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.
As you accumulate wealth, you need a way to protect your assets. WCI’s newest book is The White Coat Investor's Guide to Asset Protection, and it gives you techniques you can use to safeguard your money while also providing the most comprehensive list of state-specific asset protection laws ever published. Pick up the Amazon best-selling book today and protect your wealth!
What do you think? Have you bought a whole life policy? Do you regret it? Why did you buy it? Comment below!
Thanks for the article. It helped convince my friend not to buy an awful whole life policy. We appreciate everything you do.
Your advice on whole life has been SO HELPFUL. My financial advisor presented this as an option for the bank on yourself way of thinking – I felt like it was not for me, and your blog posts honestly were the clearest way I could find that explained it. Very much appreciated!!
My pleasure.
If you hold bonds in your portfolio, then you should love whole life insurance.
Nah, they’re not the same thing. In the first 10-20 years, the bonds tend to outperform. In the long run, hard to say. Bonds don’t have a death benefit either.
This is one of the “myths” of whole life I’ve debunked in the past.
Discussed in Myth # 5: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Might want to check out # 4 while you’re at it.
It is not enough to hold bonds. You could easily be better off holding taxable bonds than WL. Over a long period, if you keep the policy, it is possible for the WL to eventually catch up. Or not
Many years ago when marginal rates were much higher, it might have been possible to beat a bond portfolio in a taxable account with WL. At tax rates of 80%, that tax gree growth was worth a lot. With current rates, even with bonds, it is hard for WL to compete.
The good rationales are the limited cases Jim mentions. It is just so expensive that it is hard to break even vs taxable or tax exempt bonds.
With taxable stocks having much lower tax rates, it is even harder for WL to compete.
I guess my mileage varies a little.
I’m in the minority. But now 9 years into owning some whole life that is a small portion of my savings per year I plan to ride it out as part of the 20% of people that don’t surrender. I initially regretted the purchase a couple years in when I found WCI. But over time that regret has waned. The cash value is growing and it is relatively safe which feels somewhat comforting when looking the bear market in the eyes. Though inflation will kill the vibe. I kinda look at the WL annual outlay as a bond investment of sorts. I do look forward to around age 55 when I can stop paying and the dividends hopefully large enough to take over paying the premiums
The reason I appreciate the policies is that it provides me satisfaction and peace of mind knowing that my children or grandchildren will have a guaranteed inheritance should I live a long life where I actually spend down my retirement wealth. If I’m healthy I don’t want to feel guilty I’m golfing at a country club when that money could be important for my estate etc
I am glad our agent didn’t oversell us “too much” as he had a long relationship with our family and I believe had our best interest at heart. I even asked him to buy more at the time I was drinking the coolaid and he directed us just to have cheaper term life while the kids were young and that the modest policies we were getting would be sufficient for our goals.
I’m glad WCI is here to keep the industry honest and agree it’s not for everyone and caution not to be victims of a policy that’s way too expensive or not set up correctly. Weigh the risks and benefits and look at it from all angles.
My angle is a small one admittedly. If there is any way you think you may regret it and forfeit the policy then do not buy it.
I will add one last point.
With the dividend accumulations that could be withdrawn tax free or the cash value which could be borrowed against (though I don’t want to nor plan to have to do that) it is a decent place to call your emergency fund
My entire life I’ve never had to dip into my emergency fund thankfully and hope I wouldn’t need to access the WL policy either.
But it’s somewhat nice knowing it’s there in case of emergency so I feel comfortable having less cash than I was, sitting in my savings account awaiting the rainy day and collecting inflation dust
Hi Seabass: In general, I believe you are correct on this emerg fund concept. My policy (that I wish I had never bought), is also now serving as my emergency cash fund. We haven’t yet needed to use it for that. But it’s not lost on me that if I ever really needed to tap my policy cash value for an emergency, there’s a good chance I also wouldn’t be able to afford the premiums and the policy could lapse. In my case, that wouldn’t be the end of the world because I don’t need the death benefit. But if I really, really wanted the death benefit, it could end up as a failed case use for WLI.
I think WCI’s point in the article stands. There are going to be some uses for cash value life insurance, but there are almost always better ways to achieve those financial goals, and most of us end up regretting the purchase. Once we own it though, many of us fall victim to the “endowment effect” and find justification for the regrettable purchase.
I guess it could function as part of your emergency fund eventually, but up front, you basically lose something like 1/3 of your first year’s premium. That’s a terrible return on something where the return of your money matters more than the return on your money.
Have you broken even yet?
If I surrendered now I will have broken even with the money outlayed. But understand that with inflation and missed opportunity of if money invested elsewhere, it would not look pretty
I am certainly not advocating for WL to be even called an “investment” as the cash or dividends would never be better than almost any other investment
I truly am more interested in the death benefit for my heirs. Insuring them no matter what life brings for me. Especially if I retire on the early side.
Once the policy is paying for itself it will be auto pilot.
The cash outlay each year for me is less than 10% of my savings and investments etc so it’s not like I’m choosing WL and ignoring the other stuff. It’s a small piece of the puzzle where the “return” only makes sense if you (or in this case your loved ones) actually see the chunk of death benefit at the end.
If you want a permanent death benefit, whole life does that well.
I am not a physician, just a retired project manager. I enjoy your site since you give excellent financial information. I wanted to give my 2 cents relating to the whole life question. When I was in college I had insurance agents hounding me in my senior year. They offered me a whole life policy. Since I was a business major I just used my math of finance book to calculate that despite giving the insurance company thousands and thousands of $$ starting at my early age of 21, I calculated that the seemingly large cash value at age 70, actually calculated a return on my money of a whopping 3/4 of a percent. The balance of my money went to commissions or profit to the insurance company. After I found this out i didn’t buy any insurance product until i became more familiar with it.
That’s a pretty terrible policy. I’d expect to make 3-4% on a good one over 50 years or so.
WLI is going to be a drag to your financial freedom journey, don’t ever buy one, buy term and invest the rest is still the way to go.
awesome article Jim! too bad I didn’t have your chart when I got screwed into buying whole life policies for me and my wife. I just didn’t have a basis of comparison and realized the other investment vehicles that are better than whole life for specific goals.
One use case that you didn’t mention is what Wade Pfau purports as a great use of whole life in its use as a “buffer” asset to borrow from the cash value during a bear market while retired so you don’t sell equities, especially if it enables you to delay social security until age 70. do you agree with Wade’s buffer asset argument as an appropriate use of whole life?
and while we’re at it, how about Wade’s use of a reverse mortgage of a buffer asset? Seems like Wade makes good arguments, but then again as a Princeton Ph’d he is well qualified to make financial napalm like whole life and reverse mortgages seem like retirement unicorn and rainbows.
I find that a weak argument. The reason why is that your other option is having twice as much money by investing in stocks or real estate instead. Even if it drops in half in a terrible bear, you still have the same amount of money as you would with whole life.
Not a big fan of reverse mortgages either. That’s a last resort. If you’re short on money for retirement, I think a SPIA is a better option to maximize spending from what you have.
I agree with your advice IF you’re going into medicine. HOWEVER, as someone who worked decades as a freelancer in non-medical fields with highly variable income I regret not buying a WLI policy in my early to mid 20s when it was first offered. I offer the following thoughts, not to med students and doctors; but to doctor’s with children who want those children to be financially responsible for themselves and not to have to support them.
By my mid 40s the premium would have been paid for by the returns on the WLI policy itself and I would now have life insurance. The cost of the premiums in my early to mid 20s was ridiculously low. I would never advise someone to start buying WLI in their 30s because by that point the premiums are too expensive.
The argument made to me in my early 20s to purchase term versus WLI was the same as what was stated in the article; I could better use the money investing elsewhere and I agree with that statement. But ….
What happened in reality is, given the variability of my income month to month and year to year, it was challenging to make the sustained contributions to savings and other financial products with higher returns on investments. Some years I had enough money to do it, other years I was stretched too thin by a lack of earnings or accomplishing other goals like buying our first home.
The premiums for term life insurance kept escalating as I got older. Eventually I stopped carrying life insurance, around the time I started medical residency in my early 50s, because the costs of the term premiums were too high as a percentage of my total income. If I had started with WLI in my early 20s those premiums would have been paid for in their entirety in my 50s out of the returns on the policy and I would enjoy the security of now having that life insurance.
I agree with everything you say if you are following the path of a physician. But the children of your readers are likely following different paths and it may be worth their parents considering helping them buy WLI in their early 20s to ensure they have continuation of life insurance later in life should they be charting careers in more risky paths with less predictable annual income.
I’m having trouble understanding. You had years when you couldn’t save for retirement, but believe you would have been able to keep up with whole life insurance premiums? A $1M whole life insurance policy (on average) is going to cost a healthy 20 something about $10,000/year. If you’d experienced widely variable income from year to year and couldn’t set aside any money for retirement, I don’t see how you’d be able to keep up with your whole life insurance payments and keep your policy in force either. This argument leaves me perplexed.
You can make the premiums low by buying a policy early and/or not buying a very big one if that’s your only goal. But that really doesn’t change the math on how it performs.
Yes agreed to your response to my post WCI; You can make the premiums low by buying a policy and or not buying a very big one. Twenty years later, in your 40s you have enough money that the return on that whole life policy pays for itself and you don’t have to shell out the money for premiums . One less thing to worry about financially. Though it is not as good a use of money, if you have money consistently. I was never talking about a $1M policy. Again I wrote what I did, not for physicians but perhaps for the children of physician or non-physicians, I noted at least one response from a non-physician. By the time you are in your 40s the policy is generating enough returns it pays its own premium and the policy holder is guaranteed to have some life insurance through their life. One less financial obligation. Not what a physician should do but for those not in medicine, worth the thought.
Another insurance product you pay a lot less for when you’re younger; long term care. I have a 96 year old patient who told me he has being paying for it for years and been using it for over 10 years. Again, the younger you buy this the lower the premiums. Curious what WCI thinks about long term care insurance?
A lot of wrong assumptions in your post. A policy purchased TODAY won’t break even for 17 years on the illustrated side (guaranteed is even a lot longer if ever). It won’t pay for itself for a decade longer illustrated. You would have to use limited pay or overfunding or trigger a paid up status to get at 20. You do realize that very old policies were purchased when treasuries were double digits? WL has always done poor in a rapid interest rate increasing environment. There are times when savings accounts beats it. Easily could happen again. WL has benefited from a greater than 30 year decreasing interest rate environment with people forgetting how high fixed was in the past.
Also horrible idea to buy on kids. It’s actually not a better deal. Kids are harder to underwrite and they factor that in with the cost. It’s also why you ser all those commercials from Gerber and the rest say the policy doubles at 18 or whatever for the same premium. At certain ages they can underwrite “correctly”. There is no magic. With very young they are just using your money longer. You can do that but they have to factor in unknowns. They also limit insurability with kids to reduce their risk and with inflation these things aren’t great protection. Only buy any life insurance on someone whose loss causes an economic hardship. That doesn’t exist with kids. You are throwing good money away.
Those not in medicine (or other high earners) typically have even more better uses for their money than whole life. And the whole “it pays for itself” thing ignores opportunity cost. If you let the dividends pay the premiums instead of buying additional insurance with them, you get a lower rate of return on your investment. No free lunch.
WCI,
How do you feel about these policies for very very high income people? What about someone who is making millions a year, in the top tax bracket now and expects to be in the top tax bracket in retirement.
Does the tax break on such a high income earner ever outpace the low returns where the value grows into the millions?
You can afford the lower returns better if you’re wealthier, that’s for sure. Maybe asset protection matters more to you (and your state offers asset protection for WL) than your returns. But I would consider myself a “very, very high income person” and I don’t have one.
But no, it’s not worth it “just for the tax break” IMHO. You really have to need/want/value the permanent death benefit for it to work out well.
Unfortunately I’m not the very very high income person. This is a friend of mine who chose it solely for the tax benefit. His response was that he saves 37% federal and 6% state tax forever and even the lower return of a whole life policy is worth the tax break.
I could not convince him that in the long run of 30-50 years the taxable account will outpace any tax benefit but never did the math because I can not predict the future market returns vs the long term returns of an unknown policy. It’s not for the death benefit. It’s solely for the tax break. I could only imagine how much money a multi million dollar policy earned the salesperson. I conceded that maybe he is right and we moved on with life to never talk about it again.
Your friend doesn’t understand taxes. First off both a taxable account and whole life are purchased with after tax dollars in order to get the income free tax death benefit. So he never saved that at all. If you invested in a taxable account then it too gets a step up at death. All loans are tax free. A taxable account can be invested very tax efficiently so that the drag is small. If you lapse or surrender WL any gains are income rates instead of long term capital gains. Your friend lost a lot of money.
Can these policies be bought through a personal business to be a business expense and therefor tax free?
No
If paid with pretax money then the death benefit is not tax free.
You would have to buy it out with after tax money or distribute it. Very bad idea.
Kind of. It gets tricky.
Impossible to know for sure, but it’s easy to calculate which way seems the smarter way to bet with any reasonable assumptions!
At any rate, comparing to 37% federal and 6% state assumes an incredibly tax-inefficient investment. Stocks and real estate are far more tax-efficient than that.
For this who had bought Whole Life don’t feel too bad. It can be a stabilizing factor in your retirement plan. Dr Wade Pfau PhD CFA is a financial adviser with prolific peer-reviewed publication published this follow ing white paper: Integrating Whole Life insurance into a retirement Plan in 2019. He included statistics and calculations of traditional retirement plan (401K) vs traditional plus WHI.
It may make an interesting reading for younger physicians looking to build a successful retirement plan
https://retirementincomejournal.com/wp-content/uploads/2020/03/WBC-Whitepaper-Integrating-Whole-Life-Insurance-into-a-Retirement-Income-Plan-Emphasis-on-Cash-Value-as-a-Volatility-Buffer-Asset.pdf
The problem with these studies is they assume a taxable account of a certain size and a whole life account of the same size. The real comparison should be with a taxable account that is twice the size since given the likely returns, that’s likely to be what actually happens. I’ll take twice as much money, thank you very much.
The easiest way to explain his writings on WL is that the white papers have not been accepted for publication in a peer reviewed journal even after years. They all have assumptions that are purposefully favoring WL. My favorite is the one where for assumed fees of the other account he was given numbers by the insurance company that paid him to do the work. Not industry average or anything reasonable. Also assumed everyone got the illustrated results even though 85% of people lapse. I understand he has done good work on other retirement topics but I have yet to see any regarding WL. Read the threads at bogleheads.org for more on his WL work.
So, what’s the answer for those of us who are 6 years into a WL policy ($500k)? Do I dump it or see it through? I’m 47 and only plan on working until I’m 60.
See this article:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
Thank you for the article. I was sold the policy as a “be your own bank” scenario. I do not have a distrust of the banking system and am looking for other options for the be your own bank scenario outside of the insurance game. Do you have a reference for that as well?
Correction on numbers…policy is $1.3M and annual premium is $25K. Guaranteed cash surrender value today is $90K
If you want to BOY/IB, you’re going to need an insurance policy designed to do that. Or you can just do what the rest of us do.
If one buys a policy, it’s actually best NOT to take loans.
If it’s a direct recognition company like most of the better mutuals then they pay you a lower dividend on the loan amount in addition to the high interest rates. If it’s non direct recognition then those companies have always in the end paid less in dividends since there is no magic in this world. If they give you a “better loan” then that’s less for dividends. If you are going to take loans however it’s still the way to go.
Old policies you get an illustration and determine the IRR and see if that’s okay with you as a tax deferred rate compared to whatever you would invest in otherwise.
Of course best not to buy one.
A new eager agent tacked on a WL policy for $54 a month but only 10k death benefit to my policies even though I told him it didn’t sound great to me. I’m 62 and have much more net worth than that. I found your blog looking up if it was worth it because I told him to cancel it! Seems I made the right decision. Thanks for the info.
Our pleasure.
Hi everyone. Looking for some advice. I am newly married, and my parents have told me that I’m going to be given a whole-life insurance policy that my grandparents set up for myself and my siblings several years ago before they died. I am unsure what to do with this? Obviously, I would never choose to buy whole life insurance.
I already have a term life policy that is adequate, but I’m wondering if anyone has recommendations on any smart ways to use this policy.
Or is WLI such a scam, that I should not accept this gift??
Thanks for your input!
First, tell them thank you for their kind gift.
Second, WLI isn’t a scam. It’s oversold. People usually have a better use for their money. But it’s not a scam.
Third, of course you should accept the gift for both relationship and financial reasons. The policy has value, even if you just turn around and cash it out.
Fourth, whether you should keep the policy or surrender it after it is given to you is a completely different question. The answer to which is found in the post above. I know you just want someone to tell you what to do, but the answer isn’t the same for every person and every policy. Thus this post. Have you followed the steps in the post?