By Dr. James M. Dahle, WCI Founder
,In yet another way to mix insurance and investing (rarely if ever a good idea), I was recently mailed a copy of the book Lifetime Economic Acceleration Process by Robert Castiglione which introduces the reader to the “LEAP” system. I recommend you don't buy it and I certainly recommend avoiding any adviser using this system. I'm able to see the good in a lot of “financial systems,” but this one is so bad it's difficult to find any redeeming value in it at all.
An Introduction to the LEAP System
The book really serves as nothing more than an introduction to the LEAP system, effectively described to me by a former agent/salesman as “All Roads Lead To Whole Life.” After getting a grip on what LEAP is, I found it pretty funny the word “insurance” doesn't appear until page 44/142, where the book attempts to get the reader to think of permanent life insurance as similar to a Roth IRA. What could the author possibly be trying to hide? Oh, perhaps it's the fact that the whole LEAP system is designed to get people to buy whole life insurance inappropriately. (Actually, they don't care if you buy it appropriately or inappropriately, as long as you buy it.) Here's a couple of quotes to give you a flavor for the book:
“Whole life is the king of all policies providing the most benefits.”
“When you take into account all the benefits of growth in guaranteed cash value, declared dividends, income tax savings, avoiding costly term-insurance premiums, and the high overall rate of return over a period of time, it is very difficult to find a savings or investment vehicle that has consistently returned more money than whole life insurance.”
“Have whole-life insurance death benefits equal to your net worth at retirement.”
It's All About “Acceleration”
The LEAP system's big point is that you need to “accelerate” your money. That sounds pretty good, right? Who wants their money to be moving slowly, especially when it's supposed to be growing. I want my money going 100 mph! What do they mean by accelerate though? The book explains “each dollar must be used for multiple purposes” and that you should “use the cash-flow-of-money system that moves your money from one asset to another to gain a greater rate of return, more benefits, and tax savings.” If it were written in plain English, it would clearly state (probably before page 44) that to accelerate means to leverage. The author advocates that you invest in whole life insurance, then borrow back the proceeds to use for other purposes. He also advocates that you use home equity money to buy life insurance. Then you keep the money moving as fast as you can in and out of whole life insurance policies and mortgages until it is properly accelerated. Why does this sound familiar? Because you just read about it in February in my 5-day review of Missed Fortune. It's the same old crap in a different form. Just like Bank on Yourself or Infinite Banking, it's mostly a “financial system” that enables its proponents to sell more whole life insurance.
LEAP in a Nutshell
If the author really wanted the reader to understand what LEAP is, he would print this on the first page of a one page book:
- Don't pre-pay your mortgage because you can probably get a higher rate of return elsewhere, especially when you consider the benefits of tax-deductible mortgage interest.
- Buy lots and lots of insurance. Insure your life to “full economic value” (rather than doing some kind of analysis to figure out how much your family might need if you die) using whole life insurance. Keep buying more and more throughout your life.
- Don't invest in tax-deferred retirement vehicles because it's possible you'll pay more taxes later (and might even pay at a higher tax rate.) Instead, you can use this money to buy whole life insurance.
Why Compound Interest Sucks
A really interesting chapter is the one where the author explains how compound interest isn't all it is cracked up to be. He goes into a bizarre theory about the disadvantages and dangers of compounding. You didn't realize there were disadvantages, did you? He separates the infamous compound-interest-demonstrating “mountain chart” into 3 phases- accumulation, growth and “take-off” and attempts to get the reader to believe that compound interest somehow works differently the first 10 years than in years 20-30 and complains that this is somehow a dangerous situation and compound interest is only helpful after decades. Then he contradicts himself to say you should only use “compounding accounts” for 3-5 years.
Next he points out that with a tax-deferred retirement account you'll owe more tax later after years of compounding than you would owe if you just paid the taxes now. This is true, but irrelevant. For example, if you contribute $10K now to a 401(k), saving $3K in taxes, and then that $10K grows to $100K in retirement, even if you end up paying taxes at a lower rate in retirement (say 20% overall), you'll owe $20K. See! More taxes! The goal isn't to pay the least amount of tax, of course, but to have the most money after-tax. The other disadvantage of compound interest according to the author is that it doesn't provide health benefits, disability benefits, death benefits, or asset protection. Seriously. And no, I can't follow his extraordinary leap to believing that whole life insurance provides “health benefits” either.
The Worst Chapter in Lifetime Economic Acceleration Process (LEAP)
There is no better demonstration of the LEAP philosophy (“All Roads Lead to Whole Life”) than the chapter in the book about paying for college. I couldn't believe someone had the gall to put this insanity into print. The author cautions against using tax-advantaged college savings plans like 529s and ESAs because they have “the same drawbacks as other tax-advantaged plans,” like, you know, compound interest, tax-free growth, and tax-free withdrawals. He then goes on to say that these plans “have only one use” and that tying your money up to pay for your kid's college leads to many unspecified “lost opportunities and costs.” Then he suggests that instead of asking how you can pay for college, you should be asking how you can pay for college, get all your money back, and guarantee your children's education even if you “become disabled or die, the market declines, interest rates drop, [you] get sued, or college costs skyrocket?. . . the money you pay for college is lost to you and you will never see it again for other uses . . . what is the point of having the earnings [grow] tax-free and then giving all the money to the college?” Eventually, he gives you the solution to your college savings woes, which is . . . wait for it . . . WHOLE LIFE INSURANCE!
He then mentions all the benefits of using whole life insurance to pay for college (or better yet, taking out loans with the insurance policy as collateral), while failing to mention a single downside of this approach. It gets even better. He finally admits that buying whole life insurance to pay for college might not be a good idea if your kid is already a teenager. Actually, he doesn't admit that, he just says that you might have to combine it with some other options like a home equity loan or a 529. Let's look at his 13 benefits of using whole life insurance to pay for college:
- Tax-deferral – Where's the tax deferral? There is none other than the very minor effect of the cash value not being taxed as it grows. It pales in comparison to the fact that most whole life policies don't break even for a decade. If there are no gains (premiums paid minus surrender value), there are no taxes due anyway no matter how much the cash value “grows.”
- Disability protection – The assumption here, of course, is that you buy a disability rider on your whole life policy that pays the premiums if you cannot. Of course, once you borrow the money out of the policy (or take out another loan with the policy as collateral) the disability rider doesn't pay that loan back. He also fails to mention the obvious alternative strategy – buying disability insurance.
- Pre-mature death protection – Again, the obvious alternative (buying an inexpensive term life insurance policy) isn't mentioned.
- Possible creditor protection – If you want college funds protected from your creditors, 529s offer significant protection, although it varies by state (just like whole life insurance.) One alternative, of course, being that you can actually use a UGMA 529, so the money isn't yours anyway. Irrevocable trusts or just a standard UGMA accounts are also options if credit protection of your 529 is a big concern for you.
- Qualify for financial aid – There are lots of strategies to minimize the assets that count against you on a FAFSA, but the truth is that most financial aid isn't free money, it's loans. 529s and ESAs obviously do count against you in a way that life insurance does not, but if you have enough money to save a significant amount for college in a 529 or a whole life policy, your kid isn't going to get any need-based grants or scholarships anyway, at least in a way that gives whole life insurance a significant benefit over more typical college savings accounts.
- Convert term-life insurance costs – Uhhh . . . yes, if you have a huge whole life policy you don't need a huge term life policy so you can save those costs. Never mind that the insurance component of a whole life policy is more expensive than a term policy due to less transparency and competition in the market.
- Liquidity without penalty – What exactly is the penalty of liquidating a 529, ESA, savings bonds etc for college costs? There is none. It's a straw man argument. How about liquidity without paying interest? That's something you get out of a 529 that you don't get out of a whole life policy unless you cancel the policy, which comes with its own tax consequences not found in a 529.
- No stock-market losses – No stock market gains either. When the expected long-term return (and I'm talking 3 decades plus) for a whole life policy is 2-5% a year perhaps one ought to be more concerned about not getting stock market gains than enduring stock market losses.
- No income taxes – Again, what income taxes do you pay on 529, ESA, and savings bond withdrawals used for college? None. It's another straw man.
- Peace of mind – Against what? Knowing you won't have enough to pay for college due to the high costs of the whole life policy and the low returns available through it, especially over periods of time that most people use to save for college (for instance, 18 years?) If you're so scared of the market that you don't want your college savings in it, buy savings bonds or just get the bond fund in your 529. If you're scared you'll die or become disabled, buy a term life or a disability policy to cover those costs.
- Elimination of lost-opportunity cost – There are lost opportunity costs no matter what you spend your money on. If you buy a whole life policy, you can't fund a 529. If you save for college, you can't buy a boat. There's always lost opportunity cost and you don't get it back by using whole life instead of a more traditional instrument. A whole life salesman likes to say that the policy cash value is still growing even though you borrowed money out of the policy. The truth is it is growing slower if you borrow the money out in a direct recognition policy, but even if you get a non-direct recognition policy you still have to pay the loan back with interest (or the interest will be taken out of your return.)
- Enhanced retirement income – While it is true that you can borrow from your whole life policy to fund your retirement, there are far better ways to pay for retirement. Permanent life insurance is best used to cover a need for a permanent death benefit.
- Estate planning – Unless you have a very illiquid (think family farm or small business) or very large ($5M single, $10M married, indexed to inflation) estate there are no estate planning benefits with permanent life insurance.
What a contrived list of benefits! Using whole life insurance as a college savings vehicle just isn't very smart no matter how much spin you put on it.
Conclusion
LEAP is a system designed to help agents sell you whole life insurance, not a way for you to reach greater wealth. It exists to sell software ($2,500 a pop) and training courses ($750 each) to financial planners so they in turn can get you to buy whole life policies. It is heavily used by Guardian insurance agents you may be meeting with to buy disability insurance. If you're already involved in the LEAP System or considering getting involved, do yourself a favor and spend a few bucks to get insurance expert Joseph Belth's articles about it. It'll be $20 well spent. The LEAP System, like most others that mix insurance and investing, is a product to steer clear of.
Keep in mind that many of these insurance companies have similar programs with different names. For instance Guardian likes to use one called Living Balance. Its the same garbage. Its all designed to get you to think you should purchase insurance products while not telling you the full truth (that you can do better). It isnt by chance that none of these books nor any of the these programs list insurance in the name. That should tell you something right there. I find it funny that the insurance people are always mad that permanent insurance gets a bad rap but dont realize the reason it has such a bad rap is because of how they sell it and they seem to do nothing to change that.
WCI you were too easy on them in this article. For instance a typically vanilla whole life policy will take a lot longer for premiums to equal CSV.
If one wants an example of some of the problems of using whole life to pay for things like college, then look no further than this thread at bogleheads from last week.
http://www.bogleheads.org/forum/viewtopic.php?f=2&t=116341
It can be very risky taking loans against a policy early on.
In fairness of the investment and insurance planner (this is rare), whole life can be very “risk adjusted NET return” competitive. Like insurance was the original 401 (k) that was tax deferred and tax free. The 20 year historical Dividend crediting of top Mutual carriers is 7% (no risk, no taxes and no advisor expense). WL does have expenses (for a benefit or guarantee). The 20 year S&P 500 historical is similar to %, deduct taxes and fees and the net is similar. WL is good for 30% of your asset base and balance can be invested. I would look to owning individual stocks and bonds. Insurance is the can the highest ROI when the worst event happens (death), the other just provide market values at time of death. The historical dividends from various mutual companies have been impressive and have bottomed at 6%, while CD’s are paying less than 1% (risk comparison). Should interest rates go up and equities stall or go negative (revisit 20 year comparison), WL may outperform with much less risk and just targeted expense that provide benefits/guarantees.
The historical return of stocks is not similar to the historical return of life insurance, I’m sorry. You’re welcome to your opinions, but you can’t have your own facts. Nor was life insurance the original retirement account.
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
Nor is the dividend rate the return.
This is the exact book that my Guardian agent sent me years ago when I got talked into opening my whole life insurance plan when I was in my 20’s. The agent in fact quoted this book and “explained” how a 401k/403b plan with dollar-for-dollar matching would be a worse financial decision than whole life. I have since surrendered the policy after a few years at a loss, after I realized how bad it was. Whole life insurance was the WORST financial mistake I have made in my life. I’m thankful I I learned this financial lesson early in life.
I am at a loss for words. The WORST financial mistake you made was surrendering your whole life policy. That is going to cost you at least a couple hundred thousand dollars over your lifetime. You will get another whole life policy, and when you do, you will regret that you cancelled your policy at such a young and insurable age. By then you would have had enough cash value that the dividends would have been paying the premium and your step-ups would be exponential. Being a money manager myself I disagree with some of the author’s illustrations. However, the underlying economic principles of money holds much value. For a retail investor like yourself I would strongly encourage you to reconsider what you think are good financial decisions.
Really? The WORST mistake? Buying or selling a whole life policy is unlikely to be the worst or the best financial decision anyone ever makes. If the worst thing someone does is surrender (or purchase) whole life insurance, they’re going to be just fine.
I’m surprised you can put a dollar figure on how much that is “going to cost him” over his lifetime given that he didn’t mention how large his policy was. Anyone who thinks passing up a dollar for dollar match in a 401K in order to buy whole life insurance is a good idea is simply mistaken, and likely sells whole life insurance for a living.
I am convinced you really do not understand Dividend Paying Whole Life. I have a 401k and 9 whole life policies. My whole life destroys my 401k. It is a system and process not just a product. I have used my policies to finance my MRI, CT, and office buildings. It took me 2 years to understand infinite banking. You really have no idea how powerful a properly written policy truly is. Ask those who retired in 2008 how is there 401k nest egg doing? What is your tax rate going to be in 20 years? My retirement grows tax free and will be used tax free without risk. No comparison.
Ask yourself please why you need 9 policies…….while you are at it research & understand your life insurance dividends are simply a refund of a guaranteed overcharge thus not taxable. Look to the future & for your sake hope your policies never implode as you & your family will not like the tax bill.
What exactly do you think I don’t understand? You don’t think I understand the returns of the policy? How to borrow against it? What non-recognition dividends are? What paid up additions are?
Does it bother you that I actually do understand all that and STILL don’t think it’s a good idea?
Tax-free yes. Interest-free no (although non-recognition and wash loans are pretty close.) But without taking into account the rate of return, you still can’t arrive at the correct conclusion.
As far as 2008 retirees, you might be surprised how well they’re doing. https://www.bogleheads.org/forum/viewtopic.php?t=99278
The best growth of the whole life policy occurs after the 12th year. I’m not clear on how your policy was structured for cash accumulation, but I agree with Chris, surrendering was the worst thing you could do.
You would have been much better off borrowing the money from the policy if you needed cash. At least the value would still be compounding.
Craig,
Dave didn’t say he surrendered the policy because he needed the cash. He said specifically he surrendered the policy when he realized how bad it was.
The thirteen benefits listed, while possible options for Life Insurance, should be considered only after a thorough retirement plan analysis.
Using life insurance as an accumulation/distribution option for retirement income may make sense. One needs to know the effective tax rate during retirement. You have to know will taxes out-weight the cost of owner the policy or vice versa. The tax-deferred accumulations with non-tax withdrawals/loans and a no lapse design may be one method to increase income for retirement. The most effective design is to use the least amount of life insurance to maximize accumulations.
A triple A rated company is needed with a proven dividend scale for long term security. When properly designed the surrender value will equal or be very close to premiums paid after 10 years. The caveats – age – do not plan to implement this strategy with someone older than 52. You won’t have the time to compound the accumulated cash value. Health – the client needs to have minimal health issues. The cost of insurance component will be too expensive for someone with health issues.
If someone needs money for college, this plan is not for them. You don’t mortgage the house or drop your 401k for this technique. Is it for everyone? Absolutely not.
The client needs to have the cash flow to pay premiums over the number of years designed. The design needs to be suitable and flexible at the same time. An experienced properly trained agent knows how to help the client decide if this strategy makes sense.
I recently had a similar experience with a guardian agent. A wealth management advisor (another person who wants my money) says LEAP stands for Let Every Agent Prosper
Like all products, Whole Life Insurance has it’s benefits, it shouldn’t be an end all or be all. Many of the posts I read and the LEAP book and LEAP process content are abusive and not in full context. I was taught and used the LEAP process as an agent, and although I am not a LEAP agent now I do not think all of the LEAP content is bad. I do believe that many who use LEAP and promote Whole Life insurance only are doing a great disfavor to their clients. The LEAP process does allow you to plug in all your financial decisions and see how things will roll out into the future should things remain exactly the same in the financial plan. Of course that is not the intent of any good financial plan-to leave everything exactly how it is. I do believe all financial advisors and insurance agents believe in what they sell, some for their own benefit and some for their clients benefit as they benefit from a sale. No one who is selling insurance or financial products does so for no commission. So please state the fact that all products have up sides and down sides to any client, depending on the clients financial condition, their ability to stay committed to any product and financial plan. To increase their own knowledge of products they want to use and how they work. Education is the key-this is what a “Good to Great” financial planner or insurance salesperson should be. Get off the high horse and get your clients informed, be an honest part of their financial goals. Lay all the different products at their feet and guide them with integrity. What works for some doesn’t work for all. I have some whole life, some term, a Roth IRA and a 401k, as well as a fixed annuity. Be kind, be honest, have integrity.
Far better to just pay for advice, rather than going to a salesman of any type for advice.
How? And dont forget, EVERYONE is selling something. Even doctors get paid on scripts they write. So I shouldn’t see one if he gets paid by the pharma company?
I don’t know of any doctor who gets paid to write a script. Do you? If I write 5, 1, or 0, my charge to the patient is still the same.
not that I have any issue with how doctors get paid, in fact I believe a majority in the profession are far too underpaid. but this site tracks payments from pharma’s to md’s….http://www.propublica.org/series/dollars-for-docs
Most of those payment fees are speaker fees, not prescribing fees, although it could be argued they are related. How much do you expect to get paid for speaking? It’s not unreasonable to pay a doc a couple grand to give a talk.
You’ll notice my name isn’t on the list at all, but if you divided up all the payments by all the doctors, it doesn’t come out to much. For example, the biggest spender, spent $40 Million. Divided by a million docs and that comes out to $40 a doc. Given the average income of $200K, $40 isn’t exactly a huge chunk. Even if only 1% of docs are getting these payments, that’s only $4000 per doc, a fair price for a speaking engagement or two in my view.
Medicine has far bigger problems than this if you wish to criticize medicine. But since this site isn’t about medicine, any further comments on this topic will be deleted as “off-topic.”
Here’s a case study on a whole life policy. My father in law wrote it on me in 1985. Single premium whole life. $30,000 one time dump in and it provided a $115,000 death benefit. 30 years later, we never put another penny in. The cash value is over $136,000 and the death benefit is $227,000. We have borrowed from it twice: 2003 to pay half the cost of a car ($10,000 loan from the policy which we paid back in 3 years) and 2007 to pay half the cost of a kitchen remodel ($21,000 that we paid back to the policy in 2 years). It continues to grow at an average rate of 5.5 % a year, tax deferred and tax free upon withdrawal, as long as we don’t collapse the policy. Would I say it’s the best financial decision we ever made? Yes, I would. Tell me what would have given me more bang for my buck, if you disagree.
Correct me if I’m wrong, but a “single premium whole life policy” is a MEC, no? Were the rules different in 1985? That should mean all loan proceeds are fully taxable.
But ignoring that issue, $30K invested 30 years ago that grew to $136K is an annualized return of 5.17%. While I’ll be the first to confess that isn’t bad, it certainly pales in comparison to the alternatives available in 1985. If your dad had put it into Vanguard’s 500 return, your annualized return from 1985 to 2013 would have been over 11% per year. You could also buy a 30 year treasury yielding more than 11% that year. Sure, you’d have to reinvest the proceeds each year at lower and lower rates, but I’m sure you’d have still done much better than 5% on average. I don’t know if zeros were available back then, but you could avoid the reinvestment risk if you’d bought one of those.
I don’t doubt it is now growing at ~ 5.5% a year, however. That may very well be the best financial decision you’ve ever made, I don’t know. It’s the only one I know about so far.
At any rate, you probably don’t want to cancel the policy now, and if you’re happy with its performance, then I’m happy for you.
On a related note, I had a reader write in about a whole life policy he bought around that same time. I think his annualized return was around 7%. I’m not sure why his performed so much better than yours, perhaps the borrowing you did that I wasn’t able to factor in without more information. https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
As I’ve mentioned to others, if you’re good with long term returns in the 3-4% range (getting 5% seems less likely given our low interest rate environment), then buying whole life policies available today may be a great option for you. However, I only save 20-30% of my income for retirement so I can’t reach my goals with such a low return. I need my money to work as hard as I do. Perhaps you make more, save more, plan to work longer, or plan to spend less in retirement, I don’t know.
It was not until 1988 that Congress passed laws enacting MEC. I had a single prrmium policy purchased for me in 1987 after I was born that I took a loan against to pay for a fair amount of a year of med school. I am still unsure if I will pay that loan back eventually but wanted to leave myself the option.
There are a couple issues with calculations…
1. When you talk about investment, we are talking about $ that is taxable. In another words when you get that 5% or 7% or 10% return…. The profit is TAXABLE. So it is not comparable to the returns on several Whole Life policies.
2. People should understand that Average return is not, NOT, a good representation of reality return. It may be a simplified term, but NOT ACTUAL. For an examples, if you start with 100K
Case (A) 1st year 100% growth, 2nd year -50%, 3rd year -50%, 4th year 100% , The average growth rate over the 4 years is 25%. So one would naturally expect to have $125K in their account. REALITY, the account (no fees) is only $100K….. IN real life, the actual $ is 0 GROWTH, but the here is the thing… you paid taxes on the $100K tax in the 1st year!
Case (B) 1st year -50% growth, 2nd year 100%, 3rd year 100%, 4th year -50% , The average growth rate over the 4 years is again 25%. So one would naturally expect to have $125K in their account. REALITY, the account (no fees) is only $100K….. IN real life, the actual $ is 0 GROWTH, but the here is the thing… you paid taxes on the $0K over the 4 years!
Case (C) 1st year 100% growth, 2nd year -50%, 3rd year 100%, 4th year -50% , The average growth rate over the 4 years is 25%. So one would naturally expect to have $125K in their account. REALITY, the account (no fees) is only $100K….. IN real life, the actual $ is 0 GROWTH, but the here is the thing… you paid taxes on the $100K you gained in the 1st year!
Sorry, I clicked post by accident….
Case (C) 1st year 100% growth, 2nd year -50%, 3rd year 100%, 4th year -50% , The average growth rate over the 4 years is 25%. So one would naturally expect to have $125K in their account. REALITY, the account (no fees) is only $100K….. IN real life, the actual $ is 0 GROWTH, but the here is the thing…
So you see, I can show that you have gotten an average 25% growth over a 4 years period. However, I got 0 to show for in the bank account. In fact, I am most likely much deeper in the negative given the fees and management charges.
Life Insurance is a tool for risk management. It is a protection against your assets and earning and your worth…. It is not an investment. So I would highly suggest that we speak about it in the proper context. As a side note, people who promote TERM is the best solutions are most likely generalizing. In most high net worth families and individuals and trusts, TERM policies is the LEAST used tool, and one of the most profitable tools for the life insurance industry.
There is no silver bullet solution… Everyone’s situation and tolerance are different. Hence, it is ludicrous to think that, and irresponsible for people to suggest that.
I’m glad you see the difference between average and annualized returns.
I find your argument about high net worth families unsubstantiated but I suppose if they no longer have any need for term insurance due to their high net worth, I suppose it would be silly to carry it.
I certainly agreeing minimizing fees and charges is key to financial success, but investments don’t have the corner on that market. There are plenty of fees and charges built into insurance products.
A few minor points people should be aware of
1) Capital gains need not be realized and are not taxable until they are. A step-up in basis at death is just as tax-free as a whole life death benefit. LTCGs and dividends are taxable at a relatively low rate. If donated to charity, again, no taxes due.
2) Your cases are interesting. You talk about the taxable gains, but leave out the taxable losses and the tax-deferral inherent in a tax-efficient investment. For example, in your case B, you lose $50K in year one. I would tax loss harvest that. So now I have a basis of $50K and a loss I can put against my regular income up to $3K per year and carried forward indefinitely or put against investment return in the coming years. So in the second year, when your investment returns to even with its 100% gain, you now have $100K with a basis of $50K. Since you haven’t sold, you don’t owe any taxes yet (unless there were distributions, but that is likely fairly minor and taxed at a favorable rate) but you get to deduct another $3K off your regular income for that loss in year 1. Same thing in year three. Now you have $200K with a basis of $50K, and you’ve deducted another $3K off your taxes. So now you’ve got a taxable loss of $41K, an unrealized gain of $150K and have been able to deduct $9K of regular income at your marginal tax rate. In year four, you lose 50%, so you’re back to an investment worth $100K, and you can deduct another $3K. So at this point, you’ve got $100K, a basis of $50K, and you’ve deducted $12K of regular income and you have a $38K loss being carried forward. If you now decide to sell the investment, you will owe capital gains taxes on $50K. You put your $38K against that, leaving you a taxable gain of $12K, payable at your long term capital gains rate. So in reality, you have the $100K you started with, you’ve deducted $12K at your marginal tax rate, and you’ve paid taxes on $12K at your capital gains rate. Tax-wise, you’ve come out ahead, even though investment wise your return annualizes to 0% per year. Average returns are, of course, irrelevant when discussing such massive swings in investment returns.
At any rate, I’m not sure I could stomach owning an investment that loses 50% of its value every other year, but perhaps you can. 🙂
Thank you for sharing this content. I am new to the financial services industry, and was approached by a “Professional Poacher”, touting this LEAP program as the end-all-be-all program. I have to admit, as a Noob to the industry, it was very appealing. I can certainly see how it would sell a lot more insurance to the uneducated consumer, willing to trust blindly. Looking forward to seeing more of your reviews. Thanks!
I posted a reply about my own whole life policy in the previous thread. You might be interested in taking a look to see how whole life can work. It’s not about blind trust, as my results will testify.
[Numerous ad hominem attacks deleted. In essence, the commenter, who is now blocked from the site due to his rude and inappropriate remarks, feels that a doctor shouldn’t have a financial website. Thanks for stopping by to leave that lengthy comment that no one will ever read.]
Critics can talk all they want about how whole life sucks, it’s a bad investment, bluh, bluh, bluh, but rarely talk about facts. First fact- how other financial institutions use permanent life insurance- Particularly banks- to reward executives and most importantly cover their own risk. Second fact, blended whole life cash generating properties are well documented in the business industry ( J.C Penny, Walt Disney, Mc Donald’s, Pampered Chef, Vice President Biden, Senator John Mcclain) Fact three, its’ false that all life insurance policies operate the same way… Design of policy makes ALL THE Difference. Fact Four- blended whole life outperforms fixed accounts ( bank cds, government bonds, saving accounts, etc) Fact Five- Life Settlement industry which are buying seniors with 100,000 or more life insurance at a profit for them and the owner. More than cash surrender value, more than the premiums they put in. I’m tired of reading people’s opinions. Come with facts. I can.
Oh fun! Another insurance agent has found my website and left comments on multiple posts on whole life written over 4 years about how little I know about it, how much he does, and how awesome it is. Look, if you love whole life and think it’s a great deal, buy as much of it as you can. If you think you’re doing people a favor by selling it to them, then sell them as much as you like. No skin off my nose. I don’t make any more or less money if people buy or don’t buy it. But realize that rehashing these arguments, which have all been had at least a dozen times before in the comments section usually leads to the agent typing personal attacks into the computer and eventually being banned from the site.
The argument about financial institutions, rich people, and businesses owning whole life was covered in the Debunking The Myths of Whole Life series under myths # 13, 20, and 21:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-3/
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
I agree that design of policy makes a big difference. Too bad the vast majority of whole life policies sold seem designed to maximize the seller’s commission. Perhaps that’s why 80%+ of them are surrendered prior to death.
https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/
Let’s talk about your last two “facts” and how they’re misleading. Maybe they’ll make it into the “next Myths.”
# 4 “Whole life outperforms fixed accounts.”
That’s probably true if you hold it for 5 or 6 decades. However, most whole life policies don’t break even for 5-15 years. Since fixed accounts pay more than “breaking even” there is a certain period of time where fixed accounts outperform whole life. That might only be 10 years if you’re comparing a particularly well designed whole life policy to a particularly low-paying fixed account, but it certainly exists. However, if you’re going to tie your money up for 50+ years, I’m not sure a fixed account is the ideal comparison. If I wasn’t going to touch money for decades or more, I’d be investing it in something with a higher expected return, like stocks or real estate. But if you have such a high income and/or savings rate that you can afford to retire on the measly returns provided by whole life, then feel free to invest in it for the long run. Most investors, however, haven’t actually run the numbers to see what that means.
https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
# 5 – “The Life Settlement Industry pays seniors more than their cash surrender value and more than the premiums they put in.”
This is true. If they weren’t paying more than the cash surrender value, the owner would just surrender it. Duh. The fact that they pay more than the premiums put in means very little. Let’s say we’ve got someone who has paid $10K a year for 30 years for a whole life policy. It’s reasonable to assume this thing has made perhaps 3% a year (not guaranteed, but certainly reasonable) overall over that time period assuming it was reasonably well designed. So the cash surrender value is $490K. Whatever the death benefit is, let’s assume the viatical purchaser figures if he can get the policy for $500K that he will have an expected 10% return on it given this guy’s health. So he offers $500K. Is that more money than the cash surrender value? Yes. Is that more than the premiums paid ($300K)? Sure. But what is the return to the insured? Well, it’s 3.12%. Nowhere near the 10% the viatical purchaser expects to get. Hardly a reason to buy whole life. In fact, the right move or this guy is probably to hold on to his policy rather than sell it.
Thanks for stopping by.
Dr. Dahle, I can respect your effort in seeking to educate medical professionals (and the general public) with respect to the area of personal finance — and the undoubtedly extensive amount of time you must devote to the endeavor of sharing your opinion. I understand this article is rather old, and you may not care to respond to any further comments. However, I still ask of you to consider these comments:
-Products that seek to: create wealth (to include qualified and non-qualified money), protect against the risk of premature death, transfer wealth, protect against the risk of prolonged injury or sickness are generally noble in nature – after all they seek to keep the lights on and families together during difficult times. I find that most of the products carried by reputable companies in both the investment and insurance world to have a purpose and place — but situation always dictates.
-If the purpose of every dollar was merely to generate the highest rate of return, then would savings accounts, checking accounts, and other short-term vehicles exist? These types of accounts exist so that people have the ability to pay bills and protect against short-term emergency expenses.
-I think of the 401k as this —- a box, that contains money, can often be borrowed against for a fee, that typically triggers a penalty when taking a distribution before age 59 1/2, has associated that fees can be changed at any time, and does not provide a guaranteed rate of return. Honestly ask yourself…how much do I want to put into something like that? NOW.. let’s change the tune of this by just adding one caveat…I will match you dollar for dollar until a certain level. Has your answer changed? It probably depends on your current tax bracket and your future earnings projections.
-What is wrong with having diversified types of financial tools in the same portfolio — is not diversification a method of reducing risk by allocating investments in different sectors of the market? Is a wealth portfolio that contains whole life, a 401k, a brokerage account, real estate holdings, international investments etc. a bad thing? If I have something tied to the stock market — shouldn’t I have something not tied to the stock market to hedge against market risk and volatility during retirement? (Grandma always said — don’t have all your eggs in one basket)
-WHOLE LIFE INSURANCE is not an accumulation tool. However, as I mentioned earlier, the purpose of every dollar is not purely to generate the greatest ROI. Take a look at the effectiveness of distributing income out of a QUALIFIED PLAN– if you are familiar with the 4% rule, I think you would agree that they aren’t initially the most effective at generating an income stream…and how can they be? As a standalone product they are 100% at susceptible to the sequence of returns risk during retirement (you have nothing to hedge this risk). The order of the stock market returns during the accumulation phase is irrelevant — i.e it does not matter if the order of returns is -21, 18, 4, -3, 17 or 17, -3, 4, 18, -21 (the average is the same regardless of the order) but you better believe the order makes a dramatic impact when you attempt to take money out.
There are many strategies to mitigate this risk — often hurdled with whole life insurance and annuity products.
If you love whole life, buy as much as you like. It’s a free country. I find it is a financial product that is dramatically oversold (often using sales techniques like LEAP) and its purchase is frequently regretted by physicians once they learn how it really works and see the returns they really get from it. If the return on money you’re tying up for decades doesn’t matter to you, then I think you’re more rare than you think.
I became a license Leap agent in the late 90’s as an intellectual investigation about the claims and criticisms t Leap. At the time I had an insurance agent’s contract with a company that expressly forbade the use of Leap which effectively discouraged me from trying it and I never renewed my Leap license.
Many industry sources claim the average US investor earns an average of something like 3.5% on their investments. This phenomenon is claimed to be directly a symptom of Emotional Investing. The system approach, or the theory of Leap is sound: build your “financial walls” big enough to protject the values inside them, and look at the sum of your likely outcomes and risks before assuming that traditional investing,( real estate is just another asset class with relatively volatility and corresponding returns) is the best way for You given Your situation.
Yes the Leap book is useless but then it doesn’t discuss any of the macro economic principles that are at the heart of Leap. There are scums who sell Insurance, scums who sell
investments,scums who sell advice etc,etc. If that unhappy reality clouds a person’s accessment of the benefits and uses argued by its respective advocates, then that person willbe more likely to make a bad decision. Yes the Leap book sucked, as did Ric Edelman’s first first(book). I think the authors of this blog need to investigate Leap befor leaping(sorry) to conclusions based mostly on the repugnant behavior of those claiming to practice it.
You’re only 6 years late to this post.
So…one who wishes to investigate LEAP should not read the book on LEAP but rather do something else. Okay. Seems like good advice.
I’ve gotten allot of responses including from the whitecoat investor himself, about my comments on the website, and to whitecoat investor credit, he encouraged me to continue to share my opinions on his website.
first off, my background…I was all sure fire when I got into the financial services industry to become a stock broker. It was a dream of mine since i was young. It was in my education that I found out something very interesting.
I originally started off selling index universal life, with thoughts on moving up to selling index and mutual funds. (which, I am still interesting in brokering, index funds)
But back to an article I found done by an economist that compared the long term rates of blended whole life, mutual funds, bonds, and real estate over thirty year span from 1980 to 2010.
The results shocked me. Guess over a 30 year span which investment had the highest actual (key word ACTUAL) return. It was blended whole life. And it wasn’t even close.
Now i personally, think that IUL will revolutionize retirement for everyone but especially high income individuals, but I promote and believe in both.
Blend Whole Life like IUL are long term investments, that if funded properly and designed correctly are hard products to bet in the long haul.
Mot people and even advisers don’t truly understand how Life insurance works. Factors like Financial Strength and investment habits by the insurance company, the allocation of premiums, riders and the knowledge of the insurance agent factors into rate of return.
So it is very naive for anyone to make a blanket statement about life insurance, and it actually shows a lack of financial education.
It is easy to show a client, a doctor, a poorly designed traditional whole life policy with PUA’s or other riders to boost cash value and say hey it’s a bad investment. It’s expensive. It’s slow.
However, why don’t that same Financial adviser show you 1 million life insurance blended whole life policy with 750,000 in cash value purchase with a grand total of 250,000?
Is that possible? Yes. How? The rule of 72. Know what that is? Do you know how lost in the market affect actual returns vs historic returns? Do you truly understand the compounding interest cycle works? Are you familiar with Dalbar report that charts actual returns retail investors verse historical returns of the market?
I say that, to say this; Lost in the market, and human reactions, are why most retail investors don’t fair as well with the same amount of investment as some one who put their money in a well designed life insurance policy.
Money lost can never be recovered in the compounding cycle. That’s why few adviser actually consistently beat the market. Monies lost to fee’s also affect the compounding cycle.
Now I welcome anyone and everyone to disagree but I know the numbers, particularly among retail investors. Institutional investor don’t invest like you or your financial adviser, they cover their risk by buying life insurance policies and making other alternative investment. If you don’t cover your risk eventually you will be a victim.
If you have a study showing whole life insurance outperformed stocks and real estate over that time period, it has serious flaws in it.
[Ad hominem attack removed.]
The Dalbar Report studies and evaluate actual market returns for retail investor over a 30 year span.
“The 2014 edition of QAIB shows a reversal of the improvement in investor decision making, capping off the painfully slow improvement of the last three decades. The gap in 20 year returns of 10.65 percentage points in 1998 has narrowed to 4.20 in 2013. The current gap is the result of a 20 year return of 9.22% for the S&P 500 compared to the average investor return of 5.02%.”
Now if you had an insurance consultant among your financial advisers, noticed I said, insurance consultant not agent or salesperson…You would know that a blended whole life policy- the one’s recommended in leap, bank on yourself, become your own banker, infinite banking, during the same time span return was wait for it.. 8.47%
Yea so actually doctor a person who brought a blended whole life policy not one on target premiums, but a whole life policy that combines PUA and Term , in the 80’s did better than investors at Edward Jones, Charles Swab, JP Morgan, etc,,etc…
[Ad hominem attack removed. Consider this a warning. The next one gets you banned from commenting.]
If your main point of posting here is to personally attack me or others, you won’t be posting here long (like many, many insurance agents who have passed before you.) I would suggest focusing your comments on ideas rather than personal attacks on the owner of this site or its readers.
I disagree that anyone is likely to get a return of 8.47% out of a permanent life insurance policy. Send me the illustration if you believe you can do that. editor (at) whitecoatinvestor.com. I’ve issued this challenge many times, and the best I’ve seen is a guarantee of about 2% over 3-8 decades and a projection of about 5% over 3-8 decades. Lower over just 20 years, as discussed here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
I’d love to see you debate Mr. Castiglione on this. LEAP is an amazing system adopted by an independent firm i currently work for. Permanent insurance in itself is an amazing tool(s) for any financial plan. Is there one tool that is “The Tool of all Tools?’…. No. And if anyone says there is, run the other way quick! However, policies like whole life and indexed universal life are great vehicles that have built in guarantees. They pair well with assets that are correlated directly to the market and proved immense benefits that have effects throughout someone’s entire financial picture.
It sounds like you a little bitter about a particular product that was misused or abused by some advisor. Doesn’t really give you the right to talk bad about the entire vehicle or system itself. That’d be like me bad mouthing annuities because some advisors abuse them and sell them to unqualified investors. It happens, but doesn’t mean they can’t be used for the right picture and at the right time.
Interesting that someone who uses LEAP to sell whole life policies disagrees with my assessment. I know very few purchasers of permanent life insurance (who do not also sell it) that would characterize it as “amazing.”
Im currently a planner so risk management is a large part of someones’ foundation within their plan. Agin however, as you may or may not know, permanent life insurance not only accomplishes this task very well, but also has some great additive benefits. Whole life isn’t the only product I sell amongst the risk management category, but it is a great one.
I disagree that permanent life insurance is a “great” risk management tool and as a general rule, it’s additive benefits come at too great of a price.
[Ad hominem attack deleted.-ed]
For all you criminals that sell this all I ask is sit down with me with your own leap program!!!! Insurances should be with insurance companies and investments should be with investment company!!!! Never co-mingle them together!!!! Why don’t any other insurances have saving program!!!! Just ask your agent how much of your premium pays for insurance and how much towards savings and why do they charge you to borrow your money
Great comment! When I deal with cash value agents I have the client ask their old agent how much total life insurance they have. If he or she is honest and gives them an answer I then advise client to have old agent bring their policies along if they will sit down to see what they actually own. I have never had an agent in over 24 years come back to the table with their own “stuff” instead they offer client term over the phone and usually a super cheap ART or 10 year product.
Although I don’t specifically sell it, I like the leap program. As an adviser, I see investor statements all day, everyday. One investment is as good as the other. I have a client right now that is in a Fidelity target fund and has made 0% for 17 years and had she taken an income during that time would be dead broke today with the volatility of the markets during that period. I have a handful of clients that have upwards of a million in cash value in life contracts and some who stopped paying premiums and who have lapsed them with $ 0.
You have a client with a 0% return over 17 years in a Fidelity target fund? That’s some pretty terrible advisor/client behavior to achieve that.
I guess it was a DIY investment, maybe Fidelity recommended on a 401k – IRA rollover? I just got it to review.
Well, the devil is likely in the details. But if it takes an investing disaster to make investing in life insurance instead look good, that’s not much of an endorsement.
I’m sure you have the tools to run a hypothetical what a client with near $1,000,000 in cash value could have had if they were in a real investment for a portion of all those premium payments. While there is 1 oversold fund out there from a big company I finally saw come back to even recently from 2008-09 I’d love to see the ticker for Fidelity that had a 0% return over 17 years that is hard to believe. No fan of target date funds here as it is but that doesn’t seem possible.
Well assuming they can take the tax free income illustrated for 30 years a market investment would not come close. Of course they COULD have more money buying market funds but who knows how that would have turned out.
FFFCX – Fidelity Freedom ® 2010 Fund may not be exactly 0 but close enough to say 0.
Unfortunately they are not taking “income” in the normal investment sense as pulling money from a cash value life insurance contract is a loan. That loan ultimately reduces the death benefit as it accrues interest in the range of 6-8% and worst case in the rare instance a client pulls out more $ versus premiums paid in and the policy implodes there is a 1099 generated. I’m confident you will or have met others who had “paid up” policies that at one point got the letter stating they needed to send in a larger premium payment as their policies did not continue to work as advertised. If they don’t send in a premium their policy then lapses. If you have an insurance license you would likely not buy these type of products.
thats the whole point of the policy taken for that purpose and how insurance works and why its tax free. There are features now OVER LOAN protection. Doesn’t happen for that reason…
and FFFCX was $16, 17 years ago and its still $16. since you have time, calculate taking 5,000 a year from 100k from 2000-2017 and see what you end up with.
this site lol
this poster lol
FFFCX pays dividends. Those are actually a substantial portion of the return on a balanced fund like that. Not surprised an insurance fan/agent would forget to include those.
It’s tax free because it’s a loan & in a huge sense not the client’s money but the insurance company’s. Why would it ever make financial sense to pay to borrow “your own” money?
FFFCX didn’t have anywhere near a 0% return over the last 17 years. It’s 15 year return is 6.45% per year. Not terrible for a fund that is currently 40/60.
http://performance.morningstar.com/fund/performance-return.action?t=FFFCX®ion=usa&culture=en-US
And it’s not “tax-free income.” It’s a loan. Tax-free but not interest free just like a mortgage, HELOC, credit card, car loan, or margin loan.
This thread is hilarious, informative and confirmed what I just experienced. Today, I was provided a 30-minute personalized webinar of LEAP, my thought was that it truly was a financial planning tool (I am currently in the CFP program), and I was shown an example of a person either buying a life insurance policy or saving $675,000 in their 401k with a meager 5% return. I was appalled, clearly this is a selling mechanism to demonstrate that it is necessary to buy life insurance. Thanks for the discussion, seriously, thanks, JILL
I hate hate hate when insurance agents or reps who say they are financial planners only show life ins as the above suggests ….all roads lead to life ins. On the other side, I hate hate hate anyone who says “term only” is the way and invest elsewhere. Is it really one or the other? What about private placement life or variable life, etc if like market risk ? What about the actual value of having a death benefit into your 70s/80s/rest of life …no value there? I don’t think so. What about the long term care opportunities now with various forms of permanent life ins ? Unless you are poor, you will likely not pass way with your last penny so what’s a better ROR for a surviving spouse or kids via inheritance …..a bunch of stocks and bonds (inside of a 401k or nonqualified account) or the increasing death benefit? So, if you are poor, make not much money then buy term and index funds and your 401k. You won’t have to worry about being in a higher tax bracket in retirement as you won’t have that much anyways. If you are higher income earner, have a higher opportunity to build wealth in excess of 2M plus by the time you retire, do consider all vehicles to maximize not only your ROR, but your net ROR via cash flows after tax , wealth replacement planning, inheritance and more. Billions going into BOLI and COLI cannot be wrong. And in conclusion, as a estate and tax attorney I’d say this guy simple wants to sell you on whatever he’s selling. Probably his coaching of some kind. Work with a top advisor that manages millions as well as educates you on all your options including life insurance as an asset class.
The answer to higher tax brackets in retirement isn’t buying unneeded life insurance. It’s Roth conversions and tax efficient investing in a non-qualified account.
Alex I’ll take words you will never hear from a cash value life agent for $1,000 please.
I’d love to see the magic life policies that sound so rosy with increasing benefits yet nobody ever mentions what the premiums also do…….I wonder why? Oh, that’s right sometimes they are “paid up” as they like to put it. I’m sure these same folks, well I know, they follow up next with a B share VA & maybe an EIA for “safety” or am I the only one who finds that?
The whole life product puts most Finantial advisers out of the picture. Their new FA becomes a very legit math neard who calcs actuaries for the LI company who’s track record of profits is 10x any mutual fund. Commercial Banks own billions of the same product Robert recommends. The article response reminds me of dock laborers who shouted at the forklift because it was going to put them out of work dispite the forklift making the dock owner and company more successful and proficient. Oh yeah Jim Harbaughs contract was the same produce Robert talks about! Traditional FA is a cancer leaching of a productive body. Who can blame a guy thought if he’s vested in an ideology thats tied to his livleyhood? Time will soon show us all the fruits of this deseptive tax burden way of traditional high fee investing was wrong.
Was that English?
[Ad hominem attack deleted.]
We own both tax qualified plans (TSP, and Roth IRA) and have made nearly the max contributions on both for our entire careers. Yes both accounts have accumulated large sums of retirement money that I can touch when I’m 59.5. I haven’t read the book yet but I’m well read in Nelson Nash’s infinite banking concept written about in his book Becoming Your Own Banker. I would agree with the comments here that regular whole life with low monthly premiums isn’t a “good” investment. I disagree though that large annual premium participating whole life policies are a good addition to your qualified plans. It creates an eternal return. Even when you collateralize the cash value and take a policy loan out your policy is still earning interest and dividends on the entire sum you paid in. No other money system does this. IBC policies break even by year 8 typically. I hear a to of glib comments and ideas here. Some of it is bad advice. Tis ‘tis.