By Dr. Jim Dahle, WCI Founder
Whole life insurance is frequently inappropriately sold to doctors and high-income professions. These are the top questions about whole life insurance I get by email, by blog post comment, on the WCI Forum, and in daily life.
Should I Buy Whole Life Insurance?
Probably not. For most cases Doctors should buy term life insurance. Whole life insurance does four things:
- Provides a death benefit in case you die while someone else depends on your income, but it is a very expensive way to provide that protection.
- Provides a death benefit when you die even if no one else depends on your income, such as in your 70s or 80s. This is unnecessary insurance.
- Accumulates a cash value that you can borrow against. While there are a number of uses for this cash value, it is generally inferior to other options that can accomplish the same purpose.
- Whole Life Insurance has some unique business and estate planning uses you are unlikely to need.
Still not convinced? Well, at least ask yourself these questions about whole life insurance (and go through the flow chart) before committing to buy.
My Insurance Agent Thinks You're Wrong About Whole Life Insurance. Why Is That?
Insurance agents receive their training primarily from their insurance company, and that training is mostly in sales, not financial planning or investment management. They have no fiduciary duty to you and receive huge commissions if they successfully convince you to purchase a policy. A typical commission for a cash value life insurance policy ranges from 50% to 110% of the first year's premium. So if you buy a policy with a $4,000 monthly premium, the agent was paid something like $25K-$50K to sell it to you. In short, you cannot trust the recommendation of an insurance agent about whether or not you should purchase a whole life policy.
Why Is Whole Life Insurance a Bad Idea Most of the Time?
Whole life insurance advocates (usually insurance agents) often describe “ideal” policies that pay lower commissions and have slightly higher returns than other policies. However, my readers and I seem to run into “non-ideal” policies about 99% of the time like these crummy, inappropriately sold ones that seem designed to maximize the agent's commission. There are generally four main reasons why whole life insurance is a bad idea:
#1 You Have Better Uses for Your Money
So many of the docs I run into who own whole life insurance owe on credit cards, student loans, or a mortgage. They might not even know about retirement accounts available to them such as a Backdoor Roth IRA or a Stealth IRA. They probably aren't maxing out their 401(k) and perhaps haven't even established an individual 401(k) for their moonlighting gig. Sometimes they aren't even getting their employer match on their retirement plan! Their children's college plans are also probably woefully underfunded. In short, they have something else with a better return and better tax benefits available to them. As my income rises through the tax brackets, I keep thinking I'm going to run into a situation where cash value life insurance makes sense for me. But even with a 7-figure income, I still seem to keep finding better uses for my money! What are the odds that a doctor with an average doctor income doesn't have a better use? Pretty low, unfortunately.
#2 Whole Life Insurance Has Low Returns
If you buy a whole life policy today while you are in your 30s, and hold it until you die, over a period of 50 years you should expect guaranteed returns of 2% per year and projected returns in the 4%-5% range on the cash value. Your actual return is likely to be somewhere between the guaranteed and the projected returns. Remember, the dividend rate is NOT the return on your investment. If I'm going to tie my money up for 5+ decades, I expect a better return than 3%-4%.
#3 Negative Returns
The poor returns on whole life are heavily front-loaded. Most policies won't even break even for 10-15 years and due to surrender fees, you may not even get anything you paid back on a policy you surrender after just 3-4 years.
#4 Life Changes, but Whole Life Insurance Doesn't
Purchasing a whole life policy is a life-long decision, like marriage. This is not something you decide on in 20 minutes with an agent masquerading as a financial advisor. You should at least put as much time and effort into purchasing it as you did when you purchased your house. Although you can purchase a “10-pay policy“, it is much more common to commit to heavy premiums for 30+ years. Unfortunately, life changes, and what seemed like a good idea when you committed to it, no longer seems so. Unfortunately, this usually means that the policy ends up performing even worse than the original illustration.
#5 Life Insurance Lapse Rates Are High
Not convinced? Would the fact that nearly 80% of people who purchase a whole life policy (meant to be held for your entire life) surrender it prior to death bother you? It's true.
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.
How Do Insurance Agents Convince So Many Doctors to Buy Whole Life Insurance Inappropriately?
Insurance agents need to feed their kids and send them to college, too. So they have developed some extremely well-honed sales skills to sell these high-commission products. Unfortunately, many of the techniques used to sell these policies rely on myths about them.
Debunking the Myths of Whole Life Insurance
Most of the time, the agents aren't even lying. They actually believe these myths, which makes them even more effective at selling.
- Whole life insurance is great for pre-retirement income replacement. No. It's too expensive.
- Whole life insurance is the best way to get a permanent death benefit. No, Guaranteed Universal Life is half the price.
- Whole life insurance provides a great investment return. Nope. Negative returns for the first decade, and only 2-5% if you hold it for 3+ decades.
- Insurance companies are great investors. No. They're buying the same stuff you can buy, but inserting an extra layer of fees.
- Whole life insurance is a great asset class. No. There are 10 reasons why it isn't a great asset class, not even as a “bond replacement”.
- Whole life insurance is a great way to save on taxes. No. Its tax benefits pale in comparison to retirement accounts. All loans are tax-free.
- Whole life insurance protects your money from creditors. True in some states, but not others. Retirement accounts generally provide better protection.
- You need whole life insurance for estate planning. No. Most doctors won't owe estate taxes or have estate liquidity needs.
- Whole life insurance is a great way to pay for college. No. 529s are better. You want higher returns and you want them in the first 18 years. Hiding assets in life insurance cash value isn't going to help since your kids aren't going to get much aid anyway.
- Whole life insurance is a luxury you want. No. A luxury you want is probably a Tesla, a second home, a boat, and maybe a kitchen upgrade. As purchases go, whole life insurance might be the least likely one to increase your happiness.
- Whole life insurance lets you spend down your retirement assets more efficiently. A Single Premium Immediate Annuity does this more effectively. Heck, even a reverse mortgage does this more effectively.
- Whole life insurance is a great way to buy expensive stuff. No. Cash works just fine for that, no whole life policy needed.
- Really rich people or businesses buy whole life insurance so you should, too. This is irrelevant. You are neither “really rich” nor a business. Buying whole life insurance doesn't turn you into either.
- You should buy whole life insurance when you're young. You probably don't need it at all and never will. It is no better an investment at 20 than at 50.
- Waiver of premium riders provide disability protection. Disability insurance does a better job.
- You should exchange your old policy for a new one. Probably not. The low returns are heavily front-loaded. An older policy usually performs better than a new one. But the agent gets a big commission if they can talk you into exchanging.
- Whole life is the only way to pass money to heirs tax-free. Not true. Almost all assets are passed tax-free thanks to the step-up in basis.
- With whole life, there is no way I can lose money. Nope. Not only will you lose money if you surrender in the first decade or so, but state insurance guaranty corps only back relatively small policies.
- Life insurance should not be rented. Wrong. Just like a home should be rented if you're only staying for 2-3 years, a life insurance policy should be “rented” (i.e. term) if you only need it for 2-3 decades.
- Banks own life insurance so you should, too. No. Just like you're not a very rich person or a business, you're not a bank, either.
- Corporate CEOs own life insurance so you should, too. No. Again, you're not a corporate CEO. You actually need a reasonable return on your money.
- Banks failed during the Great Depression but insurance companies didn't. Not true. 14% of companies did fail.
- After-tax, whole life insurance returns are better than bond returns. Misleading at best, but generally just false.
- Whole life keeps assets off the FAFSA. True. But irrelevant to most docs whose kids won't get any need-based aid either, and most need-based aid is just loans anyway.
- Term life expires without paying anything. True, but that's a feature, not a bug. Just like you don't want to use your auto, health, or disability insurance, you'd rather not use your term life insurance.
- Whole life insurance is the perfect investment because it is safe, liquid, tax-advantaged, creditor-proof, and offers a competitive return. Four partial truths and one big whopper there.
- Insurance agents are just people trying to feed their family. So are time-share salesmen. Doesn't mean you should buy what they're selling.
- No 1099 income with whole life. That's right. Because there's no actual income, nobody sends you a 1099. Just like when you borrow against your home equity or your car title. You need some serious tax paranoia to buy into this argument.
- The White Coat Investor is just a doctor. When you run out of other arguments, just go ad hominem. I'm sure that will be effective.
- After maxing out a 401(k) and Roth IRA, isn’t whole life insurance the only tax-sheltered option left? No. It isn't. And that isn't the right question to be asking anyway.
- The estate tax exemption could go down. It could also be eliminated. Base your plan on current law and adjust as needed.
- Whole life insurance protects from nursing home creditors. Not really. Nor is this a feature white coat investors should need even if it were available.
- WCI doesn't understand the opportunity cost of NOT using whole life. Yes. He does. He still recommends against it for most.
- Buy whole life insurance for the long-term care rider. If mixing insurance and investing is a bad idea, why would mixing two types of insurance with investing be a good one? Do all you can to self-insure for this possible need.
- We don't say to put ALL your money into whole life insurance. If it isn’t a good idea to put a significant chunk of your portfolio into an asset class, it probably isn’t a good idea to put any of your money into whole life.
- Yes, we have a few bad eggs but most of us are ethical. If there were only a few, why do 3/4 of doctors who buy whole life insurance regret their decision? This is an industry-wide issue with selling this product inappropriately.
- You should buy insurance to preserve insurability. No, you shouldn't. You can't really do it, and even if you could, the multiplied risk (inability to buy life insurance x early death) is too low to insure against.
More information here:
Debunking the Myths of Whole Life Insurance
When Is Whole Life Insurance a Good Idea?
Obviously, there are a few rare exceptions where a whole life insurance policy can make sense. Being a doctor isn't one of them. These generally include some specialized estate planning and business purposes, as well as asset protection for someone willing to give up higher investment returns in exchange for the asset protection.
Some financial advisors think there are some situations where very high-earning doctors can benefit from investing in a variable universal life (VUL) policy instead of a taxable account. The basic idea is that the insurance costs will be lower than the tax costs in the long run. Whole life insurance may be a good idea for you if all or most of the following are true:
- You’re in the highest tax bracket now
- You'll be in the highest tax bracket in retirement
- You’ve bought a GOOD VUL packed with good investments like DFA or Vanguard funds you would invest in anyway
- You’re committed to holding it your entire life
- You will have no trouble making the premiums (consult your crystal ball if necessary)
- This is money you plan to completely spend in retirement
- You cannot invest in an extremely tax-efficient manner in a taxable account, and
- Neither the government nor the insurance company changes the rules significantly over the next 6-7 decades
Insurance agents these days are heavily pushing indexed universal life (IUL) policies, probably because people have caught on to the fact that whole life insurance and VUL aren't usually a good idea and the additional complexity of these policies can be used to confuse the purchaser in new ways. Despite the additional complexity (good luck actually understanding what you're investing in here), you generally give up so much of the index return in exchange for the guarantees, these policies are likely to have the same low long-term returns as whole life insurance policies. Just say no.
He doesn't need Whole Life and neither do you
What Do You Think About “Banking” Using Whole Life Insurance?
I think there are worse things you can do with your money than “Infinite Banking” or “Banking on Yourself.” However, the concept is dramatically oversold as some magic alternative banking system. If you're going to borrow to buy things like cars during your life anyway, then this works out okay. Make sure if you want to do this that you get a policy actually designed to do this well.
What Is the Best Way to Buy Life Insurance?
Your life insurance needs should usually be met with a 20-30 year level premium term life policy purchased from an independent agent. Here is a step-by-step guide showing you how to buy life insurance and how to figure out how much life insurance you need. Contact one of my recommended insurance agents to get a quote today.
Should I Buy Whole Life Insurance on My Children?
No. You shouldn't. Here are six reasons why, but you should only need one—no one is relying on their income. Start a 529 instead.
How Can I Know If I Should Cancel My Life Insurance Policy?
First, get an in-force illustration. Next, either hire an unbiased person to analyze it or analyze your life insurance policy yourself.
How Do I Cancel My Life Insurance Policy?
If you have decided you no longer want your policy, you may want to consider some options other than just surrendering it, especially if you have a significant difference between what you paid in premiums and its current value. Here is a guide to help you get rid of your whole life policy.
I hope this post provides a worthwhile, easily-shared resource for those wondering whether they should buy a new whole life policy or get rid of a policy they already have. As I always tell whole life advocates—if you understand how the policy works and are okay with the significant downsides, buy as much as you like. But typically, once a doctor or other high-income professional understands what they've bought, they regret the decision to buy.
Get a life insurance quote from one of our WCI-vetted insurance agents today!
What do you think? Why do you think whole life insurance is pitched to so many doctors? Why do so many of them buy it? Comment below!
I have funded a whole life policy with Northwestern Mutual for several years, I was a big fan as I saw my father use his cash value (he ran a small automotive supply shop) during lean years and also it provided a paid-up policy when he had a stroke, due to a disability clause I believe – and paid out at his death. Nonetheless at the time I was a believer, so the same agent at Northwestern reached out to me and I bought a combination of term and whole life, paid up at 65. I have questioned this – as I’m 6 years into the contract, I only bought $250,000 of whole life as that was what I could afford after my fellowship, and I have still yet to break-even on cash value. My agent always calls me to convert more, he says even in $100k increments. He has shown me older policies that were issued in the late 80’s and the internal rate of return as a guide of what it could be worth. He pushes the rate of return more than the insurance. But I am skeptical, he also showed the dividends of insurance companies and I know they were significantly higher in the 80’s and 90’s, and the current dividend is only 5%. I just don’t see this as an investment, or even a saving’s vehicle with those low dividends.
That being said, an advisor I sat down with did propose a UL policy with a guaranteed death benefit to age 121. It was about $1900 less than the WL ($250k as well); but premiums have to be paid for life. I don’t like that – and the cash value is not guaranteed.
Any thoughts? My goal is to have some permanent insurance, I do see a benefit in tax-free income either to my spouse or as inheritance if I live a long time. I like the Northwestern plan because it is guaranteed to be paid for at my age 65 (I hope that’s true?). The UL seems attractive, but I have heard horror stories of insurance companies jacking up premiums on these too. Not sure what to do – the $250k of whole life isn’t a burden financially, and in 29 years should be paid for.
If you really like cash value/permanent insurance in order to borrow against it, I think the simplicity and guarantees of whole life outweigh the flexibility of the various types of universal life.
I’m having a hard time figuring out what you like about it though from your comments.
You do realize the new advisor has a huge conflict of interest to recommend a new policy and get a new commission on it, right?
You have a contract with the insurance company. Unless the contract says that they can change the contract, they can’t change the contract. If it is paid up at 65, it is. They can’t change your premium either (again, unless the contract says they can). The only way this contract could be voided is if the insurance company goes under. Seems like Northwestern Mutual has been around since 1857, so I guess it’s a pretty safe bet that they won’t go under in the next 70 years. They could of course, and the entire stock market could also crash and all of our 401ks could go to zero. And there could be a nuclear war with North Korea and we all die. I would suggest you read the contract carefully. Or pay a fee-only insurance advisor to analyze it for you and ask them questions.
Get an IUL. Make sure you ask your agent on questions like MEC and ask for both lowend returns and high returns. If you dont know what MEC is it’s when you overfund a policy to a point the IRS wants you pay taxes. Defeats the tax free benefits of an IUL. Your agent is either an idiot or does mot care for your well being if he is having you invest in whole life.
What to do when you have zero confidence in the stock market and would rather not have your retirement be tied to the stock market roller coaster while investment banks suck billions in fees. Once you factor in the markets downturns, which occur on a regular cycle, the returns are not what most people think. It’s still a decent return for sure, except if you happen to be retiring within 10 years or so of the last downturn, at which point your return on investment will most likely not be what you thought it was going to be.
Maybe the solution is to get a grip, understand what the stock market is for, and use it accordingly.
Question: What about asset protection? As an OB/GYN, I have the one of the highest exposures of being sued as to other areas of medicine. In Ohio, a family has up to 18-years after the birth to file suit. My employer is made up of: 3 Physicians, 1 Midwife, and 1 PA. Also, with about 10-staff employees. Husband and wife that are the other 2-Physicians who own the practice, so I’m a W-2 employee. They offer SIMPLE IRA through Northwestern Mutual (American Funds) with no index options, and I have to pay a 5% sales load. The employer match is 3%. This prohibits me from doing a back door Roth IRA. Also, my tail insurance IS NOT covered by my employer, so I have to save for that on my own
My financial adviser has me saving about $15k a year into a Vanguard Ohio Municipal Bond Fund, and $5k a year into a Small Cap Russell 2000 index for my tail. I cannot afford the risk of a market drop if I need to pay the tail coverage so Muni’s make sense. This taxable account has zero asset protection, so saving more into an Small Cap index fund doesn’t make sense.
I get bothered about once every month by the NWM agent to buy whole life. I’ve looked into VUL and IUL and both seem to better than WL. In Ohio, the cash value of the life insurance policy is protected from being sued as long as it’s payable to my spouse or child. The VUL I’ve looked at has Vanguard and Fidelity low cost index options, and isn’t loaded up with a bunch of riders I’ll never use. The IUL has a 100% participation rate with 14.5% Caps, with downside protection (Minnesota Life.) So, from the standpoint of asset protection, these products makes the most sense to me.
Any other ideas?
That stinks. SIMPLE IRA. NML investments. Loaded funds. No Backdoor Roth IRA. A Russell 2000 index fund. A bizarre asset allocation for any purpose. Having to turn down WLI every month. Getting sold IUL and VUL.
I would recommend a new advisor for both you and for the partnership. You’re likely leaving a lot on the table. You’ve got some less than optimal stuff going on there.
At any rate, let’s talk about your question. In some states, life insurance cash value does receive significant asset protection. Before buying it for that reason, you need to ask yourself two questions:
# 1 Does MY state offer significant protection?
# 2 How much of my investment return am I willing to give up in order to get that protection?
It’s not free because WL/IUL/VUL returns are lower. Especially when you consider the very low possibility of you actually being sued for an amount above policy limits and not having that amount reduced on appeal. Granted, that risk is higher for you than me, but I calculate it out at about 1/10,000 per year of practice for me. So maybe you’re at 4/10,000 or even 40/10,000 or something. How much return you want to give up to protect against that?
I’ve also asked my employer to set up a 401K b/c of asset protection, but they said they Northwest Mutual adviser told them, ” For the size of the business a 401k doesn’t make sense, and the SIMPLE IRA is the best option.” Something about safe harbor rules and it’d have to be tested each year to see if it qualifies. ??? Whatever that means!
That may be true. The only way to know for sure is to get a real expert in there to do a study on the practice to see what makes sense. But SIMPLEs suck due to rollover rules, low contribution limits, and the fact that they screw up your pro-rata calculation for Backdoor Roth IRAs.
If they’re going to make you partner, I’d try to make some changes there after you are partner. If they’re just going to keep you as a non-partner, you might consider trying to go the independent contractor route. Then you could use an individual 401(k)- excellent asset protection, high contribution limits, and you can do a Backdoor Roth IRA.
My contract is up this Spring. Also, this is a husband and wife practice with employees that have been there for 10- years and have never received raise, so I really don’t think they’ll ever offer me a, “Path to Partnership.”
I took this job straight out of residency to learn on how to run a private practice, but what I’ve learned is how not to run a practice. As these folks have the attitude of, “Everyone’s replaceable,” most employees are ready to walk as soon as another option is available.
My options are:
1) Put up with it;
2) Go the Indy Contractor route;
3) Find another job, or;
4) Start my own practice.
Where can I find info on going the independent contractor route?
What kind of information are you looking for? This post might help:
https://www.whitecoatinvestor.com/w2-vs-self-employed/
So you’re saying it’s .004 or 40 physicians per 10,000 that get sued per year or lifetime? Most attending Ob/GYNS have the attitude of, “It’s not a matter of if, but when.” The attending OBGYN’s I knew in residency have been sued a least once and just settled the case.
Also, I chose the Vanguard Ohio Muni bond fund b/c I’m afraid of having to pay my tail at a moments notice, thus I don’t have time to dollar cost average into an index fund 100% if the market drops.
No, you’re misunderstanding me. Most OB/GYNs will get sued at least once in their career. That’s NOT what we’re talking about.
I think a basic understanding of asset protection would be helpful to you. Here are the basics:
Most suits are dismissed as without merit.
Most of those that have merit are settled. They’re pretty much always settled for policy limits or less. Meaning you lose nothing- the insurance company pays for the defense and the judgement.
A few go to court. Of those that do, the doc wins almost all of them.
Of those that the doc loses, most of the time the loss is for less than policy limits. Again, you lose nothing.
Of those very, very few that get a judgement over policy limits, they are usually reduced on appeal to policy limits.
I calculate the risk of having a judgement that is above policy limits and NOT reduced to policy limits as 1/10,000 per year in EM. Maybe half that as I move toward half-time work. Probably even lower as I am in a relatively non-litigious population and given that I haven’t yet been sued (so presumably am not massively abrasive). Maybe 1/50,000 per year for me, dunno exactly. It would be higher in OB.
Now, in the event that policy limits are exceeded is when real asset protection kicks in. Every state has different laws, so you need to know your laws. But in general, you can declare bankruptcy and not lose everything. You generally get to keep your personal stuff (clothes, furniture etc.) You generally get to keep anything you have in a retirement account. You often get to keep at least some of your home equity. Sometimes you get to keep what is in cash value life insurance and annuities. Having assets in corporations and limited partnerships and LLCs and some types of trusts can often help protect them from creditors.
But you probably don’t want to spend too much time and money trying to protect against something that you probably have less than 1% chance of happening to you in your entire career.
Hope that helps.
Ok thanks for the info. Just and FYI I’m putting
75% VOHIX, Vanguard Ohio Long-Term Tax-Exempt Fund Expense .15%
25% VTWO, Vanguard Russell 2000 ETF, Expense .15%
I probably should flip these allocations, and ditch the VUL/IUL idea and start socking away my savings into a Vanguard Index ETF. (I like the Russell 2000 ETF.) and not worry so much about being sued.
Also, I have with the SIMPLE IRA: 3% American Funds, Growth Fund of America with a 3% employer match(5% Sales load and expense of .64%)
Ugh. Loaded funds in a 401(k). Does your boss hate you and himself/herself?
They’ve just always dealt with this NWM agent and take what he says as gospel.
Hello WCI and readers,
I am getting term life insurance for my wife (pediatric dentist) and myself (general dentist). We are both early in our careers. I just bought a solo practice, and she is becoming 50% owner of another practice later this year. Right now we have an joint income of about $370,000, but as future owners, I assume and hope for that to increase.
My agent who has proven very trustworthy thus far is very insistent that we get a term life insurance policy that is convertible to whole life insurance, which obviously costs more. All the good information on this site about the pitfalls of whole life insurance make me uneasy to trust him on this. Any advice on a convertible term policy?
I don’t think that’s an important feature and wouldn’t pay extra for it. It doesn’t always cost more. Have you compared what you’re being offered to what is available on term4sale.com or insuringincome.com? How much more is it?
It’s $1M annual renewable term policy. I don’t need to undergo any further medical testing/underwriting as long I pay my premium, but the premium will go up with age. There are guarantee rates each year (costs more) or non-guaranteed rates. You can convert to whole life no questions asked for 5 years. However, in order to be able to convert anytime after 5 years, there is an extra $30/mo premium that you must pay when first starting policy.
Sounds like a crummy policy to me. Is that really what you want? Have you compared to other companies using term4sale.com? It only takes 20 seconds and requires no identifying information.
Of course I don’t want a “crummy” policy. I did take a look at both websites you mentioned. The Insuringincome.com search does result in a Guardian 30 year level term policy with extended conversion for less than I was quoted. I can’t tell the difference between the policies to account for the difference in premium without more information on the second policy. Thanks for your sage advice!
I was also mistaken. It’s an extra $30/year to have extended conversion. Again, with a yearly renewable policy, I’m sure that does increase over time.
Yea. How much more term life insurance can you buy for $30? I’d rather have that than the convertibility feature.
Surprised a Guardian policy came up anywhere near the top of the list. When I look for a policy for me, I see the top hits as United of Omaha, Protective, John Hancock, American General, Ohio National and Pacific Life. Guardian isn’t anywhere on the list. I can’t believe they don’t offer policies in my state, so that tells me they’re likely not competitive at all. Where was Guardian on your list?
The policy at the top (ordered by least expensive to most) is Ameritas then some of the companies you mentioned follow. Guardian is halfway down or more. I just mentioned that policy/company because it’s what the agent is pushing. He recommends Guardian or Mass Mutual. I forget his reasoning. Some combo of the coverage quality of the policy, strength of the company, and history of paying benefits when needed.
I realized the difference in premiums I mentioned was due to annual renewable vs. level term. The level term policy the agent quoted is equal to those websites you suggested.
Sounds like you’re in a good place. Nice to know you’re getting a good price.
Hahaha
So I have just spent several hours poring over just about every WLI post on here (and there are many!), googling various terms, and using to evaluate to a new WLI policy my parents are trying to purchase. Backstory: they are both physicians (I am also in a health care-related profession but nowhere near physician salary). They are fantastic physicians and wonderful parents, but the more I learn about financial topics (with big thanks to this blog and a few others!) the more I realize that they have generally done what they’ve been told to do by the “experts” (financial advisors, insurance agents). When I was younger my accounts ended up in the same places, but I’m in my mid-thirties, learning more, and am in the process of moving my investment/IRA accounts from those high ER funds to Vanguard index funds.
In the same vein, my parents have bought a lot of WLI. According to my dad, each of my parents have one paid up, and one for me paid up, one for each of my younger siblings that they are paying, and they purchased ANOTHER one on me that they want to add value to. As the insured, I get the related documents and finally have the knowledge to start to evaluate whether this is a good plan. I spoke with my father and explained that I wanted to look closely at this, and that I had read a lot indicating these weren’t great investment vehicles. He insisted that the policies “pay a 7-8% dividend.” You’ve mentioned several places that this is NOT the case – “the dividend rate is NOT the return on your investment”. Can you explain this more so I can have a realistic conversation with my dad? It sounds like the ones that are paid up are water under the bridge, but I want to put the brakes on purchasing even more until he fully understands what he’s buying.
Sure. Dividends are only paid on the cash value, not the premium paid. So in the first year perhaps you pay $50K. But the cash value at the end of year one may be $30K. The next year the company declares a 6% dividend. That’s applied to the $30K in cash value, NOT the $50K you originally paid (or the $50K you pay for the second year.) So the dividend is not the return. Despite paying a 6% dividend your rate of return that first year is -40%.
That is an excellent description of what dividends are in regards to life insurance products. They are not a distributions of profits like dividends on stocks or mutual funds. They are a partial return of a deliberate overcharge. Mutual companies generally charge 10-20% higher premiums than stock companies for the same amount of coverage and at the end of the year their board of directors decide how much of that overcharge they will “distribute” back to the policyholders. I have been in the life insurance business for over 30 years and many of the whole life pitchers would brag about how dividends are not taxable. Well dummy they are not taxable because they are a partial return of a deliberate overcharge. The only way they are taxed is if you receive more in a dividend that what you paid in premiums. In history of life insurance I am quite sure that has never happened.
Complete excrement
Has anyone had any experience with Health IQ? Seems like they get you set up with other companies mainly but reall cheap term life insurance.
Might try asking that question in the forum or FB group. It’ll only be seen by a few sets of eyes way down here.
Hello,
I am a CPA and very knowledgeable about all your content and yes, you have great content.
However, I would be cautious about saying “Whole Life” is not good. Using a property structured high cash value policy is one of the best things one can do, if property structured for high cash value. One can still invests in the stock market, real estate, etc, even with cash in the whole life policy. Have high cash value whole life is better than any tax qualified plan.
Thanks!
I disagree.
I would MUCH rather have $1M in a Roth IRA than a whole life insurance policy, especially since I would be likely to have $200K in that whole life policy due to crummy returns!
I agree whole life and variable life products are a waste. Index IULs work well. I bought one at 23 and overfund mine and have seen an actual return on my investment. Now I also have a Roth IRA, and some stocks. I’m a wine rep full time and don’t have the ability to partake in 401k and I had my agent give me a 6% 7% 8% and 10% projected gain on interest with my policy. It’s been doing well and following right in the 7 to 10% range for gains. I keep what I put in my policy under mec. My insurance costs a total of 30 a month I put 400 monthly in it and max my Roth yearly. I’ll have a solid income without working when I hit retirement age.
Also with term life insurance, they have return of premium products out there as well. You pay more into it but you get 100% of your money back. I’ll personally get one when I have my first child for both my hysband and I. You lose money by not getting to gain interest on a return of premium policy but in 20 to 30 years you get a check back and can reinvest or use it towards debts.
I feel like this article is a bit biast against insurance agents. There are good and bad ones and I was gvien this article because my other half was concerned about my overfunded IUL. I am 100% happy with the outcome thus far and look forward to when I can start pulling money out. Plus Life insurance is good to get while young. It protects you over a lifetime to ensure debts and high costs are not given to your family if something happens. It also leaves behind an extra inheritance for your kids and grandkids. When properly used and you get the right policy you can ensure your family is protected and safe.
Yes the younger you get it the better. Health can deteriorate in your late 20s and 30s and then the cost can be astronomical for an individual. When you compare a 20 year old vs a 30 to 35 year old getting an IUL the price difference for cost of insurance is huge. I wanted to get an IUL for my other half 2 years ago cost of insurance vs gains was as not worth it for our budget. Would of affected our vacation fund and free money we have.
Thought I’d share my opinions amd experiances. Like anything you need to fully do your research and not just jump. I sat with my agent 3x before actually signing up for my policy.
I disagree. I would expect similar returns out of an IUL in the long run, but it’ll be a heck of a lot more confusing what’s going on in the meantime.
https://www.whitecoatinvestor.com/an-index-universal-life-insurance-illustration/
Unfortunately, lots of people confuse an IUL for a good financial product like an index fund because both have the word index in their title.
Go ahead. Show me an in-service illustration for an IUL sold 5 or 10 years ago and let’s run the numbers, and that’s in a bull market.
If your agent told you you’re going to get 10% out of your IUL you’re going to be in for a rude awakening when you run the numbers.
Return of premium is also a gimmick.
https://www.whitecoatinvestor.com/return-of-premium-term-life-insurance-friday-qa-series/
Glad you like your policy. If I’m biased (as most who sell this product may claim), this is why:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
I think Megan makes a good point that having some of the right kind of permanent coverage can make sense if you over-fund the policy but not to the point where it is a MEC. The MEC status keeps the gains in the contract from being taxed during the life of the policy or when you take loans ore withdrawals. There ‘s 7 year pay number that the insurance company’s software will calculate that will be the threshold that dictates the max amount you can pay in any year to keep the policy as a non-MEC contract. Most of the insurance companies are really good about keeping their policy holders informed if or when they are getting close to have a MEC policy. Some will even let you make catch up payments if you under-funded in the early years of the policy.
One way to increase the amount you can put into a policy and keep it as a non-MEC is to use an option 2 or increasing death benefit. This will add any contract fund or cash value to the death benefit when you die and increases the corridor the IRS allows to over-fund a policy. With some policies you can switch between the option 1(level) death benefit and option 2(increasing) death benefit during the lifetime of the policy. One strategy that works really well is to use the option 2 in the early years to max fund the policy and then switch to an option 1 death benefit when you start taking income. The option 1 strategy later in life will lower the internal cost of insurance and thus provide more income.
It’s very important to look at income illustrations from several companies before choosing an IUL. Some illustrations will show high cash values but when you start to take the income they charge a higher loan interest rate and thus leaving you with less income.
A relatively new feature that is available on some IUL’s is a “Protected Death Benefit” rider that keeps enough life insurance in force even if you have depleted all the cash value due to loans and withdrawals. This is an extremely important feature as the downside of an investment plan like this is if the policy lapses you would owe taxes on any amount you received via loans or withdrawals above your cost basis or the total premiums paid.
I have been in the life insurance business for 35 years and there are only a few IUL contracts I think are worth considering. The rest of them are garbage as are whole life and VUL’s. There seems to be a push in the industry to sell whole life insurance once again and they are taking advantage of inexperienced financial planners that see the big commissions and the bells and whistles of a participating whole life policy but in my 35 years in the business I have never seen one that turned out to be a good investment. NOT ONE.
If you are going to use an IUL without the Protected Death Benefit rider as an investment you should compare one with and without the premium guarantee rider to see if it’s worth paying the extra cost for the security of knowing there is a guaranteed premium that will keep the policy in force regardless of the investment performance.
Some companies have better track records than others when it comes to deviating from their current assumption COI(cost of insurance) versus dinging their customers later in life by increasing the internal cost of insurance from what they originally projected. If the investment side looks good but the company has increased their COI’s in the past you probably should add the premium guarantee if it’s available or avoid the company all together. Life insurance companies have to file any internal deviations from their original COI projections with each state to get approval so you can contact the state department of insurance to ask if a particular company has done this practice in the past. Mutual companies can just deviate from their dividend projections to ding their policyholders so sticking with a stock company is a better bet.
I anticipate their will be some insurance agents that disagree with my assessment but I really don’t care. The most import thing is that you purchase enough term life for income replacement for your family with a A+ rated company that offers good conversion options and accelerated benefit riders for critical and chronic illness in addition to the terminal illness rider. If there is money left over after funding your matched retirement plan and or Roth IRA then a competitive IUL with multiple index options and a protected death benefit rider is a viable way to supplement your income when you retire.
Overfunding does improve the performance of the policy as an investment. Not enough to buy it at all in my opinion for most docs and certainly not enough for any doc to buy it before paying off their 7% student loans and maxing out all tax-advantaged accounts.
I’m always amazed that most agents think all permanent life products are crap except the 1 or 2 they sell, but they all sell different products!
>>Insurance agents receive their training primarily from their insurance company,
>>and that training is mostly in sales, not financial planning or investment management.
>>They have no fiduciary duty to you and receive huge commissions if they
>>successfully convince you to purchase a policy.
It is difficult to get a man to understand something when his salary depends upon his not understanding it.
Upton Sinclair
Hi Jim,
i am following your blog now for a while, and it is alway interesting to see the differences and similarities between Europe and the US. One similarity is this insurance endemic. Almost everyone in Germany/Austria is holding a so called live- incursance (quite similar to whole live insurance in the US). Almost nobody is investing in the stock market (in Germany about 15% of the total population). The returns of these life insurances are similar bad as in the US (first 10-15 years negative because of the known reasons) and then mediocre compared to the extreme long time you are paying for them. Young folks without any need of life insurance are the typical victims. I would call all of these “financial advisors” members of a mafia like system.
The main difference, at least in Germany and Austria is, that you do not have an opportunity to invest into the stock market in a tax protected way. The system here is soon bound to crash, because most people rely on “pensions” or state retirement payings. That cannot work if you have a look at the growing age of the population. I am tryin to do my best to get FI but started late and will probably have to work until age 60. But love my job as pediatric cardiologist.
Thanks a lot for this great website, all the best to you and your family!
Stephan
Thanks for sharing your unique experience. Might be fun to get you on the podcast too to talk about practicing in Germany. Consider applying here:
https://www.whitecoatinvestor.com/podcast-guest-policy/
these replies are hilarious
I realize that whole life makes no sense for us as doctors compared to term. I assume the same thing applies to lower income earners as well, correct? Just wanted to make sure before I advise others to go with term over whole. Thanks!
“advising”…….hilarious
Scott the main issue is what do they need insurance for. Better to spend less for more coverage than more for less, with risk of letting WL lapse and having no savings AND no insurance.
A wonderful article. I agree that whole life is a lousy investment. However, we bought whole life when we were young. Thank God that we did. We never could have dreamed that a child would have a lifelong, incurable illness that will make him destitute, trapped by SSDI income restrictions. We couldn’t sleep at night if we didn’t have the insurance with his special needs trust as secondary beneficiary. At some point, the dividends started paying the premiums. We have maxed out IRAs , 401Ks and 403 Bs. We paid for college and grad school. Our kids do not have loans. So we have done OK, despite paying premiums for about 20 years.
What if you had a different plan to meet those needs like an extra large nest egg before retiring with some of it designated for those needs? If you did that, you could still cover your life insurance needs with term life.
At any rate, it’s not like putting some money into a whole life policy is a bad thing, there are just usually better things. You hit a lot of those better things already (maxing out retirement accounts for instance, so maybe it’s not so bad in your case. But I keep running into docs with 8% student loans who were sold a whole life policy!
hilarious
Posts like these are important. Almost every article I read says “you have to get life insurance, it’s the most selfless act that you can do!” But they don’t really get into how to make a good cost effective buying decision that’s tailored for different people with different needs.
More education sure is helpful.
Arriving at retirement with “only” fluctuating, market-based investments is inefficient with wealth distribution in mind – the reason we save long-term to begin with. Everyone is so focused on the rate of return power while growing one’s wealth (what product will give me the best return?) The problem is having to take a low distribution percentage (3-4%) from volatile accounts (stocks, bonds, mutual funds) to minimize the risk of not running out of money. That’s only $30K to $40K per $1M of accumulated assets. However, advisors don’t do a good job of sharing that knowledge for they are too focused on wealth accumulation and not wealth distribution. Why do you think that is??? What’s your plan for the wealth distribution phase of 25+ years called “income during retirement?” Are you going to be financially fine and live the lifestyle you want and are accustomed to at the 4% “safe-withdrawal” rate? With the same dollars you could potentially enjoy much higher distribution rates by having an alternative, uncorrelated “stable” bucket of money on your balance sheet when you reach retirement that doesn’t fluctuate and that you can pull from when stock markets are correcting (down), allowing time for market-based investments to rebound/bounce back. Think about, digest, and figure this part out NOW, or just buy term and invest the difference and have a volatile life during retirement (not fun when your investment account is down for a year or two in a row and you need “income”). Something to think about & consider…
The problem is that over long periods of time the return dominates any possible efficiency gain. For example, if you earn 8% on an investment instead of 4%, you’re still better off over 30 years even if that 8% investment loses half its value in the year before it is withdrawn. Essentially, 4% of more money is, well, more money than 6% of less money.
At any rate, if one wants an insurance product to maximize withdrawals in retirement for part of your portfolio, I favor traditional investments until you’re into your 60s and 70s and then using that money to buy SPIAs. I think they do a much better job of that than a whole life policy.
Those safe withdrawal rates include growth in the portfolio over the years. If one invested only in low growth assets, like life insurance, the withdrawal percentage would have to be far lower. Most portfolios include low volatility investments. Not many people enter retirement with 100% in stocks.
Using life insurance to provide a source of income requires building up the cash value, at the expense of other investments, and watching that CV grow very slowly. To the extent that one wants low-return, low-volatility investments, they should be a limited part of the portfolio.
As with any other investment, the low risk part of the portfolio should be accessed at the lowest cost possible. One can get low-return, low-risk investments without the huge fees for cash value life insurance.
How about term life insurance with convertibility?
Is the “marginal increased cost to keep your options open” worth it?
Depends on how likely you are to use that feature. I wouldn’t pay anything for it, but if it were offered at no additional cost compared to other policies out there, sure, why not?
I don’t expect to see it, but it would be more helpful if insurance companies were to offer the ability to convert FROM whole life TO term. Keep the cash value, if any, to pay future premiums, or withdraw or borrow from it but only need to pay term premiums.
That might let a lot of people off the hook. Which is why they will never do it.
That would be a great option!
I live in a large retirement community full of wealthy individuals. Seminars are given explaining the advantages of using whole life as a tax shelter once RMDs, SS and pensions all kick in. What is the criteria used to decide if this is an appropriate investment and what questions should be raised before investing?
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
It’s mostly a product that is sold, not bought. But if you really understand what you’re buying and that’s something you want, go ahead and get it.
The answer should be it just depends on why someone would want to fund a whole life insurance policy, for either a tax advantaged, uncorrelated and safe asset class, and/or for having permanent death benefit on your balance sheet during retirement to create leverage and possibly allow for greater income streams. No investment vehicle should be looked at in a vacuum and should be considered as part of the big- picture and long-term strategy.
“It depends” might be the last refuge of a scoundrel investment. Just because it’s right 1% of the time doesn’t mean it should not be generally advocated against.