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 $25-50K 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.
Not convinced? Would the fact that 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.
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.
Additional Reading:
- Whole Life Insurance Myths #1-4
- Whole Life Insurance Myths #5-9
- Whole Life Insurance Myths #10-14
- Whole Life Insurance Myths #15-18
- Whole Life Insurance Myths #19-23
- Whole Life Insurance Myths #24-29
- Whole Life Insurance Myths #30-37
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.
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.
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!
It’s been years since I stumbled onto your blog, and I am sincerely grateful that I kept researching and adopting the concept in spite of doubts fanned by sites like this. The concept, if adopted correctly, is not intuitive so it’s very easy to cut it down without truly needing to understand the ultimate value of the process – particularly given the indoctrination of banks and wall street that are not benefitted by individual freedom from their services. It’s a process, not a product, but the product of whole life insurance is the ideal asset to perform the process of collateral lending (private banking) against.
I discovered Nelson Nash after “successfully” using the velocity banking approach to eliminate debt and looking for what is next. Velocity banking seemed great while the debt was melting as a result, but that result required debt to target for elimination. The irony of course is that a growing liquid asset as a reserve for your leveraged capital is far more ideal than a reduction in debt which is a natural hedge against inflation… and inflation is not something that we’ll be seeing the end of anytime soon.
Best of all worlds, Infinite Banking Concept allows the use of velocity of money, the controlling of your own risk profile through unstructured leverage, the retaining of inflationary hedge, the amplifying of investment returns thru controlled leverage and the recapture of finance costs thru arbitrage WHILE using the reserve liquidity to finance a traverse from the Employee/Self-Employed quadrants over to the Business/Investor quadrants.
Once in the B/I quadrants (rather than a high “earning” professional), you start experiencing the amplified returns from leverage and tax savings. At that point, the growth of wealth and cashflow is exponential. THAT has been my experience. As a captive customer of my own pool of funds, I’ve been incentivized to expand my need for finance through investment, the cashflow from those investments in turn financed the growth of the reserve capital. And the cycle continues. That same cycle is what Nelson was demonstrating with the equipment financing examples in his first book, but can be whatever financed asset you like; you are receiving the financing benefits which grows the capital reserve (i.e., portfolio of policies). Soon you can have a fleet of equipment/assets/whatever business vehicle brings the return and further use of finance.
I am fortunate that I can confidently say this is true from my own experience, and there are undoubtedly going to be people that will lose the opportunity after becoming uninsurable while struggling with doubt. There are fallback approaches for those people, but the possibilities become diminished over time.
End of the day, you are selling something yourself… it should not feel gratifying to disparage and defame something that would be a benefit to others if they implemented correctly while the option is available. If that were me that found myself uninsurable with fewer options due to bad advice, I think I might be a little disappointed.
You’re a true believer, no doubt about that.
Experience will do that! Just as tripping up the experience that others might enjoy
I am now at a point that I don’t worry AT ALL about market risk! But I never would have gotten to this point if I hadn’t started. There’s a tremendous value in certainty. I’d much rather focus on controlling finance cost (something that exists in EVERY SINGLE transaction), benefitting rather than suffering from inflation and recharacterizing income from ordinary earned to portfolio/passive income. Tally up all of those benefits and the return from market risk is nearly irrelevant.
You own a business as an entrepreneur? Fantastic, also be the one benefiting from financing that venture. If you’re a successful entrepreneur, WHY would you have your money invested in anything other than what you have control, or at least influence in the results. But that’s what advisors tend to encourage … lock your money AWAY from your controlled management of cash flow.
And if you’re not an entrepreneur, don’t minimize your chances to get off of the employee treadmill by handing over your capital to someone else’s venture. Insanity is doing the same thing expecting a different result.
Glad the guarantees are worth so much for you, because you’re paying a lot for them.
What do you do for a living again?
Your bias is showing, glossing over every positive benefit (arbitrage, hedge, tax savings, trust characteristics, CONTROL) with strictly a focus on the cost of guarantees. That’s called playing small ball!
I hadn’t said what I do for a living, that’s a moving target as I’m moving from active to passive wherever possible: real estate investor, application developer, CPA, business consultant, private lender and my own banker – not necessarily in that order, and always on the lookout for the next opportunity for a cash flowing venture… that I can also self-finance.
No matter the venture, I look to own the building, any equipment AND finance all of the above… but that might require “costly” guaranteed growth of collateral in order to positively arbitrage!! Shame if I didn’t have the perspective necessary.
Touche Vincent !!
The fun thing for me, unlike Fred, is I don’t have to have a bias on this topic. I can simply call it as I see it since it neither hurts me nor helps me if my readers buy whole life insurance. Zero conflict of interest there.
It may not hurt you personally, and particularly if you don’t know any better. Then you can sleep well at night without an issue of conscience.
I feel fortunate not to have stopped at your feedback or Dave Ramsey’s, but I do know of others that look back in regret having found themselves uninsurable and lost the option. An option that they could have had a handful of years earlier if they hadn’t been distracted with doubt.
That is my ONLY reason for posting… if there is one person that continues to research in spite of your blog.
If you do find the inspiration to expand your thinking that would be great, but you are doing damage. Whether you acknowledge it or not.
Yet somehow I have been thanked by literally thousands of doctors over the years who were sold inappropriate whole life insurance policies. Here’s a sampling:
https://forum.whitecoatinvestor.com/insurance/1728-inappropriate-whole-life-policy-of-the-week
The general warning to avoid the product unless you have a really good reason to buy it is certainly appropriate.
If you understand how BOY/IB work and still want to do it, knock yourself out. That’s the message I’ve given year after year after year.
https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
Personally, I understand how it works and have no interest in it. Glad you like your policy.
That is not the message you’ve given, the responses to the “myths”/Q&A above alone makes that clear… but feel free to rationalize that response if it helps you ignore the truth.
And again with the “product” rather than the process. That statement alone makes it clear that you DON’T know how it works. But keeping it complicated serves your purposes, so that is also an understandable reaction.
I suppose if you didn’t understand calculus, that would also be of little use and just stick with addition/subtraction because that can more easily be packaged to the masses.
Do no harm! or at least insulate your conscience! Well done on the latter.