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.
REALLY……you wife missed little gymnastics because of life insurance? Life insurance is put in place either to create an estate or preserve an estate. will your parents possibly have an estate tax liability? federal or state? You also said how much your cumulative premium would have been and how much cash value you would have had. Please tell me where you can get non-taxed growth and non-taxed access to the funds. these are available pre 59 12 and also not subject to RMD’s?
The IRR on a properly set up whole life policy is between 4.5 and 5.5%.non taxed have you seen interest rates recently? i assume you agree that taxes are likely to increase…perhaps alot. a few years a medical journal touted using whole life insurance. also, Forbes wrote an article called the Rich Person’s . check it out. You may also want to read a book called the power of zero. written by a C.P.A. you also seem to slam salespeople. really??? I have been to many Dr’s and surgeons. aren’t they also selling something? I appreciate that they were! one time it saved my life. your mistake was not purchasing whole life, but rather getting rid of it. you would have had a big bucket of tax-free money. had you passed away, as most people do, i promise you your wife and children would have gladly accepted the check from the company. no one turns it down.
Of course…Crickets, No Illustrations. Its all hyperbole. It is so easy to show, demonstrate and back test different portfolio construction. But when it comes to Permanent Insurance Products, they can never give you good historical data. What is the cancellation rate or policies written, show us a policy that’s been in place 30 years and what the returns are. Please, quite selling insurance and show us the Illustrations!
see this
https://www.forbes.com/advisor/life-insurance/whole-life-insurance/
from the above article
“In my experience, having reviewed several dozen policies, guaranteed rates of return are often 1% to 2%, with non-guaranteed rates at about 4% to 6% annually.
In one policy I recently evaluated, it would take 35 years, according to the guaranteed rate projections, for the policyholder’s cash value to exceed what she had paid in premiums. Even at the higher estimates from the “non-guaranteed” projections, it would take the client 15 years for the cash value to exceed the amount she had paid in.
It’s unclear what percentage of policyholders get returns closer to the “non-guaranteed” rates.”
ouch
I’ve seen a few bought in the 80s when interest rates were high. They actually did pretty good. I saw one with an IRR Of 7%. Of course, you could have bought a 10% treasury that year too. Don’t expect that from a policy bought today. Expect 3-4%.
Cancellation rates are available from other sources. It’s about 80% over 30 years.
No argument that his wife would have a check at his death. She would however have a bigger check had he properly invested it.
Agreed. THis was my experience with my deceased father’s whole life policy. He had it for over 20 years and then died. My mom got the death benefit but the yield would have been almost exactly double if it had been invested in a broad index instead of in whole life insurance premium. I was astounded by that when I found that out. Yes along the way capital gains would have taken a bite but even after factoring the tax drag it still would have been a significant win with the index funds.
Yes, my wife missed my son’s Little Gym Olympics because of whole life insurance. being $31,000 in credit card debt trying to pay the $28,000 of whole life premiums will force an anesthesiologist wife to have to take more call because her job had the opportunity for her to make more money. I could not afford the policy and it was bankrupting us. Even after 7 years paying into this thing we were $50,000 underwater. Whole life is not an investment despite it being sold to me as such. You are right, now I know one use of it is if I have an estate tax problem. I don’t- my buddy CFP told me it was a good investment.
btw, where you can get non-taxed growth and non-taxed access to the funds and not subject to RMD’s is called a Roth IRA. Turns out my buddy the CFP “advisor” correctly pointed out that I had a traditional IRA he had set up which disqualified from doing the Backdoor Roth since my income was too high. So he told me what you’re telling me, that I should do whole life. what he failed to tell me as I could have transfer my trad IRA into my current 401k and allow me to do the Backdoor Roth. He had an AUM fee, so he was incentivized not to transfer assets out of an IRA to my work retirement plan. He also sold me a VA within the IRA!. So much for him being a CFP. And despite being a smart doctor, I was a stupid financial victim.
Wow. VA within an IRA. The epitome of financial malpractice. Until recently, I too considered the CFP designation to be a fiduciary. Not so. Make sure they are an RIA if they are working with you. Even if they have a CFP, if they are a broker-dealer, then they dont’ have to act as a fiduciary. Too bad the fiduciary rule got thrown out. The investment industry lobby is strong. Not sure why it has to be that way. Caveat emptor!!!
That’s incorrect, Dman. I’m a CFP with a broker dealer and have to act as a fiduciary. I agree that VA’s shouldn’t be used in IRA’s as a general rule. HOWEVER, there are VA’s out there with guaranteed income for life riders in which we can utilize the VA under an IRA as a “private pension” (retirement “paycheck”) to fund monthly non-discretionary expenses. In addition, we would have a separate pool of money under an IRA (retirement “playcheck”) to fund discretionary expenses (e.g. vacations, hobbies, golf, fishing, etc.). In late retirement, this discretionary expense account will most likely be used for medical costs (most likely LTC), home repairs, etc. If it fits within the client’s needs based on their comprehensive financial plan, the practice of utilizing a VA under an IRA should be used when approaching retirement within 10 years or at retirement. Definitely NOT during the accumulation phase ( during our 20’s, 30’s, 40’s) when the returns will be dragged down by the fees of the VA. The most important fact is that financial planning varies greatly by individual and no blanket suggestion/strategy holds true for everyone (except for maybe contributing enough into your 401k to receive the full employer match). A talented CFP will dig for information……and then dig again before making any recommendations. All the best, Dman.
But you’re now “paying twice” for the tax protected growth.
The use of the VA is NOT for tax protected growth. The VA is being utilized for income payments for life. With folks living longer in their retirement than their working years, running out of money in retirement is becoming a real problem. Not to mention, most folks base their retirement quality of life on two social security checks coming in for their entire retirement. Well, now that the majority of households are dual income households, both social security checks are pretty healthy. When one spouse dies, the “smaller” of the two social security checks goes away (short version of the actual calculation). A VA can be triggered at that time, start the income payments for life, and replace the lost social security income. AGAIN, blanket suggestions and criticisms are not helping people. There will be many people that read this article & the replies that think, “Huh…..I better stay away from whole life insurance (or annuities)!” when it can actually be a great fit for them. Financial planning is an individual process. I think we should also mention that White Coat Investor will try to sell you their financial planning package as soon as you click on the notify/subscribe button. So, is Whitecoat Investor really acting as a fiduciary?
I understand. But you’re still paying for it even if you don’t want/need it.
Remember this blog isn’t written for “most people.”
That’s precisely the reaction people SHOULD have about whole life and most annuities. Most policies ARE inappropriate for the vast majority of my readers (and other people too). Sorry if you don’t like that, but it’s true.
I understand you’re trying to sell your services, White Coat. As I stated in my first reply, after completing a comprehensive financial plan in which it is determined that the client has a real exposure to running out of money in retirement, then a VA with an income for life rider becomes a viable option. If the client doesn’t need it or want it, of course you wouldn’t put a VA in place under an IRA. Run a Monte Carlo on a couple (both age 67) in which both will receive $2500/mo each for social security at FRA, $500,000 saved for retirement under an IRA/401k, withdrawing 4% per year for RMD’s (rule of thumb calculation for RMD’s), and then stress it with an early death at 75 of one of the spouses in which an additional $2500/mo (on top of the RMDs) needs to be taken out to replenish the lost social security benefit. Let me know how long the the $500k will last for the surviving spouse. Then you’ll understand why a VA with an income for life rider is a viable option under an IRA. Neither you or any other money manager can guarantee a paycheck for life in this scenario. Annuities (which are part insurance product) are used to shift the longevity risk over to the insurance company. AGAIN, a VA with a guaranteed income for life rider is NOT for everyone, I don’t recommend it to everyone, nor do I recommend investing all of your retirement nest egg in one. Your blanket comments show your true motive (selling your financial planning package) and lack of knowledge of the financial planning hurdles affecting the majority of the population. In fact, I’m now convinced that the doctor telling this story is not real.
What services do you think I’m selling? I mostly sell ads, but we’ve got books, online courses, and a conference too. But no need to sell VAs or loaded mutual funds here thank goodness.
You’re in the wrong place if you think this audience needs VAs of any kind, much less inside a retirement account.
Michael,
I’m glad that you act as a fiduciary for your clients. Not all CFP’s do. Does it have to do with the issue of ERISA and managing ERISA assets like 401K assets. Does that create a mandate to act as a fiduciary? Trying to understand this.
The VA in an IRA seems to be needlessly complex. I suppose that someone who only has limited IRA assets and no taxable account may have a need to guarantee the income. But I wonder in the scenario you proposed of 500K IRA, how much income can come out of that considering the fees involved in the VA. The money that comes out of the IRA is subject to ordinary income too. It would seem to me that the VA would have a hard time beating an balanced portfolio of index funds, say 50/50. I agree that the funds are subject to market risk but so is the VA. Is the VA guaranteeing 2%? Is it higher? That (2%) could be fairly easily duplicated with bonds and stock portfolio mix.
The reality is that most people reading here will have a much more substantial investment portfolio (hopefully) by that time in their lives.
In terms of longevity risk, I plan on a SPIA to deal with that, coupled with a liability matching portfolio ala Bill Bernstein.
Projected and held for 50 years 4.5-5.5%. But for the first 5 years it tends to be negative, for the first 10 zero, for the first 20 perhaps 2% etc. Guaranteed 2% even if held 50 years.
If there was a way to upload a picture or photo I would be more than happy to show you how a properly Indexed account out performed the S&P.
It can be done on the forum and then a link can be pasted here. Otherwise, the only way is to send it to me by email (editor (at) whitecoatinvestor.com)
But I’ve done this in several posts on the site already. Good luck finding one that outperforms the S&P long term. Never seen one.
Hello? You can share the link, what happened? Yeah, just talk… like everybody else here who claims WLI is better than term life and investing the difference, when it’s time to show proof, NOT surprisingly, nobody can find one.
I shared my info my the good doctor can share what I shared with him. I for one don’t think neither product is a one size fits all solution for everyone. First WL is the most expensive policy, the ROR is only between 2-4%, once the insured passes away the CV goes back to the insurance company. Second Term pays out is only 2-3% because most people live longer than their policy, why rent your policy when you can own it and have tax free benefits associated with it. Third I am an independent agent, I find the best solution for my clients not what is best for the company, I’ve always put the mission before commission because my family as been taken advantage of from previous Insurance Agents. I joined the industry for one because I didn’t know anything about and two I didn’t want what happen to my family to happen to someone else’s family. If you would like I can send you what I sent the doctor and you can try and post it yourself, I have tried and also reached out to someone to see if they can point me in the right direction to do so.
You only get the death benefit or the cash value. What you take out as cash value, your heirs don’t get as death benefit. One pool of money.
You rent the policy for the same reason you rent a house-it’s the right move for something you only need for a while.
I’m not surprised your family was also taken advantage of by insurance agents. It’s pretty common.
Here’s the link to the file you sent me:
https://www.whitecoatinvestor.com/wp-content/uploads/2022/02/SP-500-Index-and-IUL.jpg
Looks to me like it doesn’t include dividends on the investment side, a classic technique used by IUL salespeople. It also appears to be a hypothetical on the IUL side, another classic technique. Not to mention it doesn’t start with premiums, it starts with cash value. But you don’t pay cash value. You pay premiums. Not impressed.
It’s not a hypothetical its a comparison of someone who put $250k in a Mutual Fund or another variable account and no longer contributed and someone who put $250k in an IUL and no longer contributed to it to let the CV build up for a tax free distribution. The definition of insurance is a transfer of risk which is why they can guarantee no loss on your initial investment. If you have a level death benefit when the insured dies the CV will go back to the insurance company. If the death benefit is increasing the beneficiaries will get both the death benefit and the CV tax free. An IUL will not pay out dividends because you are able to get a higher ROR on your money. This was an IUL with a cap of 25% ROR.
The S&P 500 return did not include dividend payouts.
Which company sells a IUL with a GUARANTEED 25% cap rate year after year? The cap rate is subject to be changed by the company at any time at their own discretion.
The IUL did not include the fees that is charged every year, therefore the return CAN be negative after fees.
Such a flawed chart, totally useless.
Of course it didn’t show dividends it is showing as if you are just allowing it to accumulate wealth, not for the distribution. I never said a guarantee of 25% growth because the market isn’t guaranteed to do 25%, as you can see the ups and downs of the market. You are guaranteed no loss on your initial investment, as you can see when it is a variable account you are subject to loss on your initial investment. That is true the company definitely can change the cap rate, or you can choose a company that doesn’t have a cap, the option is up to you, its a very flexible product. If you are looking for cash accumulation with this particular product you would always want to go with the least amount of death benefit to pay less in the cost of insurance so the majority of your premium will go to the cash accumulation. I would rather have a guarantee no loss on my initial investment than have most of my savings in a variable account. The definition of variable is unreliable, unstable and unpredictable, when someone invest in insurance based products they are transferring that risk over to the insurance company to ensure no loss on their initial investment.
How convenient, take out the dividends so the chart looks better for the IUL. Meanwhile does the IUL pay dividends yearly to the policy holder too?
Name one company that has a guaranteed 25% cap rate year after year.
You CAN lose principal after fees that’s not shown here. What are the fees again for this IUL?
Again no dividends have been taken out with this comparison, it just merely shows the accumulation of wealth and how if the market tanks your money is protected. Again I never said the company guarantees 25% year growth year after year because as you can see the market goes up and down and there is loss, versus an IUL where there is a floor, either 0%, .75% some are even 2% and so even if the market is in the tank you either don’t lose any money or earn a ROR(0%) where zero is your hero or the company may guarantee you a ROR of .75% or 2% every year even if the market is in the tank. Whether its a variable account such as a 403b, 401k, mutual fund, etc. there are accounts associated with those, just like an insurance product their are fees associated with those as well, the big difference is the fees with an insurance product could be significantly lower than most products and experience a higher ROR
Dividends are NOT included in this chart for the S&P 500
Please note I asked which IUL company guaranteed 25% CAP RATE for the last 22 years straight as shown on your chart, I did not write 25% return. You still can’t come up with one company.
Another 2 column needs to be included, the total premium paid against cash value. And the yearly fees.
And how convenient that the chart ends at the bottom of a bear market in 3/2020, when in reality 2020 was a big win year for the S&P 500
Oh also, looks like S&P 500 is inside a tax advantaged vehicle and IUL is in a after tax account, the chart did not factor in the tax savings when money is put in before tax .
At the end of the chart 25% tax on the total amount is ridiculous, first off why take it all out in one year? Second we have a progressive taxation system, federal tax alone will not be 25%, what state you are emptying the entire account from?
From Jan 1998 till Dec 2020 S&P 500 has returned 485% with reinvested dividend. Why is your chart so different??? Your S&P 500 did not even return 100% in the same period of tine
https://dqydj.com/sp-500-return-calculator/
Tax advantage and an after tax account is the same thing and mutual funds are a tax now account. Im not sure if you have noticed but taxes are going up, depending on what tax bracket you fall into will determine how much federal taxes you will pay. The the 25% is the tax bracket that you will fall in if you did decide to take it all out, in case you didn’t know back in the 1970’s and 80’s that same scenario would fall into a 70% tax bracket. At the rate that America is falling into debt, I am certain that taxes will most definitely rise. Also it protects you against volatility in the market, as inflation rises that same $100 won’t buy you the same amount or same thing that $100 would buy you a few years previously.
Mutual funds aren’t an account at all, they are an investment that goes inside an account.
I cant reply to the last comment, but that is if the client reinvested their dividends. The comparison I showed was a basic comparison of someone investing the $250k. There are alot of companies that will offer a 25% cap, Nationwide being one, and Pacific Life, especially in a IUL with no caps. Some clients have received a ROR of 61% with Pacific Life last year some earned a ROR of 10% it just depends on what strategy you are using. Again the IUL is a flexible product and able to fit most of our clients financial goal, although there is no one size fits all product, the IUL is the flexible and reasonable way to accumulate wealth. There are plenty of books you can read, don’t take my word for it. May I suggest Money. Wealth. Life Insurance, The Retirement Miracle, The Financial Pocket Knife, The Family Bank Strategy. These are a few that I would suggest, if you havent already read these. Like they always say, you want to spread lies put it on the internet, you want to hide the truth put it in a book!
Danielle B,
Oh my goodness. Please stop. We aren’t going to fall for your sales garbage here. The only wealth an IUL policy builds is for the one selling it. From reading your and your fellow insurance brokers responses I’ve concluded you are all either totally dishonest, really bad with a finance calculator, afraid of the stock market, or a combination of all the above.
Your fictional example (which I’m sure is exactly what you show to you victims–err clients) shows the S&P compounding at 2.74% annualized and your IUL product at 9.69% annualized. This example is total rubbish and you know it. Is this what they coach you to show as you’re training to peddle your IUL’s? Do you even understand why this is pure fiction? Please show an ACTUAL POLICY that’s performed this way. You can’t because they don’t exist. You don’t show any policy fees. Your assumed cap rates are laughably high. Your S&P returns exclude reinvested dividends.
If you care to stop deceiving your clients, then you may wish to show them the real rate of return on the S&P during this time with dividends re-invested is actually 8.92% annualized. Your unrealistic example is classic, using a cherry picked time frame (three consecutive down years right at the beginning of the sequence), imaginary returns (which actually prompted laws against insurance peddlers using numbers like this in their official illustrations), and leaving out dividends from the non-IUL side. You guys should be ashamed of yourselves. The ‘advisor’ I fired did the same thing–cherry picking scenarios and time frames to create fear and sell insurance garbage. Are you dishonest, ignorant, bad at math, or all the above? My goodness it’s infuriating.
I have a PacificLife IUL policy. It’s TERRIBLE! Fees are TERRIBLE (over $2000/yr when annual premiums are only $18,000. I only have it because it’s funded 100% by my employer.
Here are my current cap rate options as of 2/22/2022:
1 Year Indexed Account 8.00%
1 Year International Indexed Account 8.50%
1 Year High Par Indexed Account 6.50%
1 Year No Cap Indexed Account [threshold 8.50%]
1 Year High Cap Indexed Account 10.50%
2 Year Indexed Account 19.00%
5 Year High Par Indexed Account
My IUL policy has delivered 7.71% per year since it was started in 2016. Seemingly not too bad until you realize that the policy was in force during the greatest S&P bull market of all time and the actual S&P returned an annualized 17.34% during that same period.
You sound like you’re trying to help here, so I’ll give you the benefit of the doubt that you’re not willfully lying. But your clients are getting unwittingly screwed BY YOU if this is what you sell them. I feel sad for them. Have a conscience, educate yourself, and stop this nonsense. It’s never too late for you to switch sides and become one of the “good guys”. So many have seen the light and done it before you. Save your clients and yourself.
The more you talk the more I realize you are an amateur sales person. It’s actually a waste of my time to even reply to you. I’m going to stop now since you said your family was also a victim of an insurance agent. Good luck.
$250K in a mutual fund that invests in the S&P 500 but without the dividends? Which fund is that?
What are the annual fees inside this illustration. What is the cost of the insurance?
It’s not an illustration; it’s a chart from a sales brochure.
What it shows is how when the market drops your money is protected from the loss. Its not an illustration because you can not illustrate at 25% the highest that you can illustrate a policy is at 6%. Yes I am one of the good guys because my heart is in the right place and I actually educate my clients, because there is no one size fits all kind of policy. The policy that you have that your employer pays benefits the company not you, which is why its not performing that it should. Some clients with PacificLife have seen a 61% ROR on their policy, because it is structured to be beneficial for the client, not the agent. If you have an IUL and it is not structured to where you have the least amount of death benefit and you are able to put in the maximum amount in there you will not see the benefits of that policy, you just want because it has to be structured specifically that way. Some policies the agent gets paid on how big the death benefit is (term, WL) the bigger the face amount the more the agent gets paid, and plus those are more beneficial for the insurance because one with a term 2-3% will pay out a death claim, so all the money that a client puts into that, they want see any benefit from it, it doesn’t help them while they are living, not unless the Term policy comes with living benefits, it also brings in more money for the insurance company because most of the people that have a term policy out live their policy so the insurance company want have to pay out a claim. For WL its the most expensive type of insurance policy that someone can get, most of the premium will go to the COI and the remaining will go to the CV which is only earning 2-4% ,which isn’t much because inflation was at 7% last month, so its not out pacing inflation. An IUL is for most people but not many will health qualify for it. Most of them have a cap it can be anywhere between 13%-25%, some don’t have caps at all but there spreads associated with those, which do cost a fee, most of them are between 1-2%, so technically if the market isn’t performing then you would lose 1-2% to cover that participation rate, but if you are not participating in that uncapped strategy then you are not losing anything. If you are still paying into that policy then your premium is still covering the COI and the excess is still going to the CV. In order to actually see the COI you will need to run a policy on yourself and see what the COI would be on you, that’s where it differentiate from person to person because it is based on your health.
Danielle B,
I don’t know what your magical mirror is showing you, but NO! You are decidedly NOT one of the good guys. Just because you may want that to be true, does not make it so. You are uninformed or ignorant. Please do me, yourself, and your clients a favor: stop reading crap insurance sales books and instead read books on personal finance and investment. There is a long list of well vetted books on this site that can improve your clients’ lives if you educate yourself and allow them to. What you’ve brought to this comments section is a fantasy world of total insurance rubbish. Thank you for proving the original author’s point that the insurance industry siphons money from its unwitting clients by selling them (and taking commissions on) products they don’t need. Some may never get it, but most of your clients will eventually realize you sold them a terrible insurance product and hate you for life. I can almost guarantee it. The sooner you realize that, the more fulfilling your life will be.
No the sooner you realize that their are good and bad people in any industry the better off you will be. You can’t say that a few bad apples ruin the whole bunch!! I’m very upfront and honest with anything I do, if you think the investors don’t get paid for handling your accounts and that they take money out of your pocket then by all means good sir put your money into those accounts!! I hope you never buy a car or sell your home because God forbid the agent make a commission it would definitely be the end of world for you then wouldn’t it!
You know why you can’t illustrate at 25%? Because these policies are never going to get anywhere near that long term. Long term IUL owners should expect WL like returns, not equity-like returns.
It’s not just “heart” that turns someone into a “good guy.” Lots of insurance agents THINK they’re doing the right thing for their clients by selling them whole life insurance. You also have to actually DO the right thing, which for almost everyone, is to NOT sell them a whole life policy, much less an even more opaque IUL.
You don’t need to explain to me how an IUL works. I know how it works. I still think it’s a bad idea. Thus, those who push it on clients are doing almost all of their clients a disservice. That’s my definition of a “bad guy in the industry.” Doesn’t mean you’re a bad person, but if you get yourself educated on alternatives for whatever you’re using IUL for, if you’re a good person you’ll find your way into either a different line of business of you’ll run your business differently. Over the years, I occasionally have an interaction with someone like this online and not infrequently, six months later I get an email that reads something like, “Hey, you were right. I went and became a real financial advisor. Keep up the good work.” But the insurance companies can recruit new folks just as fast as I can talk them into practicing differently.
No the reason you can’t illustrate at 25% is because the market is not guaranteed to do 25%, just like with mutual funds they can’t guarantee you 25%. Insurance companies are conservative companies so most would rather under promise and over deliver. If you would have read my previous comments I stated that there are no one size fits all kind of solution. If you were properly educated on an IUL you would see that it is one of the best ways to put Insurance on your money. Your life insurance plays into your net worth, so if you are properly educated on how life insurance can help improve your portfolio and diversify it, it can really help in the long run and help finance larger purchases without disturbing the CV growing inside the policy.
I disagree and I think your opinion is biased by your professions. As Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
True to an extent, but Upton Sinclair also stated that ” It is foolish to be convinced without evidence, but it is equally foolish to refuse to be convinced by real evidence.” You have to realize that over the years life insurance changes and gets an upgrade just like everything else, and your premium is based upon quite a few factors, its not just black and white as you are making it seem. If you really want to get properly educated on these products feel free to reach out to me, you have my email. I’m not being biased, if it’s not right then its not right, and I’m not going to sell out who I am as a person for a paycheck, there is enough of people in this world that are sell outs and im not one of them. I guess to understand the concepts that all life insurance offers in general you have to be open minded and realize just like I did that people will take advantage of you and only look out for themselves, but im not going to let it stop me in finding out the truth about a particular subject or matter. You may have think you have done your research and due diligence but you are lacking on a few important parts to how life insurance actually works and with that being said good luck and God bless!!
For the record, the insurance sales brochure you posted is not “real evidence”.
However, you’ve at least convinced me that you have good intentions. I firmly believe you’ll someday think back on this string of comments (probably after a handful of your customers’ IUL policies implode) and have an epiphany that the WCI, et al. were right on this subject after all. Cheers
Oh? Which parts am I lacking?
As a CFP(R), I’d recommend (and am asking PLEASE) you make a complaint to the CFP Board @ http://www.cfp.net/ethics/file-a-complaint . Insurance is an indemnity product. It is there to replace something that is lost….it is NOT an investment. I utilize whole life insurance with my clients to replace lost social security or pension benefits when one spouse dies. I worked hard and spent plenty of money to attain my designation. I don’t need rogue CFPs ruining my credential. Your “friend” should have completed a comprehensive financial plan prior to making any suggestions. This is a shame and makes me furious. On behalf of all the CFPs that are acting as a proper fiduciary, I apologize. I assure everyone reading this or commenting on this story that not every CFP(R) acts in this manner. Best regards.
Michael Basile, CFP(R)
Chicago, IL
I spent 40+ years in the investment business and repeatedly told clients that life insurance was not an investment. It’s only purpose is to provide a death benefit, and then, primarily when you are younger, still have children to feed and educate and/or are still building your retirement savings. Whole life insurance purports to be an investment, but once you account for the cost of the death benefit, agent and investment fees, the return will never equal or exceed what could be earned if you had invested the same money in a low cost ETF. Life insurance has a place in every financial plan, but it is a tool to replace wealth and income lost by early death. It is not an investment.
THANK YOU, finally somebody honest…
DanielleB,
So where are those S&P 500 dividends?
If I didn’t know better, I’d think this article was from the Babylon Bee or The onion! My advice to this doc, don’t quit your day job to give financial advice.
Hi Judi, yeah I’m not quitting my day job, but I want to make sure other docs day jobs are not affected negatively by being sold whole life insurance inappropriately.
Make no mistake, being sold whole life insurance was a poor financial decision on my part, and forced me to sacrifice the quality of care I deliver and rush through patients to try and make more money to keep up with these punishing premiums. Imagine if I was your neurologist, or your mom/dad’s treating their Alzheimer’s, stroke, or neuropathy. If you are in the Englewood NJ area, I might be! Whole life insurance made me a worse doctor, and affected real patients.
I am ashamed whole life compromised the care I give, and if sold inappropriately to other doctors, it is also compromising the care they give, and patients suffer.
No need to respond to anonymous ad hominem attacks that lend nothing to any serious discussion. They’re just being lobbed by another insurance agent whose livelihood you threaten by telling the truth about whole life insurance. I normally delete them but I’m leaving them for this post because it demonstrates so well how the industry works.
thanks Mike, I will. I actually complained to the NJ insurance commission board initially, but I guess I was barking up the wrong tree.
Unfortunately, this deceptive marketing is a standard legal business practice in the industry.
As you have heard in this discussion, the salespeople see nothing wrong with claiming to be giving advice then selling the highest commission products they can. Followed by mocking their victims when they realize they have been taken
How can it be known in advance the convertibility is useless to doctors? I’m not a doctor, but as a new software dev many years ago with a family, I purchased $250k of 10 yr term life which was expensive for me as I barely passed my physical. I did not even know it was convertible, but when the 10 years went by and after a heart attack (the blood tests the ins co ordered were not wrong), I was pretty happy to still be insurable without further medical underwriting as my youngest was still only 8. I guess the reason this is not useful for doctors is they would have the money to get a 20 or 30 year term regardless of current health and they are practically guaranteed to have liquid net worth on the order of the policy amount by the time it expires? I don’t know how much the convertibility cost, but the policy was about 3x the quoted healthy rate of $15/mo, a couple decades ago, I doubt it added that much over the bad health price anyway.
I’ll note the permanent life salesman did tack on a rider which costs me about 25% of the premium which I think is useless. But its hard to dump it, after further issues like bypasses and embolisms.
I agree convertability should be VERY cheap. I mean, they want you to buy a whole life policy. Maybe it should be sold at a discount!
But yea, that’s the reason. You should buy the right long term policy from the beginning so you should never need to convert it. If you’re a resident or a non-doc with an expected higher future income then you face a dilemma to buy an inadequate longer policy or an adequate but shorter policy hoping you can buy another one later.
I bet you can drop that rider. Might as well ask.
Hey John, good that the convertible option helped you out, but could you afford the whole life policy now that you have converted from term to whole? I can forsee that being a problem, although given your health problem it might make sense for you to have had term and the convertible rider.
My buddy sold me whole life and term to 80 convertible just to maximize his commission and line the insurance company’s pockets. I was very health at the time I was sold, and didn’t have a reason to have term to 80 convertible to whole life.
There is a chance that whole life can be marginally better than a savings account. It’s good to have a few percent of your net worth in savings, and a portion of that could be high cash value whole life. Maybe you make an extra 1% on 1% of your net worth. That’s a benefit and not a scam, but a miniscule improvement and not worth the hassle IMO.
Worse than savings in the short run, better in the long run. Obviously dramatically better if you die soon too, but term would have been even better in that situation.
Unfortunately as my case shows there is a chance that you can’t keep up with the $28,000 yearly premiums and after 7 years end up in $31,000 of credit card debt with $180,000 of cost basis and only 130k of cash value, a $50,000 loss 🙁
A savings account in my case would have been hugely advantageous! My wife would definitely like me more now if I had just done the savings account.
Interesting, I know nothing about a lot of this stuff, I signed up through a close childhood friend as well in 2012 around the time we were both finishing college.
I signed up for 100k whole life. and the yearly cost was around $1,250. about to hit the 10 year mark in June.
I will have paid around the 14k-15k mark in total in June, and after all this time I will have a little over 11k in the cash account for the savings. so the amount of money I’ve actual lost at this point is about 4k over 10 years. which breaks down to around $34 a month. which is around the price of my 500k term insurance. at this point the yearly dividends are up to over $400.
doesn’t seem like a total F up to me.
The longer you hold the better your return will be. But even by your calculation you paid 5X too much for insurance, no? I mean if that doesn’t bother you, fine, but I wouldn’t exactly call it a good deal. Especially when there are whole life policies that can be designed to break even in < 5 years.
Hey Jon yeah dude luckily you didn’t get killed like I did. Your case is not a total F up at all, only $4,000 of loss + any opportunity cost of paying too much for the insurance which could have bought term and invested the difference.
after 7 years I had paid $180,000 between me and wifie and only had 130K to show for it- a $50,000 loss! that’s a lot of student loan payoff, could have grown in 7 years in the biggest bull market in US history, night on call for me and my wife, or I could have just gone on a few all inclusive vacations with my family.
Instead I just enriched some insurance company CEO’s pocket and funded his all-inclusive vacations and private jet travelling 🙁
Unfortunately most people aren’t told that whole life insurance is the most expensive type of insurance policy that you can get. Most of your premium will go to cover the cost of the insurance and the average ror on the interest you will earn is about 4% on the remaining portion of your premium. In my opinion its not a very good vehicle to use if cash accumulation is your main goal.
I have read white coat investor multiple times and was completely against owning a whole life policy. I’m a physician, earn a little over $400k a year have no student loans left, and own a single family property with a mortgage of 2.875.
My friend was working with an agent and told me that he was putting in 30K to whole life insurance. I immediately told him to stop working with the advisor. I ended up finding out that several people from my training program were clients of this advisor. I ended up calling the advisor just to see how he would “pitch” me this plan.
One by one, he went over all my questions. He told me it wasn’t an investment, but it was something built on guarantees. He told me that all of his clients do investments, but this is the guaranteed part of their plan. He went over how his clients utilize the cash inside the policies with incredibly low rates. We went over compounding interest and how if I touched the principal in any of my investments I would lose the compounding. He showed me a bunch of numbers on that. We went over actual rates of return vs average rates of return (was always stuck on average before conversation). He talked about lost opportunity costs. I went from wanting to kick him to taking notes.
He explained that by me having a permanent death benefit I would be better off in retirement because I could spend down my assets and use the cash inside the policy during down years. I went through a lot of what I read and he had an answer for eveything. We went over real numbers, and unless his system was rigged, my portfolio performed better with the whole life insurance. This had to do with having a guarantee that there would be cash delivered to a charity or whatever was important to me at the time at my death. I know I would want that.
I didn’t buy any whole life, but the more I read why it’s a “scam” the more I think this advisor is right. My portfolio is really down right now. I’m down a lot. I’m 31 and not terrified, but if I happened to be 75 and needed money, I’d in a bad place. I’d have my cash earning 0, and I wouldn’t want to touch assets that are headed down. What would I do? If I had the whole life, I could dip into that and wait till my portfolio recovered. It makes sense to me when I think of it as someone in retirement. I’m more concerned with my finances when I’m older than I am today. The only thing that’s stopping me from buying it is that I have in my head I’ll be a “sucker”and I was so anti-whole life.
Did the agent disclose his sales commission on the policy?
Your agent sold you FEAR. His arguments/sales pitch is exactly what I fell for when I was pitched a policy. Like many agents, he probably believes in what he’s telling you, but he’s still misguided. I ended up buying that policy 10 years ago and I’ve regretted it since. I still haven’t broken even. The insurance company that issued my policy (which was touted as “paying dividends even during the Great Depression”) was severely financially stressed in 2020, just demutualized, and was bought out by another company. The policy is “guaranteed” only if your insurance company stays solvent—which is a bet on a single company’s operations and balance sheet. Will it work out for you? Probably. But you will probably start to hate this policy right around the time you realize your return has been horrendous and you’re net negative several thousands of dollars.
If you want to tap into your policy savings in retirement, you’ll need to pay interest to the insurance company. Right now, my rate to borrow is 4.4%, which means that if I borrowed against the policy in a down market, I’d be earning a -4.4% on those funds. If the policy lapses in the future, I get to pay taxes on any gains. Awesome! There are just better ways to draw from your portfolio in retirement during market pullbacks: perhaps by using a more conservative asset allocation, bucket strategy, reverse mortgage, etc. When times were really tough and life insurance could have really helped, such as during the Great Depression, the values of whole life insurance did in fact remain intact. BUT, policy holders were regulated on how much they could borrow against their policies due to money supply shortage. So even though policy holders had cash “inside the policy”, it was largely useless to them when they needed it most.
The ONLY reason for you to buy whole life insurance is if you want a guaranteed DEATH BENEFIT. If you want that for legacy, or for charity, or for estate planning, or your small business, go for it. If not, there are better option out there (which have been addressed/debunked by WCI’s “Myths on WLI” post).
Cheers!
Hey Pat no my buddy salesman did not disclose the commission 🙁 Would have definitely made me think twice about buying whole life, but I guess that’s why they don’t disclose it.
There were many life insurance companies that had solvency issues in the Great Depression. It’s a myth that they didn’t.
https://library.cqpress.com/cqresearcher/document.php?id=cqresrre1933051900
You know the only way to win an argument with a whole life salesman is to stand up and walk out, right? Of course they have an answer to everything. If they didn’t they wouldn’t be very successful.
The guarantees have a cost. The only question is whether they are worth the cost TO YOU. I would submit that when most people really understand how it works, they won’t want it. But if you do understand it and do want it, knock yourself out.
“If you want to tap into your policy savings in retirement, you’ll need to pay interest to the insurance company. Right now, my rate to borrow is 4.4%, which means that if I borrowed against the policy in a down market, I’d be earning a -4.4% on those funds.”
Sorry, I’m another believer of whole life. Your argument is a mess. If you borrow at 4.4% you would be losing 4.4 percent of those funds. Ok…got it. But the cash inside the whole life policy would grow because you’ve never touched it. My guaranteed rate is 5 percent. At any time I can access the cash at 5 percent worst case. When I turn 65 I can access it at 3.5 percent guaranteed.
So that’s what I’ll do. What happens if the market is down in retirement by 10 percent..and you pull out your principal? Then you have a lost opportunity cost on whatever your investment could have paid AND you’ll still pay taxes. Your using -4 percent…but you’re paying taxes. You’re paying taxes at whatever rate taxes are. You’ll pay them from another pocket. Also, why is it so horrible to have something that’s not correlated to the stock market? We’re all in the market, but if it’s down…and it’s DOWN..and you need money, where are you getting it from? Your cash?
I’ve had my plan for 7 years. I put in almost $42K and my partner puts in $15K. My plan is loaded up with additional cash (there’s a term for it but it’s slipping my mind) and I’ll be even in about 2 more years. But I got a guaranteed death benefit and cash that’s going up every year. My death benefit is going up too. I can stop paying for it if I want to, but why would I even stop? It just keeps going up. Right now I’m earning squat on my investments, but I’m putting in a bunch and dollar cost averaging and everythign is discounted! Im done working in 15 years max….no matter how shitty the market gets in the future have something that earns me a tax-free rate of return and it’s always going up. I got two kids, and I got a death benefit that I know will be there. I’m not going to be worried about leaving them 0. If I decide I hate them, I’ll leave it to my grandkids instead.
What is the problem here? Sounds like the original poster’s advisor oversold them a policy. Why would you agree to something you couldn’t afford.
I make about $500K and my partner makes $280K…we max out everything (403b for me and 401k for him-back door roths for both of us), and the whole life insurance is the best thing we’ve done because I don’t have to worry my cash will ever go down. If I want to use it, I can use it, and the death benefit will go to my family so I can spend more of my money when I decide to stop working. I don’t think it’s some evil product. I don’t know every little detail about it, but I’ll be stuffing money into it until I stop working.
“My cash doesn’t go down in value” is an interesting way to describe an investment in which you’re underwater. Seems like it did go down.
Glad you’re happy with your policy though.
As far as a death benefit to leave children, term life works just fine for that until you can leave them millions, which shouldn’t be that long when you’re making $780K.
Hi Chris I’m glad that you’re happy with your whole life policy and it seems you were doing much better than I was when I was sold my policy. Yes you’re right you can use whole life insurance as a “buffer asset” as Wade Pfau describes in a lot of his writings. I myself bought something that I could not afford because I was too busy caring for patients and I just trusted my buddy when he said that I should use whole life insurance as an investment. Also he did state that whole life will always give your kids and family a great gift of that death benefit. Sounds like because you can afford the policy you didn’t need to worry about your negative returns in the first half of the life of the policy. After seven years I was $50,000 underwater and was not going to break even for another 7 years even with “paid up additions” (I think this was the term you were looking for). Sounds like your policy is a good one to break even at 9 years. But you have still lost money after 7 years! Seems like you have a cash value of $57,000. What is your cost basis? This is the main problem with whole life is that when you can’t keep up with it and keep it for your tire life then it is a poor financial decision. As I mentioned in my article I was in $31,000 of credit card debt trying to keep with the $28,000 yearly premiums. I also was not doing the back door Roth because my Financial Salesman friend had put me in a variable annuity within an IRA.
So yes, it works for you. It ruined me. And make no mistake From a total return perspective you would’ve done better buying term and investing the rest. To use whole life as a buffer asset like you mentioned in a bear market you are paying a lot of money for that ability as well as the guaranteed death benefit. I myself in retirement when there’s a bear market will draw from bonds and cash and have no need for a buffer asset. None of this was explained to me about the whole life policy and I really wish I had known all this stuff before I signed.
Rikki,
I do feel like you got placed in a situation that wasn’t ideal for you. I blame the advisor, not the product. The advisor had you putting a LOT of your income towards this product and didn’t leave you with room to do a lot of other things. He’s a bad friend. It’s a reason why I don’t do business with friends. If I did I’d be part owner of a restaurant right now and also a salon. I don’t know much about food that’s not Italian, and I’m bald. Lose lose for me.
“And make no mistake From a total return perspective you would’ve done better buying term and investing the rest. To use whole life as a buffer asset like you mentioned in a bear market you are paying a lot of money for that ability as well as the guaranteed death benefit. I myself in retirement when there’s a bear market will draw from bonds and cash and have no need for a buffer asset.”
Maybe. Total return doesn’t help me when I’m retired and the market is a mess. Let’s use today. If I’m in retirement right now, and used the above strategy I’d be in trouble. Drawing from bonds and cash does’t work in this enviornment. Bonds are a mess, and cash is losing money to inflation. This goes back to my point about if everything is down, the cash inside my whole life policy is up. It’s guaranteed to go up.
I don’t have a lot of money in cash. Maybe 6 months. Advisor recommended a full year, but I feel more comfortable with just 6 months. If I really need money I’ll either borrow for my investment account or my cash value in my life insurance. I’m not going to stop the compounding. Most of my money is in investments. I got just about everything going, and I want something that is not going to be correlated. It’s that simple for me.
You’re talking about using cash in retirement? Every dollar in cash is money lost for me. I get 0 on it. Millions of dollars in cash just getting bashed around by inflation? I don’t like it for me. I don’t love bonds in this market either. I’ll pull money out of my cash in my whole life and wait till things recover. I’ll do it over and over again. It works for me.
When talking about whole life as a “buffer asset” you’ve got to consider that you have less of it than you would have of other stuff. You have to look at the whole picture.
For example, would you rather have a $6 million portfolio that went down 17% ($1 million) or a $4 million portfolio that didn’t go down at all right now? Obviously the former, even if it doesn’t have a buffer asset.
In addition while one could use whole life instead of bonds/cash as a buffer asset, there are a lot of reasons not to. I’ve written about this elsewhere but here are a few of the reasons:
1) Need to be insurable
2) Need to make mandatory contributions for years
3) Initial (5-15 years) negative returns
4) Difficult to rebalance
I’m not worried about today. I have very little financial concern today. Most of what I have in my portfolio I’m not touching until I’m done with work. I had very little for the first few years of the whole life plan, but the idea was that it was a mid to long term process. I’m also not touching my investment accounts for years so they compound (I’m fine with leveraging them and have in the past but I’ll keep compounding), and a majority of my retirement accounts I’m not touching without paying penalty and taxes. So that’s not being touched. When I do touch it, I’ll be at the highest tax bracket (wherever that is at the time). I’ll have my roth account(and it’s grown very well since I started it over a decade ago) but that’s market dependant as well.
So, I guess, I agree with you I won’t get to as high of a number, but what kind of rates of return are you using for the investment in your example? Are we using averages or actual rates? I can average 7 percent but one year in retirement with a -17 and my portfolio is in trouble. I can still average my 7 but the actual will different and I’ll feel it.
My actual rate of return is about a 4 percent tax-free rate of return on the insurance. My investments are higher, as I expect them to be. Still, I don’t want to be 70 years old and worry about a 17 percent decline wiping out my portfolio and I don’t want to touch my principal and really screw myself. I’ll probably become less aggressive with my investments unless I use the whole life as buffer for that as well. I’m not sure and don’t know enough about that strategy to speak on it. I do know it goes up every year. I like that now, but I’ll love that when I’m no longer earning my main source of income.
“in addition while one could use whole life instead of bonds/cash as a buffer asset, there are a lot of reasons not to. I’ve written about this elsewhere but here are a few of the reasons:
1) Need to be insurable-I go that part handled. I got the best health rating, spouse got second best health rating
2) Need to make mandatory contributions for years-Totally. I knew this going into it. Advisor told me there was flexibility but I needed to contribute for 10 years but could stop sooner if I added in additional payments. I’m in year 7. I did that, but I’m still adding because it’s increasing my guaranteed return.
3) Initial (5-15 years) negative returns-my actual rate of return is 4 percent. The first few years I was VERY negative, but I knew I wasn’t touching the money. Again, this was a piece of my overall portfolio. It was also a number I could handle with my income.
4) Difficult to rebalance-I’m not sure I understand what you mean here. I look at it as a very relevant way to rebalance because it’s not correlated to everything else I’m doing. I think that’s important. Everything else I have is in the market. I could win big, or I could lose. With this-Im not hitting home runs, but I think I’ll have better options than most when I stop working.
You mentioned this in your response for my other message:
As far as a death benefit to leave children, term life works just fine for that until you can leave them millions, which shouldn’t be that long when you’re making $780K.
I have term! I’m 39 and want to be done by 55. Total annual income will get to a million. I got some real estate as well. I’ll buy more real estate (could also use the cash inside the policy to do that-my loan rate is 5 percent-where am I getting 5 percent if I want to buy a piece of land and don’t want to use cash?). I got two kids. My plan is to stop working at 55 and stay healthy and LIVE. I’ll have a few million easy. I’ll also be spending that down and it’s another reason why I like the life insurance. Give me 5 million bucks and 10 years and if I want to…I could spend it to 0. It’s also a lot easier if my only goal in life is to enjoy the rest of my life.
@ChrisT Where are you getting this 5% loan rate? Also, how much can it adjust as interest rates start to tick upwards? I feel like the insurance companies can always change things on you which is why I’ve always avoided them.
@ChrisT – Where are you getting this 5% loan rate? Also, how high can it go in the future? I feel like these companies can always change things on you which is why I don’t like them.
The 5 percent loan rate is on the the cash inside the policy if I chose to borrow against the policy. You can bring the policy to a few different banks, and you can get an even lower rate. Only issue is, rates are getting higher and the 5 percent is fixed. Can’t go higher.
It’s fixed at 5. So if I keep dumping money in to this policy and I want to purchase a $400,000 property (I’m looking at you, Tennessee) , worst case is I go with 5%. Interest rates on properties are more than 5%. What if I want to buy a piece of land? Or a practice? What’s the going rate? Anyone on here familar with these types of purchases and can tell me what the rate is if I want to buy a plot of land? Am I getting it for less than 5%? After I turn 65 the loan rate goes down to I think 3 or 4 percent. I actually don’t know what the rates are for a land loan but I don’t picture them being under 5.
“But why would I want to take a loan from my own money???” I’ve looked into this with some help, and I keep my money compounding. If I take money out of an investment account I lose the compounding. It’s gone.
Rikki, read what you wrote above-what would be your move if you had a $50,000 opportunity tommorrow? Where would you go? Cash that’s sitting there and losing money to inflation? Would you go to your investment account and then that account loses the ability to compound over time? I have a problem with touching my investments. I dont look at the cash inside my whole life as an investment. If I did I would be depressed because the interest rate is never going touch what I can get on my investments..
BSmith, it’s definetely a locked rate. I’m positive on that. So for the rest of my career I got a worst case 5% loan rate.
5% isn’t particularly good when there are policies out there that offer wash loans.
What is a wash loan?
What is the recommendation is there’s an opportunity and you need money? I’m not saying I have the answer, but I would be interested in learning a better way. Interest rates are out of control. If the rates are higher than 5%, why would this not be a good solution? If you can’t get 5% on a prime mortgage today, you’re not getting it anywhere else. I’m not financing a practice at 5%. I’m not buying a piece of land at 5%. I’m not getting an investment anything at 5%. I have enough cash inside my policy where I could use it and I’m getting a better rate than a bank. How is that a bad thing?
I have the money in investments that would allow me to easily finance most opportunities, but again, I’m not giving up my compounding.
A wash loan could be better, but I’ve never heard of that.
Those who are into “Bank on Yourself/Infinite Banking”
https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
buy whole life policies specifically with the plan to borrow against it. The idea is to give up short term returns and pay some insurance costs in exchange for higher long term returns on their cash. But in essence, after a few years, they can borrow the money at no cost. The key is mostly non-recognition loans.
That means that despite the fact that you have “borrowed money out of the policy” the policy still pays dividend as though you did not. So let’s say you have $500K in there and you borrow out $100K. It’s paying a dividend of 5% and it’s charging you 5% in interest on that $100K. $5K cost. $5K dividend. It’s a wash. That’s a wash loan.
0% beats 5%.
Never heard of that but I think it’s exactly what I have with my plan. I must have a wash loan. If I borrow from my cash value my loan rate is 5% worst case. The cash inside the policy is still growing because I never actually touched it. I don’t think it’s a complete wash, but it’s still an effective use of my dollar to me.
I also know I’m commenting on a page that’s about getting suckered into buying a whole life insurance plan…this is from my last post-and it’s a question…
What is the recommendation is there’s an opportunity and you need money? I’m not saying I have the answer, but I would be interested in learning a better way. Interest rates are out of control. If the rates are higher than 5%, why would this not be a good solution? If you can’t get 5% on a prime mortgage today, you’re not getting it anywhere else. I’m not financing a practice at 5%. I’m not buying a piece of land at 5%. I’m not getting an investment anything at 5%. I have enough cash inside my policy where I could use it and I’m getting a better rate than a bank. How is that a bad thing?
Plus, our economy is not improving. Things are only getting worse. The Feds are going to keep raising rates.
These past two years I was a fan of investment backed lines of credit but the terms are no longer attractive. I’m not able to borrow as much, and I could have a margin call depending on how I’m invested and what I ask to take out…plus, rates are now high on these types of loans. You can’t get a fixed rate. Whole life I got the 5%. This was not an option the first few years because the cash inside the policy wasn’t there, but it’s certainly an option now for me and I’m still not understanding how this isn’t a good move.
It’s not a good move for most because of the long term inferior expected return on the money inside a life insurance policy compared to a properly structured investment portfolio.
Perhaps it is a good product for you if you value having access to borrow against your policy at a fixed rate, are willing to accept the long term inferior expected returns on your money, are willing to wait 10+ years of accumulated payments to generate enough cash value to borrow against, and are willing to accept the risk of your life insurance lapsing if you become unable to pay back your policy loan (or make the premium payments). If those things don’t bother you, then you may find WLI a suitable product for your individual financial goals.
It’s not for me. But I don’t judge you for wanting your policy and liking it. At least you have done your homework and understand your policy. Whether or not WLI is the best ‘financial’ decision for either of us is impossible to know without knowing the future. But the odds based on historical returns greatly favor a financial life without permanent life insurance.
Yeah Chris, lucky for you whole life worked out but for myself, I didn’t want to have to learn all this finance stuff and just trusted my buddy to help me reach my financial goals. It didn’t happen and because whole life as Pat says is not the most optimal way to wealth. it was sold to me to maximize profit for the insurance company, and I fell for it. All I wanted to do is focus on being a doctor and having my “advisor” lead me to wealth. Instead whole life insurance led med to $31,000 of credit card debt. It is so dangerous because whole life policies lead to stories like me, whereas if my “advisor” had stuck to low cost index funds, I likely would not be writing this post and would have avoided credit card debt, financial fights with my wife, and have to waste my time reading finance and not reading neurology.
My buddy when selling whole life cited clients with your experience. I think this makes it even more dangerous, that it can be useful in a minority of people who are knowledgeable like you are Chris. For me, somebody financially illiterate, it was financial napalm.
The issue isn’t that you shouldn’t use the money now if it is your best option. The issue is what you gave up to get to this point. With most whole life insurance policies, that’s negative returns for a decade or more and purchasing insurance you don’t actually need. So it’ s not so much a question of “Why not borrow $100K out of my policy?” so much as a question of “Would you rather have $200K in a traditional portfolio or $100K in a whole life policy?”
What do you need to borrow money for anyway? I find myself investing more and more each month, not looking for new sources of credit. I think that’s the case with more investors and their debt drops as they move throughout life.
If you really wanted to bank on yourself, you should have bought a policy designed to do that. If the concept of a wash loan is a new one to you, I’m pretty sure your policy isn’t designed to do that.
Hi Chris, I don’t invest in “opportunities” as I’m not into real estate, etc, but if I had a 50k opportunity tomorrow, well I would have had 50k in cash ready to deploy. I would definitely not touch my retirement money, but yes would save up cash if it was for a short term purpose.
The point is not that whole life doesn’t have great use later on after you get through the first half of a whole life policy, but that the first half of a whole life policy has great cost and risk! When I had my whole life policy I did borrow against it when my second child was born as my wife took 3 months off to hang with the baby, and she’s anesthesia so was a lot of lost income. However, the interest rate on the loan was 8%! This really contributed to strain as not only was it difficult to keep up with the premiums, but also the interest on the loan against the cash value. This led to $31,000 of credit card debt. It didn’t matter that my cash value was still growing 🙁
You luckily were savvy enough to make the whole life policy work for you. For doctors and other high income professionals building wealth and who want to make it easy, they should not use whole life. It was sold to me that this was the best way to grow wealth and accomplish my financial goals, and instead I ended up in financial trouble despite being a dual doctor couple.
Whole life insurance has a higher chance of torpedoing wealth like my experience than your experience with it. people who not only want to build wealth easily but also optimally have to stay away from whole life unless they really need the insurance. Jim went over the few situations in other posts on those situations where whole life insurance is a way to optimize attaining wealth and accomplishing goals, such as if I had a special needs child or had a huge estate or farm that I was bequeathing on my kids. None of those were my situation. The product was used through my naivety to legally steal money from my pocket to enrich my friend and the insurance company 🙁
I wish that this stuff could only be legally sold to those who have a true need for life insurance their entire life, or who are savvy like you who truly understand and know how to benefit from the product. Maybe I will advocate for a whole life insurance exam you have to pass before you can purchase a policy! If there had been, I would have failed the exam, not purchased the policy, and be ($50,000 + opportunity cost of paying whole life premiums instead of investing + the stupid %5 credit card transfer fee to a 0% interest credit card) richer, and avoided many financial fights with my wife.
I hate whole life insurance, and no doctor should suffer like me and my wife did.
WL is definitely not a good”savings vehicle” period!! It is the most expensive type of insurance plus if you do try to burrow money out of your policy your interest rate is probably between 4-5%, some cases 6%. Which doesn’t really make any sense when you are earning a ROR of 4-5%. If you goal is to save money, have access to it regardless of age, not lose money when the market drops and have a higher ROR an IUL would be the better option for most. Higher ROR, averaging 9-12%, if you do choose to burrow the money inside your account, the interest rate is anywhere between 0.75-3%, some cases 5% depending on the strategy they use. Never have your nest egg in one basket, meaning just in variable accounts, diversify to multiply!!
Don’t you think it’s weird that all of those people who use their WL policies to “bank on yourself” think it’s better than an IUL for that purpose? Might want to ask yourself why that is.
At any rate, your claim that IUL makes 9-12% says more about you (i.e. that you’ve never actually calculated the return on an IUL) than it does about the policy. Go ahead. Send me the in-force illustration that shows ANY IUL policy with a long term 9-12% return.
You know what it is really weird when you actually think about it. The reason why they think that way is because it was the first insurance product that offered that concept and when it came into play in around 1913 it was the best option for most people, especially the wealthy. Which is why people have written so many books on the the subject such as “What Would The Rockefeller Do” & “Money.Wealth.Life Insurance “. Then the 1980’s came along and the birth of the universal policies that came into play, they were ok, but just like any new product it has its flaws, when the 1990’s came around thats when the IUL came into and it has got better and better as the years have passed, which is why books like the “The Financial Pocket Knife” & “The Laser Fund” have been written. As far as those illustrations go notice I did say average but I will be more than happy to share them with you, please provide an email address!
editor (at) whitecoatinvestor.com. Not that hard to find on the site. Just go to the contact form.
An IUL “Averaging 9-12%” is pure fiction. We’re talking lala land. In fact, regulators passed AG49 to prevent insurance charlatans from illustrating IUL policies at 12% because that was deemed deceptive marketing (let alone creative phony math). Danielle B, if 9-12% on an IUL is what you show your clients, you are committing fraud. An actual IUL will likely generate a 4-6% return over the life of the policy. Full stop.
Danielle B, I’m guessing math wasn’t your best subject. Please stop ripping off your fellow human beings with horrible insurance products that you don’t seem to actually understand.
First you can’t illustrate a policy at that rate any way let’s be real, you can’t predict what they market is going to do, policies are illustrated between 5-6%, so no fraud is being committed. IULs do average 9-12% ROR, a UL on the other hand will average 3-5% ROR. Math was actually my favorite subject in school, so if I were you, I wouldn’t assume anything about someone, because you know what they say when you assume something, because quiet frankly if you knew how these policies work, wouldn’t be having this conversation. To be completely honest, CPA’s find these types of policies to be quiet fascinating because they can leverage the tax codes that come along with these types of policies to help their clients achieve financial independence!
Danielle B, I realize I, nor anyone else, will convince you of anything here. However, your lack of understanding (perhaps drinking insurance company Kool-Aid) on the historical return of these insurance products is concerning. Perhaps you didn’t know this, but the reason you “can’t illustrate at 9-12%“ is because it doesn’t exist in real life. So please stop trying to reiterate it. 9 -12% return on an IUL only exists in an insurance company advertising brochure. There has NEVER been an IUL policy that returned 9-12% annualized returns (geometric mean) over the life of a policy (>30 years). Post one here if you disagree and claim otherwise. Do not post an insurance brochure. Post an actual policy that performed this way. If you can do that, you will convince me. But I’m not worried. That kind of policy performance doesn’t exist.
No they don’t. And when you send the illustration, I’ll show you how to calculate the return on a life insurance policy.
You’re right I can’t show you a policy with that kind of return because it was first introduced in 1997 so not quiet 30 years. Nor did it perform that well when it first came out, if you would have read my previous comment I stated that fact, because just like with anything else you got to work the kinks out if you want it to do what it is intended to. But what I can show you are policies from the past 10 years or so that have done extremely well that have averaged those ROR, just for the record im not trying to convince anyone of anything but share the knowledge I have attained while working with these types of policies and books that have been written on them
We’ll see. Go ahead and actual in-force illustrations for policies bought in 1997 and policies bought in the last 10 years. I’d love to see one with an IRR of 12%.
yeah, I have a tough time believing an IUL ROR is 9-12% given the market return in the past century is at 10%. Danielle, even if an IUL policy says it is “invested” in a total stock market or in the S&P, the returns on IUL cash value are only based on the returns of these investments, hence your returns are “indexed”, but not actually getting the return, of a particular investment. Insurance companies will put a “cap” on your returns, so say the cap is 10%, yet the S&P 500 that you are indexed to goes up 20%, you only get a 10% return that year on your cash value. There is also a “participation” rate, so say your IUL has a participation of 50%, if the S&P goes up 10%, your IUL cash value only goes up 5%.
You might have missed the “cap” and “participation” rates on IUL policies because in brochures they focus on the downside. You might have a cap of -5%, and if the index goes down 10%, then woo-hoo! you only lost 5%. of if the participation rate is only 50% then woo-hoo! you again only lost 5%. But since the market on average keeps going up, these cap and participation rates hurt rather than help investors.
I think you misunderstand how IUL cash value can’t beat the market after fees, cost of insurance, and cap/participation rates. No worries because I obviously from my post was equally as ignorant because its so confusing!!! Amazing how much you learn about life insurance after losing $50,000 to it. Many of the illustrations that you are seeing in IUL brochures focus on times periods where the cap/participation clauses helped on the downside, such as the GFC, and also don’t count the fees and cost of insurance.
Most of the books you mentioned are likely just advertisements for IUL’s. I recently read a book called “Heads I win, Tails You Lose” that was just an ad for whole life insurance. I think the author made that title to sound like “Head I Win, Tails I Win” which is a more well know book written by a WSJ columnist.
In fact, I believe they added the term “indexed” to these policies given index funds were becoming so popular, so to fleece people into buying these policies, they will see the word “index” and think IUL are a good thing.
I totally understand where you’re coming from. But the issue isn’t that you got into horrendous policies (you clearly did – and I’m sure your agent sold you a bill of goods while making a TON of money), the issue is that you weren’t able (or trained) to figure out that there is a vast swath of ways to make policies, and these should be considered in our decision making. I’ve had my own polices since around 2015 and my experience is night and day from yours… however, during my two years of research and study prior to pulling the trigger on my first policy I came across the gamut of scams, IUL peddlers, and poorly promised dreams. In fact, even then my first policy wasn’t fully optimized to what I know now, and I took a several thousand dollar hit on the chin. My breakdown of the industry is as follows:
70% of whole life policies are atrocious and should never be used for cash value strategies.
20% of policies are marginal at best (but they really look attractive when compared to the atrocious policies)
5% of policies are mediocre or a little better than mediocre.
3% of policies are visibly better than mediocre
2% of policies are an absolute game changer and a revolutionary way to grow and protect wealth.
Now, if you look at my unscientific breakdown, who do you think gets paid the most? The 70% group followed in succession to the least paid in the 2% group. The 70% group easily makes 5x more than the 2% group plus they get all the cool trips and bonuses, but the policy from the 2% group will be phenomenal and on a totally different planet than the 70% policy, so much so that you’ll be inwardly angry if you got duped by a 70%-er. My info here is based simply on knowing how the base premium, term riders, and PUA ratios work and how insurance companies pay agents based on them (the base premium being the lion’s share of commissions).
I personally wouldn’t do any of the 98% options and it took me years to break the code here. At best, part of the 20% group along with the 5% and 3% groups will potentially offer some good info on their sites (think Infinite Banking geared sites that sound great as they are described), and they may even speak the same language as the top 2% group, but it always comes down to the numbers. After having 100’s of thousands in my cash value and using this strategy as a full-time real estate investor, I became an agent and wrote my first policy in 2021 as more of a passion project than anything else based on your exact scenario. It’s a major decrease in pay for me and takes a ton of time from my “cash cow” of RE investing. I preach the 2% and have open invitations to compare with any other agent in the US (they won’t because I’d expose how they get paid! Lol), and I love working scenarios with regular people – especially the haters. 😊
The problem in society is too many people don’t know how to analyze these scenarios, and life insurance is confusing as it is and often hidden behind the agents invisible wall called “the client doesn’t know what the client doesn’t know” (he doesn’t want you to see most of what he’s selling you and can easily hide it – in fact, time and time again I talk to people in policies and they don’t even have or know where to find their illustration. Wow!)… the 2%’ers will show you everything and you’ll know exactly what you’re getting – and maybe it’s not for you, that’s totally fine. We should just be educators presenting facts (like I did as a Special Agent). You’ll also need to compare it to alternative savings vehicles <<< another place our society lacks in financial muscle. Numbers, numbers, numbers, and apples-to-apples comparisons with ANY strategy using the same amounts of capital is the key to smart financial moves.
Sorry you got bamboozled. I hate it, but I see it all the time and most would be better served not to be in a policy since they’ll likely run into the bottom 90% agents out in the wile lurking at Starbucks. If you run into one of the 5 or 3% groups, then that should trigger you to wonder why theirs was so much better than the others. This is what got me digging in big time early on when I caught an agent in a lie. The 2% group will have an open invitation to compare to any other agent out there and will also encourage a prospective client to get multiple illustrations in the learning process.
It’s about the numbers, numbers, numbers! (and sorry for any typos!)
If what you say is true, then shame on the entire insurance industry for allowing the 98% of “bad policies” to exist in the first place. The scenario you described sounds awfully similar to a pyramid scheme where the bad policies (80% of which are eventually surrendered) fund the good ones.
As a person who thinks in probabilities, I’ll take my chances with buying term and investing the difference. Finding, and trusting, the “2%” of agents selling the so called “game changer” policies sounds harder than hunting for unicorn blood.
Hey Bankonomics, thanks for the comment but I definitely have to agree with Pat O, shame on the finance/insurance industry being allowed to sell that 98% inappropriately. I would argue the people appropriate for permanent insurance is even smaller than that. I just wanted to be a doctor and not waste time away from learning neurology doing finance, and permanent life insurance was the perfect predator for somebody like me. The SEC should protect people like me and all other financial victims out there. I propose that permanent life insurance should only be sold to people who have a disabled child, a huge estate or farm that will be given to heirs, and need “keyman” insurance for somebody who owns or is a partner in a business. Then it has to be approved by a CFP government official to make sure it’s kosher. I’m sorry that you got screwed but congrats on writing yourself a more optimal policy and utilizing the infinite banking concept. That should be another sec sanctioned legal use of permanent insurance- if you are able to write your own policy, the. That’s legal!