By Dr. Rikki Racela, WCI Columnist
I have written previously of how being duped into purchasing whole life insurance torpedoed the financial lives of my wife and me, dual-income physicians who ended up in $31,000 dollars of credit card debt over seven years because of this financially deadly product. I am not alone as hundreds of doctors have documented their woes on one of the, if not the, longest WCI forum threads. It is hard to believe how phenomenally intelligent doctors could be financially illiterate, but it is even much more unfathomable to learn how many doctors like myself were fooled into buying the worst money-sucking financial investment product in the industry.
How does this happen? In short, our brains make us do it!
First off, a disclaimer.
Before I go on, I want to encourage those readers who were smart enough not to be duped, unlike me, to continue reading. The following will outline not only how doctors and high-income professionals make the mistake of a whole life purchase, but how they make bad financial decisions in general. It will also help you convince other doctors to get out of their whole life insurance policies. After becoming financially literate, I found out that one of my own colleagues in my group also purchased this terrible product. You probably know tons of colleagues who have been suckered, and this will help them get out of a whole life policy and repair their financial lives.
How the Financial Industry Uses Our Own Brains Against Us
In reality, our brains don’t make us buy whole life. Instead, the financial industry insidiously uses ingrained human behavior to its profit and our loss. Make no mistake, the insurance industry that tricks us into buying whole life knows more human psychology and neurology than any doctor, including myself as a neurologist. How is this possible? As doctors, we utilize our knowledge of the human brain and psychology to help our patients. The insurance industry wields that same knowledge for pure profit. It has perfected the art of using behavioral biases and heuristics to get you to sign on the dotted line. What are these biases and heuristics? From my experience of being screwed, these include familiarity bias, confirmation bias, myopic loss aversion, mental accounting, bundling, the halo effect, anchoring, sunk cost fallacy, status quo bias, and framing. Whew, no wonder I got taken! Let's dive in.
Familiarity Bias
It turned out the deliverer of my financial doom was a close friend of mine touting himself as a financial “advisor.” Unfortunately, he was a salesman, but I had grown up with the guy playing Little League and high school football together in the same town. There was a familiarity bias where I felt safe and comfortable choosing him to manage my money and taking his direction. As Jason Zweig writes in his book Your Money and Your Brain, familiarity bias helped early humans survive:
“If our early ancestors had not learned to steer clear of the germs, predators, and other dangers lurking outside their own bodies and beyond their immediate home ground, they would not have survived. Too much curiosity could kill the cave dweller. Over the course of countless generations, a preference for the familiar and a wariness toward the unknown were ingrained into the human instinct for survival. Familiarity became synonymous with safety.”
My buddy was familiar to me so I trusted him. Financial “advisors” are, after all, people, too. Because of familiarity bias, they are seen by potential marks as friends, teammates, brothers, cousins, etc. And the insurance industry knows this familiarity bias exceedingly well. Companies teach their salesforce to hit up family and friends so they can sell whole life insurance. Because of familiarity bias, our defenses are down, and we put the BS meter away. This is exactly how Bernie Madoff scammed victims out of billions.
A 2010 Forbes article written by finance professors Li Huang and J. Keith Murnighan had this to say about Bernie:
“Our research suggests that Madoff may have deliberately or inadvertently taken advantage of the automatic trust process regardless of whether his family members and business associates were victims or confederates. Even if he didn't seem trustworthy, the fact that his closest relatives and associates invested with him could have provided a subtle, non-conscious signal that he was actually trustworthy. After all, foxes never prey near their dens, and thieves only steal far from their homes.”
And it was this familiarity bias that resulted in my buddy preying on me with the sharp, dirty teeth of whole life insurance policies sinking into my financial skin.
Is Whole Life Insurance a Good Investment? Seeking Confirmation Bias.
Despite only having read Dr. Jim Dahle’s book in December 2018, I had years earlier encountered his work on a website called QuantiaMD, where doctors were paid to produce video lectures regarding various physician-related topics. As part of one of those lectures, Jim had explained that whole life insurance was not a very good investment. He said it was meant to be sold, not bought; that it would be a hindrance to building wealth; and that it only enriches the “advisor” selling the product.
Whoa!!! Wait a minute!!! After seeing this lecture, my mind was blown, and immediately I googled the following: “Is whole life insurance a good investment?”
I don’t exactly remember what popped up, but when you google this now, you get this as your first hit:
I do remember that in 2016, when I googled this question, a similar statement popped up, “confirming” that whole life insurance was a good idea (as you can see in the words bolded in the above screenshot), and I disregarded Jim's sage advice. Hence, I fell victim to confirmation bias, where you seek out information that confirms that you did not make a mistake while disregarding any information to the contrary.
Shockingly, the mere act of me initially approving whole life insurance as a good idea solidified my accepting future information supporting it, while disregarding dissenting information. Amazing how our brains are wired! Forget the movie Inception where Leonardo DiCaprio had to infiltrate a guy’s brain while asleep to plant a thought. I should have taught Leonardo DiCaprio about confirmation bias! Or better yet, the insurance companies should have taught Leo what they teach their whole life insurance sales force.
What I should have done to combat confirmation bias was google this question next: “Is whole life insurance a bad investment?”
What pops up nowadays is:
It turns out one of the best ways to fight confirmation bias is to ask the question in a different way. Should have done that years ago.
Myopic Loss Aversion
I happened to be duped into buying whole life in the summer of 2012, only a few years past the Great Recession. This recent nosedive of equity and real estate markets was used as ammunition to sell whole life. My buddy scared me with how bad the recession was—how it was the worst market crash since the Great Depression—and that the cash value within whole life insurance is shielded from such tragedies. Unbeknownst to me then but clear as day now, he was using the behavioral bias of myopic loss aversion. This behavioral bias is when people and potential financial whales like doctors focus on the short term, leading to an overreaction of negative events (the recession in my case) at the expense of doing things that would benefit in the long term (like paying down student debt or buying equities at discount prices). Pretty slick!
Life Insurance that Accrues Cash Value – My Mental Accounting
Another sort of crafty behavioral bias my supposed “advisor” used to fool me was utilizing mental accounting when describing the cash value portion of the whole life policy. This part of the policy would be earmarked for retirement, a worthy goal where he reinforced to me time and time again that most Americans do not save for retirement. Here comes whole life insurance to save the day!
However, at the time I purchased the policy, I still had medical school debt which I could have paid off. But because of mental accounting, the money I was throwing away at the whole life policy was supposedly building my retirement nest egg. I had placed a different value of the whole life premiums vs. making student loan payments under the deceptive guidance of my salesman. Man, I thought, I can’t touch the part of my budget going to whole life insurance since it’s earmarked for retirement. I didn’t realize I was being played.
The mental accounting bias can be fought by remembering that money is fungible, and in my circumstance, paying whole life premiums and building cash value was taking away from making me debt-free. I should have looked at the money I was throwing away on life insurance premiums as part of an overall financial plan. I should have evaluated those dollars and should have placed them where they built the most wealth. Mental accounting prevented me from realizing that paying $28,000 of whole life premiums was not making the greatest return on my money. Turns out, after seven years, I had paid $170,000 of whole life premiums for my wife and me. I could have paid off our student debt that was around 3% interest and locked a guaranteed rate of return of 3%. My return on my whole life insurance policies? Well, I lost $50,000, as my cash value for the whole life policies were $53,000 and $67,000, respectively. You can do that math, but it’s not that hard to calculate that whole life set me way back.
Currently, I have a little less than $100,000 of student debt left. Yes, my wife and I could have been debt-free by now.
‘Benefits' of Bundling Insurance
Oh man, this is a whole life insurance salesman's signature selling point: that it is the all-in-one bundled solution for all your financial needs. From buying a home (my buddy told me you could borrow against the cash value) to paying for college (borrow again from cash value when the kiddos are college age) to funding retirement (can again borrow against cash value) to leaving a legacy (I was sold a $1 million death benefit), whole life insurance is sold as being the only financial play that meets all your financial goals.
But as Jim Dahle points out, whole life insurance does not help one accomplish any financial goal particularly well, and there are many other vehicles that are cheaper and more beneficial to accomplish these goals. It's just like buying the Verizon Triple Play because it's cheaper bundled together even though I never use the landline. I bought whole life because my buddy said it could enable me to accomplish multiple financial goals in a single solution. The bundling bias made me reflexively think I was getting great value.
The Halo Effect
Did I mention that my salesman was a Certified Financial Planner? Yes, despite being an insurance salesman, he had the CFP designation, one that according to the CFP website states:
“CERTIFIED FINANCIAL PLANNER™ certification is the standard of excellence in financial planning. CFP® professionals meet rigorous education, training and ethical standards, and are committed to serving their clients' best interests today to prepare them for a more secure tomorrow.”
In 2012, when I made the damaging financial decision to buy whole life, I did have the foresight to verify the significance of my salesman’s credentials, including the CFP designation, and I was told that he had my best interest at heart. However, the CFP credential unfortunately can act as beautiful sheep’s clothing for greedy wolves. I mistook the CFP board as similar to our medical boards—as doctors, if we violate the MD/DO standards of care, we lose our license. This led me to blindly and faithfully sign on the dotted line to purchase whole life, thinking that if my best interests were violated, my buddy would lose his CFP designation. The CFP gave my buddy the “halo effect.” Just like when the picture of a beautiful person makes us automatically assume they are a good person, just having a CFP made me feel my buddy would be a fiduciary and automatically have my best interest in mind.
Alas, the CFP is more a knowledge-type degree, just like getting a college degree in religion does not obligate you to be religious at all. Allan Roth, author of How a Second Grader Beats Wallstreet and a previous WCI podcast guest, wrote an article about how the CFP board has given up in trying to protect the public from abuse of the CFP designation. Insurance companies recognize this halo effect all too well and hire CFPs all the time to fool people like myself into a false sense of security. A CFP is incredibly not required to be a fiduciary ALL the time but instead can be fiduciary one minute and sell you a whole life policy in the next, meeting a different standard called the suitability standard. It is ridiculous how the insurance industry can get away with this, but that is how the law stands now, making the halo effect a continued and effective weapon when harpooning whales like me with whole life policies.
Anchoring
I remember when I was first shown material for purchasing whole life insurance, I was first presented with the illustration. A whole life illustration demonstrates how much cash value one can accrue each year until one reaches old age. And man, those numbers were high! Looking back at the illustration, by age 65 I would have paid $371,930 in total premiums, and if I let the cash value ride, it would have grown to $1,487,045 by age 77. Of course, when I was being sold the policy, my buddy emphasized this number before pitching me anything else. What he was doing was anchoring me to the huge number. I believe he did mention the asterisk right next to this number later on in his pitch, glossing over quickly that this amount is not absolutely guaranteed and would need paid-up additions and continued reinvestment of dividends and for the insurance company to continue to be profitable, and on and on and on.
It didn't matter what else he said; I was already anchored to the humongous amount he mentioned first. He anchored me to the highest number on the illustration page, and that was what stood out in my brain for the rest of his sales pitch. Due to anchoring bias, as I signed on the dotted line, all I kept thinking about was the $1.5 million.
Sunk Cost Fallacy
Even as I was getting to be financially literate, I was tempted to keep paying into whole life premiums and just let this financial mistake ride because of this next bias. The sunk cost fallacy is when you keep throwing more money in after bad. One example would be government projects where, after throwing billions of dollars in a project that turns out to be getting too expensive, the government decides to keep throwing in more money. As the thinking goes, “Well, we paid so much into it, we can't quit now.” Another famous example would be if you bought very expensive tickets to a concert, but on the night of the concert, there was a huge blizzard. Now you will have to risk dying in an ice storm just to make the pricey concert. What do most humans tend to do? Risk the immense cost of losing your life, go out into the ice storm, and attend the concert.
This is the sunk cost fallacy. In terms of whole life, I could have said, “Well, I spent so much money on whole life, and eventually it will come out positive sometime in the future. Might as well keep paying.” I was tempted to go down this route as the sunk cost fallacy is part and parcel to loss aversion. If the government doesn’t see that expensive project through, then it just wasted whatever it spent so far. If you don’t go through that deadly blizzard to attend the concert, then you are out the cost of those tickets. And if I didn’t keep paying into whole life, then I am acknowledging that I was stupid and lost $50,000.
Status Quo Bias
This was another bias that tempted me to stay in my policy. My salesman had mentioned there were so many other options for investing—from stocks, bonds, commodities, annuities, mortgage-backed securities, real estate, lions and tigers and bears oh my! And so on and so forth. His explanation of the financial world made me vertiginous, and this was on purpose. He, as well as the entire financial industry, is trained to present finance as intimidating and infinitely confusing, even for a doctor. They are playing to the human brain’s status quo bias, that when presented with many complex and confusing options, the bias is to stay in whatever investment you are in. It is related to the paradox of choice, where if presented with too many choices, we end up having analysis paralysis and not making any choice at all. My buddy was making the financial world intimidating and scary, tempting me to stay in my whole life policies.
Framing
Oh man, this one really got me. As my “advisor” was pitching whole life insurance, not once did he ever say I was “purchasing” anything. He explained that the death benefit would be the greatest financial “gift” to my future children and that the premiums I would pay would be an “investment.” What better gift to give your children—your seed and future, those cute kids—in the event of a terrible tragedy of your passing than to bequeath them $1 million? Or that even if I didn’t kick the bucket, the cash value was an “investment” for whatever my financial goals could be in the future. That is exactly how my buddy framed it. I wasn’t buying a whole life policy—I was giving the best gift you could give to your children! I was showing how much I loved them through buying this policy. And even if I didn't die, I was “investing” through the accumulation of cash value, taking a major leap forward in accomplishing my financial goals. Of course I signed.
Fighting Fire with Fire: Reframing
Despite all the above human biases at financial companies’ disposal, how did my wife and I manage to fight these embedded psychological tendencies used against us? We used our own personal and painful experience with whole life insurance against the insurance companies. We used the framing heuristic to bestow on us the strength to fight whole life and to go down the path of financial literacy. We fought fire with fire.
Seven years after my purchase of our whole life policies from the buddy who, by the way, I no longer talk to, I was attending my 3-year-old son’s Little Gym Olympics. The Little Gym is a chain of gyms teaching gymnastics to infants and toddlers. My son had completed the season, and there was a mini-celebration. No big deal, unless it is YOUR child in their first Little Gym Olympics. Luckily I was there, but guess who couldn’t come because she had to take extra call to keep up with paying $28,000 of yearly whole life insurance premiums? Mommy, my wife, a dedicated anesthesiologist, was in the hospital putting in epidurals on the Valley Hospital OB floor at the same time as our son’s event. I sent her pictures. She told me she cried when she saw them—luckily pregnant women’s backs are turned while they're receiving epidurals so they didn’t see her tears.
How is that for a frame? My wife will never get that time back. Whole life took that away from her. At the same time, while our time from our children was stolen from us, we were enriching insurance company CEOs to lavishly have time to hang out with their own children. One article cited MassMutual’s CEO making as much as $18 million! (FYI, it was not MassMutual who sold me the policy, but an even more infamous doctor financial killer insurance company.)
If any readers are pitched whole life, remember this story. Or if you know somebody who got hoodwinked, relay this story so they get out of their detrimental whole life policy. Frame whole life insurance this way. Tell them how whole life caused a hard-working doctor to miss her son’s Little Gym Olympics, while at the same time funding a financial CEO’s opulent eight-figure lifestyle. My wife will never get that moment back. Thanks, whole life insurance!
We moan as doctors how it is our busy careers that prevent us from spending time with our families. But for my wife and me, it was whole life insurance. You know what my wife does now? Instead of paying $28,000 in annual whole life premiums, we make the financially intelligent and family-oriented decision of paying $1,500 to a colleague in her group to take call. That’s almost 20 moments a year where, instead of throwing money down the whole life sewer, she gets to attend a Little Gym Olympics, a Little League game, or a dance recital. Whole life insurance was taking her kids away. Getting the heck out of our painful whole life policies and becoming financially literate brought her children back.
Jim Dahle has already cogently written how whole life insurance is not an investment but a product to be sold, using a rational and thoughtful framework of the facts. I hope that the above has combated the emotional and irrational heuristics that might have duped you or other high-income professionals into buying whole life. If you have already been sold poison, maybe it will emancipate you from continually paying damaging premiums at the expense of building wealth. Just like my friend convinced me into buying whole life, utilizing my own brain with its biases and framing the vivid imagery of my kids’ future, you can use my story (well, technically my wife’s) of how she missed our son’s Little Gym Olympics.
Maybe it doesn’t seem rational to use some random stranger's story of missing some random kid's event, but neither does buying whole life. Many of our other poor financial decisions don't seem rational either. And I just threw a little familiarity bias in there because my wife, just like you, is a doctor and has bled the same blood and has been in the trenches of residency training just like all of us. Just like financial companies use our emotional, reflexive brains against us, I hope you will join us as we spread our painful lesson of buying whole life, and use it as a frame to protect against Wall Street predators to never buy whole life insurance or other hurtful financial products ever again.
Do you have questions about life insurance and what kind of (non-whole life) policies would be the best for you? Hire a WCI-vetted professional to help you sort it out.
What do you think? Have you been pitched whole life or some other unhelpful financial product using the above behavioral biases against you? Do you think you can use behavioral biases to your advantage to protect yourself and others from these financial products and become more financially literate? Comment below.
I’m sorry to hear about this doctor’s negative experience with whole life insurance. However, from reading the details he shared, I can tell the policy was not set up for cash/wealth accumulation. What many people don’t realize is that life insurance is a flexible product. It is not like buying stocks, bonds and mutual funds. Those assets can’t be customized to improve their performance. Life insurance can do that. A policy designed to focus on growing the cash value will perform differently than one that is focused on growing the death benefit.
The proper way that this doctor’s policy should have been set-up was to design him a blended policy of whole life and term life insurance. He could have had a policy that was $100,000 of whole life and $900,000 of term insurance. That would have set his base premium much lower than what he would have been required to pay with that unblended whole life policy he bought.
For example if he got this type of blended policy at age 40 and rated preferred plus, his annual premiums would have been just under $1,400. However, to accelerate the growth of the cash value he would need to overfund it with a paid-up additions rider which would allow him to annually pay $14,000 into the policy with $12,000 of that premium going directly to the cash value versus paying for the cost of insurance. What this does is minimizes the amount of life insurance he is being charged for, and accelerates the cash value growth because it will earn him greater dividend crediting annually. This type of policy would also give him great flexibility because he would have the option of paying the minimum premium of $1,400, or a maximum of $33,000, which is the limit set by the IRS for a policy of that size to keep the preferential tax treatment life insurance is given.
This type of policy design would also have paid a significantly less commission to the agent who sold him the policy. The agent’s commission is determined by the base premium so a policy with a base premium of $1,400 pays significantly less to the agent. The agent does get a commission for the extra funds that are paid into the policy as part of the paid-up additions rider, however, he only gets cents on the dollar which is minuscule when you do the numbers.
A policy structured this way with a dividend interest rate of 6% would give you $100,942 in cash value with a death benefit that grew to $1,384,515 in seven years. During this time you would have paid $98,000 in premiums over the course of those years. The policy’s performance would only continue to improve over the years and give you $605,117 in cash value by age 65.
When looking for a policy as an alternative saving/wealth accumulation vehicle, the life insurance company and the product you choose must seriously be evaluated. Some companies are better at managing and investing money and charge lower fees. Other companies don’t excel in those departments. So, it is extremely important to get this type of policy design from the right company to avoid buyers remorse like this doctor. This is why it is important to work with a noncaptive agent or financial advisor who works independently. They can shop around with different life insurance companies and compare policy performance to make sure you are getting the best product for your money. A captive agent who only represents one company will not be able to do that.
I hope this feedback has been helpful to anyone. Feel free to respond with any questions for clarification on anything I shared in this post.
PS: Forgive any typos. I was up late typing this while way too tired.
I hear this excuse all the time when I show an example of an inappropriately sold whole life policy. “It just wasn’t set up right”. Why do you think the vast majority of policies aren’t set up right? Are all the agents really that dumb? Do all the companies really hate their clients that much? Or are the policies DELIBERATELY set up to maximize the commission and minimize the return to the purchaser? Maybe I’m a cynic, but I think it’s mostly the latter. Thus, the blanket prohibition that “almost nobody should buy a whole life policy” is accurate.
Very skillful. Acknowledge the objection, maintain rapport, and keep on selling and close the sale.
I see what you did.
Your time is much better spent finding actual people to sell whole life to. Your wasting your valuable time here. The best thing you can do if you have doctor is to bring him to this site while on your appointment and address it. Thats what i do every time. Otherwise your just bantering into the wind.
Hey Xavier, that is just it though: in your hypothetical illustration I would have paid in 7 years $98,000 and only made $2k in cash value! Dude, I put in $98,000 bucks in my taxable for 2 years into low cost index funds and it has since doubled to $200,000!!! if with long term cap gains tax, that’s a huge gain!!! I know this is a small moment in time, but come on!!! I wish I had known this before my buddy screwed me. I didn’t know these type of gains were possible, and again I just blindly bought whole life, and instead of my money going into the greatest bull market from 2012-2019, I lost $50,000 ;(
At least your hypothetical whole life policy would have screwed me less, but losing money until you finally break even around year 7- terrible investment.
Holy smoke.
I’m neither a doctor nor an insurance salesman but if I bought something I couldn’t afford I sure wouldn’t write a long article on all the supposed tricks played on me and all those clever ways the industry and my own darn brain I have no control over fooled me.
If you went into $30,000 in credit card debt in 7 years over your life insurance then your buddy isn’t to blame. Nor are all the deflections and rationalizations about what tricks your brain was up to that your buddy took advantage of.
If something is causing you to spend substantially more than you make each month then even a child knows it will not end well.
This article could have been much shorter, and since it advises people to elide true responsibility for doing something basically and obviously stupid, much more useful, if it had simply said, “Don’t buy stuff you can’t afford.”
It is not a matter of numerous biases and psychological mumbo jumbo that occurred.
You simply didn’t sit down for five minutes with a calculator to figure out whether you could afford something while you had a large debt hanging over your head. That’s not your friend’s fault nor even financial illiteracy. It’s basic math that one learns in about fourth grade. Unless someone concealed that basic math from you, stop dodging responsibility for a dumb decision with complicated psychological analysis and grow up a little.
People who sell a product or service don’t always do a great job and are often looking to maximize their income. Nor do they always have their client’s best interests at heart. It is my understanding there are even some doctors like that.
It is the responsibility of an adult to do what in this case would have been the infinitesimal due diligence to determine if what you are being offered is in your interest and whether you can afford it.
I don’t walk into a doctor’s office assuming this guy is my new buddy and has dropped his own life to fix mine any more than I do a financial planner or used car salesman has.
If your friend sold old Ferraris and told you they’re great investments (which they are for some people) and you bought one you couldn’t afford, who is to blame if you had to sell it for a loss because you put it on your credit card?
Hanging some credential on a wall, whether a used car dealer’s license or a medical license is not a license for the sap sitting down to sign on the bottom line to turn his brain off.
Whole life makes sense for a few people in a few particular situations. Should a CFP figure out if you’re one? Yeah. Does that mean you don’t do some rudimentary due diligence of your own anymore than you did on the playground when your buddy was trying to make a trade that sounded too good to be true? Of course not.
When your buddy rooked you, should you have written a long tear soaked letter to your teacher complaining about your buddy? No. You learn a basic lesson about how the world works, and watch out for your stuff. After a short time on the playground and some lessons learned, if you let somebody rook you out of your stuff in a deal you can see (if you’re inclined to look) is not in your interest, it’s on you and you don’t get to whine about it.
Were you never on a playground?
Thank you for demonstrating that the industry and its agents ARE NOT looking out for the clients. I think that’s the point of the article. That docs think they can trust the agents and they agents don’t think they have any responsibility to be trustworthy (and legally, they don’t.)
True, I did not due any due diligence. I trusted blindly my high school buddy, a guy I trusted on the football field with and I even now his mom, without spending one second on what he was selling me because I did not want to deviate one millisecond away from my patients. I am a doctor, and as a doctor I put my patients first, and I never take time away from them to do financial due diligence. that was, until, the lack of financial due diligence and trusting my CFP blindly led me to rush through my patients and compromise care.
Shame on me for dedicating all my time to medicine and trusting the other stuff to a CFP who I grew up with in my hometown.
How does the quote go? “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Wow, this really riles up the hornet’s nest–it is amusing to read!
I LOVE how so many of the responses to the angry insurance salespeople are from WCI readers. Amazing that Dr. Dahle has built a strong cadre of smart investors who can push back against their nonsense. Fight the good fight!
Here here man. I am shocked that there are so many insurance salesmen/women that read WCI. I guess it’s like Machiavelli/Godfather quote “Keep your friends close, but your enemies closer.”
also, reminds me of the Michael jackson lyric/actually was Rockwell song “Sometimes it feels like, somebody’s watchin me!”
Did I ever mention Jim had to censor some of my comments on the name of the insurance company that screwed me, in fear of libel? just like saying Voldemort so the Death Eaters can hone in on you!
I believe that my whole life death benefit allows my wife and I to spend more of our money in retirement because, when I die (and I’m almost certain I will go first) the bucket gets filled back up for her. If I go first, I have the cash value to spend. So higher retirement income with less market risk and taxes, sounds good to me.
Until you realize you would have been in a much better situation if you bought term life and invest the difference in a low cost index fund. Haha
Again, less market risk and taxes/higher income. Oh and no longevity risk. Peace of mind = priceless.
I’m not sure “priceless” is quite right. I’m sure there’s a price at which you’d sell your peace of mind.
Didn’t cost me a dime. It’s a savings vehicle and I got 4% tax free. If the end game is income in retirement and this allows me more of that because I can spend down my other assets all the while having less risk and taxes paid then that can’t be beat. Peace of mind baby. Try again.
I’m glad you have peace of mind, in reality, our economy system works better when there are people like you who volunteers to do wealth redistribution, I just choose not to be the one.
You didn’t come up with this idea on your own. You read it somewhere, thought it appealed to your preference, and rushed off as though you were spreading wisdom.
Buying term and investing the difference does not fare better. This is actually empirically knowable, so why do you come here preaching philosophy that has long been debunked? The irony of doing so on a thread that claims to be about avoiding biases surely cannot escape you.
Uhhh…okay. Now I’m questioning your ability to do math. Are you seriously arguing that on average buying term life to cover insurance needs and investing is not going to do better than buying whole life? Really? You’re entitled to your own opinions, but not your own facts.
“Buying term and investing the difference does not fare better“
Let me give you a chance to proof it. Otherwise you may want to change your name to Non Understander.
What? You bought whole life insurance because you wanted a permanent death benefit? How novel.
Recognize, of course, that ON AVERAGE, your wife will have less to spend than if you had used standard investments instead of life insurance for this need. But there is no guarantee you will get the average (or better). Thus, you value the guarantee and were willing to pay a lot (in the form of opportunity cost) to get it. Sounds like a good use of insurance to me.
I appreciate your thoughtful reply. I respectfully disagree with your point about the lost opportunity cost. Opportunity at what cost is the question. I don’t have to worry about 2008, or 2002 or the other market slaughters. My retirement income is higher than someone else with the same net worth because I own this asset that gives me (again) Peace of Mind. Market takes a dump? No problem, I have money I can draw from this asset not correlated to the market. Freedom to live without stress. Again, priceless.
Note that when you buy term and invest the difference, you are not obligated to invest in stocks. You can put the money in low risk investments, at far lower costs than if you put the money in low risk investments through a whole life policy.
Of course you have less taxes, your Insurance Contract will make you less money. I’d rather make a 1 MM a year and pay 40% in taxes than 250K a year and pay 20%. Make sense?
I was referencing the fact that I will pay less in taxes in retirement because I will be spending principal and interest and not just interest only. Spending down the principal is afforded to me by virtue of the permanent death benefit (back to my original comment where the bucket gets filled back up for my wife). Higher income, less taxes . Make sense?
Glad you’re happy with your purchase. Wish everyone was. When I poll my audience for people who actually bought a whole life policy, 75% regret their purchase.
Unfortunately JR, in my case there was the risk of not being able to keep up with the whole life premiums. It was worse than any bear market I could experience. after 7 years, I was in $31,000 of credit card debt trying to keep up with the $28,000 whole life premiums. I had to to end the policy with my cost basis at 7 years of $180,000, and my cash value only $130,000. I lost $50,000- so much for peace of mind!
BTW, my wife gave me a piece of her mind when I told her of how we lost $50,000 in whole life . . .
I’m sorry you had to go through that. You can’t plant an oak tree in a desert.
Again, less market risk and taxes/higher income. Oh and no longevity risk. Peace of mind = priceless.
Sure. Less market risk because the underlying investments in whole life are bonds and bond-like instruments. Index funds are tax efficient for most people even in taxable accounts. Guess what. When you die, your spouse gets a stepped up basis and you pay no tax on that taxable account (fully if in comm. property state or half if in other states). Longevity risk is minimized by proper asset allocation and exposure to equities. Once most docs are of retirement age, there is no more need for life insurance as their investments provide both income and capital appreciation. Typically their expenses are stable and low, kids are moving out and in their careers, and the investment account allocation is conservative enough that they have peace of mind. No need to pay excessive fees for years to an insurance company (and its agents) to have peace of mind.
Happy to jump on zoom call bud. proof is in the pudding. and you too are product ignorant. you can not go back in time and compare whoulda, shoulda, coulda. You do not account for investor emotion when they see their account down 40% and panic sell or get FOMO when it s up 40%…… Product design for life policies assuming you are wanting it for retirement purposes is EVERYTHING….
“Happy to jump on zoom call bud. proof is in the pudding.”
Rather than a Zoom call, how about putting it all in writing, illustration tables and all, right here on this site? Everyone on this thread can see it.
More importantly, the life insurance salespeople can refer their customers to this discussion where they show all of us how WL is the answer, we agree we were wrong and all WCI readers go out and buy permanent policies.
Made it to the end of the comments. What a comments section; it’s like you just posted an article about Trump or Biden! Which I think says a lot; is WLI a solid, boring old insurance product as insurance should be, or a cult?
I don’t mean to be ad hominem, but does it bother anyone that many of these insurance salesmen posts don’t use capitalization properly and have grammatical errors? I wouldn’t send a text message without a capital after every period. Insurance is complicated, precise, and filled with complex legal wording. I find many of these posts concerning for that alone. It would be like having a dentist with horrible teeth.
You’d have to be an idiot to believe everything this guy is saying. I’m a stock broker and believe whole life can be great for your overall portfolio depening on your needs and risk tolerance. This guy is also clearly broke and doesn’t understand the tax advantages either. You are right, its mostly for the wealthy…..which you clearly are not. Do your own research people.
Steve, you lost me at “I’m a stock broker.” I’m not going to label you an idiot, but your chosen career does tell me you don’t really understand markets, math, or probability. You may “believe”things about whole life, but you’re probably going to be wrong in the long run.
Pat, Just because I am in another profession doesn’t mean I can’t be unbiased and recognize there are other good financial products and strategies for people to own to help them accomplish what they need to. Just as real estate may also be a good investment, it’s just a different investment. Whole life will not return what the stock market will, it doesn’t mean it’s a bad thing to own. And i do believe there are only a few good whole life companies that are mutual companies with strong dividends. Is 100% of your money invested in crypto? If not you must be an idiot 🤪 because it’s out preformed everything….see my point? Go back to school
Steve, I agree with you, I am an idiot, and idiot for when it comes to finance. But everything I wrote is not lying- it is a true and painful story. Whole life is appropriate for a few minority of people, and I was not one of them, and got taken advantage of because all I wanted to do was treat patients and not deviate any time from them into seeing if whole life was appropriate for me. It is not a bad thing to own if I had a huge estate to pass on, a disabled child, or was a “keyman” in my own company. None of these things applied to me, and I am sure you are right, that there are insurance companies and salesman that are honest and only see whole life for these reasons. The insurance company that sold me my whole life policy though played me like I wrote, and did not have my best interest at heart, when the optimal financial decision was not whole life but to pay off my medical school debt or invest in low cost index funds in a taxable account.
Based on the responses from the medical folks on this thread, we should start do it yourself medical clinics for heart, brain and other surgeries rather than deal with licensed professionals who are formally trained.
John J Doolan, go for it! That would be awesome and will save me from getting called into the ER in the middle of the night to save your life. If you can convince all your fellow whole life insurance pushers to join you, I’d be forever grateful. You guys could probably get through an appendectomy from a YouTube video. If you chicken out though, I’ll still save you and your buddies. I took an oath on it.
Of course not, that would be foolish. My point is that I know a lot more about finance, accounting and taxation that you do based on my education and background. It is not what you make it is what you keep. In retirement, you need income, not assets and you will have a partner named Uncle Sam if you do not plan correctly. I am in the protection business and I protect my clients if they live too long, die too soon or get sick or hurt and I know how to do it better than most. I show up with a check that a client or their family can sign on the back.
Oh. The “protection” business. That’s rich. Another euphemism concocted by the permanent insurance industry designed to ingratiate themselves to their victims, er clients. There are advisors out there that do put their clients first. The difficulty is in finding them. If I meet an advisor and they even mention whole life to me, I immediately wonder if they are trustworthy. There are so many better solutions to address financial issues than whole/universal life insurance. Buy term and invest the rest. Period.
Yes I am in the protection business and the insurance product or plan is secondary to what the client needs and can afford. I use Term Insurance all of the time where and when it makes sense and also make sure that I use a company with good conversion options going forward. I have seen people’s health change over night and I have seen people become uninsurable over night too. I do not use euphemisms or buzz words and I present my clients with the facts. Whole Life insurance is the not the end or be all for everyone but it has its place with the right client and the right situation. If I did not show you a whole life option and every available option, I would not be doing my job. I help my clients make informed decisions based on the facts and explain the advantages and disadvantages of each option. I remember my first death claim very well and what it meant to me to show up with a check and have a client receive it when they needed it the most. It is a powerful thing and something that I have never forgotten and I take very seriously.
One of the main problems with a product like Whole life insurance is the fees. Term insurance is cheap and useful for the purposes of protecting life and a term insurance ladder will protect the vast number of doctors out there, matching liabilities until one’s investment accounts are significant enough that insurance is not needed. But Whole life insurance is so profitable to the insurance company that it offers huge commissions to agents to push it. If whole life insurance was so attractive to clients the insurance company wouldn’t have to incentivize its agents to sell it. The commission drives the sale. Whole life is solving a problem that really isn’t there for the vast majority of people. Yet it gets sold too often as the best solution. It is overly complex and for good reason. No one reads or understands the realities of the contract that is involved in whole life. Once sold to them, eventually, the client realizes that this is not what they want but it is too late. By that time, they are stuck. The insurance company has siphoned off the full commission to the agent upfront, and the fees have dropped the cash value sufficiently that people have to make the decision to take the loss or continue paying into a policy that is full of ongoing expenses but that one day will break even (7-10 years later). This is the reality for most people who get sold these policies.
If whole life insurance had no commissions and the underlying fees were minimized (ala Vanguard and index funds), then maybe it would be reasonable for more people. Would you recommend this product if it provided the same commission as a term policy? It is a rhetorical question, but I doubt it.
You will be able to deliver a check to a client who purchased term insurance too.
What % of the policies you sell are whole life?
I do not even know. The plan of insurance that I use is dependent on the risk and needs of my clients and their situation, either personally or for their business.
Oh, please stop with the “Uncle Sam as a Partner”. Every time a write a quarterly tax payment I curse the IRS. Then I remember being a broke resident getting a refund. No comparison. Smart investors pay taxes because they make money. Idiots (like myself) who buy Permanent Insurance pay little to no taxes, because they end up with little to no gains.
Yes, Uncle Sam is your partner regarding your retirement accounts dependent on your tax bracket. That is what I am referring too. I create 3 types of retirement accounts for my clients: taxable, tax-deferred and tax-free. You face many tax obstacles in retirement that involves Social Security, Medicare Part B premiums and your retirement accounts. Your tax bracket determines your tax liability. When a spouse dies, it is even worse as you become a single filer and you lose their Social Security income. I help my clients plan for this and based on the posts from all of the medical professionals here, you are not planning or addressing any of this.
“Uncle Sam is your partner” in life insurance too if you surrender it with a gain.
So let me get this straight. Because I don’t an overpriced Life Insurance Policy, I am not properly tax planning for my family? There are numerous ways to pass down wealth more effectively. And, by effectively investing in actual investment products, there will be more to pass on.
Assets/income are fungible. Give me one and I can turn it into the other.
The comparison is innacutate. It’s more like if you want to clean your house or mow your lawn by yourself or hire somebody to do it. The only difference is that this maid/gardener charges A LOT of $$$ to do it. Personal finance is not rocket science. Anybody can do it by learning some basics. I have known a lot of people who have done it by themselves and succeded (majority of the regular readers here) but I have yet known anybody who has done their own appendectomy let alone succeded.
Ok so I’m all about managing your finances yourself with education and I think we’re on the same page. However, in terms of appendectomy there actually was a guy:
https://en.m.wikipedia.org/wiki/Leonid_Rogozov
Are you really trying to equate the basic salesperson “training” that most insurance agents receive with the 20,000 plus hours a doctor spends in medical school and residency training?
Whole life is a muni bond proxy when structured correctly. Institutional investors who understand how to buy and use it as a collaterized warehouse of wealth make out quite well with it. Most agents cannot see this because they are blinded by the compensation struture and never learn how to skinny it down to achieve a decent IRR that is better than any corp bond index before adjusting for fees and risk. How would you like to buy an unlimited, liquid muni bond portfolio with a death benefit and no interest rate risk? Before you surrender a contract, consider right-sizing it by exercising the option to convert to a reduced paid up contract or max non MEC funding so you don’t walk away from your aquistion costs.
“How would you like to buy an unlimited, liquid muni bond portfolio with a death benefit and no interest rate risk?”
Like any other purchase, it depends on the price.
If there were no commissions and near zero ongoing fees – like a Vanguard muni bond fund – then it might be worth a look.
If there were huge upfront fees and annual expenses, no thanks.
By the way “no interest rate risk” is misleading. The nominal value will not go down if interest rates go up. But the cash.cash value growth rate easily can lag inflation. That is happening right now to people who are in these products.
Have you seen every possible funding scenario from lower commission top mutual carriers?
I understand you got taken like most out there in the market. Most of our clients are professional investors that need stable collateral. Bancorp is our preferred lender that only lends against whole life from 6 carriers. You’re so scorned at this point so there’s no use continuing this conversation unless you care to open your mind to alternative possibilities and use cases. Sadly, the fin services industry lays people to waste every day because interests are not aligned properly with customers. No structural integrity to the integration of banking, investing and risk management due to the comp models. We are changing that with concepts like ThePerfectCollateral.com which brings the institutional concept of Corp/Bank owned life down to people. It’s nice to have an axe to grind and whole life is an easy target, but don’t let it kill all your objectivity. I was out pitching the best structured products in the world that banks in Europe were prop trading amongst each other. Crazy return history with zero downside to the extent they were built on treasuries of your choice. Money managers kicked me out of their offices before I could get the seat warm. I figured out the unsaid quickly. I was rendering their fee useless. There was certainly a place for the SIP in their mix, but not at the expense of tearing down the facad of money management. You might look up Brian Bewley and ask him for some of his calcs and spreadsheets. He’s a beast with the numbers. He is speaking this week on a panel with Dr. Laffer on home wealth management and the use of home equity agreements, a cousin to whole life equity. Lastly, re-insurance and the lobby you are buying into wil have some serious value when this train wreck of an economy brought on by government malfeasance and corruption with the Fed comes off the rails. The words whole life might not be so distasteful very soon.
No it’s not. My muni bonds don’t take a decade to get back to even.
John Doolan,
“and also make sure that I use a company with good conversion options going forward. I have seen people’s health change over night and I have seen people become uninsurable over night too.”
Remember the readers of this site are health professionals. They all know that healthy people can become ill and uninsurable overnight.
That does not mean they suddenly need whole life insurance. If they are past the point that their families need to replace their income, then they do not need any life insurance at all. No whole life, no term, universal or anything else.
Many readers of this site have saved past the need for life insurance. Why should they have been paying extra to have been able to convert their now cancelled policies to WL policies they never needed?
I did not say that in my post. I said that you need to examine the conversion options of term insurance as most people do not and only buy on price. I have been doing this for for 30+ years and I have seen a lot. I use term insurance all of the time and I am not a one trick pony with an agenda. Many of the companies with the cheapest rates have the worst term conversion options and that is on purpose.
Doolan,
“I did not say that in my post.”
With all due respect, I simply quoted what you said.
Can you explain why someone becoming uninsurable would make it desirable for them to convert term to whole life?
With all due respect, I did not say that. I said to review the term conversion options too and many companies that offer term insurance do not even have whole life policies. That is what I mean and what I said. It is an important consideration that needs to be addressed in my professional opinion.
“I said to review the term conversion options too and many companies that offer term insurance do not even have whole life policies. ”
Again, WHY?
Why would someone need to convert term to whole life?
What does this have to do with becoming uninsurable? If someone who does not need a policy at all, how are they better off having the ability to convert an existing term policy to whole life? If they don’t need a life insurance policy, what does it matter that they cannot buy a new one? They don’t need one, so who cares whether they can buy?
As for what you said, I have tried to help by copying and pasting your statements. You are free to reread what you posted, but all I did was quote.
Because people get sick or hurt and their needs for life insurance change. If you have a 20-year level term policy and you are close to the end of the level term period and get sick or hurt, you may still need your life insurance longer. That is why and a simple safeguard to convert to universal life, whole life, variable universal life or equity indexed universal life. I recently had a client with Stage IV Lung Cancer that this happened to and I was able to extend her coverage and with the terminal illness rider, receive funds from her death benefit that were needed before she passed away. Her term conversion option was one of the best in the insurance industry and that is why I use that particular company. You can convert to a new policy at the same rate even if you are terminal with no questions asked. That is why.
The idea of having a preset term life insurance is because after that time whether it’s 20 or 30 years, you will not have anybody who depend on your income anymore. And if you buy term and invest the difference in low cost index fund, there is way bigger chance of getting more money to your heirs compared to a WLI, tax free too as there’s step up basis. The whole idea of needing to convert term life to WLI is absurd,
In your example the customer may have needed life insurance past their 20 year term.
Or maybe they just spent a bunch of money to convert to whole life when that could have been better spent on other things.
Again, for this audience, financial independence means they no longer need earned income or life insurance to replace earned income.
If they are not sure 20 years is long enough, then include a 30 year pilicy for some of their coverage. Buying extra in middle age is a terrible plan.
I had a 20 year policy. When the 20 years ended, I cancelled it. Because I no longer needed insurance. It never occurred to me to buy more insurance or to investigate the price. I did not need insurance, so why should I care about the price?
I don’t have a boat and I don’t know what boat insurance would cost. I don’t need it. I am not buying it. I don’t care what it would cost.
John,
You are arguing about ‘what if someone gets sick or hurt”. If they get sick or hurt, they need health insurance or disability insurance, not more life insurance. That will protect them from the expenses that they currently have. If they have a need for life insurance, then term is the most efficient form. Again, once they are financially secure, then they can live off their investments and there is no need for insurance at all. Not sure why you don’t understand this.
This month I have a term life insurance policy expiring that I bought when i finished residency 20 years ago. It is convertible and my agent tried to convince me to convert it. I replied that there is no reason to. I don’t need it. I have done the analysis and there is no purpose anymore so I am letting it expire. I have no qualms about it because it served me well when I had young kids and a mortgage. The kids are in college and late high school and the 529 plan is sufficient.
I think that an advisor needs to have a holistic view of a persons financial life and to focus on one aspect (insurance) is a disservice. This is why insurance brokers masquerading as fiduciaries is such a problem. When you’re a hammer (insurance agent), all the world’s a nail (whole life). As WCI has repeatedly stated, doctors buy lots of insurance to protect against catastrophes. There is just little need for whole life and its brethren. There are other tools in the tool chest that fix the problem more efficiently.
While this is a sad story and I guess it’s great that you helped the client get as much as they could after the diagnosis, the only reason someone would NEED to convert/extend their coverage is if they were not sold/did not buy the appropriate term product in the first place.
As the insurance agent, why did you sell the client the wrong product to start with? If they had had a term policy that lasted at least until they were financially independent, they would have had no need to convert the product in the first place.
Where are the customers’ testimonies how awesome their cash value life insurance policies are?
I have 2 policies. One whole life policy that I was unwittingly steered into (vis a vis Dr. Racela’s post), and one IUL policy. I hate both. I’m trapped in the whole life policy until my insurance company (Ohio National) demutualizes due to financial distress and gets bought out by a Canadian bank. Oh yeah, before I forget, INSURANCE COMPANIES CAN GO (AND HAVE GONE) THROUGH BANKRUPTCY. 7 years in, I still haven’t broken even on my premiums on this policy and am not set to do so till year 15 of the policy. It was sold to me as a “liquidity risk investment.” Non-guaranteed returns going forward (based on a revised in force illustration this year) are about 2-3%. What an awesome piece of my retirement plan!* [Let me guess, my agent didn’t “structure the policy properly”. LOL!]
My PacificLife IUL policy is paid by my employer. This policy is horrendous, even worse than whole life. But since my employer pays 100% of the premiums, it makes no sense to cancel it. Frustratingly, I still have to pay ordinary taxes on the premiums. I can assure you, however, that all 800 of the physicians in our group would much rather take that money as wages then pour it into this terrible product. The fees on this policy are truly outrageous. Premiums are $18,800/year and fees are north of $2500/year. Imagine the commission that agent made when selling these IUL policies to our large physician group? Talk about generational wealth (for his children)…..that guy is set for life—all on the backs of my colleagues and me.
How come the only posts defending permanent life insurance are those who sell it for a commission? I mean seriously. You’d think that if this were such a great product, then there’d be a strong defense from it’s customers. In all the posts I found on whole life on this site and others, there was only one customer who loved his policy. ONE! Turns out, he was also a salesman too (which he didn’t disclose at first), so I can’t count it. That brings us back to zero happy customer posts. You guys are laughable.
Dear insurance salesmen trolls,
Please go to your customers, ask them to read this post (and other WCI posts on cash value life insurance) and ask them to write a comment on how happy they are with their policy. I’ll stay subscribed to the comment updates. Will you do that for me? Think of it as your public service. But be forewarned, most of your customers will realize that you sold them a pig with lipstick. So only do this if you feel supremely confident that your customers understand what they own, why they own it, and truly need it. Good luck, I’ll be waiting.
Cheers.
* = sarcasm
Well Pat, I am not a troll and I am degreed professional just like you and your colleagues. Ohio National is not in financial trouble and is being acquired since they demutualized. If you were my client, I would advise you to contact Ohio National and see if you can take a reduced paid-up policy and see what that comes out to. If you do so, you more than likely can stop paying your premiums and will have a guaranteed policy and death benefit for life with no further premiums required. It will still have a cash value that will accumulate and that you can access as needed.
You are right about Pacific Life and their excessive fees in their IUL policies. I cannot comment on yours without examining it to see where you are and where you can be. I do not recommend Pacific Life or Minnesota Life (Securian) to my clients just for this reason.
In closing, I have many happy customers Pat and everyone that has followed my advice are extremely happy. You are the one that is laughable Pat with you rants and name calling and especially since you do not know what the hell you are talking about.
John J Doolan, sorry if I made you angry. I know you can’t be persuaded.
My physician colleagues and I don’t always agree on the optimal way to manage disease, but we try to follow evidence based practices. Most finance academics will tell you that permanent life insurance is good for the insurer but not for the insured. There are some obvious exceptions when you truly need risk pooling or guaranteed legacy money as noted in the original post, but I have yet to find a research study that finds a contrary position. At least none that haven’t been funded by the insurance industry (i.e. Wade Pfau’s recent ‘study’). It’s fairly clear that most high income professionals on this site don’t want or need what you’re selling. I’ll let them decide who knows what they are talking about.
Let’s hear from some of your happy customers! Send them to this site.
You will have happy customers until somebody show them a side by side comparison of what they could have had if they just pay a plain vanilla term life and invested the difference in a low cost index fund. Haha
“everyone that has followed my advice are extremely happy”
Great! Get a couple to read this article and post why they love their policy and why we are looking at this wrong.
Or better stull, post the details of the while life policy. Show the inforce illustrations, tell us when they were purchased, the premiums paid and compare that to buying term and investing the difference.
Nothing like cold hard figures to sort out a disagreement like this
Honestly I blame on the victims of of WLI just as much as the sellers, when financial regulators states WLI is fair game then its your own fault if you dont watch out for yourself, they sell a product to make a living, to feed their families, even though they are basically leeching on the financial illiterate. Some people learn from their mistakes, which is why sites like this is so helpful because we all make mistakes, the key is to learn from it and never fall for it again. Some other people will never learn from it, they are so brainwashed that they think this is the best thing ever, there is really no point to proof them wrong either, let them be happy giving part of their money away
This post and the comments agreeing with it demonstrate the same level of ignorance that doctors rightly complain about when patients think they know more because they Googled some stuff.
Permanent life insurance is not an investment product — it’s just that life insurance is tax-advantaged and, thus, can benefit a financial plan greatly. The insurance industry didn’t come up with this — research shows this to be true.
Permanent life insurance is not a fit for everyone, so people must understand when to buy it and when not to, as well as how much they should purchase if any at all. Even the screen grabs the author chose to disclose speak to conditions under which it can be good for a buyer, yet the author chooses to pretend that the product itself is at fault for his purchasing too much, too soon. No. If you had debt and not enough savings, then that wasn’t the time to buy it, or at least so much of it. At a later time, or in a different amount, the case might have been different.
It’s also foolish to complain about what the cash value is after a short period of time as though we’re talking about day trading rather than insurance. The author spoke of seeing the illustration, so he also saw that the cash value would be lower in early years and increase in later years. Why would that be the case? Simple: because it is INSURANCE. As soon as the first premium is paid, the insurer is on the hook for the whole face value, so why the hell would the earliest years not go to paying into the death benefit first and then more into the cash value later on? The longer one has paid the premiums, the less the company is on the line for if a claim is made, and since permanent insurance guarantees a payout, it behooves insurers not to be caught holding too much of the bag. That’s why premiums are high — so that the insured get closer to covering the full cost of coverage as they pay into it. In order not to get hit with not enough money to cover claims, insurers invest the premiums and the best ones pay dividends to policy-holders that increase both the benefit and the cash value. This makes mathematical sense. It isn’t a hustle, just a feature of the product that makes it affordable for the insurer and more useful for the insured.
Lastly, as no one should discuss neurology seriously who does not understand how it works, people should not discuss financial products in this amateurish way. So-called gurus who denounce permanent life insurance are never actually insurance licensed themselves. They have taken no exams and cannot explain how the products work or why. Thus, they offer such folly as “buy term and invest the difference,” because they understand investments, but not risk products. Ask them to explain any type of insurance at all — life, health, home, car, etc. — and they’re likely to think the better play is to go as cheap as possible and put money into the market to get some magical returns that never truly come to fruition over the long haul. You cannot understand life insurance from someone who is not licensed in it, you cannot understand investment from someone who has no formal training in it, and you cannot understand neurology from someone who is not a neurologist. Apparently, a neurologist cannot grasp this simple point.
Understander,
Here we go again. Insurance salesmen always trying to get the last word in on a physician site. I won’t let it happen.
1. We all agree with you, “Permanent life insurance is not an investment product” indeed. However, it’s as an “investment” that this product is almost always sold. That’s the way it was sold to me. In fact my insurance broker called it the: “best investment you will ever own.” [cringeworthy] Judging by the story after story of individual physicians reporting a similar experience, I’d say my experience is the norm, not the exception.
2. The cash value is negative in the first few years (first 15 years in the case of my policy) largely do to the commission. You know that, or should. There’s a much more nuanced explanation to that involving paying the annual renewable term and building cash value in the policy. But I won’t get into that here. I suspect you already know that or you can google it if not.
3. Finally, to your last point. The complexities of permanent insurance requiring expert knowledge are a bug, not a feature. Those complexities favor the insurance agent and company, not the insured. The concept of “insurance” (ie. risk pooling based on probability) is not rocket science or brain surgery, and could be understood by a Second grader (homage to Allan Roth). The fee structures, ROR, death benefit, dividends, paid up additions and commission tails complicating permanent life insurance took me months to understand what I own. If you are too risk averse (or have maladaptive psychology) to invest in the equities markets, then go buy permanent life insurance. No problem with that. There are worse decisions you could make with your money. Better than blowing it on cocaine and hookers for sure (homage to Dr. Dahle). But just know that the odds are you’ll be paying more (in the form of commissions and insurance co. profits) and earning less over the long term from these insurance products.
Do you disclose to your clients your commission on the sale of these products? I bet not, and I bet I know why.
Hey man, I made no claim that I had any financial knowledge prior to purchasing whole life- again I trusted my buddy, a licensed CFP working for a very reputable insurance company that advertises on TV and has AAA ratings. They told me this was a good financial move for me, and that it was an investment, and showed me the illustrations but despite the obvious loss on the first few years of the policy, told me it was a good idea, and I signed.
you’re right, the product it not at fault- it is the insurance companies that sell it to people like me where it is totally inappropriate. I hope that my article prevents other hard working docs from being screwed like I was, and only buy whole life when it is appropriate- having a disabled child and hence a need for a permanent policy, needing it as “keyman” insurance for your company, or having a large estate to pass on. Well, my kids are healthy, I don’t own my own company, and I don’t have a large farm or $11million to pass on to my kids upon my death. Hence, whole life the product was not intended for people like me. My buddy, and the insurance company that taught him to sell, used whole life insurance as a vehicle to legally steal my wealth.
“As soon as the first premium is paid, the insurer is on the hook for the whole face value”
The same is true of term, yet it has a far lower cost. Which is why it is a better product.
That’s ridiculous. Getting a license to sell insurance clearly does not magically make someone understand it. Just look all the agents in this thread that think whole life for young doctors with 7% student loans who aren’t maxing out their retirement accounts is a good idea.
Well, their recommendations of inappropriate policies do not mean the salespeople do not understand them.
Raise your hand if you are surprised that after all this praise of whole life, not one of these salespeople has posted a full illustration of one of these great deal policies.
One has offered to join a Zoom but not to put anything in writing.
Why, oh why might that be?
I think that the bottom line is that the permanent death benefit allows one to spend down their assets in retirement as opposed to doing the 4% rule or whatever you are stuck with because you don’t know what the market’s going to do where taxes are going and how long you’re going to live. Less risk, higher retirement income and lower taxes (because you are spending principal). Is retirement income not the end game? The ROR on the cash value is moot.
JR,
No! Your bottom line is all wrong. If you need a volatility buffer for sequence of returns risk in retirement, change your asset allocation or hold more cash when you’re vulnerable. Why is that so hard to grasp? You don’t need to be paying into a life insurance product for 30 years to do that.
You claim:
“Less risk, higher retirement income and lower taxes (because you are spending principal). Is retirement income not the end game? The ROR on the cash value is moot.”
Point by point:
“Less risk”: Probably, but you are assuming your insurance carrier will remain solvent and honor your contract with them over your entire lifetime. This is a fairly safe bet, but nothing in life is guaranteed. You are also assuming you won’t incur a hardship when the policy is immature and have it lapse due to failed premium payments.
“Higher retirement income”: Debunked. The assumptions in the modeling that insurance salesmen use to push this narrative are always cherry-picked to show customers an outcome that creates the most fear and uncertainty.
“Lower taxes”: Money is fungible. Whether you pay money in taxes to the US Govt or fees/commissions to an agent you still net-net come out behind with the abysmal long term low real returns in these products.
“The ROR on the cash value is moot”: Uhhh….. not even sure what to say here. If you believe this to be true, then your understanding of finance can’t be helped. Perhaps the whole life insurance product was, in fact, designed for people like you who lack the understanding or psychological fortitude to invest in markets. I’m not judging you, but making an observation based on your stated beliefs.
Most individuals will come out WAY ahead with a properly constructed globally invested portfolio.
Agree to disagree..my income is higher because I am not concerned about how long I’ll live or what the market is going to do. I’ve given myself permission to spend all of my other money because when ( not if) I fie before my wife, she gets the bucket refilled. If she goes first, I have the cash value that’s grown at about 4% tax free. No worries here Bud. Good luck to you, maybe you’re too young to remember 1997, 2002, 2008… By the way, is this your day job? You should get back to work so you can stockpile those investments. Or maybe this is your guys’paycheck? Seems like you all have a lot of time on your hands. You drew first blood in the ad hominem, just had to slap back a bit.
JR,
I’m a physician.
I’ve lived through 1997, 2002, 2008, and March 2020. Bought equities on the dip each time. I’ve read enough market history to know my wide range of outcomes. Not always roses.
Not my day job.
Not my paycheck.
Your turn.
Have you ever sold whole life insurance?
Did you earn your own commission when you bought your policy?
I hope not, then we will have at least one happy customer who’s not an insurance salesman.
Just a happy customer, well informed by someone I trust. No need here to time the market, I feel bullet proof.
When you’re closer to retirement (or in it) those major corrections are no longer your friend. I have a pot of money I can draw from when markets are down so that my other investments can stay invested and recover (except RMDs obviously). Anyhow, best of luck.
Hey JR, I wish my situation had been like yours. Whole life insurance, despite not being optimal, it would have been nice if I lived in ignorance and had been able to fund this stupid thing and also meet my goals. I think the problem with financial advisors that are actually salesman of whole life to doctors is that doctors made relatively high income with minimal if any medical school debt in the past, so funding a whole life policy with most of the loss being in the first half of the policy was not a big deal.
Unfortunately for me, despite my wife and I making $500,000 at the time, we also had high taxes, high debt load of $360,000, and bought the doctor home so could not keep up with the whole life premiums, and after 7 years was in $31,000 of credit card debt and could not keep up with the payments. Sound like you were a doc at a time where you probably made relatively more money without the crushing student loan debt, and maybe didn’t inflate the lifestyle like me and the wife, and was able to push through the negative returns of the whole life in the first few years without consequence. Likely though the optimal solution for you still would have been to do term and invest the rest.
Or get a SPIA, which I think solves the longevity risk problem much more elegantly than whole life insurance.
The ROR is far from moot because spending a larger percentage of a smaller amount (even tax free) can be a smaller amount overall.
Still waiting for a complete illustration of one of these “good” policies…. If it can show how a young physician would be better off than with BTID, then the salespeople have the attention of a collection of docs.
Rather than continuing to claim that such policies exist, why not show one?
I’ve looked at some “good” ones. The key is mostly to maximize the paid up additions to minimize the commission. But even a “good” one guarantees a 2% IRR and projects a 5% IRR if held until death.
JR,
I am finding it difficult to follow your logic.
By having a WL policy, you are able to spend down “all” your assets before you die. You are able to do this without predicting how long you will live and without using a spending rule.
How does this work?
I could see it almost working in the extreme case in which you know you are going to die today, so you spend “all” your money today.
But of course, spending “all” your money would mean surrendering your policy and spending that cash value as well. If you did that, then the death benefit would not be there for your wife when you die.
Since you expect the policy to be there at your death, I gather you are not surrendering it. So you are planning to spend during your life “all your money, except for a reserve fund, which is in a WL policy.” OK, how large is that reserve fund?
Since you are not planning to spend all your money, except for the reserve fund, today, how do you determine how much to spend? If not some sort of spending plan how do you expect your money, outside of your policy, to last for your lifetime?
Now compare the spending you can afford during your life and the policy death benefit which will support your wife at your death to the total you would have had if you had not bought the policy. You would have avoided the commissions and the costs of insurance for the duration of the policy. The logic of buying term, for as long as you need, and investing the money you save on WL premiums is that you end up with more money.
You say you will, somehow, spend “all” your money during your life without knowing how long that will be. Will your wife also spend “all” the death benefit without knowing how long she will live? Again, how will she know how much to spend each month without a spending rule to guide her?
Can you explain?
I don’t have time to read all of this but I was referencing spending down my other money (not the policy). Again, this is afforded to me by virtue of the eventual death benefit so my wife can start over. Can you amortize your other assets without knowing how long your going to live, market volatility, taxes for a 25 year retirement? No, but I can.
Right. You are spending down your other assets. But how are you deciding how much you can spend each year to make it last for the rest of your life? Apparently not using any SWR. But somehow planning for the amount to be zero when you die, but not before.
How are you doing that?
If you did not have life insurance, your assets would be greater (because you would not have paid all those premiums all those years).
How do you conclude that you are better off with the insurance policy?
My death benefit is 500 K so I can amortize 750K of IRA/taxable money over the next 15 years knowing that my cash value will be 500K in 15 years. Again, if I die, wife starts over. If still alive at 80, tax free cash value to then amortize again. I’ve studied the numbers and it’s almost twice the income off of the 750K with less risk, taxes. Could I have had a bigger pot of money without the whole life? Probably. But income is the end game and, more importantly, peace of mind. Without the life insurance, I don’t have the permission slip to spend down my other assets. Does that make sense or no?
No, doesn’t make sense at all. Holy cow that’s a risky strategy!!!
If you start accessing all that “tax free” cash value at age 80, then you’ll be paying interest to access it. What is your lending rate on the policy? The interest you’ll accrue is going to cannibalize your policy value in no time unless you have another source of funds to pay it back. If you can’t keep up with the interest payments, the policy eats itself, lapses, and you get to pay taxes on any gains (albeit measly ones) made over the previous decades. You really should get a second opinion on your strategy from a fee only CFP. Ad hominems aside, I’m actually genuinely concerned for you and your wife. Well, mostly just for you. Because you’re right, if you die before 80, your wife will get the insurance payout tax free. However, if you both live to 95, you and your wife are going to be eating Alpo using this strategy.
If you haven’t already. Contact your agent to get an updated inforce illustration. Due to the current extremely low interest-rate environment, my original illustration looks very different from my updated one from 2022 — not for the better.
I am sorry it does not make sense to you.
Therein lies the problem with giving advice to people without knowing their personal financial situation. How can you suppose that I’ll be eating Alpo with my wife? You seem to lack knowledge of how the policy works. I have obtained updated ledgers carrying the death benefit out past age 100, the interest is not something I have to service and the income is more than sufficient.
Sounds like you are in the business of trying to scare people into agreeing with your opinion and by the way that is all that it is, an opinion.
Lastly, I find it interesting that you actually own a policy. That doesn’t jive with your vitriol for them.
JR,
As I’ve stated elsewhere, I’m stuck in my policy until my insurance company demutualizes, at which point in time I will surrender it.
No more back and forth from me though. You are entrenched in your thinking, as am I. One of my attendings used to say: “You can’t teach a pig to sing. It frustrates you and annoys the pig.” I’m not calling you a “pig”, it’s just an axiom that applies here. I suppose you feel the same way about me anyway.
Please note: I remain unconvinced that any of the current permanent life insurance products sold on the market today are worthy of my money. The reader can decide how to interpret our conversation if they’ve made it this far into the comments. Speaking of which, why don’t you remove your personal info and post your updated inforce illustration here so the readers can decide for themselves? Please.
Enjoy your life insurance product! But in earnest, please think about getting a second opinion on your retirement spending plan from a fee only advisor. Other than the time and small amount of money spent, there’s no harm in doing that. Your wife and your future self may thank you someday. Cheers!
JR,
No. It does not make sense to me.
You plan to spend down 750k over 15 years. No indication of the sequence of spending or how you will react to inflation. Maybe it is as simple as 50k per year, not matter what happens with inflation? Somehow you have decided this will be enough to cover your needs for that time.
But then it seems to me that you plan to spend the cash value twice if you survive to 80.
If you are still alive then you will start borrowing against the cash value and I gather, letting the interest compound as further borrowing.
When you die your wife will not get the full death benefit you are counting on. Instead, she will receive the DB minus the outstanding loan balance. If she would have needed the full death benefit, because you spent all the other money before starting to tap the cash value, then she comes up short.
You have protected the cash value and DB from market volatility but not from inflation.
Over 15+ years, that is a huge gap.
Or am I missing something?
That guarantee costs you something, but if the guarantee is worth more than the price you pay (primarily in opportunity cost).
Didn’t see where to post it to the forum so I sent it to your email!