Trust and LTCi – I lost – they all say I was right now – that gives me no pleasure nor does it take care of mom’s financial challenge coming down the road. There will be no inheritance (which is fine, but there were charities near and dear to hearts who also will not receive).
Rex, May I Link In with you?
My Linked In profile is:
Carole B Starr AS BS MBA Retirement Planning
I don’t use that and I am not interested in making money off financial products. I like contributing to conversations to help other physicians make decisions. I have no idea if WCI will some day be a “financial advisor” instead of just s blogger but I won’t be.
Northwestern Mutual.
That just isn’t necessarily the case.
To begin with only 2 companies had to drop dividends further for 2016 with NWM being one of them.
They would also be an example of where (using illustrated results) they show more CSV at retirement but once you factor in direct recognition loans, they don’t illustrate the best results.
Not that they are horrible but just they aren’t the only answer and again this assumes you are buying which few should do.
I’m insulted that you think I form paragraphs and capitalize as poorly as Rex. But no, I assure you we’re different people. Both docs. He currently owns at least one permanent insurance policy and I used to own one.
If you want an agent who specializes in permanent life insurance I like the guy over at pro insurance blog as he at least writes that structures policies the right way (PUAs, blended with term etc). But I have a list of recommended insurance agents for the insurances that most docs need- term life and disability, that can be found here: https://www.whitecoatinvestor.com/websites-2/insurance/
Again, your statement is too general. WLI, even properly written, does not outperform other fixed income investments in important ways and time frames. Perhaps the most important aspect is that an investment you intend to hold for 4-6 decades probably doesn’t belong in fixed income investments in the first place.
I agree that most older policies should be kept as the low return years are now water under the bridge.
Complexity favors the issuer. As has been stated before by WCI, these policies are designed to be sold. You don’t get out of bed and say to yourself that I need to buy a WL policy. Insurance companies employ very smart people. They could easily deploy a configuration tool that would allow consumers to buy a WL policy over the web without an agent in the middle. The agents are needed to push, obfuscate, and clear roadblocks.
My buddys a licensed insurance agent and agrees to let me keep the commission on whatever product I buy from him.
I am currently 25 years old, wife , 3 children and about making about 60-100k per year based on performance. Paid off alot of debt and finally have some nominal savings (3k in my 401kitchen with a 4.5% match)
What would you recommend as an investment strategy and a means of protecting my family?
First, I would avoid illegal activity. I’m not 100% positive, but I think rebating insurance commissions counts.
Second, as far as your insurance plan. Do you plan on reaching financial independence in your life? If so, I would buy insurance that lasts at least that long. If not, I might rethink your financial plans. How much to buy? Well, what would you like their life to look like without you? Buy that much.
Third, I generally recommend a diversified set of low cost, broadly diversified index funds inside tax-protected accounts such as 401(k)s and Roth IRAs as the foundation of your portfolio.
Are you asking if you should buy whole life insurance just because you get to keep the commission? Probably not, but I’d probably run the numbers to see how that affects the return. If it made it dramatically better, maybe I’d consider it if I could resolve the legal issues.
https://dworkinassociates.wordpress.com/2012/09/27/a-sticky-issue/
Looks like you’d best be living in CA or FL to me if you want to do this. And not care about your buddy’s job.
I’ve been a follower of WCI for a few months now. Love all the postings regarding WL, as I was suckered into buying “the greatest investment tool in existence” (actual quote from my agent) almost 3 years ago. For background, I am 26 years old, married, no kids, and my annual income is $75K. I have no loans except for a mortgage and my wife is heavily burdened with student loans (she is currently financially dependent on me and would not be able to afford the mortgage + utilities). My NWM agent was referred to me by a “friend” – and might I add that every time we met, he would go through my list of Linkedin connections (mostly personal friends of mine) and ask me if any of them might be interested in “financial advice” and if I could give him their phone number to contact them. Every time I felt violated and thought to myself “what a quick way to ruin a friendship”. That alone should have turned me off from what he was selling, but he proceeded to pitch whole life as an offer I seemingly couldn’t resist, and I fell for it.
After hearing thoughts from my friends and colleagues saying I had made a mistake, I had to keep convincing myself that maybe they didn’t understand what it was and I was making the right decision, even though truthfully I didn’t fully understand the policy myself. Well needless to say, I finally came to my senses and have decided to dump my WL policy and switch to a 30-year level-premium term policy. I’ve reached an odd point in the process and wanted to see if others have any thoughts.
I’ve actually just completed the process for putting term in place and have paid my first premium on the policy. Naturally, I did not tell my “financial adviser” (NWM insurance agent) I was doing this since I knew he would end up relentlessly begging me to keep my WL. He caught wind of this when the got the letter from Prudential (my term insurer) saying I was replacing my WL policy.
He called me a week later, confused by what had happened. He kicked into full-on-desperate-salesman mode, and kept asking me probing questions about why I was dropping the policy and if I was confused by what my WL policy had to offer. He went on to tell me about all the wonderful tax benefits that WL offers that other investment vehicles do not. “We went over all of this before” – we did, when I was 23 years old and had no clue how to invest or what a WL policy even was. Of course, he did not mention once how much of my premium goes to the insurance company fees, his commission, and the cost of the insurance itself. Call it tax-free all you want – that doesn’t change the fact that somebody is shaving off a portion of my investment.
I explained to him that I wanted to surrender my policy (despite losing a few G’s). He pondered for a moment and then told me I could stop making the premium payments and my cash value could continue to grow (from dividend payments) and the death benefit would not decrease. I was taken aback by this statement, because everything I have read in my policy states that doing so would either cause the death benefit to decrease or the cash value would be used to purchase more paid-up additions until the cash value is gone and the policy lapses.
My question to WCI and the community is…what is the agent’s angle here? He clearly is desperate to keep my business, but this seems like an empty promise to me. Is it really possible to stop paying premiums and let the cash value sit and grow? If so, it doesn’t seem like the worst idea to just keep the WL policy if I never have to pay a premium again and still get a sizable death benefit + growing cash value.
Nope. After only a couple of years you aren’t going to have enough cash in the policy to keep it alive. It will lapse. I can’t imagine you have much cash in it at all after 3 years. The only options that you have are going to be to surrender it and take whatever cash you can, let it ride and keep the coverage until it lapses and lose whatever amount of cash is in it, or potentially convert it into a paid up policy, which will drastically reduce the death benefit, but will keep receiving dividends.
WL is not an investment. It is life insurance. It can be used as some form of investment down the line, maybe, but that’s not what it’s for. Since it never lapses as long as long as you pay, the insurance company isn’t “shaving off your investment”, the cost of the insurance just costs more because there is a 100% chance that they will eventually have to pay out a claim.
If you stop making payments, the policy’s cash value will continue to make them until it is exhausted. If you’ve had the policy for 20-30 years, that might be indefinitely. But after 3? You might only get a couple years of insurance before the cash value is exhausted. The agent could run the numbers for you and tell you exactly how long it would last on the guaranteed scale and also on the projected dividend scale. But it wouldn’t last until you’re likely to die and the cash value isn’t going to grow, it will decrease. He’s either dishonest or an idiot to suggest otherwise, and neither would indicate you should continue to get advice from him.
You don’t mention how big this policy is, but if it is small, now that you have term in place, I’d just surrender it, take your cash value, and send it to Sallie Mae. Frankly, it’s malpractice to sell you this when you still have student loans. Too bad you would never win the case.
NWM agents are captive agents. They only sell NWM and their entire renewal system is based on a persistency structure.. So in other words, if a single policy lapses, it can effect the overall rate in which the agent’s entire book of sales is paying his renewals.
This could be the reason why he’s hounding you to not let it lapse. he already has received his upfront commission on the transaction.
Alan, B.
NWM agents are captive agents. They only sell NWM and their entire renewal system is based on a persistency structure.. So in other words, if a single policy lapses, it can effect the overall rate in which the agent’s entire book of sales is paying his renewals.
This could be the reason why he’s hounding you to not let it lapse. he already has received his upfront commission on the transaction.
I don’t know if you see comments to the old post. I was working on this type of evaluation for someone, and I’m wondering if I’m doing it correctly. I look at the (projected, guaranteed and not) year-over-year return for every year in the future, and I get a result that I didn’t expect; the returns decelerate over the life of the policy. My friend has one very similar to the one in this post, and they both look to have the same effect. I went in thinking that the returns on this would accelerate every year you got into it, making sense to keep it, but is not the case, it seems. Is this right? and, why would this be? I’m thinking it’s basically your buying the death benefit past the point that life insurance makes sense. A 90-y.o. can’t get term insurance at a reasonable price, so this feature is built-in by the ever decreasing rate of increase in the cash benefit. It’s like the insurer is trying to make you dump the policy before you die.
I suspect it isn’t right. You sure your math is right? Are you sure it is a whole life and not a universal life policy?
It’s the same as the one you broke down here (Guardian), except to age 100.
I think I know what is wrong: I’m thinking about it like a year-to-year invest option against the cash value plus the premium, net of a term premium. However, I was using a flat 20-year term premium from the beginning in the analysis; in reality, I would have to know what the term premium would be starting at each additional year. 10 years from now, if she opted out of WL, that original term premium relative to now (for the remaining 10 years) would be higher. I suspect when I account for this then the year-over-year return curve will flatten (or increase, more likely).
I have a whole life policy that I bought almost 9 years ago and treated it like my conservative portion of my portfolio (which seeing how bonds did) I’m not too regretful. Everything I put in now is even money Ie. I put in 1,500 a month and it’s 1,500 and it’s now accruing tax free. So my question is this. Given that I’ve already kept this policy to the point it’s going to start making money tax free — do I keep treating it like my conservative portion of my portfolio (even tho it’s accruing tax free ). Or do I start putting more into it as oppose to my Non tax sheltered IRA. ***The question is referring to the money I’m saving after I’ve exhausted all my tax sheltered account**.
Thank you for your opinion/advice !
A few issues with your comment:
# 1 You’re looking at it wrong if you’re just considering the fact that the premiums are $1,500 a month and it’s going up in value by $1,500 a month. That doesn’t mean much. Get an in-force illustration, calculate your likely return going forward (somewhere between the guaranteed scale and the projected scale) and if that’s acceptable to you, then keep it. If not, then bag it. But you’ll have to do more than just compare the premium to what it goes up each year.
# 2 It’s not tax-free. It does grow in a tax-protected way, JUST LIKE A NON-DEDUCTIBLE IRA, but if you surrender it, the gains are fully taxable as ordinary income, JUST LIKE YOUR NON-DEDUCTIBLE IRA.
# 3 I don’t find that whole life insurance to be a very attractive asset class, but in the long run, yes, I would expected fixed income like returns from it. So if for some reason you do find whole life insurance to be an attractive investment, then sure, you can use it for a conservative investment. It certainly wouldn’t have expected returns like those from an aggressive investment like stocks or real estate.
# 4 You do know about a Backdoor Roth IRA, right? I’m getting the impression you don’t from your comment. I’d certainly do that for myself and a spouse before even considering keeping a whole life policy as an investment.
Thank you for the response !
1. Yes. Backdoor roth has been maxed out for myself and my spouse.
2. I understand it’s not going up in value by my premium
Main question: since all tax shelters accounts are maxed out and this is money I plan on never touching until retirement……. 1. doesn’t it make sense to keep whole life as my conservative portion of my portfolio (compounding tax free and giving me life insurance and at this point likely to give me same rates as say bonds if not higher ).
I wouldn’t expect higher rates than bonds. I’d actually calculate out the expected return using the inforce illustration. Have you done that? If not, feel free to email it to me and I’ll help you use the Excel Rate function to calculate them. Then you can make an informed decision.
Thanks for the input ! I will definitely take you up on your offer and copy an illustration on to this discussion. This website has helped me greatly w my finances! ** unfortunately , the whole life policy was bought prior to finding out about whitecoatinvestor**
So was mine. I wish someone had given me that book as an MS1. Would have saved me a lot of errors.
This was a very insightful article. I have requested my in-force illustration for my whole life because I would like to do the same calculations you did in the article on my policy. However, I had a hard time following where some of the numbers came from that you used in the formulas. Do you have simplified formulas so I know what numbers to plug in (ie.=RATE(Years policy held,-yearly premium,0,Cash value,1) )?
That’s exactly the right formula.
I couldn’t figure out the rest of the formulas though. Or all they all the same?
That’s the main one I use to figure out your rate of return on these things. What else would you like to determine?
My head is spinning! Dumb doctor here. About the only thing still clear to me after reading all of this is that I should not have bought whole life insurance. I purchased it about 8 years ago with the idea that it would be the bond portion of my portfolio. I am in a very similar position as the last poster. I have maximized all avenues for tax shelter (401k, hsa, roth rollover). I am having a hard time determining what I should do now. You referenced using paid up addition, buying more, using dividends to decrease premium or just cancelling. My initial face value is 1665000 and I’m paying a premium of 23k/year. I just figured out last year they (massmutual) were charging me 9.5% interest for the luxury of paying monthly instead of yearly! Paying by the year now. I am just barely over the hurdle of having more cash value than I paid in so far. I have no known need for a death benefit (no children). I am also able to decrease my policy as low as I want. Any guidance you can give me? I think you could start another business evaluating these things and make some money!
Thanks in advance for any help you can give me.
Well, if you have decided you don’t want it, you can basically walk away now having only lost the opportunity cost. But if you bought it as a bond substitute and you’re maxing everything else out and your return going forward is bond like (check an in force illustration to be sure), why not keep it? Sure, your returns the last 8 years weren’t good, but they should be better going forward.
Given how much money we’re talking about though, it might be worth paying James Hunt a few bucks for a recommendation.
WCI, I was sold NML whole life in late 80’s when young and and unknowing, but by the time I started evaluating it a couple of decades had gone by and I’ve just kept it. Fortunately, as soon as ROTH’s became available I aggressively pursued other investments and later 401k (and in last 5 years also max out a 401k-ROTH) and by now I’m now financially independent , though not retired. I say that only to show I’m not completely stupid.
Anyway, I know I can withdraw WL cash value without tax consequences up to cost basis, and after that would pay income tax rates. Question: if I were to find myself without income for a year or a few, is there a way to ladder out WL cash value in excess of cost basis without tax consequences in that case, as with a traditional IRA? I hope I’m making myself clear. I know people do that without tax consequences if they’re in that circumstance for IRA or 401k to ROTH conversions. Just trying to understand WL in comparison to other investments–er well, you know.
Without tax consequences, yes. You just borrow against the policy. It’s tax-free to borrow. It just isn’t interest free. See your policy for the rate you would pay and whether it is recognition or non-recognition.
Had my policy for 3 years now- have 1mill term, 500,000 whole life .
put in a bout 30k so far and wanted to cancel but believe you can reduce the face value of 500,00k to as low as 10,000k . Not sure if this would effect the money already contributed or how it would effective plan. Suggestions ???
It would use your cash value to pay the now lower premiums for now lower face amount. But if you don’t want the insurance….
DW has a whole life policy in place for 16+ years now and we just got term policies in place with the intention to cancel this existing whole life policy. Thankfully, it has a gain of ~$4K if we surrender it now. Looking at the in-force illustration one thing I started to consider – is it worth timing when exactly to surrender the policy? Just looking at the guaranteed cash values, it increases year over year at least a few hundred $ more than annual premium outlay similar to the illustration used in this article. Using the illustration in the article for instance, the cash value increases by $2,197 from year 8 ($10,697) to year 9 ($12,894) for a premium outlay of $1,941. So just viewing this in the 1 year window, it seems like you gained $256 ($2,197 – $1,941) for an investment for $1,941, which isn’t too bad for deferring the surrender of the policy by a year . I am pretty sure I am missing something here – anyone care to point out the flaw? Thanks!
I think it’s adjusted for that, but if not, then it seems the ideal time is just before making your next premium payment, no? The easy way to sort it out is to ask “How much will I get if I surrender now” and “How much will I get if I surrender on such and such a date” and then take into consideration any premiums you will pay between those dates. I’ll bet you won’t be as impressed once you get the real numbers.
Thanks for your response! Here are some actual guaranteed cash value numbers from inforce ledger
Yr 17 (Current): $31,953
Yr 18: $34,468
Yr 19: $36,989
Yr 20: $39,767
Yearly annualized contract premium is $1680 (currently paid monthly, we should do annual I know!). This is a MetLife Paid-Up at Age 98 whole life policy. If we surrender it at Yr 18 instead of Yr 17 we will get an additional $835 net of premiums. Thats a crazy amount of return, what am I missing?!
What are you missing? If you think it’s a crazy amount of return you’re not doing the math right.
So you’re paying $1680 this year and the guaranteed difference is $34,468 – $31,953 = $2515
So $2,515 – $1680 = $835
$835/$31,953 = 2.61%
I guess if that feels like a “crazy amount of return” then you should be very happy with the performance of this policy going forward because it will likely be even better than that going forward. But I suspect you’re doing the math wrong if you’re super excited about that.
lol – thanks for putting it in perspective! Your math is absolutely spot on ..I guess I was too focused on the short term return on the “new money” ($1680) but you are absolutely right it is the opportunity cost for the entire present cash value rather than just the yearly premiums going forward. If there is no immediate place to invest the entire cash a guaranteed 2.6% return isn’t too bad but there is definitely nothing “crazy” about it! Thanks for your time!
I don’t know your overall risk stratification , but If you’re on year 17 of your policy. Wouldn’t it make sense to just make the whole life , part of the conservative portion of your overall portfolio ? Guaranteed 2.7% that slowly gets higher the longer u have the policy isn’t terrible compared to cds, bonds, etc. it’s one thing if your early on in your policy, but if you’ve already invested in it for 17 years…… unless I’m missing something
At 17 years? Probably. As long as you can afford the premiums, don’t have a better use for your money, and it isn’t a particularly terrible policy.
[Ad hominem attack deleted. If you can’t argue your points without name calling, don’t expect to have your comments on this website.]
Why are Banks the biggest purchasers of this type of insurance?
BOLI https://www.investopedia.com/terms/b/boli.asp
Uninterupted compounding interest is a powerful force……… CONTROL by policy owners as opposed to Stock holders…whereby private contract
Addressed that one in the “Myths” post:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
Help me out, please! 3 years ago, we purchased a Prestige 10-year whole life insurance policy. This is the start of our 4th year. We have paid $15,060.20 for 3 years. Our current CSV is around $28,000. The insurance agent who sold it to us is our good friend (and aside from this, we have disability and term life policies with him). My husband (the physician) is not convinced by my arguments that we should dump this policy and take the $20K loss. Our agent is telling us that we never have to pay the premium again (which seems weird to me). How do I go about evaluating this policy so I can explain to my husband in clear-cut terms that this is a terrible investment? When we acquired the policy, I had done a bit of research and kept reading that WL policies were bad but couldn’t really find anything that wasn’t just opinion-based. My husband views it as a way to have some tax-sheltered money, completely independent of what the market is doing. He keeps saying it’s like your own bank. I’ve encouraged him to read your articles but he’s not one to research too much. Ugh. Here’s some info from our January statement (the CSV has increased a bit). Death Benefit
Basic Death Benefit: $446,000.00 Term Rider: $.00
Death Benefit of Dividend Account: $12,288.99
Total Death Benefit: $458,288.99
Policy Value
Guaranteed Cash Value: $24,026.02
Cash Value of Dividend Account: $3,207.67
Loan Interest Rate: 4.40%
Net Cash Value: $27,233.69 Past Year’s Cash Value Increase: $16,290.45
Current Dividend: $1,057.69
When people ask this question normally I send them a link to this post that you left the comment on that basically answers your question. Why not peruse through it again and let me know if there is part of it that you don’t understand.
As far as your husband, I don’t know of a way to convince someone of something when they don’t want to learn anything about it. If he/you understand how the WL policy works and still want it, I don’t have a problem with you owning it. But most docs, once they understand what they bought, don’t actually want it.
As far as “bank on yourself”, read this post: https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
Okay, a couple questions I have after re-reading the above article. How do I figure out our rate of return? I know it’s negative (obviously) right now but what other info do I need from our agent to make sense of this? I see your equations (i.e., =RATE(5.6,-1941,0,4576,1) = -25%) but I’m not sure what all those numbers stand for or how to calculate my own based on that. Second, is there any option for that loss we will take if we surrender the WLI? It’s about $17,000. I know Vanguard isn’t doing variable annuities anymore. Thanks for your help.
1) This might help: https://www.whitecoatinvestor.com/compound-interest-the-excel-future-value-fv-function/
https://exceljet.net/excel-functions/excel-rate-function
You need the in force illustration to get the numbers (guaranteed and projected) in 5, 10, 20, 30 years. Figure out what your rate of return will be. If you value the insurance, add in a factor for what term life insurance of that amount would cost over that time period. If that’s good enough for you, then keep it. If you have a better use for your money, dump it.
2) You could try a Jefferson National VA until it grows back to basis, or just walk away from the loss.
Is there an online calculator to help decide whether to surrender or keep a whole life insurance policy?
As discussed in the article, you really only need to make one calculation, the RATE calculation which you can use with any spreadsheet or financial calculator. Simply get an inforce illustration and input the numbers. Then decide if the return is worth keeping the policy for you.
Thank you for putting this article up. I was given ownership of several of these types of policies. I knew they were terrible from an investment perspective, but all have now reached the point where the annual payments are usually covered so I never took the time to evaluate the numbers. Seems like I’ve reached a point where it doesn’t hurt to keep them as a fixed rate investment given the low rate environment we are in.
For those who are curious, the go forward rate of return on my policies are between 2% (guaranteed) – 5% (projected) depending how early the death benefit is paid out. These are highly illiquid niche products that should only be bought by a small amount of people that actually want the specialized benefits they provide and not the general public.
I am hoping I might get some help regarding my whole life policy. I purchased a 100k and 50k back in the late 1980’s, when I was about 27 years old. I paid the premiums for a number of years but decided to discontinue at some point as the policy did not support itself as I was lead to believe by the sales agent. I let the premiums be paid by the dividend and loans against the cash value. I am now 60 and have paid the premiums for the past two years. I am trying to determine if I should just go ahead and close the policy and take the net difference in the cash value and the loan or if I should look at paying off the loan and keeping the policy in place. Wonder if you could help me with the analysis to look at the options.
Thanks
Chris
It’s highly likely that it makes sense to keep a whole life policy bought in the 1980s, but you’d have to look at an in-force illustration to know for sure.
Hello,
My name is Scott and I have some deep concerns regarding my financial decisions when I was 21 and just got my first teaching job. I thought I was doing a good thing for my future self by setting up an investment in Northwestern Mutual Fund Adjustable Complife Insurance in order to save for retirement. It has recently been brought to my attention that this may have been ridiculously stupid. It was pitched to me by a friend who was working for them and I naively trusted him. I have been investing $500 a month for 7 years now. Can anyone please explain to me what I should/could be doing instead? Should I stop payments immediately? Should I try and pull my money out? What the f@@@ do I do now?
oh no 🙁
do you know what the cash value is ? Might need to take it to an indipendant advisor or the bank and see if you can pull the money out or borrow against the policy. If your canadaian would have made more sence to put the $500 month into a TFSA or if your American into a Roth IRA and have a term policy instead.
Welcome to the club.
You should almost surely walk away and invest in real investments inside a real retirement account like a Roth IRA or your 401(k) instead.
https://www.whitecoatinvestor.com/why-i-love-the-roth-ira-back-to-basics/
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
Be sure to get term life insurance in place first if you actually have a life insurance need.
https://www.whitecoatinvestor.com/how-to-buy-life-insurance/