By Dr. James M. Dahle, WCI Founder
Whole life insurance is a life-long life insurance policy that gradually accumulates cash value that can be accessed by surrendering the policy or borrowing from the insurance company at pre-set terms with the cash value as collateral. As a general rule, it is a product designed to be sold, not bought. It's rarely the best use of someone's extra cash, even if they are a physician. So, the short answer to whether whole life insurance is worth the premiums you pay has to be, “No, it isn't.”
However, given the persuasiveness of those who sell whole life insurance, it's important to understand the reasoning behind that answer of “no, it's not worth it.” Let's get into the long answer.
Whole Life Insurance Is Designed to Be Sold
What do I mean by a “product designed to be sold?” Well, once people understand how a whole life insurance policy works and its performance vs. alternatives for various financial tasks, very few people actually want whole life insurance. They simply use the money to buy better financial products for whatever their financial need or want may be. For example, here are some of the potential uses of a whole life insurance product and what is usually a better alternative (you can click to enlarge):
If whole life insurance is only rarely the best product for a given need, why does it get purchased so often? There are two primary reasons, and both have to do with the sellers of the product. The most cynical among us consider the first reason to be the most important, but I think the second actually has more to do with it:
- Whole life insurance pays really high commissions, and people do what they are incentivized to do.
- Agents do not understand the chart above because most of their financial education was provided by the insurance company they work for.
Whole life commissions are 50%-110% of the first year's premium. If you buy a policy from an agent that has $40,000 per year premiums, that agent was paid something like $20,000-$40,000 to sell it to you. Now you know why they were giving you such a hard sell. You don't have to sell very many of those a month to have a very nice life.
Surely Someone Likes Whole Life Insurance, Right?
If someone really understands how a whole life policy works and they still want it, I say more power to them. Buy as many policies as your heart desires and your wallet can afford. I have zero problems with someone buying a whole life policy that they really understand and really want. While whole life has its pros and cons, there are a handful of reasonable and appropriate uses of a whole life policy. They're rare, but they certainly exist. Let's go through seven case studies just to demonstrate.
Case Study #1
Joe really wants a guaranteed death benefit to fund a specific need at his death. He wants to endow a chair at his medical school. That costs $1 million right now, but the price goes up every year. He wants to make sure he can do this whether he dies next year or in 30 years, so he highly values the guarantee that is provided by a permanent life insurance policy—even if it means that, on average, he is likely to leave less money to the school. He considered a guaranteed universal life policy. In the end, he opted for a whole life insurance policy instead, because the guaranteed death benefit goes up a little bit each year, just like the cost of endowing a chair.
Case Study #2
Sally hates the government, and she hates banks. For some reason, insurance companies are excluded from her institutional hate list. She frequently buys real estate properties, and she would like to have a ready source of funds with pre-set terms that can be accessed within a week or two without any underwriting hassles. It does not bother her that she will earn a negative return on those funds for the first few years, as she feels the higher long-term returns on her cash will make up for it. She buys a whole life policy well-designed to do the “Bank on Yourself/Infinite Banking” technique with paid-up additions and non-direct recognition.
Case Study #3
Jacque and Talifa are partners in a successful business. While they are both still healthy, they plan to run this business into their 70s or 80s. However, if one of them were to croak, they would not want to be forced into running the business with the heirs of the other. So, they decided to have the business buy a whole life insurance policy on each of them for approximately half of the value of the business. When one of them dies, the remaining partner now has the cash to buy out the heirs of the deceased partner as per the buy/sell agreement. To save money, they may even just buy a single “first-to-die” policy for this need.
Case Study #4
Bobby Jo owns a large farm and is in good health. She really wants to keep it intact at her death, but it is 95% of her net worth and she has four kids. She wants them all to have an equal inheritance, but only one of them is interested in the farm and she does not want it broken up, anyway. That child has some cash and can afford to take out a mortgage for part of the farm but can't afford to buy the whole thing from her siblings. So, Bobby Jo decides to use some of the significant income from the farm and use it to buy a whole life insurance policy. That policy will provide most of the inheritance in cash for the other three siblings, and the child keeping the farm can cover the rest of it.
Case Study #5
Rodrigo lays awake at night worrying about losing everything he has worked so hard for. He is in a high-risk medical specialty and has already been named six times in his career, settled one lawsuit, and then lost one in court with a slightly above policy limits payout. One of the injury attorneys in the town really has it out for him. But he loves his practice and both wants and needs to keep practicing. He lives in a state that does not provide a lot of asset protection benefits, but it does fully protect retirement accounts and whole life insurance from creditors in bankruptcy. He is already maxing out retirement accounts (including Backdoor Roth IRAs each year) and has already done several large Roth conversions. He is considering forming an overseas trust but decides to put money into a whole life insurance policy instead. He knows the returns won't be as high as just investing the money in taxable, but he finds that asset protection benefit to be very valuable.
Case Study #6
Bella has been very successful and has an estate tax problem. She has decided to form an irrevocable trust to provide for her adult children upon her death and to try to minimize the estate tax bill. She considered putting stocks, bonds, and real estate into the trust, which could maximize the return (and the amount of money she is likely to pass to the kids). Instead, she finds the guarantee of a large amount in the trust should she die unexpectedly early combined with the hassle-free/tax-free nature of just having one big whole life insurance policy in the trust to be attractive.
Case Study #7
Carinda and Pablo have an adult disabled child. They are nowhere near financial independence, despite being in their early 60s. They expect to work into their 70s at a minimum, and they are terrified that their child will be thrown into poverty upon their death. Providing for him is their most important financial goal even if it means they'll be living primarily on Social Security and a small pension in their later years. They have started an ABLE account, but it won't be large enough to really meet the needs. So, they have purchased a second-to-die, 10-pay whole life insurance policy, and they will retire as soon as they've made the 10 annual premium payments, knowing the proceeds of that policy, annuitized inside a trust, will provide for their child.
Conclusion: Is Whole Life Insurance Worth It?
I hope this shows some of the situations where a whole life policy can make sense. Note that none of these are medical students or residents. None are young attendings with student loans and practice loans. In each case, the purchaser understands how the policy works and the trade-offs they are giving up in exchange for the benefits they want.
When that is not the case, you are far more likely to see doctors regret the purchase of whole life insurance and even feel like they have fallen for the “whole life scam.” Seventy-five percent of white coat investors who have purchased a whole life policy (including me) regret their decision, and the Society of Actuaries has found that about 80% of whole life policies are surrendered prior to death. Don't be part of the majority of purchasers. Buying a policy is like getting married. It's either “til death do you part,” or breaking up is going to be really expensive. Do the same amount of due diligence into the purchase as you would take getting married.
Whole life insurance has quite a few niche uses, but for most financial needs, there is a much better financial product out there. Just saying “no” and walking out the door is unlikely to lead to regret. Whole life insurance is dramatically oversold by ignorant insurance agents facing a massive conflict of interest. While I am well known for being “anti-whole life,” I have less of a problem with the policies themselves (although most seem designed to maximize the commission rather than the desired benefit) and more of a problem with the manner in and frequency with which they are sold.
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What do you think? Have you bought a whole life policy? Do you regret it? Why did you buy it? Comment below!