It takes 5-15 years for a typical whole life policy just to break even to where your surrender value equals your premiums paid (not counting the time value of money or inflation.) If you count inflation, some policies never break even while most take decades to do so. This brings to mind an important question:
How many people are still holding their policies after 5, 10, 15, or 20 years?
Luckily, this data is tracked by the Society of Actuaries and is demonstrated in the chart below.
If we use an 11% lapse rate in year 1, 9% in year two, 7% in year three, 6% in year four, and 6% in year 5, that means that 1/3 of folks have surrendered their policies within just 5 years, long before breaking even. If we continue on to 10 years (using a 5% lapse rate for years 6-10) then we’re down to an overall lapse rate of 50%. Using an annual 4% lapse rate for years 11-20, the overall lapse rate is 60% at year 15 and 70% at year 20. By year 30 (using a 3% lapse rate for years 21+), about the time of retirement for someone buying one of these upon residency graduation in their early 30s, 77% of those who purchased their policies no longer own them.
Combine these lapse rates with the likely returns on a whole life policy, and you see the devastating effect that whole life insurance, overall, has on the financial situation of those who purchase it. You can get returns of 2-5% per year on whole life (before inflation) if you hold it for your whole life. If you hold it for less (especially less than 20 years) those returns are likely to be terrible. Witness this illustration run for me on a Guardian Whole Life 99 policy for a healthy 34 year old male in New York. It has a $500K face value and an annual premium of $10,180. Perhaps not the greatest WL policy in the world, but certainly one that is sold to physicians frequently. Here’s what it shows:
| Year | Guaranteed Cash Value | Annualized Return | Projected Cash Value | Annualized Return |
| 5 | 35,977 | -11.4% | 39,245 | -8.5% |
| 10 | 92;531 | -1.7% | 108,349 | 1.1% |
| 20 | 235,498 | 1.4% | 330,396 | 4.4% |
If you assume your return will be somewhere between the Guaranteed scale and the Projected scale, it’s easy to see that 50% of whole life purchasers are, at best, just loaning money to the insurance company for free (and more likely throwing away thousands of dollars) and 70% are, at best, still losing money to inflation. Conclusion? Overall, whole life insurance salesmen are doing a terrible service for their clients.
Does that mean there is nobody who is benefiting from buying a whole life policy? Of course not. But it seems to me that 4 out of 5 of these policies are being sold inappropriately. Buying a permanent life insurance policy is a life-long commitment. The vast majority of purchasers don’t seem to be interested in that type of financial commitment, despite the consequences.
If you’re an insurance agent and want to be able to sleep at night, you need to be making sure that your clients who buy these things are really those who will hold it their whole life. If you’re an investor considering purchasing one, you might want to ask yourself what makes you think you’re in the 20% who will be happy enough to hold on to the thing for 30 years, much less the 50 or 60 years remaining to you? There’s really no excuse for a 30 year lapse rate of 25%, much less 80%. Insurance agents should be ashamed of their industry for this damning statistic.
What do you think? Is a 33% lapse rate in the first 5 years and an 80% lapse rate in the first 30 years acceptable? Why or why not? Comment below!
That’s actually a “generous” illustration from that company. Mine was illustrated to “break even” at year 16.
On the face of it, these lapse rates suggest a real problem for the insurance industry. Behind the face, however, are questions that I don’t have answers for. Among them are to what extent has an insurance company used the lapse rate to calculate the premium being charged? If I’m pricing a whole life policy in a competitive environment, I’m going to want to know how infrequently I’m going to have to pay a death benefit before I offer that policy for sale. Since I can’t print money when a claim appears, I have to have reserves and surplus available. Another question which I don’t see addressed yet is whether or not any of those lapses are of group term life insurance. If such a policy is in place as a result of my employement with X company, clinic, hospital, etc., and I move on to another, it is usually lapsed. If the numbers above include those contracts, that will skew the interpretation of the numbers. I hope this is a valid question.
First, the chart is whole life only. Not term. Not universal. I believe those are found in the report (follow the link.)
You’re right that the pricing probably includes this info. That doesn’t really change the problem. You know it’s a terrible investment if you don’t hold on to it for longer than at least 20 years. But most people don’t. So selling it to most people is hurting them financially, no matter what the price.
I don’t know that this is a “real problem” for the insurance industry. I doubt these statistics have changed much over the years.
***
You know it’s a terrible investment if you don’t hold on to it for longer than at least 20 years.
***
But whose fault is that, really?
Have you seen the turnover of the average mutual fund? Most people don’t hold investments for more than 3 to 5 years. They buy high, sell low. Or, get scared when the economy crashes or they simply need the money when the stock market (and economy) are in the dumps because they just lost their job and… they need money.
Housing. Most people refinance their home after 5-7 years and pay extra interest, points, closing costs, etc. for the privilege. Or, they take on a 30-fixed mortgage when they’re fairly certain they’ll move in 5 years. Dumb move, but you can’t force people to think and you can’t force people to think long-range.
That’s not the insurance company’s or the agent’s fault. That’s the customer’s fault.
There are lots of potential negatives with whole life. But considering insurers are really hurting right now and their dividend rates are at a 30-year low, 4.4% projected after 20 years is pretty good (for what it is)… which is what you have to keep in mind.
Also, something seems a little off about the way these lapse rates are being reported. At the rate people are lapsing, you’ll end up at more than 100% after 30 years, which is impossible.
Most investments don’t come with a 50-100% load like WL insurance. A mutual fund at worst might be 8% (and you’re a fool to buy any mutual fund with a load) and a house is perhaps 15% round trip.
The lapse rates look fine (I mean they’re bad, but not erroneous) to me. It works out to around 80% at 30 years.
You are comparing apples to oranges. Whole life insurance is not an investment! Got it? Now, let’s say you start a mutual fund with $5000 and a year later you die, how much does your family get? Now take the same amount of money and put it into a whole life policy and you die the next year, your family will get a whole lot more than $5000. That’s the difference.
You’re seriously replying to a 14 month old comment.
Yes, I’m well aware that whole life insurance isn’t an investment. Now get your colleagues to quit selling it as one. If people didn’t want the investment, all you’d sell would be term and guaranteed universal life – those are the true insurances.
Let’s use your $5K example. Let’s say I bought a term life insurance policy with a $5K premium instead of a whole life insurance policy. Now my family gets 10 times as much as they would have otherwise. That’s the difference.
By the way, this post is about the fact that the vast majority of whole life insurance policies are surrendered before death. How do you justify defending a product with that sort of record?
Oh, I just thought of something else. If folks like yourself are suggesting people dump their whole life policies, then the lapse rates become a self-fulling prophecy.
This happened in the late ’70s and throughout the 80s when A.L. William’s VP sat in front of Congress saying whole life was a crappy investment, which was then put into the FTC report, which was then shown to clients to “prove” whole life was a crappy investment. Which then led to a marked increase in term insurance sales for A.L. Williams and an increase in lapse rates for whole life.
But, you left something out of the lapse report. This part:
“Larger sized policies, face amounts greater than $100,000, have more volatile lapse rates during policy years 10 through 25. These policies are more likely to be surrendered or converted during retirement or mature at older ages”
Translation: people are converting their cash values to annuities or drawing income from them, causing the lapse.
Those larger policies also have much much lower than average lapse rates in the early years, which suggests they’re using them just as the salesmen told them to. Interesting.
I hope you’re right and that a significant portion of the WL policies are being converted to something better, but I’m skeptical given my interactions with real doctors who have purchased real policies. A sampling can be found here:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
Of course, even if converted to something else, chances are good the initial purchase was still a mistake.
Those lapse rates are for permanent only in this case whole life. Why do you think the pricing for guaranteed no lapse UL is so much higher than just a UL premium? It’s bc of risk that they might actually have to pay some death benefits. I imagine current pricing and current dividends take into consideration the known lapse rates. This was the problem with ltci. They thought everyone would lapse that as well. Frankly dividends should be astronomical given the lapse rates. Just shows you how much goes out in commissions and fees etc.
These policies are designed/priced to cause a large portion of the policies to lapse over their course. While the insurance company makes money from the payment of premiums, when a policyholder lets his or her policy lapse, the insurance company never has to pay the death benefit or any cash surrender value (which has likely all dwindled away from nonpayment/loans). Although premium payments have flowed into the company for years, nothing ever flows out… well except for commissions to the agent who sold you the policy.
I have a variable whole life insurance policy that was sold to me as an idea of LIRP (LIFE INSURANCE RETIREMENT POLICY). I was told the loan rate would only be 3%, as opposed to say tax rate of 20-30%. At that moment I thought if nothing else this would be a good way to pass money to kids without inheritance tax. This policy has a premium of 2k a month. I started this 5 years ago. So I have invested 120k in it. It’s value is around 160k now with surrender value of 140 ish.
So I’m happy with how the policy is growing but kind of really unhappy with the idea of LIRP. at 3% interest rate the money I take out first year will be taxed at 60% by end of 20 years. 90% at 30. Plus being male I may die before my wife, in that case she will anyway get it tax free and if kids get it after her death they would be taxed anyway.
Should I get out of this policy (I can afford it), would I come out ahead if I just buy index funds like spy with it and pay 20-30%tax on it vs an indefinite loan Apr of 3%.
Plus if I decide to get out, how should I do it?
Wci has posted about both of your questions In the past, how to get out, and if you need to keep with the policy.
Do you have a need for permanent benefit?
It sounds as though you are risk tolerant which goes toward two parts:
Buy term and invest the difference (but you actually have to invest the difference), and using whole life as a stable function of your portfolio (pseudo-bond allocation). If you are bringing up spdr, you have thought those two parts through, however.
First, no such thing as a variable whole life policy. It’s probably a variable universal policy. It’s pretty clear you didn’t get all the details before jumping in, which is unfortunate, but nowhere near uncommon. Your lack of understanding of the tax consequence of other “retirement plans” like a 401(k) and a taxable account probably also contributed to your decision (also unfortunate and not uncommon) But now you’re in it, so it’s a different discussion. You may find this post helpful:
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
Second, despite being invested relatively aggressively presumably in this VUL, you’ve had a return of something like 5.2%. Not terrible (especially for a life insurance policy), BUT, in a period of time when the US stock market has returned 19.44%. So yes, you would have been better off the last 5 years in stocks. Will you be better off in the stocks the next 5, 20, or 50 years? Nobody knows.
Thanks for putting this together.
Can anyone comment on this type of insurance vs the infinite banking or be your own bank methods? They are touted quite a bit, and I know a lot of people are buying the story.
Tom
Here’s the bit on Bank on Yourself/Infinite Banking. Like whole life in general, it isn’t the dumbest thing in the world to do, but it’s benefits are highly overrated.
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
Wow. Thank you.
Both lirp and infinite are selling strategies to get you to buy permanent insurance since you likely aren’t originally interested. Doesn’t change the conclusions. Only positive in my view is that typically at least they try to overfund the policy so it performs better.
I believe actually there were variable whole life polices at one time. Not sure if they are still available so might want to check the actual paperwork. It will be tough to get good advice on it bc they are so uncommon. Might want to try bogleheads.org or a service like James hunts.
Maybe those were the ones that didn’t accumulate a cash value. Never actually seen an illustration.
There is a few over at bogleheads that did. It will have cash value. Not likely worth researching. If I were guessing I’d say the person does have a vul but wanted to be clear that such an animal has existed.
Yes, Variable Whole Life policies did exist.
The premium and death benefits were guaranteed to a certain period of time. After that, at a certain age, rates were recalculated.
If things were on track, your premium would remain the same. If not, the premium rate could be increased substantially.
John Hancock was one of the carriers that sold those policies.
Not surprised to see those disappeared.
1) A lapse rate is a client-decision. I’ve seen people lapse policies that they absolutely shouldn’t have. This isn’t necessarily the agent’s fault. People are horrible at saving and even worse at strategizing insurance. It’s no surprise a lot of them lapse. People who lapse @ year 5 or later, even on poorly-designed policies, as long as it’s from a decent mutual company, are often making an awful decision… often promoted by “advisors” who don’t understand the benefits of the contract at that point.
So if your post proves anything, it is that people make stupid financial decisions at the behest of people that hate whole-life and dog it even after a lot of the negatives are in the rear-view mirror.
2) Of course your money placed in safe $$’s has a chance of losing to inflation. I could worry about that with my low-interest debt acceleration or bond portfolio as well (especially my LTT’s with high principal risk). This is nothing unique for nominally-safe investment options. This is just part of the game. Losing is a matter of degree. I’ve seen the equity markets lose HEAVILY against inflation depending on the decade you look at. Since loss is relative to degree, and high degrees of loss are exponentially worse than low degrees of loss, nominally-safe money has a role on our balance-sheets.
3) Is your rate of return adjusted for the cost of term insurance that one does not have to incur to obtain a given amount of coverage? I assume it does not, as none of your analyses that I’ve seen have adjusted for the cost of your preferred 30-year term insurance.
4) A big reason dividend rates have lagged “projected” rates is because the bond market has retreated significantly in yield. If you really want to assume that a WL policy is going to perform below projected rates, you might want to realize that this could likely be a 2-3% bond rate environment. These lagging rates don’t occur in a vacuum. You must account for a reasonable opportunity cost.
5) You say “don’t mix insurance with investments” on a regular basis, but you recommend “SPIA’s.” These are essentially the exact mirror image of Whole Life, and you still recommend them to your readers. You’re not being consistent.
6) This appears to be a poorly designed policy. You can design policies for maximum cash value, and, when properly adjusted for term insurance, actually has a nice RoR @ 20 years. It’s called “blending.” You should educate yourself more on it. http://www.theinsuranceproblog.com is a good place to learn a bit.
7) The bond market makes us accept S-T yields to achieve principal protection. WL Cash-Values tend to better-mimic L-T yields, and have L-T guarantees, but still give you principal protection of your cash-value.
There’s a lot lacking in your analysis, which is sad, as so much of the rest of your blog is so good, IMO. A few other things to note about how you talk about life insurance…
A) YRT/ART is often extremely desirable for term insurance as-opposed to your recommended 30-year level. I can show you “buy YRT and invest the difference” against 30-year level for young people and it will surprise you, methinks.
B) Waiver of Premium is often a very efficient way to secure disability protection (obviously-limited on term policies, as it is). The cost per unit of Total Disability protection is often quite reasonable, without all the pesky disability underwriting, and it allows you to get above-and-beyond the amount of disability protection you would other-wise be limited to when doing only pure Disability Insurance as your protection.
Sorry to be all insults, but this is a subject I think you need correction on. If you weren’t as spot-on with so much other stuff, I wouldn’t even bother. Take it as a compliment :).
LTT’s should be LTB’s, as in Long-term Bonds.
My bad.
1) I agree. People sometimes make bad decisions. It’s probably not possible to get the surrender rate below a certain level, and it’s not always the agent’s fault. However, that level shouldn’t be anywhere near 80%. Keeping a whole life policy you’ve had for a long time can also be a good move. That cut off could be as early as 5 years at times, depending on the policy.
3) Term insurance is so cheap, ignoring it has a very minor effect. I’m now about a decade away from financial independence. If I were contemplating a $500K face value whole life policy, I suppose I could reduce one of my term policies by $500K if I bought it. But what is the cost for a 10 year level term policy for a $500K 10 year level term policy? Just $189 a year. That’s unlikely to be the difference between this whole life policy being a good idea and it being a bad idea. Agents love to use this factor to make whole life look better in comparison to a more traditional investment, but they usually project out the term insurance far longer than it is needed by someone with a decent savings rate. I’ve seen it projected to age 80 or 90 before, which is ridiculous. If you really want life insurance when you’re 90, of course you’re not going to buy term.
4) I agree. Bonds are likely to have relatively poor returns going forward, whether I buy them directly, whether a Vanguard mutual fund buys them, or whether NML buys them. This is the main reason that whole life purchasers going forward should not expect the returns that those who bought a policy 30 years ago got.
5) Forgive me. But nearly every time I mention SPIAs I mention them as an exception to a general rule. One issue with insurance-based investment products is that it isn’t “If you’ve seen one, you’ve seen them all.” If you’ve seen one, well, you’ve seen one. Most of them are terrible products designed to separate dollars from clients. But occasionally I see one (and one might be an annuity, a whole life product, a VUL or IUL or whatever) that looks a lot better than the vast majority. If you see that as inconsistent, well, I can live with that.
6) Not sure what policy you’re referring to. It’s interesting to hear agents describe every other policy except the ones they design as “poorly designed.” I find it hilarious that I run into agents all of whom think their pet product is awesome and all the ones anyone else likes are terrible. The IUL guys think VUL is terrible. The VUL guys think WL is terrible. The WL guys think IUL is terrible. The annuity guys think life insurance is terrible. If I just asked a majority of insurance agents which products were terrible, I’d come away thinking they were all terrible. I’m familiar with blending. I’m also familiar with ways to increase IRR. But yet I still get doctors coming to me with policies that have definitely not been designed to maximize IRR. Instead they’ve been designed to maximize CTA (commission to agent). Now I’m sure you’re one of the apparently very few good guys out there doing the right thing for your clients, but apparently you’re pretty rare.
7) Bonds and insurance are different. I don’t find the cash value/principal protection in the first five years of an insurance policy to be very attractive at all. An awful lot of that principal just goes “poof” the second it is put into the policy. There is no doubt that insurance provides some guarantees. But I find the cost of those guarantees to be unattractive, as a general rule.
A) I agree that annually renewable term can be pretty attractive, especially if you become financially independent well before the end of the term. Perhaps I should give more consideration to it. Freeing up those premium dollars to invest earlier in life could really boost an investment portfolio. I don’t know how easy it is to get an ART policy where the premiums are guaranteed (even if increasing) versus unknown, but I’m not sure I’d be a big fan of unknown future premiums.
B) I agree it’s possible that waiver of premium could be an efficient way to secure disability protection. I disagree that not being able to get enough disability insurance is that big of a deal. Most physicians can buy enough disability insurance to provide a pretty awesome standard of living, no matter what their income. I doubt the WOP riders are nearly as good as a really high quality individual disability policy with regards to terms and definition of disability, however, but it might be as good as something like the group policies often offered by employers. The point is that it is very difficult for even a relatively educated consumer to compare the two to know which is the better option. In my experience with financial products, simpler is usually better. Separating your investments from your life insurance from your disability insurance generally allows you to get the highest quality and the lowest prices. Are there exceptions? Almost surely. But adding in complexity usually only benefits the agent and the insurance company.
Those aren’t insults. I get plenty of those too.
Whats also funny is that agents seem to ignore that a current illustration also assumes that most of the polices will lapse/surrender. The moment the lapse/surrender rate decreases, the dividends will also decrease further. Thus i highly doubt the insurance industry has any interest in decreasing the lapse rate. The idea that it is the fault of other promoters is laughable at best. Just check out the long term care insurance experience when lapse rates arent low to see how the insurance company reacts (in this case they are allowed to increase premiums). Also you might want to check out the Japan experience with insurance companies during a long low interest rate period. It will give you a good idea how to value the guarantees. The reason disability riders are cheap on permanent insurance is because they are unlikely to pay off. The definition of disability is such that if would be pretty hard to collect compared to any disability policy that is discussed on this site. It isnt a free lunch that they throw in there.
A lot of advisors give awful advice telling clients to lapse a policy 5-years in. This is the fault of the advisors advocating lapse, not the insurance agents… though many missell policies so you’ll have that.
WoP does have a different definition of disability in a lot of cases, and doesn’t have a risidual/partial benefit, but, as you mentioned, it’s cheap extra coverage when you could be bleeding a lot of money due to a sickness/injury and medical bills. I’m not calling it a free lunch. I’m saying there can be some good value there for additional coverage, as opposed to the “scam” a lot of “advice” is telling us. Yes, get full disability insurance. AND get WoP on your life insurance.
I don’t need WoP on an insurance policy that costs me less than $100 a month. I can cover that with an emergency fund. Insure against financial catastrophes. Self-insure everything else. Insurance companies aren’t charities. On average, you’re better off not buying insurance if you can afford to self-insure.
Jim,
Your problem is that a lot of little mistakes in analyzing whole life have built up to essentially one big mistake. Once you remove all those mistakes and properly analyze a PROPERLY structured WL contract (yes, they do exist… just cuz every agent says they’re better than others doesn’t mean some are not correct) against it’s most reasonable alternatives (investing in the bond market and/or CD’s, and/or paying down low-interest debt), it is a better option for a LOT of people than simply relying on term (I love term insurance… LOVE it… so I’m not dogging it here).
Re: Term insurance. Sure, if you want to get a 10-year level term policy, it’s $189. But, for good reason, that’s not your advice for a lot of young, healthy, to-be doctors. Locking in life insurance early is a great idea, whether 30-year level, or a good YRT contract. Interesingly, the BEST priced term insurance I’ve ever seen was for a guy who would have paid 3 times more for a 10-year level policy than the OYT built into his PROPERLY STRUCTURED WL contract!! 🙂
30-year level is the easiest to measure the cost of when calculating IRR of a WL contract. It’s about 1/10 of the premium of a base WL policy of the same death benefit. Even more of a base UL (obviously). This is significant on the 30-year IRR of a WL contract. About .5%. That’s a big deal when you’re looking at bonds/cd’s as the comparatve asset class.
There is a lot of disagreement about products in the insurance industry. Surely, this is going to make it tougher to trust someone, but it doesn’t mean that there isn’t a CORRECT analysis. It just means it’s difficult to find, at times. I appreciate you wanting to shield your clients from bad advisors, but giving bad analysis to do so isn’t helping. It’s obfuscating the facts. But most of your advice is spot-on so, as I mentioned, I’m only picking on this because I respect what you are doing here.
You are adding nothing new. An overfunded, or blended, or early high cash value has been discussed by him many times. Sure its better but not worth doing for 99% of the people here unless they want a permanent death benefit and realize doing so likely means giving less money at eventual death but gives you some security in exchange. You know why these “mysterious properly structured polices” are better, because you have reduced the amount of garbage in the policy…ie the whole life part. You know which promoters actually are the most likely to get you to you to inappropriately cancel your whole life…..insurance agents…Happens time and time which is why they needed to create rules about churning. When i wanted to get out of my whole life contract, i visited over a dozen agents for ideas and guess what EVERY single one of them wanted me to dump what i had and purchase a new one from them. It will happen again in my view with whole life as its returns drag and ULs “look better”. The industry could teach its agents to start off only selling these “mysteriously” great polices and even require disclaimers for the client when the policy isnt setup correctly to prevent this problem but it doesnt. That isnt by accident in my view. Additionally, if it did, and if people actually kept these things, then dividends would fall like rocks (more so then just currently). You also dont need to compare this to bonds or cds and it certainly isnt guaranteed to perform as well as them either. You must keep the policy in force for your entire life which for the majority of people who qualify for any decent rate will be much longer than the time period until retirement. If you are required to invest over that sort of a long time horizon (which you are with whole life) then thats a greatly reduced return compared to stocks. Those differences in percentage really add up over the decades. I dont believe WCI is the one obfuscating the facts.
Rex, this used to be a non-issue when endowment contracts were allowed. You could buy a $100,000 policy, and in 10 or 20 years, you knew the minimum you could get ($100,000), the insurer could pay more, but at least you knew what you would get. It was difficult to pull something over on someone because there was a very clear guarantee of what would happen.
Then….regulation. Insurers have had a change of heart, partially driven by fear of regulators creating more strict regulations on cash value policies (which is their bread and butter), and partially because they don’t want to run into problems with people suing them over MEC’ed policies.
Result: a lot of agents that don’t know what they’re doing. A few that do. WCI creating many posts on why whole life is crappy.
I actually agree with you. Most insurance agents are terribly trained. A few know what they’re doing and can design a policy well. But that doesn’t change the fact that once they understand how they work, most people, including docs, don’t need or even want even a well-designed permanent insurance policy.
I’ve addressed the “myth” that whole life should be compared to bonds here in Myth # 23:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
If I’ve got to hold something for 50 or 60 years to get my returns, then I’m comparing it to an investment I’m going to hold for 50 or 60 years- that’s stocks and real estate, not CDs. How much does a 60 year CD pay these days anyway? Exactly.
As far as using a 30 year term to look at the WL IRR, I disagree that is the right thing to use. Think about it. Take a typical doc who comes out of training at say 34 years old. He then spends 5 or 6 years maxing out retirement accounts and sending everything extra toward his loans. Now he’s 40. He expects to be financially independent at 50. He now has the choice of investing in index funds in a taxable account, or buying a cash value insurance policy. If he only needs insurance until he’s 50, and he already owns all the life insurance he’ll ever need (because he bought it as a resident at 30) why “bake in” a 30 year term policy’s costs into the IRR calculation? It’s not insurance he’d buy at all, and if he did, it would be 10 year term. Does it have value? Sure. But not nearly as much as the premium. At any rate, as I mentioned above while 0.5% might matter when comparing to bonds, it doesn’t even come close to making up the difference between expected whole life returns and the expected returns of more appropriate long-term investments such as stocks and real estate.
But like I’ve said many times, if you (or a doc) understands whole life (or VUL, or IUL) and still wants it, then by all means go buy it. The problem I have is when docs buy it (or more likely, are sold it) without understanding its downsides (one of the most significant of which is lower expected returns than they can get elsewhere).
You suggest my analysis is flawed and that someone I’m doing readers a disservice. I would suggest those doing doctors a disservice are those selling them permanent insurance policies inappropriately and without pointing out all the downsides (and why would we expect them to, since their very income depends on them NOT doing so?)
Look around on these threads- Where are all the doctors who have had whole life policies for 10, 20, 30 years and love them and want to defend them? In over 3 years blogging I’ve run into only one doctor who is glad he bought his whole life policy, and he didn’t even know what his return had been! I had to calculate it for him! It was so rare I wrote a blog post about it (which also pointed out he would have been better off over that time period in treasuries, much less stocks.):
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
I can go to the Bogleheads forum and find hundreds, thousands, perhaps tens of thousands of millionaires who did so by earning a decent living, saving a good percentage, and investing in boring old index funds. Yet it is very hard to find someone who did the same thing using life insurance policies. Any objective observer has got to wonder why that is.
Dammit. Long post got deleted. I’ll try some other time. In the meantime… good day. 🙂
Sorry. I know how frustrating that can be. You might try writing them in Word then cutting and pasting if you have something you spent a lot of time on.
I was looking at the laps rate report published by Society of Actuaries, it shows that lapse rates for Term, Universal, Variable policies are also high up there. Could you elaborate on that?
I view the fact that the rates are similar for universal and variable policies as the same issue as with whole life. These are permanent policies designed to be held your whole life. A 70-80% lapse rate is totally unacceptable in that situation.
But the term policies are likely a different situation. Some may be people realizing they have the wrong policy or reaching financial independence and canceling. But the point is that the policy isn’t designed to be held forever.
Back in 2011, there was a death in my family, and it produced a small inheritance. We looked at putting money aside in venture capital, oil and gas MLP’s, REIT’s and permanent life insurance.
We ended up splitting the assets towards a new home, venture capital and a 5 pay whole life policy. Our home value blossomed. The venture capital did extremely well. The whole life insurance ended up doing a little better than what was shown. All told, I feel pretty lucky.
Looking over the comment section in different posts, I can’t help but chuckle a little bit. I appreciate your point of view. I also appreciate your patience with the trolls and with folks with other viewpoints. While I like the idea about getting at the cash value and limiting taxes, I think I draw the largest satisfaction knowing that this policy is done and will grow with dividends. I like knowing that I can make available to my kids & grandkids the same as what was provided for me.
Lastly when I reflect over my decision 6 years or so ago, I don’t think about the whole life too much. I mostly thank whatever guiding force kept me away from oil and gas.
Glad it all worked out well for you. Surprised to see the policy slightly outperformed projected. Most of those bought in the last 20 years have performed a little less than projected due to falling rates.
I’ve been rereading your life insurance posts, and found a small discrepency. In the graph you included at the beginning of this article, “Figure 2” includes both whole life and term etc insurance lapse rates. If you want to isolate out Whole life, you need to look at “Figure 5.” Don’t think it would make a difference in the ultimate analysis, seems like the chart is roughly the same, but just wanted to point that out.
Thanks!