I've explained elsewhere how the vast majority of physicians and similar professionals should buy life insurance, namely buy a 20-30 year level term policy or two. On rare occasions, someone may want or desire a permanent death benefit, meaning that your beneficiaries WILL get the death benefit when you die, no matter when that might be. Obviously, most term life insurance policies never pay anyone anything, because they don't die during the term. But if you absolutely need a death benefit no matter when you die, the cheapest way to get that is through a universal life insurance policy known as a “guaranteed no-lapse” policy (rather than the more commonly and often inappropriately sold whole life policy). Sometimes you need to buy a “no-lapse” rider to go with it. A policy guaranteed to pay out is obviously going to cost more than one that is probably not going to pay out. But how much more? Let's take a look.
Life Insurance “Returns”
I asked Larry Keller, an insurance agent well-known on this blog through guest posts and comments, to give me the best no-lapse guaranteed universal life policy he could find me for $1 Million for a healthy 30 year old male in New York. He suggested the PruLife® Universal Protector Life Insurance Policy. With this policy, you would pay a level premium of $3434 per year from age 30 until age 120 (if you live longer than that you get to stop paying premiums and STILL get the death benefit-what a deal!)
A 30 year level term policy from the same company would cost $745. Let's take a look at the “return on the investment” of these two policies.
If you die in the first few years of either policy, your family obviously makes out like a bandit. That's why you buy insurance. You're betting you'll die sooner than later. But what if you die in the 30th year of the policy? What kind of a “return” is that on the premiums paid?
For the term policy, you plug this function into Excel: =RATE(30,-745,0,1000000,1) = 19.74% per year return. So basically, any time you actually collect on a term policy, you've earned an incredible return on your “investment.”
For the GUL policy, put in this function: =RATE(30,-3434,0,1000000,1) = 12.37% per year return. That's still a pretty nice return on your money.
Naturally, those returns look pretty good. The reason why is that you're not very likely to die before age 60. In fact, the life expectancy of a 30 year old is to live to age 81.1, probably longer for a healthy 30 year old. Obviously the return on that term policy if you die at age 81.1 is a big fat negative. What would the return be on the GUL policy? The function would be =RATE(51,-3434,0,1000000,1) = 5.67%. That's a much more modest figure, and seems quite reachable for an insurance company with five decades to invest your money, even with business expenses and profits taken out.
By the way, if you live through 2 or 3 broken hips and mercifully keel over at age 120, your return is 2.25%.
Why does any of this matter? Well, if you're going to consider “investing” in a life insurance policy (which I recommend you don't do), you need to remember that aside from the investment aspect, you're also getting a death benefit, and need to subtract that out prior to any calculation.
Whole Life “Returns”
Now let's compare three different life insurance policies from the same company. We'll use Metlife since they offer all three types, at least in New York. Again this is all standardized to a $1 Million face value for a healthy 30 year old male.
- 30 year level term: $909 per year
- Guaranteed No-Lapse Universal Life: $4101 per year
- Whole Life (standardized to a policy where you pay every year of the policy similar to the GUL): $8230 per year
So in reality, you're spending $4101 a year on the death benefit, and “investing” $8230-4101=$4129 a year.
If you look at the guaranteed cash value on this policy, after 40 years, it will be $521,000. What kind of a return is that? 4.98%. At 10 years, the return is 9.16%. After 70 years, the return would be 2.83%. I was surprised to see that the guaranteed return declines over time. I wondered why that might be. The return actually seems pretty attractive, at least in the first few years. But you have to remember that with Whole Life you get either the cash value OR the death benefit, not both. You can actually take a combination of the two by borrowing from the policy, but the death benefit is reduced by the amount borrowed. The more I thought about it, the worse the idea of buying a whole life policy seemed to be. Not only does Whole Life have a lousy death benefit return, but it also has a lousy investment return. Combining insurance and investing seems to be a lose-lose proposition. At 10-30 years, when the return seems not too bad when compared to a GUL policy, you really should be comparing it to a term policy. After 30 years, when you SHOULD be comparing it to a GUL policy, the investment return, at least the guaranteed return, is relatively poor.
The return for dying at your age expectancy for this GUL policy is 5.15%. For this Whole Life policy, it is 3.02%.
If you cash out of the whole life policy at your life expectancy, thus deriving no insurance benefit, your return on this “investment” was a mere 1.93%.
At least the return was tax-free if you die. The gains are fully taxed if you cash out (unless you cash out in the early years when cash value is less than total premiums paid and thus have a negative return.)
A proponent of investing in a life insurance policy would argue at this point that you also had the benefit of a death benefit while you were investing. I don't see that as relevant to the calculation, since you get either the death benefit OR the cash surrender value, not both.
All these calculations are made using the guaranteed values in the policy. MetLife can, at their own discretion, pay you higher dividends than the minimum guaranteed amount. So it's possible the return could be better than 1.93%. In fact, the illustration they send you using the “current dividend scale” shows both a higher rate of cash value growth AND a higher death benefit. Calculating returns using these values would give the following “returns” at your life expectancy:
- Death Benefit Return: 5.79%
- Cash Value Return: 4.95%
Better, but not exactly exciting, especially if there's any significant inflation in the next 5 decades.
Conclusions
The more you mix investing and insurance, the worse the deal seems to be. Most readers of this blog need life insurance temporarily, and should cover that need with a 20-30 year level term policy. A few may need a permanent death benefit, and should use a guaranteed no-lapse universal life policy to meet this need. I see little reason to use a traditional whole life policy. You'll end up with one of two things: A life insurance policy that costs twice as much as it had to or an investment that ties your money up for decades to provide you with a guaranteed return under 2% (with a possible return of up to 5%).
Stay tuned next week for more on Whole Life insurance, including Bank on Yourself and Infinite Banking Concept. In the meantime, comment below! What has the return on your whole life policy been? Are you happy with your policy, or wishing you'd never bought it? It's a controversial topic, no doubt, so keep comments civil and on topic. No profanity or ad hominem attacks.
A few things id like to point out. With gUL, finding the cheapest price is pretty much the way to do it. Its like term where its fairly transparent with what you get and what you pay. That isnt true with WL since dividends play a larger role in the final equation and each company has a different formula for dividends that makes it next to impossible to completely compare ahead of time. You will only know the return on a whole life policy after your death. Thus i should point out that while Pru may be a good choice for gUL, it might not be for WL (not that im recommending WL in fact far from that position). Unless a company is wrong with how they rate you (which isnt super likely on average), most people who get the best rate will live beyond 81. The rating is directly related to how long you are expected to live. I realize you gave folks the excell formula for determining the return, but any chance you could put up a table with return per year from 78-100 both guaranteed and illustrated? I know thats some work but I think that would help folks. I believe the reason why you see a decline in return towards the end is because there are no longer lapses at that point. Pretty much when you get out that far, most people keep the policies in force until death and thus the costs to the company are higher. Keep in mind that most policies lapse and many lapse or surrender early on for big losses. You mentioned that surrendering is fully taxed. I should add that it is taxed as income and not the current better long term capital gains rate. I should also add that you are likely using 2012 dividend scale and while i dont believe Pru has released their 2013 scale yet, NWM (what some would consider a leader in the field) has and it is less than 2012 and thus the policy will perform even less than illustrated at least currently.
We must determine WHY an individual needs/wants permanent life insurance before we can determine the best way to fund this need/want.
For example, assuming the individual will outlive any term contract they can buy and THEIR GOAL is to provide their heirs with a specified amount of tax-free cash at the time of their death(whenever that may be), then Guaranteed No-Lapse Universal Life is the best way to accomplish said goal.
1) The premiums will be less expensive than Whole Life.
2) We can be more creative in the design of the Universal Life product versus Whole Life.
What that means is that we can pre-determine how long the individual will have to pay into the contract to guarantee the Death Benefit until any age i.e 80, 95, 100, 110 or 120.
For example, a 40 year old physician who only wants to have to pay premiums for 15 years and wants a guaranteed death benefit until age 110. We can design the contract to accomplish that specification.
The individual will pay a higher premium than if they spread the premiums out until age 110 but after 15 years, the physician is done paying into the policy and guaranteed that if they die anytime before age 110, their heirs will receive the pre-determined guaranteed tax-free death benefit.
In this scenario, the individual is willing to pay the higher premium in their working years so that when they are retired they won’t have to use any of their retirement income on life insurance.
In my experience, Whole Life rarely fits the WHY someone is looking to buy permanent life insurance because they are expensive and inflexible.
Another benefit of UL versus WL:
UL provides the policy owner with the scheduled internal expenses/charges of the contract in the illustrations.
WL does not provide the policy owners with the scheduled internal expenses/charges.
The problem with that comment is that nobody actually wants to provide a specific amount of tax free at their non premature death. They want to provide the most money including any tax angle in the equation. Most of the time that will be to use investments other than insurance. The problems with doing it that way are primarily there is no insurance in case you die prematurely. I should also add that pricing for gUL is going up Jan 1st bc of new reserve requirements and the low interest rate environment. Many companies already have those prices in effect.
Rex-
Your comment perfectly illustrates how there is no perfect product, doesn’t it?
The reason why my clients and I have to use a combination of strategies to best achieve their financial goals is because their isn’t ONE product that will do everything. We need/want diversity. We need/want protection and at the same time we need/want growth, we want tax-shelters, we need some guarantees so that we can make their other assets work harder, simultaneously.
For example, disability insurance. Disability insurance is not only income protection but its investment protection as well. We can make their assets work harder if we know that if they can’t work due to an injury or illness that they aren’t going to have to liquidate their investments to pay their rent/mortgage, buy food, and pay their bills. Their entire investment portfolio will be compromised if they do not have adequate disability insurance and become disabled.
As I said above, pay for some guarantees/protection in order to make the vast majority of your assets work harder.
I’ve had a client say to me “I want at least $1,000,000 to go to my kids-it’s for them- I want the rest of my money and they can have whatever is left over.” He already had an adequate amount of term life insurance. This was his goal assuming he was going to live a long time.
In this scenario, with GUL my client will achieve that goal with much better efficiency than using Whole Life.
The White Coat Investor’s article is illustrating that if there is a need for a permanent life insurance death benefit, then no-lapse GUL is better than Whole Life Insurance.
And you’re absolutely right about GUL premiums increasing Jan 1 2013 but even with the increased GUL rates, GUL will still be significantly less expensive than WL.
1. The asset protection from both WL and gUL is horrible but state dependent. Dollars going in arent protected and thus the policy can easily lapse if you are wiped out and thus get nothing. Dollars coming out while living in regards to WL are also not protected. Usually gUL is setup so there is little to no cash surrender value so loans arent really an option.
2. There is no additional diversity with WL or gUL. Insurance companies invest primarily in treasuries and bonds. If those investments go bust then so does the insurance company guarantee. Instead of diversity, one has doubled down on safe assets but added an expensive middle person and purchased insurance. If the insurance component isnt heavily valued by you then its a bad idea.
3. Nobody wants tax deferral unless it gives them more money in the end. You dont get or give more with insurance most of the time unless you die prematurely.
4. People dont need insurance company guarantees to make the other assets work harder since your non premature death is even further away then retirement. It is this investment that should be even more in equities. Not the other way around. You are just losing purchasing power due to inflation.
5. Clients dont say they want at least 1 million. That is what insurance agents pretend clients say. The truth is most clients have real goals for this money which isnt tied to their death. They may want to pay for a grandkids college education for instance. With gUL if they dont die fast enough then that money might not be available when necessary. With whole life, you need to take out an expensive loan. Bottom line, its a bad idea to tie money to your death unless it must be immediately available at that exact moment and not sooner or later.
6. Nobody knows the final cost of WL so while i agree it is likely that gUL will be cheaper for the same death benefit, that all depends on dividends. In the current environment, id bet gUL would be cheaper but it actually isnt known. The younger you are however, the more risky no lapse gUL becomes since if for any reason you cant pay the premiums on time then the guarantees go away and the policy can easily bust.
There is no perfect product but insurance as an investment is one of the worst.
Rex,
I think you may have misinterpreted my comment.
“We need/want diversity. We need/want protection and at the same time we need/want growth, we want tax-shelters, we need some guarantees so that we can make their other assets work harder, simultaneously.”
I interpreted your response to the above quote from my last comment as if you thought I was saying these were reasons to buy perm life insurance.
And for what its worth, my client did actually say he plans on converting $1,000,000 of his term insurance to buy $1,000,000 of perm life insurance to leave to his heirs. I have no idea where he got the $1,000,000 number from or whether it’s something I would advise him to do. I think its just an idea he got from the individual who sold him the term insurance.
I was just using what he said as an example that if he was going to buy perm insurance for that reason, GUL is a better option than WL.
Forgetting for a moment that most people shouldnt purchase permanent life insurance, the reason one might do that if he/she was buying permanent insurance is bc his or health status would have changed and this was the best conversion option available or they were too lazy to get another physical to find out what they would qualify for and they wanted the possibility of loans. Typically the cheapest term (which is what id purchase) doesnt have the best conversion options. Conversion options are typically only a good decision if your medical history has changed and it seems more likely that you will die a few years after when the term would expire. I imagine however is that the client mistakenly believes its a good thing to do without any of the issues i mentioned probably like you said bc a previous agent put it in his or her mind.
Wonderful article. Can’t wait next week for your review of infinite banking.
Could you also look at the other one called “Automatic millionaire” which looks at universal indexed life insurance rather than the whole life insurance that infinite banking looks at.
I’m not sure what “automatic millionair”e you’re talking about. I know David Bach’s book, which I don’t think mentions anything about universal indexed life insurance.
I’m not generally a fan of these indexed insurance products I like the theory (never goes down and you get some of the gains of equities), but in practice you tend to get pretty crummy returns over the long run due to lots of little reasons.
one only has to understand how equity indexed roducts work in order to realize they arent that great. First off you dont get dividends which is a reasonable part of market returns. 2nd off what they do is invest almost all of the money they are investing in their normal treasuries/bonds. They take a small percent and invest in options. If the options do well then they credit your account accordingly. If the market isnt doing so well and the options become worthless then most of the time they can meet their guarantee obligation by the treasuries/bonds. If you look carefully, you will notice they are allowed to change the caps at their leisure. The reason is that if the market doesnt behave like they have modeled it, they just reduce your ceiling or modify it in some other way so they still make money. These are fixed products by definition and will perform very similar to other fixed products and not at all like equities. The idea of market gains without the losses isnt reality. In reality they may perform slightly better or slightly worse than traditional fixed products. Nobody knows ahead of time but again they perform like fixed bc that is what they are.
The book I was referring to was Missed Fortune by Douglas Andrew. It basically says to dump your 401k, ira, and take out a HELOC and invest in EUILs, equity universal indexed life insurance. I was curious if you had heard about this book, read it, and give us your opion. I didn’t like this strategy for a few reasons. You get no dividend, Fees get higher as you get older so policy can lapse and you have a big tax problem. There is a ceiling, so if stock market goes up 50% you may only get 12%. There is a floor of 0% though. Maybe you could run the stock market for the last 30 years against this product and see what is better.
dfd you should read my commment above on how they work. It is impossible for thes products to get returns anything near market. In a test tube they were designed to hopefully get 1% better than typical other fixed. In realtiy they will do slightly better or slightly worse. The reason they never can produce market like returns is bc only like 2% of the money invested is placed into options and thus very little is in the market. There are no magical investments in this world. You cant get magic safety with market risk returns period. That strategy is no different than any other UL strategy. If you dont highly value the death benefit, then it is a mistake as an investment. Way to many people have had their ULs crash bc of illustrated returns. In particular with this strategy since the COI always rises, if you have a few bad years at the end then it quicikly goes under. Illustrations like to pretend a constant upwards increase with these policies.
Ahhh…Missed Fortune Radio! Yea, Doug is here in my hometown. He has a 3 hour advertisement every Saturday night where he advertises his seminars to teach the secrets of his investing style. He never actually says anything on the radio. It’s pretty amazing he can go for three hours every week without actually providing any significant information other than “come to my seminar and I’ll show you how this works.” I’ll probably read the book eventually, but I’m almost positive I’m going to disagree with nearly all of it. He basically wants you to pull all your money out of retirement plans and home equity and put it into insurance-based investing products. He thinks you should pay the taxes now since tax rates “are going up” (but doesn’t seem to understand the difference between marginal and effective rates) and is harping on “safety, safety, safety” yet ignores the dangers of having a highly leveraged house.
I’ve written before about equity index annuities- you can read more here:
https://www.whitecoatinvestor.com/pros-and-cons-of-equity-indexed-annuities/
The theory is good, but you lose so much in the application (as Rex points out- you have to have lower returns in order to have the guarantees) that it isn’t worth it. In my opinion, you’re overpaying for the guarantees. You just give up too much return to avoid something that you probably ought to be able to tolerate.
I talked to his son a few years ago after reading the book and came to the conclusion this was a pretty aweful way to invest money unless you need permanent life insurance. Doug Andrews book looks at equity indexed universal life insurance{EUILs} as the magic investment because you accumulate money tax free and can take loans against the cash value tax free. What he doesn’t tell you in the book is this is dependent on solvency of the life insurance company[AIG], you lose out on the dividend[2% last year from the S and P 500 index from Vanguard], doesn’t show how easy it is to lapse the policy, and the ceiling[being 13%, what if the market gives 30% because of high inflation?]. I can’t tell you how many other docs I operate with who love this product and tell me how much I am missing. My I bonds and TIPS from 2000 were one of the best investments I ever made.
just to correct something. it grows tax deferrred. The death benefit is tax free and loans while tax free cost around 8%. The worst thing to do is fund one monthly bc that adds like 6% on the front end to cost. That plus the loans on the back end make it difficult to beat inflation. The solvency of the company hasnt been a problem yet. Even AIG has been secure. Though if the low interest rate environment goes on for a long time that may all change. You also need to realize the market doesnt have to get great increases just more than what they projected in order for them to change the caps and participation. Again only a small amount of the money is in the market as options. The rest is in bonds/treasuries.
This is wonderful book “The Retirement Miracle” written by best selling Author Patrick Kelly that is a must read when in comes to the above article subject matter. This book totally opened my eyes when I read it, I literally couldn’t put the book down. A Free E-Book copy of this book is available to download from my website.
From the Amazon reviews:
“This is a must read book for everyone, especially if you are in the Financial Industry and is offering Indexed Universal Life Insurance to your clients. It detailed the characteristics and living benefits of Indexed Universal Life.”
“This book is basically a sales tool to help promote Indexed insurance products. And it is currently being actively promoted as such by annuity and insurance marketing support organizations. How do I know this? Because I’ve received e-mails promoting insurance sales systems that utilize this book.
Perhaps you’ve seen courtroom dramas where the witness is sworn in. “Do you promise to tell the truth, the whole truth, and nothing but the truth?” This book “tells the truth”.
Since I’m very knowledgeable about economics, U.S. taxation rules, stocks, bonds, options, and various annuity products, it was very easy to spot where this book fails to tell “the whole truth” and includes statements that would be so misleading to the uninformed reader that they would fail the “nothing but the truth” test.
However, I am NOT negative about insurance products. Immediate annuities and even Variable Annuities with Guaranteed Minimum Withdrawal Benefits (GMWB’s) can have a place in a retiree’s portfolio. ”
Hmmm…..Call me skeptical.
Anyone who knows anything about whole life would never buy whole life from MetLife. This is a textbook straw man argument. This would be the equivalent of me writing an article on stock market returns (instead of permanent life insurance returns) and using a mutual fund with an extremely high expense ratio, high front or back-end load and high turnover ratio. If I did that, would you think I was being honest and objective?
It’s interesting that every insurance agent I ever ask says all of the other types and brands of life insurance are crap except his. Let’s do this. How about YOU send me an illustration for a healthy 30 year old of your favorite life insurance policy and I’ll repeat the exercise done in this post. Better yet, send me one for a 45 year old smoking rock climber with renal insufficiency.
I don’t have any brands of life insurance that are “mine” or any “favorites.” Again, anyone who knows anything about whole life would never buy whole life from MetLife. I have a contact that can get you an illustration. Are we going to use Guaranteed Values or Current Dividend Scale? (Using Guaranteed Values is another straw man.) If you’re willing to use the Current Dividend Scale, which is the honest thing to do, then what is your email to send the illustration to?
The email is found on the contact form- [email protected]. I’ll certainly use both the guaranteed values and the current dividend scale. It certainly IS NOT a straw man. I owned a whole life policy and received “returns” (they were negative) very close to the guaranteed scale after 7 years.
You’re very adamant about MetLife, care to explain why? Why is it you feel their whole life policies are so horrible?
It is a straw man to use the guaranteed values. What life insurance company do you know of that stopped paying dividends forever? Because that is what the guaranteed values are: never again a dividend. What do the guaranteed values look like on a stock? Do you use something equivalent to the guaranteed column when you’re discussing stocks and their projected values? Or just whole life?
As to your policy, do you have a copy of the illustration you signed when you got the policy and then what you were paid? I hope you don’t expect people to just take your word for it. (You would never take my word either, as you are asking me to email you an illustration.)
MetLife is not a company you want to own whole life from. That doesn’t make them a bad company. In all areas in life, some companies are better at certain products than others. When it comes to whole life, there are companies that like to take their profits from other areas of their portfolio (say money under management) and give those profits to their whole life policy holders. There are companies who like to take their profits and give them to their universal life policy holders. This is why you don’t want whole life from MetLife.
P.S. BTW, I would only own whole life from a mutual company. MetLife and most insurance companies are stock.
Sorry, tossed everything to do with the whole life policy when I cashed out of it (long before I started blogging, or I would have kept it as it would have made a GREAT post.). But as I recall, I paid about $1800 in premiums over 7 years and got back a surrender value of $1200. With a mutual insurance company. As I recall, that was just slightly more than what was guaranteed (for various reasons- falling interest rates, I was paying monthly, it was a tiny policy etc)
I guess we’ll have to agree to disagree about whether using guaranteed values is a straw man. The point of investing with an insurance company is to take advantage of guarantees. If I didn’t want guarantees, I’d just buy the investments directly rather than using a middle man.
While I theoretically like the idea of using a mutual insurance company rather than a stock one, as I recall the data doesn’t show much of a difference.
Here’s MetLife’s defense of being a stock company: https://insper.com/Content/Content/1/Documents/Stock%20versus%20Mutual%20Companies%20mar2012.pdf
Brandon at the insuranceproblog also throws MetLife on his short list of companies to buy whole life from: http://theinsuranceproblog.com/top-whole-life-insurance-companies-for-building-cash-value/
Personally, I don’t think it’s a great idea to buy whole life insurance from any company, so take up your argument with those folks and if you want to send me an illustration, feel free.
Considering I don’t know of an insurance company that stopped paying dividends forever (and I don’t think you do either), I think it’s fair to say that looking at something that has never happened is a straw man argument. And seeing that some life insurance companies have paid dividends for over 100 years running, that should be enough for you to look at an illustration with dividends. But I don’t think you will, because you’re not objective with whole life. So be it. I’ll let the readers decide.
The link with Brandon recommending MetLife is interesting. The MetLife products he is recommending were not out when you wrote this blogpost. I think his recommendations are semi-decent. As the article points out, MetLife is coming back to the Whole Life world, and they will have to be time-tested before I’d buy it.
As to you not liking whole life from any company, that really shows in your writings. You definitely do not give it a fair shake and it’s clear you have an ax to grind. Just answer one question for me. What has produced a higher rate of return since January 1st, 2000, the Dow or whole life?
First, I thought we agreed to disagree about the straw man thing. Please try not to get fixated on it.
Second, if you’re not going to send me a better illustration than this MetLife one I used, then quit pretending there is one.
Third, I have no dog in the whole life fight. I don’t get paid more if you buy or don’t buy whole life. I could care less. If you love it, feel free to invest every dime you have in it. It really doesn’t bother me. “Ax to grind?” No. “A bad idea for most people?” Definitely.
Fourth, not sure what you mean by the Dow. last I checked, you couldn’t invest in an index, only an index fund or ETF tracking an index. There is one that tracks the Dow, IYY, although I don’t know anyone who invests in it. If you’re looking for an index fund that tracks the broad US market, I generally recommend a Total Stock Market Fund. Despite you picking an extremely cherry picked time period (beginning at the beginning of a very deep 3 year bear market), your argument still doesn’t hold water. The annualized return of Vanguard’s TSM fund from inception in 2000 to present is 5.67%, which is higher than any whole life contract I know of that could have been bought at that time. If you have data to suggest otherwise, I’ll take a look at it. Thanks for playing.
Third, I’m not sure what you mean by “the Dow.” You can’t invest in an index, only an index fund, and an index fund tracking the Dow
What I mean by the “Dow” is second oldest stock market index. The one people often refer to when you hear such things as “the market dropped 200 points today.” And I did not cherry-pick a period of time. I simply chose the last 15 years, which is a substantial amount of time. If someone took your advice 15 years ago, would they be better or worse off today if they had put their money into whole life instead? (Just in case your readers are curious, the Dow has done a whopping 2.64% since Jan. 1st, 2000.)
As to the 5.67% you presented, I don’t think it’s fair you are using a gross rate of return to compare to the net rate of return in whole life. What is the 5.67% return after taxes?
Didn’t cherry pick, right….you just happened to choose last 15 years instead of last 5, 10, or 20, 25, or 30 because it makes the numbers look the worst.
I’m well aware of what “The Dow” is but just wanted to point out that only unsophisticated investors pay any attention to that silly index. But even if you choose to use the Dow (and not include dividends as you seem to be doing) you’re still coming out ahead of most whole life plans that typically don’t even break even until early in their second decade.
5.67% gross inside my Roth IRA is 5.67% net inside my Roth IRA. If you want to calculate an after-tax return in a taxable account, you’ll need to assume a tax rate. If you’re in the 15% bracket or lower, that’s awfully low (LTCG/dividends rate is 0%). Even with a 50% tax rate, 5.67% gross still comes out ahead of most whole life policies after 15 years, and nobody pays 50% on LTCG/dividends, it’s 23.8% max.
I’m not sure how you’re going to “win” this one, or why it even matters to you. If someone wants high long-term returns, whole life is not the vehicle. Any honest seller of the product will readily acknowledge this. Why would you expect whole life to beat stocks in the long run? It wouldn’t make any sense. If it did, we’d all buy whole life instead of investing in the market. Purchasers need to want something else whole life offers in order to make it a good deal, because high long term returns just aren’t there, and the short term returns look even worse.
I completely agree with the fact that returns may not be as high as the index funds that is proposed.however given the beta of an index vs whole life cash value, is it fair to compare the two? Index funds are all based on the S&P consisting of 98% US equity and 2% international equity. That is considered a fairly risky portfolio. If they don’t yield more return than a diskless whole life they’d have bigger issues. But wouldn’t it be more fair to compare whole life CV to maybe fixed income where its more risk aversed? And we are also assuming people hold onto index for those 40 years to receive that 8-10% return however, as people get older they shift more towards fixed income portfolio and returns drop over time. Over all it wouldn’t be fully 8-10% it would be less(not including all the capital gains taxes) comparing an index vs whole life is not really comparing apples to apple. Highest return on the SP500 was about 40% but the lowest its gotten was also 40% can you ultimately compare that?
Am I reading this article right? The “guaranteed cash value” (cash surrender value) for whole life at 40 years old (after 10 years) provides a 9.16% return? That sounds too good to be true. In another article on this site it says that it takes 5 – 15 years just to break even.
9.16% is the return on the death benefit. The point of that exercise is that the return on the death benefit isn’t reasonable to look at unless it is calculated to your life expectancy. The 9.16% isn’t.
Expect a return of 3-5% out of your whole life policy cash value held for a long period of time and 5-15 years to break even. But obviously there’s an insurance component too and if you keel over 3 minutes after buying it, it’s a heck of a great return.