Myths of Whole Life Insurance Part 7

February 11, 2019

I started this series of posts way back in December 2013. They continue to be among the most popular posts on the site. If you've never read one of them, I suggest you start at the beginning and work your way back to today's post to have a complete understanding of how whole life insurance works, how it is sold, and why you most likely don't want to buy it.

Each item in the list discusses an argument used to sell whole life insurance and my thoughts on why it is misleading or outright false.

Lots of people think I hate whole life insurance. I actually don't. I hate the way it is sold and those who sell it inappropriately. If you really understand how it works and still want it, then feel free to buy as much as you like. It really doesn't affect me one way or the other. But I'm sick of running into readers and listeners who DID NOT understand how it worked when they bought it, and once they do understand it, DO NOT want it.

Unfortunately, the vast majority of policies sold are sold inappropriately and the vast majority of those selling it are salesmen masquerading as financial advisors. Over 80% of whole life policies are surrendered prior to death and polls of actual real life doctors on this site and our Facebook group show that the vast majority of those who have purchased whole life policies regret their purchase. If this is all news to you, then go read Everything You Need to Know About Whole Life Insurance before continuing on with today's post.

While most WCI FB group members have never purchased whole life insurance, of those who have, 76% regret it.

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The numbers are similar but slightly lower in the ongoing poll on this site (which unlike the FB group permits voting to be done by those who sell these policies.)

In part 6, we left off with # 29. So let's move on to # 30.

9 More Reasons Why Buying Whole Life Insurance is a Bad Idea

# 30 After Maxing Out a 401(k) and Roth IRA, Isn't Whole Life Insurance the Only Tax-sheltered Option Left?

This is the wrong question to be asking, but the answer to it is still no. Just because it is the only option presented to you by an insurance agent, doesn't mean it is the only option. Other options for retirement savings include defined benefit/cash balance plans, an individual 401(k) for self-employment income, a spousal Roth IRA, your spouse's employer-provided accounts, and Health Savings Accounts (HSAs). In some ways doing Roth conversions and paying off debt is also tax-sheltered. But most importantly, there is no limit on investing in a non-qualified mutual fund account (where long-term gains and qualified dividends are somewhat sheltered from taxes) or in real estate (where income is sheltered by depreciation and capital gains can be deferred indefinitely by exchanging.)

Obviously investing in whole life insurance compares better to investing in a taxable account than to a retirement account (where there is no comparison from a tax, investing, or in most states an asset protection standpoint). But the real problem with this argument is that it is focused entirely on the idea that any tax-advantaged investment is always better than any fully taxable investment. That simply isn't true. It also mixes up the idea of an investment and an account, two things that financially naive doctors sometimes have a hard time telling apart. (Think of the accounts as different types of luggage and the investments as different types of clothing.) The real question to ask yourself when you hear this argument is “Where should I invest after maxing out my available retirement accounts?” The answer is a taxable, non-qualified account. Now you're left with the question of what long-term investment to invest in–tax-efficient mutual funds, real estate, or whole life insurance? It's pretty hard to really compare the merits of those three investments and end up choosing whole life insurance given its limitations and terrible returns previously discussed.

# 31 The Estate Tax Exemption Could Go Down

The idea behind this argument is a rebuttal to the argument discussed in Myth # 8. In summary, that argument is that you need whole life to avoid estate taxes, which is silly given the vast majority of doctors won't owe any federal estate taxes. The next step is for the agent to argue “Well, the estate tax exemption might be decreased.” Well, I suppose that's true. Congress can change any law they want any time they want. But buying insurance or investing based on what could happen seems foolhardy. I mean, it is probably just as likely that the estate tax is eliminated as the exemption reduced. It seems to me the best way to plan for the future is to project current law forward, since most laws aren't going to be significantly changed. If they are, you can make changes at that point. At any rate, it isn't like whole life insurance is some magic panacea to eliminate estate taxes. The only reason whole life insurance reduces your estate taxes is by making sure you have less money due to its low returns! The thing that reduces the size of your estate is the irrevocable trust you put the insurance into, and you don't even have to put insurance into it if you don't want to.

# 32 Whole Life Insurance Protects From Nursing Home Creditors

This one was particularly fun to debunk. Apparently, the idea here is to not pay for your own nursing home care somehow by purchasing whole life insurance instead of mutual funds. I'm not sure exactly how those envisioning this process think it will go. Maybe they think the nursing home doesn't ask for money until after you die or something, which is, of course, completely silly. But I think what they're referring to is the ability to spend down your assets to Medicaid levels, get Medicaid to pay for the nursing home, and still be able to leave a huge inheritance to your heirs because Medicaid somehow doesn't look at the value of your whole life insurance.

The whole process of Medicaid planning is a little distasteful to me to be honest. The idea is to hide someone's assets from the state so that the heirs can have them, foisting the cost of caring for the owner of those assets on to the public. But even assuming that you have no ethical problem with doing this, it's unlikely to work very well. Medicaid is state law, so it varies by state, but in Utah, a person can have up to $2,000 in countable assets and still qualify for Medicaid. Above that level, no Medicaid until you spend down to that level. If there is a spouse, the spouse can keep 100% of assets up to $24,720 and 50% of assets up to $123,600. Above that, Medicaid won't pay for the nursing home. Non-countable assets in Utah include:

Your home if your spouse lives in it
The value of one vehicle (including a Tesla)
Funds set aside for a funeral
Household and personal items
Cash value of your life insurance policies IF the total face value of all policies is < $1500

So I guess if you want to hide money from Medicaid in Utah, then you could go buy a $1,000 whole life policy. Most states have similar policies regarding cash value life insurance. Even if there were a state with a higher limit than Utah, this seems silly for someone who should spend her entire retirement as a multimillionaire to be making plans to spend down to Medicaid levels for nursing home care. A far better plan to stiff your fellow Utah taxpayer (assuming you have a spouse who doesn't need care) is to upgrade your house and your car.

# 33 WCI Doesn't Understand the Opportunity Cost of Borrowing Against WLI and Investing Elsewhere

This statement has been made without explanation, but the idea isn't that complicated (nor misunderstood by WCI.) You can borrow against the cash value in your whole life policy and use that money for whatever you want. You can spend it or you can invest it. Lots of whole life fans use fun phrases like “velocity of money” to describe buying a whole life policy, borrowing the money out, and investing it in something else. The really talented salesmen get you to invest it (along with any home equity they can get you to borrow out) in yet another insurance product.

Is there a cost to not maximally leveraging your life in this manner? Sure, anytime you can borrow at a lower rate and earn at a higher rate you'll come out ahead. But leverage works both ways, and the risk is not insignificant. What is not often mentioned by those advocating doing this is the opportunity cost of plunking money into a low return life insurance policy and buying unneeded death benefit instead of a higher returning investment. For instance, consider two options. You can invest $10K a year into an investment that returns 10% per year or you can buy a whole life policy that won't break even for ten years. After ten years, the first investment is worth $175K and the whole life policy only has a cash value of $100K. That's a $75K opportunity cost that apparently the “insurance agent doesn't understand.”

With a properly structured policy, you can break even in perhaps 5 years (maximizing the use of Paid-Up Additions), and using the combination of wash loans (interest rate to borrow against the policy = dividend rate of the policy) and a non-direct recognition policy, this idea becomes “not terrible.” You still have the opportunity cost of the first few years in the policy, but that is balanced out by a higher return on your cash in later years. I have discussed “Bank on Yourself” or “Infinite Banking” previously in detail if you are interested. It's not an insane use of whole life insurance, but it isn't for me. If you really understand how it works (it's going to take working through a lot of hype to do so) and want to do it, go for it.

# 34 Buy Whole Life Insurance For the LTC Rider

In recent years, insurance companies are adding on a Long Term Care rider to whole life insurance policies (and universal life policies and annuities) and agents are using the fear of expensive long term care to sell them. I find this appalling. Not only are you mixing insurance and investing, but you're now combining two different types of insurance policies with investing. Given the track record of insurance companies with long term care, I think most of my readers should strive to get a place where they can self-insure the risk of long term care, but even if they cannot, I'd prefer a simpler long term care policy on its own than mixing it with an otherwise unnecessary and expensive insurance policy.

The benefit of buying this as a rider of a whole life policy is that the premiums of the policy are guaranteed–you don't have the risk of the insurer upping the premiums like you do with a long term care policy or upping the cost of the underlying insurance like you do with a universal life policy. Those guarantees are worth something.

Remember we're not talking about just an accelerated death benefit. This is just another way of self-insuring long-term care, but with a lower return on the investments used to pay for it. You're really buying two policies combined into one. But there's no free lunch here. You're either paying more for the combined policy, or you're getting less of something, usually death benefit. Most likely, you're also paying for a life insurance policy you don't need or wouldn't otherwise buy. That death benefit isn't free. The reason life insurance companies stopped selling long term care insurance and started selling these hybrid policies is that their actuaries were convinced they are more likely to make money that way. That profit has to come from you, there is no other possible source.

If you do decide you wish to purchase some sort of long term care insurance policy, it is entirely possible that a hybrid product is right for you, but just like health and disability insurance, the devil is in the details. Read the fine print and be sure you know what guarantees the insurance company is actually providing. Know about what is covered, what isn't covered, and whether benefits are indexed to inflation or capped. Or better yet, live like a resident for 2-5 years out of residency so you'll be rich enough to self-insure this risk and never have to make this decision.

# 35 We Don't Say Put All Your Money Into Whole Life Insurance

This argument is simply bizarre, but used by agents once the prospective buyer has refused to buy the massive policy they were offered at first. A small commission is better than no commission, I guess. Of course, you shouldn't put all your money into whole life insurance, that's a straw man argument. Also, if buying a policy is a bad idea, you're going to be better off if you buy a small one than a big one. But that's hardly a reason to buy a policy in the first place. Like any asset class, if it isn't a good idea to put a significant chunk of your portfolio into it, it probably isn't a good idea to put any of your money into it.

Buying whole life as an investment is as dumb as the captain going down with the ship

# 36 Yes, We Have a Few Bad Eggs But Most of Us Are Ethical

This argument is used when I point out that literally hundreds or even thousands of my readers have been sold clearly inappropriate insurance policies. The problem is there are two options to explain this phenomenon. The first is that these agents are unethical. The second is that they're incompetent. Given the statistic that 80% of policies are surrendered prior to death and 76% of the docs I've surveyed regret their purchase, this is hardly just a “Few Bad Eggs” doing this. It's an industry-wide problem.

# 37 You Should Buy Insurance to Preserve Insurability

This one is used to sell insurance to people that don't even have a need for insurance. The idea is to prey upon their fear of the combined risk of needing insurance AND not being able to purchase it. One example would be a 25-year-old single doc with no kids. No life insurance need here. “But what if you get diabetes before you get married and have kids? You should buy the policy now.” Uhhhh….no.

First, you may never have dependents.

Second, if you do need it, you'll probably be able to buy it at that time at a reasonable price.

Third, if you do become less insurable, you will still likely have options for some insurance through an employer or other groups.

Fourth, even if you become uninsurable through anyone, the risks must be multiplied. For example, let's say there's a 5% risk of you becoming uninsurable before you have a real insurance need. And the risk of you dying before reaching financial independence is 5%. To get your true risk of a financial catastrophe, you must multiple those risks. 5% x 5% = 0.25%. That is a 1 in 400 chance. Life is risky. You can't eliminate every possibility of something bad happening to you and even if you could, that wouldn't be a wise use of your money. Wait to buy insurance until you have a need for that insurance.

This argument is often even extended to children. If you're buying life insurance from the same company that sells you baby food, you're probably doing something wrong. Now, if you could buy a lot of future insurability for that kid very, very cheaply, that might be something to consider. Unfortunately, you can't really do that for several reasons:

First, you have to actually buy unneeded insurance. That newborn likely won't have any need at all for life insurance for 25-30 years.

Second, you're not pre-buying the policy that kid will need. You can't buy the right to buy a 30-year level term policy at age 30. You have to buy a whole life insurance policy. Which means you're also paying for insurance that will be unnecessary on the far end of life too, after the kid has become financially independent.

Third, you generally can't buy enough insurance, or even enough future insurability, to actually meet any sort of realistic life insurance need. Most of these infant policies are only $10K or so. That's basically a burial policy, and as sad as it would be to bury your kid, it's not a financial risk my readers should need to insure against. (I've even heard the argument that you should buy the policy so you can take a few months off work because you'll be too distraught to work, but that's what an emergency fund is for.) Even if you find a policy that allows you to purchase future insurability for a larger policy, let's say $500K, that's not going to mean much in 30 years when the life insurance need actually shows up for the first time, much less in 50 years when the kid is actually reasonably likely to die. At 3% inflation, $500K today will only be worth $200K in 30 years and $109K in 50 years. Better than nothing, but you went to all this effort and expense to preserve insurability and your kid still ended up with inadequate life insurance coverage.

# 38 Whole Life Insurance is a Great Investment To Put In Your Defined Benefit/Cash Balance Plan

I had this one pitched to me by a doc turned financial advisor of all people. The argument was that you could buy whole life with pre-tax dollars and then if you wanted to pull the policy out of the defined benefit plan you could do so. He felt this was an “advanced technique” for “high net worth folks.” I was flabbergasted. It was such a stupid idea I couldn't believe it. A defined benefit/cash balance plan already provides tax protected growth and asset protection, two reasons frequently cited to buy whole life insurance. You're now paying twice for those benefits. To make matters worse, should you die while this policy is in the defined benefit plan, part of the death benefit becomes taxable, negating another usual advantage of life insurance- a completely tax-free death benefit. But the main reason why this is such a stupid idea is when it comes time to close the defined benefit plan, which is usually done every 5-10 years or so in order to roll it into an IRA. At that point, you have to do one of two things.

First, you can surrender the policy and move the cash surrender value into the IRA. But what is the investment return on the first 5-10 years of a whole life policy? You break even if you're lucky. Not exactly a great investment for that time period, especially compared to a typical conservative mix of stocks and bonds.

Second, you can purchase the policy from the plan. Of course, you have to do that with AFTER-TAX dollars. So while you initially bought it with the pre-tax dollars in the plan, eventually you're going to have to cough up after-tax dollars for the policy. And then what are you left with? A whole life policy you probably neither want nor need and perhaps even with associated premiums you have to make each year. Some deal!

There you go. Nine more reasons for buying whole life insurance debunked. Don't worry; the agents who sell this stuff will come up with more. Just hang out in the comments section over the next year or two and you can watch. Whole life insurance is a product designed to be sold, not bought and the only way to win an argument with an agent trying to sell it to you is to stand up and walk away. As Upton Sinclair famously said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Maybe it should be called Whole LIE Insurance.

What do you think? What other arguments have you heard for buying whole life insurance that haven't yet been covered? Comment below!

103 comments

1 The Physician Philosopher | February 11, 2019 at 4:45 am MST

Many physicians I know don’t even understand to max out their tax advantaged space, much less buy a complicated whole life policy. There is so much confusion surrounding it.

For example, the salesman says things like “and there is a disability rider if you can’t make your payments… So you don’t have to worry about that!”

If you don’t know to ask “how does the policy define disability” you’ll think it’s great, because they didn’t tell you the definition of disability for them to pay your payments meant “flat on your back, can’t do anything.” Unfortunately, disability isn’t usually that clean.

I completely agree that the problem is the people buying the product clearly do not understand it.

Thanks for this series of posts!

TPP

2 Xrayvsn | February 11, 2019 at 4:51 am MST

I agree with all the reasons you have listed regarding whole life and luckily never fell for a sales pitch for this product.

In all your research have you come up with any situation where Whole Life would be an appropriate choice for someone?

The White Coat Investor | February 11, 2019 at 7:25 am MST

Yes, as discussed here:

https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/

If you really understand how it works and still want it, go for it. But for just about every financial use of whole life, there is a better product.

Need longevity insurance? Buy a SPIA.
Need a tax break? Use your retirement accounts.
Pay for college? Use a 529.
Income protection? Use term life insurance.
Need long term care? Self-insure or use LTC insurance.
Need a way to buy cars? Pay cash.
Need a good long term investment? Use stocks and real estate.
etc.

Xrayvsn | February 11, 2019 at 7:26 pm MST

Thanks. Yeah I think I am not missing much by not doing it as really don’t think any of those 8 scenarios would really apply to me

3 Jay | February 11, 2019 at 5:14 am MST

So who is the ideal candidate for a WLI policy? I have a $1 million dollar policy in place from NWML that I bought with my eyes wide open and in fact wish I had done so much earlier so that the actual cost would have been lower.

I am 53 years old with a a 23 year old son who is severely disabled. Even though I have about 2 million in retirement and investment accounts and another 2 million in various real estate investments if feel that I am not prepared fully fund his special needs trust.

I currently have 3 million in term coverage but I didn’t purchase a 30 year term policy and if I did ,it would have termed out eventually anyway. I am now looking at rapidly increasing costs and feel that regardless of my current net worth I have a “permanent” insurance need” I am currently in the process of phasing out my term coverage due to the increased cost. I will keep the $1 million policy that is subsidized through my group in place as long as I am working but it does help my planning to know that I will be able to fund the trust.

Thanks
JSB

The White Coat Investor | February 11, 2019 at 7:23 am MST

Not sure there is an ideal candidate, but I discuss what I consider acceptable uses for these policies here:

https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/

If you don’t have enough for your son and you are getting closer to retirement years/in retirement years that would be an appropriate use.

Frank | February 12, 2019 at 12:55 am MST

Wow. Seriously, now much are the banks paying you to be a shill for them. This column is utter garbage. Whole life insurance with Mutually owned companies (Mass, Mutual, Guardian) is a SUPERIOR strategy compared to what you propose. No sane and intelligent person should fall for your agenda. Youre LTC argument is so dangerous to the public you should be sued.
Hmmm, why do all the successful and wealthy people I’ve met in my life own Whole Life? I truly wish I could debate you on MSNBC and destroy your alternative facts, but I’m busy enjoying my wonderful life.

Hank | February 12, 2019 at 5:23 am MST

You wouldn’t perhaps sell permanent life insurance, would you?

Also, why do you think that WCI is shilling on behalf of banks? Where exactly did WCI that a substantial percentage of your retirement funds should be in bank accounts? It’s almost like you don’t understand this investing thing.

The White Coat Investor | February 12, 2019 at 6:14 am MST

Not sure what strategy you seem to think I’m proposing that you feel whole life insurance is superior to it? Just piling all your money in cash on a pallet, pouring gasoline on it, and lighting it up? I agree WL is superior to that. But not most other strategies. Glad you have a wonderful life with all your successful and wealthy whole life insurance owning MSNBC watching/appearing pals. It sounds really great.

Matt | February 12, 2019 at 9:36 pm MST

Please, please, please don’t delete the WL insurance salemen’s ad hominems. I’ve already got my popcorn popped!

The White Coat Investor | February 13, 2019 at 7:33 am MST

Glad people insulting me can entertain you so much. So far, they’ve been polite and I haven’t had to moderate a single comment on this post. I don’t have a problem with people disagreeing with me and arguing about ideas. That allows readers to see that there are responses to these myths that are propagated over and over again. It also allows more nuance to be discussed that can fit into the post itself, like some of the ways whole life can be used in a reasonable way.

Jenn | February 13, 2019 at 4:14 am MST

I hope/gather you and Hank have a back history, WCI, but take it easy on us MSNBC watchers! Usually this political outlier (me, vs Utah) feels welcome here… No whole life policies for this woman (just luck, and probably Andrew Tobias, since our wealth building years started prior to your adulthood).

The White Coat Investor | February 13, 2019 at 7:15 am MST

Funny how tribal this country has become that someone would feel mentioning a radio station in the same context the previous commenter mentioned it would be interpreted as some sort of attack. I was actually thinking it was CNBC (which personal finance types love to bag on for its ridiculous 24 hour coverage of stuff that has little bearing on our actual financial plans), but you’re right that MSNBC has a slightly different bent.

Hank | February 13, 2019 at 3:54 pm MST

Andrew Tobias was treasurer of the DNC. I unhesitatingly recommend his Only Investment Guide You’ll Ever Need to beginning investors on either side of the political aisle.

I think TV is a bad place to get your news, whether you watch MSNBC, Fox News, or something in between. I also think whole life insurance is a good deal for the folks selling it far more often than it’s a good deal for the folks buying it.

The White Coat Investor | February 13, 2019 at 7:32 pm MST

I never knew that. Interesting. Also one of my favorite books and certainly not political at all.

Peter Steinberg | February 13, 2019 at 6:26 pm MST

I think the easiest way to conceptualize any product is pros and cons, and whole life has really one pro and that’s the lifetime death benefit. The cash value build up in the policy is a side perk, but the true benefit is the lifetime death benefit, as there are other ways to build cash value

If you don’t need a guaranteed lifetime death benefit, then by and large there just isn’t much of a need for whole life insurance.

There are reasons you would need this and I think your scenario seems like one. Poor insurability risk, with a policy from your younger years is another.

The White Coat Investor | February 13, 2019 at 7:42 pm MST

I wouldn’t say that’s the only pro, but the big issue is the main con is so big- poor returns. If I’m going to put a lot of money into something for decades, I want a decent return out of it.

4 Psy-FI MD | February 11, 2019 at 6:48 am MST

I was sold a policy out of training. It was the typically playbook for insurance agents: Sell a good disability policy. Then come to your house with scary charts and sell you on whole life insurance.

My agent incredulously told me that I would not have to save for retirement with a $1 million dollar policy for myself and my spouse! This was obviously before I knew about the WCI message. We got rid of the policies about 5 or 6 months after purchasing them.

What was really funny was that the next insurance agent we switched to tried to pitch us whole life! I had all the responses to the “benefits”. I even turned the tables on him and asked him how much he would get paid for the policy he was trying to sell me. He used the excuse that we were sold a mega policy from my previous agent and that was the problem, not the terrible product he was actually trying to sell us.

5 TNL | February 11, 2019 at 8:52 am MST

My wife and I buy Whole life on our grandkids, starting at a young age, with a rider that guarantees more insurance can be purchased at a later date, and the policy should be paid up after about 10 years of moderate premiums. While there may be other ways to do things, it is one way we know our grandkids will have access to insurance, and helps me sleep at night. It does seem to be one way to transfer some wealth to future generations, without making them dependent now.

The White Coat Investor | February 11, 2019 at 9:32 am MST

Yes, it is one way to transfer money to the next generation. The best way? I would argue not.

Have you calculated how much your ability to sleep is likely to cost those grandkids because you chose to use whole life instead of a few index funds or some real estate (that would also transfer tax-free after the step-up in basis) for their inheritance?

TNL | February 11, 2019 at 9:58 am MST

Yeah I hear ya, and thanks for the thought and feedback, I will think about it some more. If our current assets hold there should be lots of different ways wealth will pass down. Also, I guess I am not always sure life comes down to just a math problem. We use an insurance company that is affiliated with our church, and supports its mission. We use an agent that is a really good church member, and good friend. Some of our kids are very active in their affiliated churches, and this company supports that. At the end of the day the premiums will be a small amount of money, and the ability to get more insurance at a later date is nice. The premiums should be done being paid after about 10 years. Also maybe if the funds are tucked into something like this the kids won’t access it right away or spend it on silly things? We also kick in for grandkids 529 with the same idea, giving them something, for something specific, and not as easily accessed

We fund our kids Roth IRA with the same concept, some transfer of wealth, but maybe a little less likely to be accessed or cause dependency………..time will tell I guess. Also doing this type of stuff, funding stuff kids can’t or wouldn’t fund, seems like one way to put the time value of money to use for them. In the Millionaire next door terms, (if I remember correctly) trying to get PAW not UAW.

The White Coat Investor | February 11, 2019 at 11:38 am MST

It certainly sounds like you can afford to do it. That’s a far cry from many docs who buy it with huge premiums when they aren’t maxing out retirement funds and haven’t paid off their student loans or mortgage!

TNL | February 11, 2019 at 11:44 am MST

totally agree, we didn’t start doing stuff like this till we basically had hit FI. I guess that is a good way to sum it up, we know it is somewhat of a luxury, but now willing to do it, as a small part of an overall big picture,

How is skiing? snowcat next week, steamboat…..

The White Coat Investor | February 11, 2019 at 2:01 pm MST

The snow is dumping in Utah and I have a trip to Canada coming up. Should be great.

Tim Logemann | February 12, 2019 at 3:47 pm MST

This is my first time posting. Wow a few folks get pretty excited eh? Best luck skiing. Helicopter eh? Stay on top of the snow. Thanks for all you do

Hank | February 11, 2019 at 11:45 am MST

When it comes to affinity marketing (great guy at my church, old fraternity brother, buddy from military service), hold onto your wallet and apply more scrutiny, not less. Run the math and see whether it really beats other good investment options.

Edward Loebl | February 12, 2019 at 2:38 pm MST

A couple of weeks after I graduated from high school, my eleventh grade history teacher called to congratulate me and to be sure I had enough life insurance. I was 18!

Frank | February 12, 2019 at 12:59 am MST

This guy did the right thing and he and his family are winning, and you still want to push your buy Term and LOSE the rest agenda?! You are despicable, and an embarrassment to the financial world.
How has FINRA not shut you down yet?

The White Coat Investor | February 12, 2019 at 6:11 am MST

Last I checked FINRA didn’t regulate blogs. Too bad they don’t regulate insurance salesmen selling whole life insurance as an investment. If they would, there would be no need for me to write about it.

6 Lordosis | February 11, 2019 at 9:18 am MST

I was talking with some older physicians and several of them remember being warned in medical school and residency about insurance companies praying on new grads. That was back in the 80’s and 90’s.
I have never heard of any of this until I was reading it here on your site. I am a few years out of training. Is this hopefully becoming less common. Or are they just ignoring us lowly primary care folks?
However this seems like I am asking a pulmonologist if COPD is become less common. You are probably exposed to a lot of people with trouble with these policies.

SerrateAndDominate | February 11, 2019 at 9:28 am MST

Hopefully some med schools are cracking down on this. When my class was nearing graduation, we started to get phone calls from NWM trying to sell us this stuff. They would meet with a student then ask him/her for contact info of classmates. I only met with them because I recently had a tree from my yard fall on my neighbor’s house, who turned out to be one of the agents. I declined the universal life or whatever nonsense was being pitched and didn’t give away any phone numbers because they weren’t mine to give away.

The White Coat Investor | February 11, 2019 at 9:30 am MST

It is still VERY common. Read some recent experiences:

https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/

7 Trent McBride | February 11, 2019 at 10:36 am MST

I am curious how the “loans” from the polices actually work. Everywhere I see it discussed, a random number for illustration is used, but what is a reasonable number to expect? On the few policy illustrations I’ve seen with my own eyes, the rate is well above prime, more than a HELOC anyway. On the other hand, I’ve heard secondhand that salesmen claim an “advantageous rate”, and I would assume the bank-on-yourself enthusiasts would be less enthusiastic unless the rate was low. I’m sure they are all over the place, but what is a reasonable expectation on these things?

Lordosis | February 11, 2019 at 10:52 am MST

Along with this. If you have a sizable taxable account you can barrow against that if you really wanted to. I have never done it or know if it is practical but I have hears that it exists. Sounds like more flexibility then within an insurance account.

Trent McBride | February 11, 2019 at 11:19 am MST

Put more succinctly, much like you should separate the insurance and investing part of WLI for analysis, you should separate the investment and leverage part as well. Then the question become, does the insurance company offer the lowest rate one can get? I’m very skeptical.

The White Coat Investor | February 11, 2019 at 11:43 am MST

You can borrow against your taxable account for sure, but you do have to beware of margin calls. Interactive Brokers is currently offering margin loans at 2.7-3.9%. Seems a bit more attractive to me than buying unneeded insurance in order to be able to borrow against it.

https://www.interactivebrokers.com/en/index.php?f=1595

And if you don’t want to borrow against your taxable account…you can just sell. Your basis comes out tax free and LTCGs come out at advantaged rates, much better than surrendering a WL policy with gains that are taxed at ordinary income.

Trent McBride | February 11, 2019 at 11:52 am MST

What’s the trade-off/catch with IB?; seems too good to be true.

The White Coat Investor | February 11, 2019 at 2:05 pm MST

You get the point of non-direct recognition right? That’s the part that makes IB/BOY work. Combine that with a wash on the interest rate and it makes it a reasonable thing to do. But if you think it’s “too good to be true” you’ve been misled by the hype. This post explains it:

https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/

Basically you’re trading some opportunity cost and expenses the first 5 years or so for the opportunity to earn a higher rate of return on your cash after that. Don’t fall for the whole “velocity of money” hype stuff. It boils down to making more on your cash in the long run and there is a price to be paid for it in the short run.

Trent McBride | February 11, 2019 at 2:47 pm MST

What? No, I’m saying the margin rates at IB seem too good to be true, compared to margin rates you can get anywhere else, and even less than a HELOC. I want to open an IB account, but I feel like I’m missing something big. How come my rates at Fidelity/etrade are so much higher, and IBs are barely above prime. Is there some hidden cost?

The White Coat Investor | February 11, 2019 at 4:39 pm MST

I don’t know. I’ve been watching it for years and it has always been like that. Maybe ask them why their rates are lower and report back?

SerrateAndDominate | February 11, 2019 at 11:17 am MST

I think the pitch I was told was you can borrow at 5%, but I don’t remember if that was against the cash value or the overall policy amount (I’m pretty sure it’s against the cash value you’ve built up). As naive as I was about this stuff 5 years ago, the idea of paying interest to access my post-tax dollars just seemed pretty darn silly to me

The White Coat Investor | February 11, 2019 at 11:41 am MST

The loan terms vary from one policy to another, so if this is how you plan to use the policy, best to pay a lot of attention there.

You’re right, a lot of the loan terms are not good at all. 8% isn’t uncommon. Why would I borrow against my policy at 8% when I can borrow against my home at 4-5%? Heck, I can probably get a signature loan at the bank for 6 or 7%.

But it gets a bit more complicated than that if you’re looking at a wash loan in a non-direct recognition policy like the BOYers/IBers are doing.

Trent McBride | February 11, 2019 at 11:50 am MST

I guess I would say I don’t think it’s appropriate to cancel out the dividend growth rate against the loan rate and call it a wash; best to keep them separate. Any other loan against an asset as collateral, be it a margin account of a HELOC, lets you keep the asset and get that return, too, and nobody would call it a “wash”; this should be no different, unless I misunderstand the whole concept.

Frank | February 12, 2019 at 1:08 am MST

You cant be that ignorant?!
Loan rates are 6 – 7.4% and the dividend paid is currently 6%. So leveraging the money is almost at ZERO real dollars cost, or 1.5 percent worst case
ON THE TAX FREE MONEY THAT YOU NEED OR WANT TO TAKE OUT…YES, THE GOOD COMPANIES DO THIS…but Shhhh, don’ tell your sheep.

The White Coat Investor | February 12, 2019 at 6:10 am MST

In a direct recognition policy, that isn’t 1.5%, it’s 6-7.4%. And you can borrow tax-free against your car, your house, your portfolio, or your insurance policy. But it’s not interest-free and it’s not some special quality of whole life insurance.

8 WillCD | February 11, 2019 at 1:01 pm MST

Have you ever done an apples-to-apples calculation on the IRR of a short pay whole life policy (i.e. 10-pay) compared to investing elsewhere, paying investment-related fees, paying taxes on the gains, buying term insurance until 65, and buying some equivalent long term care policy? To elaborate, you would have less money to invest outside the whole life policy because you would be buying term insurance throughout your life and also some sort of long term care policy. And you would need a higher return on your investments outside the whole life policy to cover the investment-related fees and the taxes on the gains. You would agree this would be a proper way to compare whole life vs. another investment correct? Have you ever done this?

Hank | February 11, 2019 at 1:34 pm MST

Keep in mind this poster is an insurance salesman who’s been posting pro-whole life replies to this site since 2013. Certainly no conflict of interest.

The White Coat Investor | February 11, 2019 at 2:27 pm MST

Ahhh..WillCD. I haven’t seen you for four years commenting on my articles. Glad to see you’re still reading. Looks like you’re still a fan of investing in life insurance. Some things don’t change I guess. Still selling insurance in California?

At any rate, I agree that 7-pay and 10-pay improves returns. I also agree that whole life insurance returns don’t look as bad when they are compared to a taxable investing as when they are compared to a 401(k) or Roth IRA. They are also more valuable if you actually have a life insurance need or a long term care need (and the policy includes a LTC rider). Obviously if you don’t have a need for either of those, those benefits are much less valuable.

The problem is they keep getting sold to my readers primarily as an investment. And when they’re sold as an investment (despite that being illegal as you know) the proper comparison is to another investment. The problem with adding a “term life until death” premium into a comparison is that is a benefit that almost no one needs or really even wants once they understand the cost. So no, I don’t think that would be the “proper way” to make a comparison. Among my readers, most will not need LTC insurance, so again, no sense adding that in to the comparison. And when adding in the tax and investment costs, one needs to do it properly. The agents I see doing it seem to have no idea of anything like low cost, low turnover index funds, retirement account investing, tax loss harvesting, lower LTCG/dividend rates, tax free muni bonds, donation of appreciated shares to charity etc. They just assume every gain the investment is fully taxable right then and there when it is made. That’s a very dishonest way to make a comparison.

But you can make any comparison you like before buying yourself a policy to decide if it makes sense for you. It certainly doesn’t make any sense for me for many reasons:
1) No need for life insurance
2) No need for long term care insurance
3) Don’t like being locked into payments, even for 7-10 years
4) I’m expensive to insure due to “bad” hobbies
5) I prefer a higher return than 2-5% on money I’m going to lock up for 40-50 years
6) I dislike interacting with people who sell whole life insurance because I find them to generally be either lying or incompetent

So obviously I’m not a fan of buying this stuff. But I just want my readers to know how they work BEFORE they buy one so they don’t become one of the 75% of doctors who have bought one and regret it or one of the 80%+ of purchasers who surrender their policy prior to death. Two readers in the comments section above are happy with their policies so I’m happy for them. That is not the case for most docs I meet who have purchased one of these policies.

WillCD | February 11, 2019 at 3:30 pm MST

So the short answer is no, you have not calculated a true apples-to-apples comparison. I think that’s important for your readers to know. As you stated, you want your readers to know how this works before they buy a policy. And if that’s true (and I believe it is), then your individual circumstances (i.e. not needing life insurance) don’t really matter as much as do the circumstances of your readers in general. So why not use accurate numbers for your readers who may want life insurance/long term care?

Your point #5 ignores (once again) my overall point which is that you cannot compare the IRR of a whole life policy to the IRR in some other investment. There are many factors that must be taken into consideration for this to be a true apples-to-apples comparison. Again, if you are part of the 99% of Americans who need life insurance, you will have less money to invest as you will be buying term insurance. And you will have investment-related fees. And you will have taxes on your gains, even in an IRA. Which means “2-5%” in a whole life policy (assuming you are correct), might be the equivalent of 5-8% when all relevant factors are calculated. Something tells me you are afraid to run this calculation for your readers’ benefit because it might make whole life look better than you purport it to be. Am I right?

The White Coat Investor | February 11, 2019 at 4:46 pm MST

The numbers I’m using are plenty accurate and assumptions in calculations are clearly identified.

The 99% of Americans who need life insurance likely have a FAR better use of their money than buying whole life insurance with it. 99% of Americans aren’t even maxing out their retirement accounts. Anything that encourages them to buy whole life insurance instead of paying off their credit cards, their cars, their student loans, maxing out their retirement accounts, or even buying less term life than they really need is doing them a disservice.

The fact that you would even trot out an IRA and compare it to whole life as an investment reveals your lack of understanding of how an IRA works. To understand how an IRA works, its best to realize that gains aren’t really taxed. The only taxes paid on gains were part of the chunk of the IRA that was never yours in the first place.

There’s no “assuming I’m correct” about whole life returns. Open up the illustration you hand to your clients. Calculate the guaranteed return over the next 30-50 years on the cash value. It’s 2%. Calculate the projected return on it. That’s about 5%. And it’s NOT the equivalent of 5-8% in an IRA. If you are telling your clients that, you’re doing them a grave disservice and should knock it off.

If insurance agents would get more training in taxes and investing and retirement accounts you’d quit telling people falsehoods like you just did.

So no, you’re not right. You’re wrong. Just like you were a half decade ago when you first showed up here. How many whole life insurance policies have you sold inappropriately in that time period?

WillCD | February 12, 2019 at 8:58 am MST

I’m sorry to nitpick, but you are claiming I said things I did not say. First you quoted me as saying “term life until death”, when I actually said “term insurance until 65”. Then you claimed that I compared an IRA to whole life. I did no such thing. Then you claimed I just told people falsehoods. I did no such thing. And lastly, you said “And it’s NOT the equivalent of 5-8% in an IRA.” I never said it was the equivalent of 5-8% in an IRA.

You essentially admitted that you’ve never done an apples-to-apples comparison of whole life and an investment taking into account the variables I mentioned (buying term insurance, buying long term care insurance, paying investment fees and taxes on gains). If you’ve done this, where can I see the results? In reality, you claim life insurance salesmen are dishonest when they sell their products (and that may be generally true), but you are dishonest when you compare whole life net returns to other investments’ gross returns before taxes/fees and forget about term insurance and/or long term care insurance. And I’m pretty confident that you personally believe residents (especially married ones) should have term life insurance. So if I’m right, then your calculations are incorrect if they do not account for the cost of term life insurance. If I’m wrong, where can I go on your website where you explain that even residents should not own term life insurance?

The White Coat Investor | February 12, 2019 at 10:39 am MST

I think a reasonable person can read what you wrote and come to their own conclusions.

Show me a resident maxing out their retirement accounts with their loans and mortgage paid off and we’ll talk about whole life for residents. I sure don’t meet very many of those.

I’m not even sure what “calculations” you’re referring to. But the comments section is wide open to all the calculations you want to do. You’re the one with access to the illustrations. Let’s pull one up and look at it. But any calculation is garbage in, garbage out. Until assumptions are agreed upon, it doesn’t matter what the calculations show.

WillCD | February 13, 2019 at 9:03 am MST

“You’re the one with access to the illustrations. Let’s pull one up and look at it.”

I would like to take you up on your offer. Would you be willing to dedicate a blog post to this? I would even be willing to do a guest post.

The White Coat Investor | February 13, 2019 at 9:16 am MST

Maybe. I’m 6 months out on blog posts right now though.

I know this feels very unique to you, but this is something I’ve been talking about for years. I mean, this blog post was already published 7 years ago: https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/

You’re just arguing about the assumptions used. You want me to add in a factor for LTC and term life.

Guest post policy is here:

https://www.whitecoatinvestor.com/contact/guest-post-policy/

Bear in mind a guest post submitted on this topic is likely to end up being a Pro/Con.

WillCD | February 13, 2019 at 9:23 am MST

Great. I think that’s reasonable. How do Pro/Con posts work?

The White Coat Investor | February 13, 2019 at 10:48 am MST

The comments is a bad place to continue this discussion. Just send in your post as per the instructions. If we choose to run it, I’ll likely write a “Con” section and give you the chance for a “rebuttal.”

9 DJ | February 11, 2019 at 1:18 pm MST

Loving my whole life policy! Purchased in 1991. Originally $200,000 death benefit. Current death benefit has increased to $345,000. Total cost basis of premiums $69,000. Cash value has increased to $139,000. That’s $70,000 more than I put in. My death benefit and cash values continue to increase at a rapid pace and my yearly premiums are the same as they were in 1991 and will never go up. I still currently need life insurance and it’s nice to know I can make a phone call and have close to $150,000 check in my mailbox within a week or two any time I want.

The White Coat Investor | February 11, 2019 at 2:15 pm MST

Glad you like your policy. I run into so many docs that do not once they understand how they work and see the returns they get.

Readers should note that in 1991, when DJ bought his policy, 30 year treasuries were paying over 8%. Policies bought today when 30 year treasuries are paying 3% are likely to provide much lower returns. So, if DJ could have bought a treasury and made 8%, surely his whole life policy provided a similar return, right? Let’s do the math.

1991-2019 = 28 years. He’s paid $69K. $69K/28 = $2,464 per year. If you put in $2,464 per year, start with $0, and end up with $139,000, what was your rate of return?

=RATE(28,-2464,0,139000,1) = 4.50%, about 3.5% less than if you had just bought a treasury.

I don’t think I would be happy with that return, but if you are then it looks like you made the right decision back in 1991. Since you have a need for life insurance, you can also add the value of a $200-345K term policy on to that.

Devin | February 14, 2019 at 8:09 pm MST

I think this anecdote lends itself well to a comparison to understand exactly the costs involved. The policy costs about $205.35/mo ($69K/(12*28) = $205.35. Invested in the S&P index over that time (net of fees if using a low-cost index fund) would be $249,924 from January 1 1991 to January 1 2019. For a difference (opportunity cost) of $250 K- $135K = $115K (I’m using the calculator here: https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/ which provides historical returns net of fees)

But, that calculation is disingenuous because the $135K is net of taxes, whereas the $250K isn’t. Taking long term capital gains taxes on that at 15%, we get about $228K net. So the true opportunity cost is $228K – $135K = $93K.

So the real question to ask is whether or not $93K is worth the death benefit of $200-$345K (I’m using your numbers because I don’t know how to estimate the death benefit) that he would be giving up. For some that answer may be yes, for others it may be no.

I don’t know DJ’s life situation, but looking at a 1-time payment UL policy from State Farm (easiest website I found to play around with without needing to put my email etc.) costs anywhere from $50K for a $200K policy for a 50 year old male in “excellent” health – $84K for a $345K policy for the same 50 year old male, but this time in “average” (worst health choice available) health.

So now the opportunity cost is down all the way to $9K-$34K. But again, this calculation is slightly disingenuous because it relies on the backwards looking knowledge that he wasn’t going to die at any time the policy was in effect. So he did get some tangible benefit from having the policy (just like people that get term, have a benefit, even if they don’t “use” it). If he values that benefit between $9K and $34K, then it seems he did pretty well, and he should be happy with his policy, which it sounds like he is.

However, as I’m sure you’d be the first to point out, there are several flaws with the logic above:

1) This is using the worst possible alternative investment (OK, not quite worst, but pretty bad). In that it has no tax advantage like a 401K, IRA, Roth IRA, etc.
2) I didn’t use any form of tax optimazation like Tax Loss Harvesting that is available in a taxable account.
3) I don’t need to subtract capital gains if the goal is to pass it onto my heirs as the basis will reset.

That’s all I can think of right now, but please point out more if you see them! I don’t want to mislead anyone by accident.

I wanted to do this exercise for myself, and I think this is the kind of comparison that WillCD was getting at, so I thought I’d share it with everyone in case someone else was curious. I was actually surprised how close the numbers ended up being.

But I think, at least personally, it really drove home what I think you have said many times. WL is not in and of itself an evil or horrible product. After all, it can (after a really long time) have similar returns to an after tax account. So if someone has already maxed her tax advantaged accounts (something most people aren’t doing) and don’t want to hassle with optimizing an after tax account, maybe WL is for her. But for the majority of people that aren’t maximizing their tax advantaged accounts, WL is likely not for them.

For me personally, I am maxing my tax advantaged accounts, but I still will not be pursuing WL. The death benefit (what I’m really buying) isn’t appealing to me, and I’ve got plenty of other options available that will perform just as well, and I can use to buy a death benefit in the future should I want one.

The White Coat Investor | February 15, 2019 at 12:09 am MST

Your comparison assumes someone wants a permanent death benefit. If your goal is to get a permanent death benefit, whole life is a pretty good way to do that (although a GUL policy is probably better) so no surprise when you include that as a benefit you want that the numbers don’t look so bad.

WillCD | February 16, 2019 at 8:30 am MST

Devin, you did forget some important variables, although I appreciate you attempting a true comparison with all factors taken into consideration. One huge variable you may not have considered is that I borrow against my policy all the time to invest. And since I only have non-direct recognition policies, my gains in the policy are not affected when I do this. This cannot be done in the exact same way with stocks, especially when your stocks are in an IRA or 401(k). When you add my net gains on these collateralized investments (returns minus interest), my whole life policies start to become a force to be reckoned with. Do you follow my argument? And do you agree or disagree that this particular feature increases the value of whole life?

The White Coat Investor | February 16, 2019 at 2:18 pm MST

Agreed you can’t do it in an IRA or a 401(k), but you can borrow against a stock portfolio and with the same effect as a non-direct recognition policy (i.e. the stocks keep making money.) You can often do it at better terms than many whole life policies as well. It’s 3-3.5% at interactivebrokers.

The one advantage of the whole life policy in this regard is no margin calls, but I don’t think that’s worth the higher interest rate you’re paying or the lower returns and all the other crap you get with a whole life policy.

But that seems silly to add the returns of what you invested in with the borrowed money on to the returns of what you borrowed against.Give me a break. That’s like borrowing against your home, making a killing on a rental property, and saying the return on your home was awesome. Totally unrelated.

10 Seabass | February 11, 2019 at 4:35 pm MST

Devils advocate

If you’re interested in having a fruitful retirement and leaving an inheritance is important to you…can we not look at WL as a hedge to allow you to spend down your nest egg more aggressively (more fun) and not be worried that your heirs will be left with less than what you deem important?

Especially if the premiums basically pay for themselves at retirement age through dividends?

I realize that people have varied ideals when it comes to inheritance.

I can’t get over the hump of thinking, the premiums I’ve paid for 7 years (prior to finding WCI) are not that bad over 20 years to gauruntee my kids/grand kids a nice boost to their lives and needs at my passing. Which makes me have a hard time hitting the “regret” button on the poll.

I am not looking at WL as an investment I plan to use for myself which I guess helps me justify in my brain.

I do look at it as a plan B should I ever need to “tap” the cash value, but am hopeful I just let it grow for my family.

I max out 403b 457b BDRoth and HSA spaces thanks to this place. Also supposed to have a healthy Pension that seems to be alive and well that I’ve vested in and all signs point to it being there at the end (I max the other spaces in case it’s not though)

Full disclosure , when I was sold the policies I was not maxing and I was more in debt so it was inappropriate with the early entry costing me opportunity but at least locked in a lower rate during top tier health.

I don’t think I want to give them up at this point given the already paid front loaded costs, so I guess it’s no regret given the above points?

Will I have more wealth at death than the WL policies?, maybe, but not garunteed and that would not be something I can swallow.

Pretty sure my kids work ethic will keep them from being homeless, but who knows what their earning power will be if they chase a dream they enjoy rather than chasing a high earning career?

The White Coat Investor | February 11, 2019 at 4:50 pm MST

Yes, if you want to leave your heirs with a GUARANTEED inheritance, whenever you die, permanent life insurance is a good way to do that. But you’re probably better off with a Guaranteed Universal Life policy (GUL) for that since it costs half as much as whole life. If you want a policy where the death benefit slowly increases in value then WL would work best, but it beats me why someone would want that. Bear in mind, you are more likely to leave them more money if you invest it in stocks and real estate instead of life insurance. The life insurance only works out better if you die long before your life expectancy.

Whether the premiums pay for themselves now has nothing to do with it.

Not surprised to see WL was sold to you inappropriately. It usually is. And you’re right that the decision to surrender is very different from the decision to buy. It’s entirely possible that you are better off keeping a policy you never should have bought.

Seabass | February 11, 2019 at 4:57 pm MST

Wish I woulda known more about the GUL then.

Thanks for the reply WCI!

You’re write up of the surrender or not surrender was very helpful to me

Many roads to Rome …I guess I’m trying to travel them all. Lol ?

Seabass | February 11, 2019 at 5:23 pm MST

Or is it roads to Dublin

I think I confabulated there

Hank | February 11, 2019 at 4:58 pm MST

If the goal is to leave a lump of money to your kids, to your alma mater, or to some other charitable endeavor, you likely would leave more money if you invested outside of a whole life policy. Wall off that chunk of money and don’t consider it “yours”, and that same chunk probably will be worth more without the drag of paying commissions and paying the whole life company.

That said, if you bought a policy some years back, forget the sunk costs and evaluate it as a possible investment going forward.

11 Anna | February 11, 2019 at 6:42 pm MST

Is Vul 5 whole life insurance? Is there a time period when surrendering it still makes sense?
Thanks

Chris | February 11, 2019 at 7:43 pm MST

VUL is variable universal life. Whole life and variable universal life are both considered permanent policies. The major difference is that variable universal life has investment options within the product. Those funds often reflect a major market index typically the S&P 500 or the US total market but are grossly more expensive than a true index fund and have upside limits. I’m not positive what the 5 stands for, it could be a lock up or penalty period or it could be an estimated time when the policy would start accumulating cash value. WCI has a post somewhere where he talks about situations where it may make sense to surrender a policy or where are you may want to hold onto it and there are a variety of factors. Sometimes but not always it makes sense to surrender if the policy does not have cash value and you do not have a permanent insurance need, but it’s not always that cut and dry.

The White Coat Investor | February 11, 2019 at 10:16 pm MST

You sound like you’re mistaking a VUL for an IUL. They are not the same thing. A VUL has mutual fund like subaccounts. It’s possible that those subaccounts could be like index funds, but they are often actively managed funds. It is really quite variable. Ideally, the VUL offers the same investments you would use if you weren’t investing in a VUL.

I think this is the post you’re referring to:

https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/

Either way, it’s a lifelong commitment to these things so be sure you really, really want them and understand what you’re buying BEFORE you buy them.

The White Coat Investor | February 11, 2019 at 10:11 pm MST

I don’t know what “Vul 5” is, but a VUL is a variable universal life policy, a similar cash value/permanent life insurance policy. Like whole life, if you bought it but don’t really want it, the best time to surrender it is early on. Partial surrenders in late retirement are generally a much bigger part of using a VUL as a retirement account instead of WL because the cost of insurance continues to ride and erodes into the cash value without the guarantees that WL provides.

12 Chris | February 11, 2019 at 7:29 pm MST

Just a note about insurance products, a lot of their built in costs are the result of the commission paid to the agent and since the late 90’s there have been a scattering of commission free products available but they failed to gain too much traction because the only people making them available were fee only advisors. If anyone on this thread already works with a fee only advisor and has a legit insurance need you should ask your advisor about fee only insurance products. You can find WLI MUCH cheaper without the commission and with much lower internal costs, the same for VUL and all flavors of annuities. (Term is a bit cheaper but heavy competition already makes it pretty affordable). None of those products should be bought as “investments” but if you do need them and already pay a fee only advisor why not get them at a lower price?
Be careful about the carriers, a couple have shady credit ratings, but most are pretty solid.

The White Coat Investor | February 11, 2019 at 10:14 pm MST

I’ve looked at a few. You would think it would make a huge difference, but it doesn’t seem to. Where it really does help though is if you choose to dump it early. Then I think it makes a big difference. It might be fun to do a post where they go head to head.

13 MichaelThomas | February 12, 2019 at 11:09 am MST

I’ve been contemplating buying whole life insurance (overfunded) as an alternative to a bank savings account. I found your website with a Google search and wanted to get your thoughts on this. I’m always going to have a savings account throughout my life for many things: emergency fund, future investments, liquidity, etc. Wouldn’t overfunded whole life be a great alternative to a savings account? The return would be better, it would be tax free growth, I would have a death benefit and you can also get a disability rider. And in the future, if I wanted to buy real estate or do a hard money loan or something along those lines, I could borrow against the policy, earn a spread on my investment and still earn a full dividend in the whole life policy. Would love to know your thoughts.

The White Coat Investor | February 12, 2019 at 4:56 pm MST

I can’t quite decide if you’re sock puppeting me or not but I’ll just take your question at face value and assume the best.

Yes, I’ve discussed this use of whole life insurance here: https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/

Done properly, you’re essentially trading some upfront costs/expenses/opportunity costs for a higher long term return on a savings account.

I don’t think it’s crazy to do that, but it’s not as awesome as the hype surrounding this technique would lead you to believe. Just make sure you really understand how it works, really do want to do it for the rest of your life, and buy a policy properly designed to do it.

MichaelThomas | February 12, 2019 at 5:33 pm MST

Thanks for the link to your other article. I read it. And this is actually not what I am contemplating doing. (FWIW, I’m not a fan of the “Infinite Banking Concept” and “Bank on Yourself” for some of the reasons you mentioned.) Those concepts you mention have to do with using whole life insurance to pay for expenses. I would never use whole life insurance for expenses. Rather, what I’m thinking of doing is using overfunded whole life as my emergency fund, for liquidity and for future investment opportunities. I need an emergency fund, I need liquidity (cash is king) and I’m certain opportunities to invest will cross my path in the future and would want to take advantage of them.

Instead of using a bank savings account for this, why not use whole life? I don’t see a downside, unless I’m missing something. I don’t see any costs or expenses upfront unless I surrender the policy. And there’s no opportunity cost as this money would just be sitting in a bank account any way. So what am I missing? I would get life insurance as part of the deal and that’s important to me as I’m just starting my career and already thinking about starting a family. So I would never need to buy term life insurance. And the return absolutely crushes a savings account and it’s tax-free no less! And I will earn full dividends for life, even if I need the money for an emergency or investment.

I have a copy of the illustration from the life insurance guy. Would you want to see it to see if there are any pitfalls I’m not seeing?

The White Coat Investor | February 12, 2019 at 6:21 pm MST

No, that’s EXACTLY what BOY/IB is.

I wouldn’t put my entire e-fund in there though.

The downside is the crummy returns the first half decade or so. It’ll take you that long to break even in a well-designed policy. If you’re okay with that, then the rest of it works out okay. You’re probably still going to need a term policy on top of it.

As interest rates rise, the return doesn’t “crush” savings accounts by quite as much. For instance, the Vanguard MMF is now paying 2.5%. If short term rates keep rising, especially without a corresponding increase in intermediate term rates, it wouldn’t really be much of a deal. It was much more impressive to get 4-5% in a WL policy when savings accounts paid 0.5%.

Hope this works out the way you want. Be really sure this is what you want to do. Surrendering prior to death rarely works out well. You’re usually better off never having bought it.

MichaelThomas | February 13, 2019 at 9:33 am MST

With all due respect, I researched IB/BOY pretty extensively and what I’m thinking of doing is not it at all. For example, in your own article on IB/BOY, you talk about how those concepts are used for buying cars, home mortgages, college, and vacations. What I want to do is nothing of the sort. Maybe I wasn’t clear, but I stated I was not contemplating this for expenses, but as an emergency fund, liquidity, and future investment opportunities.

And what you call “crummy returns the first half decade”, that’s not really accurate. Like I said, I want (and need) life insurance, and looked into GUL, which I learned from your blog is the cheapest permanent life insurance. And it would be $4,718 for a $1 million GUL policy. So when I compare $10,000 a year into whole life vs. $5,282 into a savings account (after buying GUL), I’m ahead at the end of year 2! (I’m sure you can tell I’m a numbers guy. I live in spreadsheets and have really thought this out.) Further, on the whole life, it’s a 10-pay I’m looking at, which means I’m done in 10 years. GUL has a premium until 100.

And as to interest rates rising, my insurance guy showed me historical dividends and they were higher when interest rates were higher. And he claimed that the dividend rate today is essentially the lowest its ever been. So if the past is any way indicative of the future, wouldn’t my returns be higher if interest rates rise?

The White Coat Investor | February 13, 2019 at 10:53 am MST

What difference does it make you borrow against the policy to buy an investment property or an emergency versus a car? None at all. The policy functions the same way. If that’s not obvious to you, you may want to hold off proceeding until you really get how this works.

If you want a permanent life insurance policy that also accumulates cash value you can borrow against, whole life is your baby. That’s exactly what it does and what it is. Not very many people actually want that sort of thing, but if you do, it’s a great fit for you.

And I’m not sure why you think “crummy returns in the first decade” is inaccurate, run the numbers and see what your returns will be in the first 10 years of owning a whole life policy. Every time I do, they’re pretty pathetic compared to something like stocks, real estate, or even bonds. So yes, I think that’s a very accurate statement. If you want to massage the numbers around like WillCD and add in some factors for LTC insurance or term life or even GUL, you certainly can, but I think that’s kind of a bogus argument. It’s not like you get the death benefit AND the cash value. It’s either/or. When you die, you get the death benefit minus all the loans you’ve taken against the cash value.

Yes, it’s entirely possible you could get higher returns if interest rates rise. It’s also possible your returns could be as low as the guaranteed rate in the illustration.

14 Enfvog$ | February 12, 2019 at 9:23 pm MST

WLI is a good vehicle to achieve multiple financial goals. See, I did not call it a “INVESTMENT”, so no one has a coronary event.

I have used WLI to meet many needs over past many decades. It has done better then savings accounts, bonds and some years better then 50 – 50 stock/bond portfolio.

However, many of you feel as though WLI is a instrument created by Bernie Madoff, or perhaps the devil herself. In that case, dont buy it and move on with something else

The White Coat Investor | February 13, 2019 at 7:17 am MST

WLI has not outperformed bonds over any time period I am aware of. In fact, it can’t since that is what the money is primarily invested in. You take the premiums, pay the profits, commissions, and expenses of the company, and invest the rest in bonds. That’s what the purchaser gets. So it can’t provide a higher return than bonds. It certainly isn’t higher in the first decade or two. You’re lucky to break even in the first decade. That’s decidedly worse than bonds.

Peter Steinberg | February 14, 2019 at 1:31 pm MST

This is a very good blog post on VUL and WLI and on the actuarial math behind the scenes, showing how various approaches can be used to either maximize the death benefit or to maximize the IRR on the policy.

It’s heavy on the math and written by an actuary, but I think can answer some of the high level questions that are coming up.

https://www.kitces.com/blog/universal-life-insurance-funding-strategies-death-benefit-cash-surrender-value-bd-csv-irr/

Peter Steinberg | February 14, 2019 at 1:35 pm MST

And the other thing to keep in mind is the highest IRR on these occurs when you die young/before life expectancy. I don’t think that’s an outcome most people are looking for or thinking of when they consider what the IRR will be . . . .

You can’t get much greater return than buying a life insurance policy and dying shortly after getting it; however, I don’t think this is what people have in mind . . . .

The White Coat Investor | February 14, 2019 at 5:13 pm MST

I don’t think it’s fair to consider the IRR at any time before life expectancy. If that’s what you really want, your IRR would be even better had you bought term.

The White Coat Investor | February 14, 2019 at 5:13 pm MST

Design definitely matters. If you want a policy for a specific reason, you should buy a policy that will maximize that particular feature.

15 afan | February 14, 2019 at 10:04 am MST

I for one hope the life insurance salesperson sends WCI an illustration of the best policy he/she can find, with no guarantees that it will be published. I hope WCI evaluates the guaranteed performance ( including guaranteed cost of insurance as well as guaranteed dividend rate) using assumptions he can state for taxes, market stock and bond returns and logical behavior by the individual. That is, no assumption that the individual liquidates and payes taxes on the entire portfolio every year- a popular unstated assumption among those who sell life insurance. Include the high likelihood that WCI readers will never realize capital gains but leave them in index funds until death with a stepped up basis. Assume 10 basis points of investment cost annually, although most of us pay less.

Then compare to a taxable account, a tax deferred account and a Roth.

If the whole life policy guaranteed return wins then I would be interested.

To WCI- I appreciate your comments about the ethics of this sort of Medicaid planning, particularly for a physician who should never go on Medicaid with any rational behavior. But even if one were doing such planning, the core of the strategy is gifting money to an irrevocable trust. That need not be used to buy life insurance. For any doc who has been paying attention to finances, they would need to gift a huge amount to the trust to become eligible for Medicaid. No sane person would spend millions on life insurance premiums even if they did want to stiff the taxpayers with their nursing home bills.

On the other hand, I don’t think it is crazy to plan for an increase in estate taxes, among other contingencies. The exclusion is historically high right now and one party is resolved to cut it drastically if they get back in control of Congress and the White House. Planning for this need not mean buying life insurance, but whistling past this graveyard seems irresponsible.

Some states have high estate or inheritance taxes and a lot of docs who live there would see their bequests reduced by taxes. Funding an irrevocable trust also provides asset protection for heirs with no need to buy life insurance.

The White Coat Investor | February 14, 2019 at 10:34 am MST

Give me a break. The guaranteed return won’t even be close. The guaranteed IRR on even good policies held for 50 years is about 2%. There is no assumption that is going to get there. At a minimum one has to compare the projected returns to a taxable account. It isn’t even in the same ballpark without that.

16 afan | February 14, 2019 at 1:59 pm MST

I assume that is true. Which is why I suspect your salesperson may not follow up. This one insists on an apples to apples comparison. It is easier to claim this would show that whole life is a good deal than to prove it.

No hype, just an illustration that proves it.

It is also why I would not promise a guest post. What we want is a list of numbers that supports the claims. Salesperson submits it and you present your analysis. Salesperson does not get to write a post. Can answer any questions you may have about the illustration before you post your analysis.

If the claims are true that will be clear from the illustration, with no need for a pitch.

The White Coat Investor | February 14, 2019 at 5:15 pm MST

I know. I’ve looked a dozen of these in the last 5 years all from an agent who was sure I would be convinced after I saw their illustration. But I humor them.

17 Emily | April 12, 2019 at 1:56 pm MST

My husband and I have really been diving into your book mainly based off our financial advisor getting us both started on a whole life insurance. We were always questioning it since it’s close to $1000 a month combined. Mine is 440 and his is 500. We are young professionals: husband is a dentist and I’m a dental hygienist both 5 years out of school. We want to cancel in but know it will be a battle with our financial advisor. Are there some key points we could bring to him as to why placing that money elsewhere per month would be better for us. I’m doing a Roth IRA that is matched at work and my husband is doing a match 401k at his work. Neither of these are reaching there Full contribution amount per year. Every time we bring it up our financial advisor says we will be pulling from it eventually to live off of in retirement and eventually it will begin to pay the premiums on itself but that feels like a millions years to us at this point!!!

Hank | April 12, 2019 at 2:59 pm MST

Is your “financial advisor” the same person who sold you these whole life policies? If so, you don’t have a financial advisor, you have a commissioned salesman.

There are no rollover minutes for qualified funds. If you don’t maximize your 401(k) and IRA contributions for a decade, you don’t get to go back and make those contributions later. Worse still, you could have reduced your taxable income at your highest marginal rate and these funds early in your career would have had the longest time to compound for your retirement. (Of course, contributing to your 401(k) wouldn’t enrich this commissioned life insurance salesman.)

The White Coat Investor | April 15, 2019 at 7:02 am MST

$24K a year into whole life insurance. Wow. That seems like a lot of money for a dentist/hygienist combination. Seems like a terrible move to me.

But why would you try to convince this salesman that he is wrong? You’ve been wronged. You’ve been given bad advice. Why go back to the same person that gave it to you?

Get a real written financial plan (on your own with books/blogs/forums, using my Fire Your Financial Advisor online course, or hiring a real, fee-only advisor), get term insurance in place, then dump this policy and this “advisor.”

There’s not reason to “have a battle.” You never have to talk to him again.

https://www.whitecoatinvestor.com/how-to-fire-your-financial-advisor/

https://whitecoatinvestor.teachable.com/p/fire-your-financial-advisor

https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/

https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/

https://www.whitecoatinvestor.com/investing/what-you-need-to-know-about-financial-advisers-2/

https://www.whitecoatinvestor.com/financial-advisors/

By the way, Roth IRAs are never matched, you must be discussing a Roth 401(k). You can both do Backdoor Roth IRAs as well ($6K a year each). That is a WAY better use for your dollars than whole life insurance.

https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/

https://www.whitecoatinvestor.com/how-to-buy-life-insurance/

18 Rachael | May 11, 2019 at 5:50 pm MST

I have had more than one financial advisor try to pitch whole life to me as an investment strategy and I’ve remained skeptical. Their main argument is tax diversification since I am in a position where I don’t have a lot of tax advantaged investment options. I make too much to contribute directly to my Roth IRA anymore (although I fully funded it all through residency) and my employer sponsored plan (which I’m currently maxing out) is a Simple IRA which makes the backdoor Roth a less viable option. I also don’t have the option to contribute to an HSA because my employer sponsored health plan has too low of a deductible. However, after reading some of your blog posts I’m thinking that taxes may not be as big of a concern as they make them out to be.

The other thing that was most recently pitched to me related to whole life (which I didn’t see as one of the myths you talked about) was using the cash value of the policy as a type of protection during down markets in retirement to avoid selling at a loss. Basically, the advisor was suggesting that during times when the market was low you borrow money from the cash value of the insurance policy and use that as income in place of other retirement accounts (just take the RMD) and then you can leave those accounts more aggressively invested because they’ll have time to recover since you have a back-up income stream that isn’t going to lose value with the market.

The White Coat Investor | May 11, 2019 at 8:43 pm MST

You’ve mistaken a commissioned salesman for an advisor.

I find the “whole life is an attractive asset class” argument to be pretty weak. It’s in this series somewhere. I think bonds work better for that.

19 Alan-Michael Alston | May 15, 2019 at 8:29 am MST

Based on your previous posts, I was convinced you “hated” whole life and was prepared to write a diatribe about how every product has its place. After reading this, I realize you’re in the same boat I am: you know its place but you hate how its sold. Hats off.

The White Coat Investor | May 15, 2019 at 9:22 am MST

Exactly. The problem is it’s sold like it’s right for 99% of people but in reality it’s right for 1%. Huge disconnect there. Check out all these people to whom it was sold inappropriately:

https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/

20 Mark Smith | September 29, 2019 at 11:43 am MST

These are my responses to your article on IUL back in 2012. A lot of your points are accurate, but they’re made in a black-and-white scenario, and I think you’ll understand this based on my responses. I personally owned both level term AND VUL, and in hindsight, I should have combined the two so that my term coverage would have been paid for by the IRS (I’ll explain, below).

(Numbering and summary match to your article’s numbering.)
1) Assumes that the insured is in the “vast majority”. It’s the minority that needs to retain coverage, and they won’t be able to afford term insurance at their renewal rate.

If in fact independence is achieved, the policy can be surrendered, or retained with a reduced/minimized face amount to retain the tax benefits.

2) You don’t need to retain the policy for your entire life to achieve a low return. You must be comparing the accumulation amount with a straight investment account, which isn’t congruent. Challenge: find an alternative investment option that lets the insured make separate term insurance payments *tax-deductible* from the investment income, makes the income grow tax-deferred (if not tax-free through net-zero-cost loans), and has no age retrictions on withdrawals before ages 59.5 and 70.5. Where, but in a permanent life insurance solution, can you find a way to pay for term insurance using pre-taxed dollars? Think about it… In a 40% marginal tax bracket, a $1000/year term policy really costs $1667 of GROSS pay or investment income. The same coverage in a permanent life policy costs just $1000. So really, your term policy costs $1000 (carrier) and $667 (IRS).

3) This is a valid point…maybe. In a perfect world, we’re all putting 100% of our investable assets and discretionary income into equities, but that only makes sense in 1932, 1974, 1987, 1990, 1998, 2002, 2009,…and only AFTER the low occurred in each of those years. You’re suggesting that every available investable dollar be subjected to stock market risk! That is the only way you’ll achieve the dividend capture you seem to require. Is it reasonable to put perhaps 10% of investable assets into a vehicle that can return 6-7% long-term and never have a 50%+ drawdown? I can’t imagine elderly retirees accepting the 13-year rollercoaster of 1997-2009 just to capture the dividends passed on by seeking the stability of IUL. In the end, even retired physicians enjoy having a tax-free account that can’t lose value, has meaningful upside, and has just one put/take restriction (limits to deposits to preserve preferential tax benefits).

4) This is accurate. If it’s critical to capture 100% of the market’s potential, then IUL will fall short. Of course, the author is assuming that the investor sold his account on the last day of the year, and realized the return given that year. But what if it was one of the negative years? What if the market was down 50% at the time? To achieve 100% on the upside, one must assume 100% of the downside. The Nasdaq 100 dropped 75% starting in 2000. Yes, the prior year it was up, and you captured that “up”. But what if you need your money in 2002, at the low, and your $1M is now worth only $250k? What if a nuclear bomb detonated over Miami, launched from a North Korean submarine off the Cuban coast? Then, will you be happy that 100% of your money was invested in the stock market?

5) This is also true. I don’t have a great response to counter you, except to say that it’s wrong to suggest that participation rates would be less than 100% for 30 years.

Adding it All Up
This isn’t an investment in equities. If you want that, buy stocks! If you need life insurance and want full participation in stocks,consider VUL, and don’t buy IUL or whole life. Don’t compare IUL to Whole Life. IUL policies synthetically participate in equity-like performance. Whole life policies participate in the (real) general fund of a carrier. The investment mix of the carrier is far removed from equities. The returns should be quite different over time, and that’s OK, if low correlation of returns is desired.

The White Coat Investor | September 29, 2019 at 9:04 pm MST

Take a look at people who have had IULs for a few years already. Their returns are very similar to those who own WL policies for hte same length of time. That shouldn’t be surprising to anyone.

21 Joseph | March 16, 2020 at 9:20 pm MST

My financial adviser is selling me WL insurance based on the fact that I can get tax free money at retirement, any thoughts?

The White Coat Investor | March 16, 2020 at 9:29 pm MST

You can get tax-free money by borrowing against your house, car, or taxable portfolio too. But it isn’t any more interest-free than borrowing against your whole policy. You know what else is tax-free? The money you have left over after paying taxes. If you earn 8% instead of 5% by using a real investment instead of whole life insurance you end up with more money even if you pay 15% on the gains. Don’t let the tax tail wag the investment dog.

Did the insurance salesman masquerading as your financial advisor mention that he gets 50-110% of the first year’s premium as a commission for selling it to you? Does that bother you? Does that make you question his motivation to sell it to you and perhaps even the quality of the advice he has been giving you about other things too?

Good luck with your decision.

Joseph | March 16, 2020 at 9:41 pm MST

Thank you for the quick reply, matter of fact, I already bought Whole life insurance last month and now as I am reading through this, I am seriously thinking to cancel it.
It indeed bothers me that my FA was very adamant about getting me to buy this LIRP. Stating that having another bocket at retirement (on top of Roth and 401K) to borrow money from, would lower my tax to 0%

The White Coat Investor | March 17, 2020 at 3:33 pm MST

But the goal isn’t to lower your taxes, it’s to have the most money after taxes. Your “advisor” moved the goalposts to sell you a product.

Joseph | March 27, 2020 at 4:10 pm MST

Any thought on the term life insurance with fixed premium vs. increasing premium?