By Dr. James M. Dahle, WCI Founder
Today's post sprung out of one of those ideas that came to me at 4am in that state between sleep and wakefulness. Now, as I write the actual post in the light of day, the whole idea seems a little silly. Let's go with it anyway and see what we can learn from it. If nothing else, I suspect the exercise will illustrate many of the problems with “investing” in whole life insurance. So, if you've ever considered the idea of investing in real estate vs. whole life insurance, this post is for you.
Investment Returns
Perhaps the biggest difference between these two investments is the returns. Insurance agents will balk at my even calling whole life insurance an investment, and I agree with them. But they're usually talking out of both sides of their mouth on this point. First, they'll say, “It's not an investment,” and a few minutes later, they'll encourage you to use it for your retirement savings. Guess what? That's an investment.
At any rate, expected long-term returns on well-managed real estate investments are usually in the 8%-15% range. Guaranteed returns on a well-designed whole life policy held for decades until death are about 2%, and projected returns are currently about 5%. In my experience, the actual return usually comes in between those numbers, perhaps 3%-4% per year. Obviously, there are bad real estate investments and poorly designed whole life insurance policies that have worse returns, so I'm only comparing good against good here. But what does making 10% vs. making 4% mean over the 40 or 50 years you might own a long-term investment? Let's take a look.
Consider investing $100,000 at 10% vs. 4% over 30-, 40-, and 50-year time periods.
These are not trivial differences. We're not talking about 50% more money. We're talking about having 500% or 1,650% more money! Obviously, you're taking more risk with real estate, but over 50 years, are you really? What are the odds that your return is really going to be less than 4% over 50 years? You'll probably get close to that out of appreciation alone without any leverage or income. There are going to have to be A LOT of other advantages somewhere else to make up for this huge disadvantage.
Both types of investments suffer from poor short-term returns. A typical whole life policy has a -30% return in its first year. Likewise, the high transaction costs on real estate usually result in a negative return if you sell within the first few years.
More information here:
16 Different Ways to Invest in Real Estate
Taxability of Income
Both real estate and whole life insurance can provide income to you. In the early years of a whole life policy, the dividend is usually less than the premiums you are still paying. But eventually, it will hopefully be more than the premiums or you will have the policy paid up such that you are no longer paying premiums. Whole life dividends are technically a return of premium paid, so there is no tax due on them. You can argue whether that's income or not, but it is certainly tax-free.
Rental income is taxed at your ordinary income tax rates. However, with a typical real estate equity investment, at least for the first few years, the rental income is generally covered by depreciation. So, it also comes to you tax-free. When that stops being the case, many real estate investors simply exchange their equity tax-free into a larger property and continue the process. If you ever sell the property, that depreciation is recaptured, but only at a maximum of 25%. You'll still have benefitted from the time value of money during that time period.
Taxability of Exit
If you decide you want out of one of these investments before you die, there can be significant taxes. If you sell your equity real estate investment, all depreciation you've taken will be recaptured at up to 25%, and you will pay long term capital gains rates on any gains. With whole life insurance, you will pay ordinary income tax rates on any cash value that is more than the sum of premiums paid. Any tax losses you may have from tax-loss harvesting can be used to offset capital gains but not gains from the sale of whole life insurance.
More information here:
10 Tax Loopholes for Real Estate Investors
Exchanges
However, you do not have to sell either asset. You can exchange them. A 1031 exchange allows you to swap your real estate for similar real estate (and “similar” has a pretty broad definition) within 60 days of the sale and avoid paying capital gains taxes or depreciation-recapture taxes. A 1035 exchange allows you to swap the cash value of your whole life insurance policy into another cash value life insurance policy, an annuity, or even a long-term care policy, all tax-free.
Tax-Free at Death
Both assets pass to your heirs income tax-free. Real estate passes tax-free by virtue of the step up in basis at death. Whole life insurance passes tax-free by virtue of the fact that life insurance death benefits are not taxable. Remember that with whole life that there is only one pot of money, not two. Whatever cash value you borrowed against the policy is subtracted from the death benefit before it is paid out.
Retirement Accounts
While neither investment is available in most standard retirement accounts, real estate can be placed into self-directed IRAs and 401(k)s with the attendant tax, estate planning, and asset protection benefits. Life insurance cannot.
Ability to Borrow Against the Asset
You can borrow against either asset tax-free but not interest-free. The terms to borrow against your whole life insurance policy are fixed (and guaranteed) when the policy is signed, but they are generally not favorable. The terms to borrow against your real estate are neither fixed nor guaranteed, but you can also generally get better terms. One unique aspect of non-direct recognition whole life insurance policies is that the dividend is not decreased even if you borrow out a large portion of the cash value.
Death Benefit
Whole life insurance provides a death benefit, no matter when you die. Real estate does not. That means that in the event of an early death, the “return” on a whole life insurance policy will be dramatically higher than that of a real estate investment. Of course, this advantage can be relatively offset by using inexpensive term life insurance.
Asset Protection
Some states (about half of them) provide excellent asset protection for the cash value of a whole life insurance policy. In the event of bankruptcy, you often get to keep the entire cash value and stiff your creditors. Real estate, at least real estate outside of retirement accounts (which provide even better asset protection than whole life insurance), has more limited asset protection options. Placing it into a multi-member Limited Liability Company (LLC) will often limit creditors to a charging order and force a settlement, providing some limited external liability protection. Obviously, real estate is a far more toxic asset than life insurance, and it can create its own internal liability. The LLC can help protect your other assets from that, but the entire value of the property (and anything else in that LLC) will be subject to creditors.
Estate Planning
Whole life insurance is a far easier way to pass wealth to the next generation than real estate, although its lower returns usually mean you're passing less wealth to them. Life insurance death benefits do not pass through probate, and the asset is easily placed into an irrevocable trust where any growth is not subject to estate taxes. Real estate can also be put into an irrevocable trust, but there will be more hassle and taxes due. Using a revocable trust, a family-limited partnership, or even an LLC can help avoid probate—just be careful not to lose that valuable step up in basis at death just to avoid probate. Whole life insurance is also obviously a lot more liquid at death, which can help pay any estate taxes that may be due.
Ability to Add Value
Many real estate investors love the fact that their expertise and hard work can boost their returns and add value to their investments. Naturally, if you are lazy and suck at real estate, you can also subtract value. You're not going to add or subtract any value to your whole life insurance policy no matter how hard you work at it.
Hassle Factor
While good systems and good managers can reduce hassle, there's no doubt that real estate investing involves far more hassles than a one-time purchase of a whole life insurance policy. However, do not minimize the difficulty and hassle of managing a whole life insurance policy properly during the withdrawal phase. While much less of an issue with a whole life policy than the various types of universal or variable life policies, you don't want to turn it into a Modified Endowment Contract (MEC) and turn those loans into taxable income.
Hype and Scam Potential
One of the worst parts of both of these investments is the hype that surrounds them. High commissions cause unscrupulous and uneducated insurance agents to push lousy whole life policies for lousy reasons. If they can't sell it to you for asset protection or estate planning, they'll try to sell it to you for retirement income, paying for college, or as a tax-reduction scheme. Many doctors fall prey to these sales tactics. They're not technically a scam (if you read the contract, it'll tell you exactly what's going to happen with this policy), but you might still feel bamboozled.
Real estate investing has almost as much hype surrounding it as multi-level marketing schemes. Books, courses, and seminars are filled with rah-rah-rah motivational material. You should ask yourself why it takes so much motivation to be successful if real estate is such an easy, guaranteed path to wealth. The answer is that it isn't. It's hard work and certainly not guaranteed.
To make matters worse, there are outright scams out there. Real estate education is full of them. One well-known course charges $0 for the first session, $400 for the second session, and $5,000 for the third session. And that's downright cheap compared to many courses and coaching programs. What many beginners don't realize is that all that information is available on the internet and at their public library for free if they're willing to spend the time going to get it. In addition to the education process, there are plenty of downright bad deals out there and incompetent and unethical players in the space. Caveat emptor!
That's why The White Coat Investor's newest course, No Hype Real Estate, is so effective. We're not hyping real estate at all. Instead, we give you the basic knowledge you need to decide whether real estate is the right investment for you. In fact, we've worked so hard on this course that it gives you more than a dozen instructors and 25 hours of content. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course.
More information here:
Is Whole Life Insurance a Scam?
Summing It Up
Let's take a look at a summary of the advantages and disadvantages of each of these investments.
As you can see, each asset has its advantages and disadvantages. But over a time horizon of 30-50 years, the advantages of whole life insurance simply cannot overcome the high returns available with a decent real estate investment. That's why 20% of my portfolio is in real estate, and 0% of it is in whole life insurance.
If you would like to learn more about real estate investing opportunities, we recommend you sign up for our free real estate newsletter to learn about various private real estate syndications and funds, including most of those I invest in.
Featured Real Estate Partners
What do you think? Do you invest in real estate, whole life insurance, both, or neither and why? Comment below!
Really?
You didn’t like this one Bev? I’m still waiting for your guest post:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
I have to admit that this made me laugh
Same here. After seeing Bev’s comment, I had to check to see if Jim wrote this article and not Dr. Racela.
It’s almost like an inside joke at this point.
Shouldn’t it be 1035 to defer taxes. I feel defer is better word.
Depends on the eventual outcome. If never sold, I’d call it tax-free. If the policy is eventually sold/surrendered, then sure, tax-deferred would be a more appropriate term.
It’s still 1035 for insurance not 1031 and most of the time it’s actually to an annuity. I still feel it gives the wrong connotation. It’s a tax deferred vehicles with a n income tax free benefit/step up. But up to u of course.
I agree that defer is probably better when going to an annuity. Actually, now that I think about it, the exchange itself is always tax-free. There is no cost to the exchange itself. So I think the wording is fine.
The comparison table lists the 1035 as an exchange for both.
Previously it was 1031 for both. I think he will adjust it again soon.
I think we’ve finally got it right now.
“Insurance agents will balk at my even calling whole life insurance an investment, and I agree with them. But they’re usually talking out of both sides of their mouth on this point. First, they’ll say, ‘It’s not an investment,’ and a few minutes later, they’ll encourage you to use it for your retirement savings. Guess what? That’s an investment.”
I think you and the insurance agents are talking past each other. When you say that life insurance is “not an investment,” you seem to be saying that it is merely a means to a death benefit and should not be used to store wealth. When the insurance agents say it, they are making a distinction between investing, where you put your principal at risk in the hope of earning a high return, and saving, where your principal is at little to no risk but your return is generally lower. I run almost all my income through my two whole life policies, but I don’t think of myself as “investing in life insurance” any more than I would be “investing in checking” if I were to keep my savings in a checking account.
For the record, I am a pathologist—not an insurance agent or a financial professional of any kind.
I’ve written about “banking on yourself”/”infinite banking” elsewhere:
https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
Sounds like that’s what you’re doing.
Yes, that is what I’m doing. I know you’ve written about IBC elsewhere, and I wasn’t trying to go off topic. I was merely pointing out that there is a sense in which nobody is “investing in whole life insurance” because whole life insurance is not an investment but a savings vehicle. (By the same token, one could argue that people who invest their retirement savings in real estate, stocks, etc., are not actually “saving for retirement,” but that really would be off topic.)
Your term “investing” in life insurance that is no tied to the equities market is illegal in my state to use that term. As far as recall (caveat i am a licensed agent for secuities and insurance) a Universal Life insurance policy can accumulate cash value and the cash be taken out on a withdrawal basis TAX FREE to live on. ( caveat again Ul type 2 and the policy does not turtle or run out of cash to survive until death) I would like to know as i am curious if you are licensed for insurance?
Of course not. If I were, I’d dance around this like you and the other agents do.
I love your “TAX FREE” in caps. I do wonder why you never put “TAX FREE BUT NOT INTEREST FREE” in caps. No, actually I don’t. Principal (partial surrenders) come out interest free, but the gains don’t.
Not to mention the load and fees to put additional money into UL. Horrible idea even though this post was about WL.
Agents never understand what their license means. It’s a license to sell insurance. Nothing more. Zero fiduciary responsibility and the industry successfully killed efforts to have one. 85% people lapse or surrender their policies. It rarely works out.
Why do you keep mentioning “you can borrow tax-free but not interest-free?” when it seems you know that there are insurers (basically any top mutual insurers, which is really the only ones you should get WL from) out there that continue to give you dividends even on policy loan amount, which has effect of more or less washing off loan interest? For example, a NYL policy can have net return of around 5% at current dividend scale and loan interest is 4.7%. Historically, the net return and loan interest are more or less at same level.
Borrowing against your real estate doesn’t have this function. I am sure there’s insurers out there, mostly public insurers, who don’t continue to give out dividends on loan amount, but just because some or many WL is bad doesn’t make WL as a whole bad, which is really what you are saying. It’s half-truth.
Yes, there are wash loans and non-direct recognition policies. No, most WCIers I run into with whole life policies do not own policies that offer them. More discussion on that point here:
https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
Every post can’t contain every detail of everything or they’ll all be 30,000 words long and no one will read them.
They also frequently provide a lower dividend on the loaned amount. This is just another way to hide the cost of the loan. Most of the non direct recognition companies provide lower dividends just in general. There just isnt a free lunch out there. If a company has better loan deals then they must take that cost from some place else. If they give you the money as a loan then they cant invest it some place else. Its not like the companies that have non direct recognition or better loan deals have some special sauce. There are tons of posts over at bogleheads about people with WL policies about to go bust after taking out loans for a while. The worst case scenario is usually for college bc its just so many more years for interest to eat away.
It would take you one more sentence to put that information in. A lot, if not most, of WL policies are with mutual companies that have historical wash loan performance.
WL from top mutual insurer is more or less a saving account that has guaranteed interest and profit transfer after reserves and expenses, with historical return rate of around 6% and tax free access, which would be similar to 8% taxable return from say a Chase saving account for saying at 25% fed/state/local tax rate. Make that what you will.
The concept of BOY/IB/LEAP is all discussed here in great detail:
https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
Naturally, there are downsides.
The biggest issue, however, is that despite the possibility of designing a policy that way, the ones that keep getting sold to unsuspecting doctors are not designed that way.
They are not guaranteed wash loans and the vast majority of the posts at bogleaheads about policies crashing with loans are from the “top” mutuals in particular NWM.. It’s irrelevant that old policies performed at 6% bc treasuries were double digit. Agents seem to forget the entire industry successfully lobbied to lower the guarantees on WL bc the industry felt they could not meet their current minimums going forward.
Yes I know they are not guaranteed but in practice the loan interest is more or less negligible (like .5%) in the event that the dividend pay out is less than loan interest for non-direction policy. Sometimes you can even net. Also, remember that policyholder’s life is still being insured by the difference of loan money and net death benefit, so even if one has to pay .5% net in event of taking out all CV, it is still great value.
Ie: $500k net death benefit, $100k cash value, fully paid up. Take out all $100k, pay the net loan interest if there is, let say $500/.5%, all the while being insured for $400k.
NWM is direct-recognition and from what i know their old policies had fixed loan interest rate of 8%, so yea in this low interest environment that’s not so good, maybe that’s what happened.
The 6% figure isn’t the dividend pay out at a time of double digit treasury rate, it is average even after accounting for the last 15 years of near zero fed interest low policy. When mutual insurer makes profit, WL policyholders get whatever is left over after expenses and reserve to be set aside, the profit doesnt go to “greedy insurance company”.
I don’t know whether the insurance industry lobbied it but after over a decade of feds setting near zero interest rate, can you blame them? But even at today’s covid and low interest environment, you can still get around 5% return at current dividend scale from the likes of New York Life and Mass Mutual because they adjusted through getting in other low risk stable profit generating businesses. The lower guaranteed also freed up reserve requirement to be put into making money. As rates go back up as they have been now the dividends should go up even better now imo. The decade plus of low interest environment may have been blessing in disguise for those who adjusted well.
WL is like stock, there’s bad and there’s good. There’s some WL from insurers that i wouldn’t touch with a ten foot pole but from the likes of NYL or MM i wouldn’t hesitate to touch.
No thats not true at all. EVERY single one of the mutuals has been successfully sued and several more than once for NOT distributing enough in dividends. The mutual is just a gimmick which is also the same thing for Vanguard by the way. ZERO of the mutuals have competitive term which is a very transparent and easy to compare product which would definitely be better if there was a real difference. They arent giving the best deals period. Guess who is… the “greedy companies”. Mutuals work for the agents bc thats who they need. Its also why schwab and fidelity easily have ETFs that are cheaper than Vanguard. Calling something mutual isnt a game changer. MIght make you feel good but thats about it.
And no policies arent 6% returning unless they were purchased a long time ago when treasuries were much higher. WL has always trailed a rising interest rate environment by the way. Its been a big deal when interest rates have risen quickly which is why so many people jumped ship from the guarantees of WL to UL products back in the 80s. WL has been lucky that interest rates have been falling for decades to make it appear better. So far all of the mutuals who have listed dividend rates for 2023 have NOT increase dividend rates even though interest rates have risen .
No WL is very very similar amongst all the mutuals in the end. Its because none of them can do anything different for the most part. The differences they can change only manifest results for a little while when they get lucky. Thats why in the past people liked to say buy a guardian overfunded 10 pay. It illustrated better at a period of time. Guardian had gotten lucky with its slim differences in investments. Nobody is even mentioning Guardian any more as a WL, they have become practically a disability only company. Mutual companies that were heavy into using WL as income such as Ohio national for the most part have failed. Anyone who bought that mutual based on its previous performance is pretty unhappy now. Every company that has been up has reverted to the mean later on. NWM was once considered the best by the way.
Why dont you go over a bogleheads and tell all those mutual policy holders with crashing WL policies that it just isnt happening. Frankly loan interest is between 7-10% of the profit of WL companies. It just isnt true that they can give you a no interest loan and still make the same amount of money off their investments which they then pass on to you.
How does mutual being sued for not distributing enough dividends have to do with what I said not being true?
What does Mutuals’ term life insurance not being competitive have to do with anything? Mutuals work for whole life policyholders, not term life. Term life policyholders are mere profit stream from which to add onto dividend payout.
I never said WL policies at today’s dividend scale would net 6%, i said its average net return.
Which mutual released their dividend rate for 2023? None from what i know. Plus, it’s only been few months of interest rate increases, and who knows where it’ll level up, give it a year or two.
I am not denying that near zero interest rate environment for decade plus has been challenging for some WL companies. But there are mutual companies who have been adjusting reasonable well given the circumstances, are still financially solid, and as interest rates start existing again they dividend payout should be stronger than before. NWM is still good, they just havn’t adjusted as well as NYL and MM by diversifying into other profit streams. I am sure they’ll make the adjustment in time.
Of course they can give you interest free loan and still make money, why not? It’s not as if everyone would be looking to take all of their money and leave nothing for the insurer to invest. It theory that could happen, the same way everyone could take all their money out tomorrow from Chase, but in practice this doesn’t happen.
And why would anyone take out their money from this safety cushion of an account that historically returns around 6% with tax free access? I can think of emergency fund situation and obvious higher return opportunity. Let say ibonds, with its 9%+ for 6 months and 8%+ for 6 months, then additional 3 months to avoid penalty, that’s like 8% return over 15 month period. Sounds great. Now if you are an average taxpayer at around 25% tax rate, Uncle Sam will be taking around 2% of that, so now you got 6% return, more or less a wash from what WL would’ve got you. Not so great and worth the effort.
Again, WL from mutual is practically a saving account with guaranteed interest credit and profit sharing, along with death benefit if you pass away early and tax free access. Imagine going to Chase to open a saving account and you are told that, in addition to their guaranteed interest rate of 2%, you will get profit share from the money you put in, if you die early your family will get more money from them that you didn’t put in, and has tax free access. That’s WL from top mutual, with return history of around 6% which is similar to around 8% saving account return for someone at 25% fed/state/local tax rate. Take it for what it is. I wouldn’t put all my money in it, but it is a great supplement as part of overall portfolio for various uses (lifetime insurance, opportunity fund, volatility fund, emergency fund).
It says a lot actually that it has happened and not like to just one so its a real problem. It means that they arent reliably returning all excess to owners. It frequently goes to its executives and board members and things that just arent you. It is also a BS statement that these companies just work for WL and not term policy owners. They will tell you differently if you ask for sure. NONE of the WL companies will make any statement implying that they use term to facilitate WL dividends. That is completely made up stuff from you.
Pretty much none of the companies with a new purchase are illustrating 6% long term . You claiming its historically 6% but not mentioning that this includes very very high treasuries years is failing to disclose important information. WL has not outperformed bonds in a rising interest rate environment. Thats the history of it. It lags both on the up and the down and it easily can be more than 2 years. If we continue at current rate hikes WL will perform less than savings accounts. Thats what has happened in the past with rapid rate increases. No reason to suspect differently. People will be jumping to IUL (since thats the new kid) when that happens especially since agents like new commissions and will present the idea to you. That is not an endoresement for IUL at all.
ALL LOANS ARE TAX FREE. Insurance loans are some of the worst. They dont even let you take out all the CSV so there is zero risk to them. Its not magical that a loan is tax free. You have to invest the money over your whole life with this product and thats a long time unless you die very prematurely and the low return will hurt a lot as it compounds (lack of compounding actually). I dont need 50 years of crappy returns.
No its a horrible savings account which has been discussed here many times. It takes 17 years currently to break even on a non overfunded/non limited pay and that assumes current dividends. Thats not a savings account. Thats a money losing account. Chase does do better than that although im not recommending them.
Dividend releases are always around the same time every year and pretty much in the same order. So far NWM and Mass have released. Same crap as the last few years where they dont initially release the dividend rate though but tell you they paid more dollars out then ever before so to make you think they did. Always forgetting to give you the denominator. If you read at insurance agent forums, you will find the information.
The cost of life insurance within WL is always more expensive by the way. Now technically they dont tell you the cost but if you look at all the companies that sell WL, their term is never competitive and they arent going to charge you less when they dont have to disclose it. Also when the same company sells a UL and has to disclose COI, guess what, its also more expensive then equivalent term from lets say Banner would be. So its expensive insurance with a poor investment.
You must invest very tax inefficiently bc i dont pay that kind of taxes on my taxable investments. Im not surprised since you like WL. It actually works best for those who pay way too much in fees otherwise.
Maybe you dont get why cheap loans has a negative effect on dividends. If i am an insurance company and have 100 bucks and i invest it in a bonds paying 5% then i get 5 bucks next year. If however bc you are a client, i loan you the money pretty much at zero cost then i cant also purchase that bond so i have 5 bucks less. The more this happens, the less i have to give out in dividends. Insurance companies with better loan eventually suffered on dividends for this bc guess what the other companies dont have that drag. Thats why the direct recognition companies alter their dividends on loaned amounts from year to year. Some years they dont mind discouraging loans bc its better than they can get from their bonds. Some years they dont want to loan out so they factor that in on their direct recognition costs.
Buy your insurance separate from your investments. Its cheaper and better all around.
The lawsuits are over whether the money should go to reserve or to dividends, not to executives or board members. Show me one case alleging this. CEO or board members no ownership interest in the company, nor is there a fat cat owner at the top pocketing the profit.
WL dividends are made up of profit, of which term insurance premiums is a part of. Term insurance is a money maker for insurance company. Why would they need to specifically make statement on this? It’s common sense.
Of course there’s no insurer illustrating 6% long term, from what I know they can only illustrate at their current dividend scale. But one can look at past dividend scale and can reasonably add around 2% to current net. Over one’s lifetime before retirement, around 40 years, WL is likely to outperform bonds/savings. Short term, who knows. The historical 6% does include the very very high treasury years but also include the last decade plus of near zero treasury years, what’s your point? Net return even at current dividend scale is a little less than 5%. Let say the treasury rates steady at 2-3% as they should instead of ridiculous near zero, that’s reasonably looking at around 6-7% return with tax free access.
Yes, all loans are tax free. The good thing about WL is that its value via dividend payment historically grows to practically washes out the loan interest for taking the loan, where as others don’t. Others can lose their value while you have a loan and paying interest on it.
Yes non overfunded is bad for saving, that’s why you overfund. And no, even non overfunded policy makes gains, just don’t realize it till later. But the CV does accumulate and you can use as they do if needed. Not great, but does beat saving imo.
Yes I just saw the MM rate steady at 6% but others havn’t released.
WL doesn’t show insurance expenses because it varies yearly, like let say a covid year, as more people die thus more claims have to be paid out. As claim payments vary year by year, so does WL insurance expense. Remember, WL policyholder has ownership interest in it. When company takes a hit to its money due to higher claim payout, so should the PH’s payout; and vice versa. Reasonable to me.
25% taxable income is not inefficient if you live in a state/local with income tax. The great 15% long term gain tax becomes around 25% when additional 10% gets added up in places like NY or Cali.
No, wash loan does not affect insurer. Very few percentage of money ever get loaned out via policy loan in a given year (like less than 5%). In your example, the insurer is getting 5%, from PH, instead of elsewhere, which means it’s getting from PH what it would get from elsewhere anyway. And if it does affect profit, they’ll just lower dividend, but because real life doesnt result in affecting profit since significant amount of money doesnt ever get requested to be loaned out, insurers don’t have to care about this.
I dont consider WL to be investment, like IUL may be, since there is no risk to cash value decreasing once it accumulates. It’s just a saving account on steroid due to profit sharing feature that it has. If Chase would like to give me guaranteed interest for my money, share profit from what they do with it, and tax free access to the money to avoid tax, with historical return of around 6%, i’ll put my money there too.
The court cases never dictate where the money should go to except that it should go to policy owners. And that wasnt happening. It required lawsuits to make it happen. These companies all know their reserve requirements and were above those. All of the CEOS and board people which is a hand picked group do very very well. They continue to do even better as the actual dividends fall. The additional money was still going to them still.
You can not reasonably look past and add 2%. You do realize that NONE of the policies in the last 40 years have done better than originally illustrated? I wonder if those folks should have expected an additional 2% to their original illustration when planning for retirement?
Yes lets say treasuries rates do stay at 2-3%. What will happen? There will be more begging for additional reductions in the required minimal interest rates which interestingly enough is not actually the return one gets in the guaranteed column. You actually get less since that is a rate that is applied to a non disclosed value. There will also be more Ohio Nationals. I wonder if the Ohio National execs and board members got paid handsomely for selling out and thus reducing policies to guaranteed returns? Surely they took a bath too? You do realize that this story did play out in Japan and some insurers went under?
It is incorrect that the WL dividend is wiping out loan costs and that low cost loans have no effects on the companies that provide them. Some how you just think that NWM or whomever that has higher costs just does this bc they dont like their clients? Its also why there was an increase in bank loans against WL policies instead of policy loans. Banks were offering better deals with less financial impact.
You havent reviewed the history of WL performance in rising interest rate environments. If the rate change increase is fast, WL gets crushed by even savings accounts. If slow then it still lags but its not as big a deal. If treasuries go to double digits again for a while then WL will not get that high. It also never gets as low either.
I told you MM released and NWM released. They both stayed the same. The fact that they call it 6% is meaningless, actually its miss leading. First you say none have released then i tell you MM and NWM which is always the case around now but still you persist on this.
If you look at the yearly statements from companies its 5-10% of profit from loans. It is a big deal to them. Its not meaningless. Its actually the reason why some lowered their costs. They wanted to compete with banks. They didnt want to lose the loans. Its funny you think for sure WL is going to do better based on your quoted historical average but you dont think it matters that crashing loans which have been a big issue for decades is going to raise its head.
Feel free to put all the money you want in WL. Most people savings accounts will do better for 17 years in a non overfunded and around 10 overfunded. Since the money must be kept there for 40 or so years, ill chose something that will very likely do much better. Odds are very much in my favor. I also get the step up at death. I have very little tax drag and if i want i can take tax free loans. I get offers every day for loans. Good luck. You should submit a blog post telling everyone how wrong they are with the math to prove it. WL has been around for over 100 years and while the insurance industry has tried to create research to show its value, only white papers with substantial flaws have emerged.
I don’t see a case where the court ordered the insurer to give the money to PHs instead of putting it in reserve, you have a cite? The cases are about whether it should go to PHs or reserves, since money not given out are held in reserve. There’s no case where allegation is the CEO and Board were unjustly keeping the profit to themselves. I personally wish my insurer NYL would give me more in dividends instead of keeping it in reserve. Did you know NYL has 15 years worth of current dividend payout amount held in reserve? But it’s just me thinking for myself for the coming decade or two, while they have legal obligation to keep the business model sustainable long term even through serious crisis.
Yes the illustration from 40 years ago with dividend scale given out in high interest environment hasn’t done better now that dividend scale is given out at near zero interest environment. That’s how it works, what’s your point? If you average it out, it’s around 6%, even 7% as per another article on this site. Now let say you get an illustration today at near zero interest environment and still see around 5% return, where do you see it in the next 40 years? I mean is it possible that we’ll be at near zero interest rate environment till the end of time, i guess, but unlikely and around 5% with tax free access is still good imo.
I don’t know why you think there will be more getting for additional reduction if treasury rate stays around 2-3%. My point is that if mutual insurers like NYL and MM can give out around 5% at near zero rate environment, they likely will be able to push out 1-2% more in dividend payout if treasury rates are stable at 2-3%.
I don’t know why you keep thinking WL policy wash loan damage insurers, it doesn’t. They still get loan interest from PHs, at current 5% which is a great return for them for the money, and only small portion of the money ever get requested to be loaned out. And yes dividend payout will make loan interest negligible, that’s how it works, and it works because insurer still gets comparable interest rate on it and only around 5% of money ever get requested to be loaned out. As dividend payout goes up, the insurer can match it with higher loan rate. And yes the loan interest have come down from early 2000s, because interest rates have come down, its not necessarily to compete with banks. It’s a bad look for the company if it still keeps ridiculous high interest rate for loan when the rates in general have come down, they want and need the PHs to have good perception of them with regard to taking out their money to use as needed. No one is going to get policy from insurer with ridiculously high loan rate just because they can go to bank to get cheaper loan, they’ll rightly feel ripped off.
Yes i understand that WL yearly return may not match a rapidly rate increase in saving account, that’s because the insurer doesn’t have time to put all their money in these high yield assets before the rate comes down. That’s why i look at average return, not short term.
I don’t believe savings will beat a WL policy but things like indexed stocks have proven they can beat WL return. I just like to diversify instead of putting my eggs in one basket because it could also turn out that the stock market return may stagnate or barely grow like other countries’ indexes. What’s better to diversify in something similar to a saving account that gives you guaranteed interest credit, profit sharing, tax free access, extreme liquidity, and return history of around 6%, while allowing me the flexibility for uses as lifetime insurance, opportunity fund, volatility fund, and emergency fund.
Good luck with your margin loans, hope you don’t experience 2008 again and have to take a call from Margin, that’s not a pretty girl i’d want to take a call from.
If the stock market isn’t beating WL long term, your whole life certainly isn’t going to be paying 6% dividends for long. When I go looking for diversification of my portfolio, I see tons of better options than whole life. Whole life as an asset class has a ton of problems:
1. Requires you to qualify for insurance
2. Requires you to actually buy unneeded insurance
3. Negative returns for at least 4-5 years, with most policies sold 10-20 years
4. Low long term returns
5. Overpriced guarantees
6. Requires you to either permanently decrease the amount of the asset you can have (partial surrender) or pay interest in order to use your own money
7. Returns dependent on a single company and whatever they feel like paying in dividends
That’s a lot of negative. And what positives do you get with it? Well….
1. You get a death benefit you may not need or want
2. You are forced to “invest” each year by the premium bill sent to you
3. You probably beat cash in the long run
4. Low correlation with the stock market
5. No margin calls when you borrow against it
Sorry. Hard to get too excited there when you step back and objectively look at WL as an investment.
Stock market performance has no effect on WL performance, so not sure why you think its impossible for WL to ever beat stock market.
Let’s go through your problems:
1. If you qualify, what’s the problem? This is like saying 401k has a problem because there’s qualifications to be in a 401k.
2. The premium money becomes part of the net return that one will be getting, so i don’t see what the problem is. This is like saying 401k has a problem because you have to put money into it to get something.
3. That’s why you design it for negative return of 4-5, instead of 10-20. Did you know you can design it to even access 90% almost immediately? Losing some liquidity access for few years is expected for financial products with decent returns. What’s the guarantee on breaking even in stock market? Those who started in 2000 didn’t break even till 2008 only to then drop again until break even at 2013. What’s the guarantee on those who got in starting this year and need 25% pop to break even?
4) Historical return of around 6%, and even now around 5%, with tax free access. That’s great for someone at 25% fed/state/local tax rate.
5) Huh? This is a non-issue.
6) That’s why you go with insurers who are non direct recognition.
7) A non-issue based on historical performance.
You dont seem to understand the trail effect of dividends. IT WONT MAINTAIN at its current rate if we stay low. It will fall further. A new policy will do around 3.5% after breaking even but even that wont hold in that environment. You dont have to take my assessment of that. The industry claims they could not maintain the guaranteed returns under current economic conditions. They made that argument. You seem to have a lot of faith in them but for some reason you think they lied about that. Its a pretty significant move for them to do this. You seem to think they can somehow get very low returns but give out 6% to folks. Even considering that 85% of people lapse, the math wont work. When one considers the commissions, the high cost of regulations and reinsurance, underwriting, advertising etc and the actual insurance, you are being unrealistic that these companies can do that long term. Again that isnt my assessment really..It is their assessment. And finally the proof that this was happening besides what the industry did is Ohio National. Im not expecting any rate increases this year unless it comes with a reduction in their reserves. Im not sure it will even happen next year without a reduction in their reserves (but of course above what is required). Some companies have done that in the past. The trail is usually around 6 years but its harder to really figure out since the rate changes over time have not been consistent but given the length of their investments they only have a percentage that is invested really low. So im not expecting dividend rises but i will say its a tougher call exactly when.
Let me try one more time to help you understand the loan issue. I am a bank. I loan you money. I charge you 5% but i give you a 5% special dividend for being a customer so in essence you pay nothing for your loan. Since you are my only customer, at the end of the year i havent made any money so i cant give any profit to anybody. Loans are about 5-10% of the profit for these companies. It makes a difference over time. If on the other hand i dont give you a sweet loan deal. This can be done via interest rate or via direct recognition effect, then i make more money period. I have profit now and i can do something with that. This is also why you need to careful judge what you plan to do with a WL policy before purchase. Many companies who will illustrate a much higher CSV, will actually product you less income in loans especially if taken out early in retirement. Not as much a factor if the loan is near the end of life or temporary. So if you are someone who really wants to do that then you need to look at more than the CSV both guaranteed and illustrated. You need to check out the guaranteed loan factors.
It will be just fine if the market takes a dive 20 years later when i want to take money out. Ill have doubled my money twice while my WL would have just gone past breaking even a few years ago. Even if the market drops in half, i have double then what is in the CSV.
Well if that’s what you think, that’s fine. I personally don’t think that’ll affect top mutuals like NYL and MM, nor do i think rates will stay near zero till end of my lifetime. If it does, it will surely wreck small mutual insurers like it did with Ohio National for sure, but don’t think so about the top mutuals. Ohio National was like a tenth the size of the likes of NYL or MM, means nothing. They’ve been adjusting into other streams of profits well and should likely continue to do so. They have big interest in providing competitive return as much as possible. In either case, my policy breaks even in 5, and i can make adjustments as needed.
With regard to wash loan issue, this is a non-issue in either case because practically only about 5% of the insurer’s money gets used in policy loans and they still get competitive rate. They can make money with the remaining 95% of their money, so yes they can make money to give to people. This is all baked in.
With regard to your stock market in year 20 scenario, very rosy market outlook i must say considering that since 2000 to recent high in the longest running bull run in history, the s&P500 went up 3x, not 4x. Now let say you went up 4x by year 20 and then lose half as you stated in your scenario, that would mean your money just 2x in 20 years. Now this is funny because, at current dividend scale my policy would break even in 5 and would 2x by year 20, except you may have to pay around 25% in fed/state/local tax to access the money while i wouldn’t have to via practical loan wash. And this assumes I don’t touch my cash value for 20 years and don’t use it for obvious better return opportunities like i plan to, you know, like during the approximately 5x times over 20 year period where the stock market experiences big dips; with this i should be better off even more.
Look im glad you are happy and i honestly mean that. Very few are happy with WL. Over 85% lapse the darn thing. It doesnt work for me to recommend it as an emergency savings vehicle given it REQUIRES premiums and is guaranteed negative early on. Thats the only time most here will ever actually need an emergency fund.
They can not adjust into other streams of profit. They have regulations and its a huge handicap. Its purposefully that way though for safety. The big ones do have more insulation but they also cant move the needle. As ive mentioned, if you review which companies are doing best now it changes. These companies revert to the mean every few decades and another one or two looks better. It will happen again bc they cant lock up the warrnen buffets of bonds in their basements. They all have the same situation and minor differences play out. Its also why the loans are a factor. 5-10% of a portfolio where 70% is locked in makes a difference. I guess you just arent going to understand loan effects but they arent getting a competitive rate if they create a situation where its a wash for the client. They could have used that money to invest elsewhere. It would be more obvious at higher rates. The longer term history is direct recognition companies have had higher CSV over time. They didnt cater to this loan situation.
We both know, im going to have more money. If i needed to sell because of a personal economic emergency in 20 years then well i probably wouldnt pay any taxes or a greatly reduced rate bc im not making or have any money for some reason. I get offers all the time for loans as well and probably will because of my house, savings etc. Some of those are targeted at me just bc im a working doctor but not most. If It isnt an emergency but im just spending my retirement then again that angle has been worked by the insurance industry in white papers and they can only make a possible argument for it IF im going to pay high AUM fees. They otherwise have been unable to provide evidence for using WL as part of your portfolio. There are other flaws in that work but thats a show stopper there.
I don’t know about the number but yea i have no doubt a lot of WL policies get lapsed. But that has more to do with bad regular WL policy design and that there are non-mutual insurers out there selling WL with only guaranteed interest credit and no dividend. How many of those lapses are from top mutual insurers with strong historical dividend performance and are designed to lapse around year 5? Half truths that people read online doesn’t help, like how policy loans have interest rates without mentioning existence of policies with wash loan performance due to continued dividends on the loaned amount, or the “you get only cash value or death benefit, not both” without mentioning that death benefit grows as cash value grows and cash value is a part of the death benefit (practically the amount of death benefit that one is allowed to access while alive) instead of its own pot of money that one is suppose to get when they pass away if not for the greedy insurance company trying to take it from them.
With regard to use as emergency fund, you can design the policy to be able to access around 90% of what you put in almost immediately, through 10% mandatory premium and 90% optional PUA policy design, and make the premiums to stop by year 5 if you so wish. It’s a non-issue for something that provides return of around 5% with tax free access even today and sure beats whatever you can get in the “high yield” savings account today.
Well we’ll just have to see how the future of WL and fed rates unfold. Really, no one knows and can just hope to diversify in proven financial instruments while hoping for the best. There are stock markets of other developed countries that have barely made taxable gains for the last 20 years, and that could well happen here too, who knows.
If one understands WL for what it is, a safe savings account with profit sharing feature, with return performance of around 5% with tax free access even today, then he’ll be satisfied with it as a part of overall portfolio, instead of going crazy comparing with things like stocks or bitcoin.
You mean long-term performance. Short term performance is terrible. And since most savings account money is short term, that’s relevant.
I don’t know where you got that info but I would think that there are many people who would love something that works like a savings account with a return history of around 5-6% and tax free access, could be wrong. I don’t think most people want everything they don’t need for day to day expenses in stock market, could be wrong.
What is the short term performance of a savings account? I mean technically you may be in positive after a year but really at .03% rate you are merely just technically netting. I know someone who had around $90k in a BoA savings account and was getting tax statement for the $10 in interest gain. Now that person is in a policy where $70k would be paid over 5 years, and because it would be prefunded only $60k need to be put in and yet it’ll grow as if there’s $70k in the account. By year 5 the policy would be netting around $10k at current dividend scale, which would take 1000 years at BoA even with 50% higher amount. I guess if you want short-term gain you can prefund it.
Yes, you do need to delay gratification for at least 5 years to see return on WL but with the saving rates at what they’ve been it’s a practical non-issue. The money can be made to be liquid around 90% almost immediately which you can take out if you see obvious better return opportunity than whatever the loan interest is.
Straw man argument. What informed consumer is using a 0.03% savings account? A MMF is 3.58% today and Ally Savings Accounts are paying 2.75%. Comparing best case scenario for a WL policy against worst case scenario savings account seems a little disingenous, especially when getting a top notch savings account is far easier than a top notch WL policy.
I am just giving you an example. And really getting 3% interest while having to pay a third in fed/state/local income taxes is not much too, and that’s only because of recent rate hikes i am guessing. Yes, harder to get well structured WL, but not that hard.
Anyway it’s fine if we have different view. I just think having well structured WL can be important piece of overall portfolio and it is possible to get one. Just like not every stock is a bio penny stock that falls 90% on failed fda trial news, or even a well known tech company that’ll fall 30%+ on vague ER news, not all WL is one that’ll net you 2% and take 15 years to break even with net loan interest payment to access it tax free. It’s all about knowing what you are getting in. If one has time to write out a sentence on a half truth, one can write a following sentence to write the other half truth which would balance out the prior one.
Almost nobody needs whole life.
Most whole life sold is crap that is sold to people who have no need for it and don’t even want it once they understand how it works.
Therefore, I’m doing far more good than bad by having a general bias against buying it. The rule of thumb, while not perfect, is and should be Don’t Buy Whole Life Insurance, even though one can spend thousands of words talking about possible exceptions.
No need to exaggerate as to how much more you would have to type regarding alternatives/”exceptions”.
There are only three concepts where clarification would be needed and helpful:
1) liquidity- availability of policy design to break even by year 5 and even around 90% almost immediately as opposed to break even at year 15;
2) policy loan- availability of wash loan policies; and
3) get cv/db at death but not both- availability of policies where db grows as cv grows, where cv merely acts as amount of db that one is allowed to access as needed while alive.
I think articles with complete information would be more helpful for readers to come to their own conclusion on WL, as opposed to those that contain the worst half of the half truths. Yes, most WLs may be bad and most PHs don’t understand how it works so shouldn’t you be writing articles with complete info so they can be informed, as opposed to adding to their misunderstanding by mentioning only the worst halves of the half truths?
You want complete? Go read these and then all of the comments below them. You’ll come away with a very complete picture:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/
https://www.whitecoatinvestor.com/12-questions-to-ask-before-purchasing-whole-life-insurance/
https://www.whitecoatinvestor.com/whole-life-insurance-regrets/
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
https://www.whitecoatinvestor.com/is-whole-life-insurance-worth-it/
https://www.whitecoatinvestor.com/participating-whole-life-insurance-basics/
https://www.whitecoatinvestor.com/downsides-whole-life-insurance/
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
https://www.whitecoatinvestor.com/suckered-into-whole-life-insurance/
https://www.whitecoatinvestor.com/whole-life-in-the-distribution-phase/
https://forum.whitecoatinvestor.com/insurance/1728-inappropriate-whole-life-policy-of-the-week
If you want to write “more complete” whole life insurance articles than that collection, feel free to start your own blog and do so.
Lol. I am talking about having complete info in the same paragraph within the same article so that when the worst half of the half truth is mentioned it gets cancelled out by the other. No one is going to browse around dozen of articles and piece half truths together for complete picture.
Everybody wants more info in a blog post, but nobody wants to read 10,000 word blog posts. It’s a difficult conundrum deciding what to include and what not to.
Oh and one more thing cash withdrawals do not have any interest rate … zero
Hard to compare returns for something as safe as whole life cash value to something as risky as real estate. For most people most of the time WL is a terrible investment. Just too high a price to pay for the asset protection and low risk advantages.
But it does not have the same high risk of loss as in real estate. Remember the Crash? Many real estate investors lost it all. That did not happen with life insurance.
I look on both as unappealing investments. Both have high expenses, unless one buys a simple REIT index fund. WL has a pretty much guaranteed low return. (It is possible for some life insurance to do well if bought in a time of high guaranteed returns with interest rates then falling and staying down for decades). Private real estate has guaranteed high costs and high risks. If you directly own the properties then you have liabilities that do not apply to life insurance.
One can do well financially without ever investing in either life insurance or private real estate.
It would be more appropriate to compare investing in private real estate to total stock market or REIT index funds.
It would be more appropriate to compare investing in WL to using annuities, high credit quality bond funds or Treasury bond ladders.
At least there would be some similarity in risk and expected returns.
Then one could talk about the similar correlation to stocks of REITS and private real estate, the illiquidity, the opacity and the fees. One could dive into the tax treatments, which depend in how the real estate is held. One could compare the complexity of tax returns and the delays in reporting between these options.
For WL vs bonds and annuities one could talk about different responses of real and nominal values to changes in interest rates, relatively risk of default, strength of state guaranty associations, fees, income tax treatment, and implications if you decide to draw out some of the money.
Comparing WL to real estate is apples to moon rocks.
Yea, it’s a weird article. Made it fun to write.
You should compare it to whatever you would invest money in for the rest of your life. If that’s conservative for you then sure.
Hi Rex,
I find your comment Insulting at the very least. I am a CHFC held to a higher standard than any other insurance agent that does not have the same education. I am held to the highest standard and am tested on a regular basis to be a fiduciary to my clients. Holding a hypocritic oath just like you to “Do no harm” I am not a “Sales” agent just trying to sell the cheapest thing a client can purchase without discussing in depth what the client actually needs and giving them the opportunity to understand what they are purchasing.
You see having grown up with a district court Judge and having a sibling that is an attorney and 16 relatives practice law. I have observed the uneducated stand in court who do not understand what their “Sales ” agent sold them and how it did not protect them.
Therefore, I tell my clients I am your consultant a bridge if you will to the industry, making certain you do not visit my family during business hours.
I give clients the information they need to make an informed decision then let you decide how to spend your money on the protections that are available that we offer.
As for the Life insurance it is not an investment it is a vehicle with leverage
Example house payment for $2,000 and your die You still owe the balance on that “investment”.
Life insurance and you pay your first payment of $2,000 and the company pays your heirs $2,000,000
Leveraging your $2,000 to a level your investment could never reach so the fees paid on the $2,000 at that point become a moot point.
Another day, another insurance agent in the comments section of WCI blog. This comment is messed up in several ways.
Permanent life insurance products do not use “leverage” as the term is generally understood. The accepted definition of leverage is using borrowed money (debt) to invest in something, with the hope that the investment (eg. stocks, real estate) returns better than the interest cost on the debt. A mortgage on a rental property, or margin loan on a portfolio are leverage. That’s not at all what permanent life insurance does. With whole life, the insurance company buys low-risk fixed income investments, takes a cut of the returns, and gives the rest to the policyholders, along with running life insurance over the same pool. No leverage. With an IUL, the insurance company is buying stocks or other investments, and again taking a cut of the returns and passing the rest along to the policyholders. No leverage either. So stop saying that. I worry you say leverage to make it sound like an investment because, as you admit, you’re not legally allowed to use the term.
Second, why are you comparing a “house payment” to life insurance? What kind of rare, bizarre situation would someone be choosing between the two? They are completely different.
And yeah, if you buy life insurance and die a week later, the return is very good. But most people don’t die young. It’s about the statistics. If someone needs life insurance to protect their family, they should buy the right amount of coverage (millions for most readers here) with a competitively priced TERM policy that will cover them until retirement or financial independence. After that, no life insurance needed.
You know what’s better than spending $2,000 on a whole life policy, dying, and having your heirs get $2M? Spending $150 on a TERM life policy, dying, and having your heirs also get $2M.
Fees always matter, whether buying life insurance, a house, a mutual fund, or anything else. The only person I’d expect to say fees don’t matter is the person collecting them. Do you disclose your commissions to your clients? Do you explain that you get $15,000 commission when selling a whole life policy, but get $500 when selling a term policy for the exact same coverage? To you tell them to “make an informed decision” about whether this massive difference in commission biases your recommendation? Come on, tell the truth. If you’re really a fiduciary and are selling more than a tiny number of permanent life insurance policies per year, I’d personally be really worried about lawsuits for breach of fiduciary duty.
“ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.” I guess my analogy was incorrect, so I stand corrected. ROI is a better term. Yes an insurance agent who has the proper licenses who has incorrect information come across their radar should speak to people about that information who are not licensed and do not have the training sharing with other the incorrect information on and across the web.
Your site was the one comparing Life insurance and real-estate as an “Investment” vehicle so that is why an analogy was used for real-estate.
Your analogy of term insurance is correct that statistically if you bought term and whole life and passed the next day Term and whole life would both pay out. How about if you live according to your theory? Life insurance specifically Whole life is about living. Let’s use your theory, Let’s say you live for 30 years and accumulate all of the wealth of your stature in society and have 10M in assets and your Term policy expires. At that moment you are illiquid and will without putting into place all of the costly and expensive will’s trusts and filings a great majority of those assets to Uncle Sam because to do all of the work necessary to avoid taxes takes a bit pf time and money and paperwork preparation on your part to avoid all of those expenses. A whole life policy can be purchase for pennies on the dollar and exchanged with the tax man to retain in your estate all the illiquid assets accumulated (great time to sell your stock portfolio right this minute, wouldn’t you say?”) You also can generation skip with the policy, and have it offset the cost if you desire along with living on cash withdrawals tax free and interest free and If you would research a little more you may even find a huge break for you as a business owner a “split dollar arrangement” which you are unable to do with a “term” policy effectively.
In regard to fees, you must not be following NAIC and their requirements these days for fee disclosure. I wonder the same for you if you tell me about the cost of your procedures before recommending them? In my experience (currently at 4m plus with a 28-year-old daughter in a coma for the last 3 years, the answer has definitely been a no, your industry is they call it practicing which our family has been practiced on enough thank you)
Ugh. I feel like I need to take a shower after reading this.
Yes, rate of return matters A LOT for a long-term investment, probably more than taxes or anything else. WCI’s conclusion on this post is that all of the other differences between whole life and real estate are not enough to make up for the massive difference in rate of return. Having sixteen times as much money in the future is more than enough to cover differences in taxes or anything else. A better comparison would be term + real estate vs. whole life so the life insurance components are equal. But term life is so cheap that it would be a comparison between a high-return illiquid investment (real estate) to a low-return illiquid investment (whole life). The only cases where the guarantees are absolutely needed and worth paying a huge amount of money for is whole life appropriate. That’s why I said, if you are a fiduciary I hope you can count the number of whole life policies you write in a year on one hand. Something tells me that’s not true though, and it’s concerning.
Maybe you didn’t know, but the estate tax exemption is $24M for a married couple. So your hypothetical future “me” with $10M in assets wouldn’t have to to pay any taxes. And stop pretending like whole life is a magic solution to estate taxes. Whole life death benefits ARE TAXABLE in one’s estate! They are only estate tax-free when placed in an irrevocable trust and funded with less than the annual gift tax exclusion. But any investment can be placed in that trust, and again, over a long period of time, a high-return investment like a low-cost tax-managed mutual fund will beat whole life almost every time. Why am I not surprised that an insurance agent would not be entirely forthcoming about these details? Call me cynical but maybe the commissions have something to do with it.
I am not a doctor, nor am I affiliated with this site in any way. Regardless, pointing to problems in another industry is whataboutism and in no way excuses any biases, lack of transparency, or poor recommendations that you and many fellow insurance agents perpetrate. The facts are that life insurance is much more cheaply purchased with a term policy, and the guarantees, low returns, and illiquidity of whole life are only appropriate in a tiny number of cases. There’s zero doubt in my mind that the commissions are the dominant reason why agents push these policies on individual investors, and on business owners as you have tried to here.
I have no idea what happened with the care for your daughter in a coma. But you make it sound like you’re ready to withdraw medical care, and I strongly discourage you from doing anything like that. If you have concerns about her medical care, the right answer is better medical care. Good luck.
Sadly i know exactly about your “qualifications” and where you received them from. That “college” is heavily associated with the insurance industry. You can try to pretend your online education is something that makes you an expert but you actually have demonstrated why it doesnt have a lot of value. You know there is a relatively famous professor at said college and he created a white paper several years ago trying to prove exactly what you are describing using WL in retirement. You should go to bogleheads.org and read all about it. To demonstrate a benefit he decided to use costs for investments that were outrageously high. Not industry average or anything. When asked how he got those numbers, he was forced to say well he used numbers the insurance company gave him. He also decided to use the illustration they gave him (of course with decreasing dividends over the last 30 years this has never worked out). He also decided to pretend that nobody lapsed their policy but instead got the illustrated results (an impossibility). This white paper has of course never been accepted for publication in a peer reviewed journal and never will be bc those flaws are ridiculous. I believe he on a later podcast is quoted as saying that when using a boglehead approach the evidence for WL isnt there or less clear or some words to that effect. So when an institution purposefully produces faulty research, well i cant have a lot of faith in that institution.
So i dont mean to be rude but you have clearly demonstrated why i dont value your qualifications. You dont even seem to know the work of the professors who taught you or the flaws of that research and i didnt go over them all. If he couldnt prove it….Guess what, you wont be able to either. Im sure you spent good money and a lot of hours online but dont expect people here to think that makes you an expert because it doesnt.
Rex,
Why you continually insult someone is strange without research or facts about the American College is like saying all your degree’s are worthless as well. (aren’t undergraduate degrees available from many sketchy places? that still allow someone to get an advanced degree? Many of my “online proctors” were attorneys that taught the classes (Oh by the way just like they do at law school when they teach those classes) In my particular case the attrition rate was 98% I was the only graduate. Pretty easy right? so why don’t you sign up and see how “easy” the course work is and then we can talk about online courses shall we? Sadly ignorance of what others have accomplished doesn’t allow one to look down on them until you have researched and walked my path. No Pretending here go ahead and sign up if you truly believe one is “pretending”
Life insurance is for and always will be to prevent tragedies, unexpected or intended consequences.
Any investment fallacy relies on the fact that you can survive those 30 years and enjoy any return and that your health and lack of disability remain intact. Statistics are against you, as they were against me 1 in 4 will become disabled in some capacity and all the carefully laid plans for “investing” during those 30 years fall apart. I had that happen to me personally and can speak about trying to put the train back on the track and trying to survive. I personally hope you never ever experience the tragedy of your plans hitting an atom bomb mine have and trying to help people is what we are about not an easy task i see with your comments.
I didnt think i could have a lower opinion of that college but you proved me wrong. So as you imply, you are like the top 2% of people who attended. Yet you still dont know Wade Pfau’s work on this topic or the flaws in that work which have been covered extensively here, bogleheads and elsewhere. So if 98% of people attending this college know less, then well i need revise my opinion of the situation. Why dont you actually read the work since you clearly have not. You know the work from the professor at your college where you are like the top 2%. Then read the criticisms of it. Once you have done that. Maybe you will realize your errors but i doubt it. Ill give you a little heads up, the only way you can make a claim for an advantage of whole life in the situation you are proposing is IF the person is otherwise investing with very high AUM fees. and not willing to change that If that isnt the case (which it course should be the case but some people like paying too much) then this has been studied. Its been studied by “your people” but you still dont know the data. Instead you make these false claims which pretty much research from your own college show not to be the case.
Now you are just throwing out inappropriate disability statistics to boot which has nothing to do with this. If you are trying to pretend the disability riders on some WL policies are very useful then you are again very mistaken. But a little additional heads up. People here highly value personal own occ disability coverage. Even though its expensive, its recommended. I guess you missed that too.
You’ve certainly picked an easy Insurance product to poke holes in…haha! No one in their right mind would buy WL as a supplement to their retirement or as an alternate source of income. It’s a death benefit product. That being said you obviously have not taken a look at some of the A+ rated firms’ dividends over the past decade…even WL has done better than 6% over this decade…A+ providers. For cash accumulation a VUL or IUL works much better. Do your research. Ask to see some real recent statements/historical returns on VUL/IUL any A+ provider will give you them. They are a better comparison. Study VUL/IUL traditional loan from CV versus participating loans and then let us know if VUL/IUL does not provide leverage? There are capped indexes and no cap indexes, now volatility control indexes and Both VUL/IUL offer a zero% floor. Sure there are costs, front loaded or back loaded. These should be long term vehicles. Costs spread out over time are minimal. There are Honda versions, Nationwide and Ferrari versions, PacLife… of products. You get what you pay for and should be structured properly GLP and above or 7 Pay and leveled off at right time to get max benefit. Again you chose an easy target. I do the same thing when it comes to WL.
BS.Send me a real in force illustration of a whole life policy bought ten years ago that has an IRR on premiums paid of 6% and I’ll eat my hat.
I have no doubt you spend a lot of time selling this stuff, but that doesn’t change what you’re selling.
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