Cash value life insurance, such as whole life insurance, universal life insurance, and variable life insurance are products designed to be sold, not bought. They are inappropriate for the vast majority of people on this planet, including physicians.
Among physicians that actually purchase the product, 3/4 of them regret their decision. Even among the general population, over 80% of whole life insurance policies, a product designed to be held until death, are surrendered prior to death.
The vast majority of whole life insurance policies should have never been purchased. The fact that they were should be an embarrassing stain on an industry that is presumably trying to make families more financially secure. It's even worse when it is done by a mutual insurance company. In what other industry is a company actively trying to hose its owners?
So why do so many doctors regret purchasing whole life insurance? There are a number of reasons, and usually, it's a combination of a few of them. In today's post, I'll list them all out.
Remember as you go down the list, that I don't have a problem with YOU buying whole life insurance or even with the product itself really. If you really understand how it works and you want it, then buy as much as you like. But if you realize that you regret the purchase in a few years, don't come crying to me. My problem is with the way the product is sold and especially those who sell it inappropriately while masquerading as unbiased financial advisors.
Top Ten Reasons to Regret the Purchase of Whole Life Insurance
# 1 Bad Advice
The regret of purchasing a whole life insurance policy is often wrapped up together with the realization that you have been getting bad financial advice. Once you become financially literate, this isn't terribly surprising. I mean, you went to someone with an obvious financial conflict of interest expecting unbiased advice. You don't go to a used car salesman and ask whether you should drive to work or ride the train expecting an unbiased answer. Likewise, you shouldn't go to an insurance agent and ask if you should max out your retirement accounts or buy whole life insurance and expect to get the right answer.
# 2 Better Use For Their Money
Most doctors, especially young doctors, have a far better use for their money than whole life insurance. After a decade or more of deferred gratification, the cash flow needs of a graduating resident typically exceed the cash available. There are student loans to pay back, house down payments to save up, disability, term life, and malpractice insurance premiums to pay, retirement accounts to max out, Roth conversions to do, emergency funds to save up, and 529s to fund. These docs don't have a prayer of starting a non-qualified investing account for at least a few more years.
Yet, I keep running into doctors who owe $300K in 6%+ student loans who just bought a whole life insurance policy. What kind of a jerk sells such a thing to a young doc? Well, there are only two answers to that question–incompetence or connivance, your choice.
# 3 Life Changed
Here's another common issue. Life changes, and it changes far more frequently than we think it will. If you buy a whole life policy and a couple years later decide you want to work part-time or take a sabbatical or something else happens to your income, you can spend less money and save less money for retirement.
But you know what you can't cut back on? That whole life insurance premium. You've just picked up a massive fixed expense. Or perhaps life changed in other ways and you no longer have the need for insurance you thought you did. Or maybe you changed employers and now have four times the amount of tax-protected space in retirement accounts. Either way, a life-long commitment to a whole life insurance policy doesn't work out well when life changes. Buying a whole life policy is like getting married–it's either until death do you part, or it's going to cost you a lot of money to get out. How much money? Well, it's often similar to the cost of changing jobs or changing houses–tens of thousands of dollars.
# 4 Unnecessary Insurance
As a doc becomes financially literate, she realizes that insurance is, on average, a bad deal. This is a mathematical certainty. You see, the insurance company collects premiums and must use that money to cover its expenses, pay its policy holders for any bad things that happened to them, and hopefully turn a profit. The average payout must necessarily be less than the average premium. Since insurance is a bad deal, you don't want to buy any more insurance than you need to cover financial catastrophes. Whole life insurance is, by design, supposed to pay out any time you die no matter when that may occur during your life. That includes time periods before you have an insurance need and after you have an insurance need. Dying at 85 is not a financial catastrophe, it's an expected event. You don't need to insure against it.
There are many bad decisions in life — don't make whole life insurance one of them.
These days people are being suckered into buying whole life insurance just to get a long-term care rider on the policy. This is a classic example of buying unnecessary insurance. You've now bought a whole life policy you don't need just to get long term care coverage. If long-term care policies weren't so terrible, this wouldn't even be a consideration.
# 5 No Asset Protection
A large amount of the cash value in a whole life insurance policy is protected from your creditors in many states. If you don't live in one of those states (or moved from one of those states), but bought a whole life policy primarily for the asset protection benefits, you're highly likely to regret your decision. The following states have weak (I'm defining that as less than $100K) or no creditor protection for whole life insurance cash value: AR, CA, CO, CT, GA, ME, MN, MT, NH, ND, PA, SC, SD, VA, WV.
# 6 Tax Advantages Oversold
A frequent method of selling whole life insurance is to claim there are massive tax advantages to buying it. “Tax-free retirement income!” “Tax-free to your heirs!” It isn't that the agents are lying, but they ARE misleading you by what they're not pointing out. Consider the tax benefits of whole life insurance:
- Tax-protected growth. The dividends/interest aren't taxed as you go along. Technically, this is because they represent an overpayment of the premiums, but in essence, this is exactly what you would get in most investments and types of investment accounts. You get this in an annuity, a 401(k), a Roth IRA, a defined benefit plan, and even your home. In fact, even a stock that doesn't pay dividends will give you this.
- You can borrow against it tax-free, but not interest-free. Again, this is no different from your 401(k), your house, your car, or even a collection of mutual funds in a non-qualified account. Of course, borrowing money is tax-free, it isn't income.
- Tax-free death benefit. It's nice that your heirs don't have to pay taxes on the death benefit when you die. But this really isn't any different than almost anything else they inherit. If they get your house, your investment properties, or your mutual funds, they also get a step-up in basis there for a tax-free inheritance.
- Partial surrender tax-free. This “First in, first out” tax treatment is a nice feature of whole life insurance. You can partially surrender the policy and take out some of the principal before taking out the interest. You can't necessarily do that with most investments or even an annuity. But again, it's no surprise this is tax-free. You've already paid tax on this money; it's your principal, not interest. It's not actually income.
But look at the tax benefits you don't get.
- No tax deduction for contributing. You get this with any tax-deferred retirement account, HSA, or in some states, a state tax deduction or credit with a 529.
- No lower capital gains taxes. If you surrender a policy with a gain, you don't get to pay at the lower long term capital gains rates even if you've held the policy for decades. You pay on those gains at your ordinary income tax rate.
- No tax loss harvesting. If you surrender a policy with a loss, you're just out of luck. You can't even use that loss to offset investment gains, much less any of your earned income.
- No depreciation. If you buy a rental property or other real estate investment, you can depreciate it, shielding some or all of your income from taxes. Even if you sell the property before death, that depreciation will be recaptured at a lower rate. There is no similar tax benefit with whole life insurance.
- Interest not-deductible. Yes, you can borrow tax-free against your policy cash value. But not only are those terms often unfavorable to you, but the interest isn't deductible like borrowing against your house or your investments.
When policy holders realize the tax benefits aren't nearly as good as the agent made them sound, they often regret their purchase.
# 7 Negative Returns
This one happens way too frequently. This isn't a bug, it's a feature of a whole life insurance policy. For a period of years after purchase, the cash value of the policy will be less than the total of premiums paid. It must be so. The insurance company has expenses, particularly the large commission paid to the selling agent. Some of the premium also has to cover the cost of the death benefit.
It should not be a surprise to see that you're in the red for 5, 10, or even 15 years after purchase. If you would have read the illustration you were given when you bought this you would have seen that. But this is a major reason why people regret and even surrender a policy they've held for 2, 3, 7, even 10-15 years. “I'm still underwater! I thought this was a good investment!” No, it's not a good investment and you should have expected to be underwater for years after purchasing it.
# 8 Low Returns
Even after the policy eventually breaks even (and all but the most terrible will eventually), many investors are disappointed to learn just how low the returns on your cash value are. The reason is usually that they mistook the dividend rate for the rate of return.
These are two very different numbers, and only in the very long term (3-6 decades) does the rate of return begin to approach the dividend rate of 5-7%. In fact, the policy for all its talk of “guarantees” really only guarantees a return of about 2% per year, less than the average rate of inflation, on a policy held for the rest of your life.
Even the rosy projected returns (generally projected as high as the law allows them to be projected) typically average out to only around 5% on a policy held for your entire life. If this isn't what you were expecting when you bought the policy, you're likely to regret its purchase.
Platinum Level Scholarship Sponsor
# 9 Cost of Insurance Rises
This one is technically not about whole life insurance, where the premiums are guaranteed, but about its cousin universal life insurance.
Universal Life Insurance
In a universal life policy, the cost of insurance actually goes up each year just like it would with an annually renewable term life insurance policy. While the cost is quite low in the beginning, allowing a substantial amount of cash value to build up, as the years progress the cost of the insurance eats up more and more of the premium. Eventually, it eats up the entire premium and starts into the cash value.
If the investment performance of the policy was not as good as projected (and it usually isn't), the entire cash value can be used up to pay the premiums. Once the cash value is gone, the policyholder must start making larger and larger premium payments each year to keep the policy in force.
Rather than being a source of income in retirement, the policy has now become a huge expense! Often, the policyholder cannot afford to keep it in force and ends up surrendering the policy, technically with a fully taxable gain and no cash value to pay the tax bill on that gain!
Unlike a whole life insurance policy, many universal life policies really aren't designed to provide a large death benefit after a long life. The only way to even have the policy in force at the end of your life is to dramatically reduce the death benefit as you get older so you can afford to pay the premiums from the cash value or your other income.
# 10 Non-qualified Investments Aren't That Bad
Finally, many docs get suckered into buying whole life insurance because they don't know where to invest more money for retirement after maxing out their 401(k). Aside from the fact that the agent is unlikely to suggest such places as a Backdoor Roth IRA, an HSA, an individual 401(k), or a defined benefit/cash balance plan, those who are not very financially literate don't realize that they can actually invest money outside of retirement plans and insurance policies.
Platinum Level Scholarship Sponsor
If you invest tax-efficiently using total market index funds, municipal bonds (or funds), and equity real estate, a non-qualified account is an excellent place to invest for all kinds of purposes, including retirement. You benefit from the lower qualified dividend rates, the lower long-term capital gains tax rates, tax-gain harvesting, tax-loss harvesting, the ability to use appreciated shares for charitable giving (flushing the capital gains out of your account), and with real estate, depreciation and exchanging. There's nothing to be afraid of here, especially since the tax benefits of whole life insurance really aren't all that great anyway.
Whole life insurance is a product designed to be sold, not bought. Most who buy it regret their decision. Now you know why.
What do you think? Have you bought whole life insurance? Did you regret it? Why or why not? Comment below!
Sounds like the author of this piece had a poor experience and rather than giving 10 reasons where it CAN be bad, they speak from opinion rather than all facts. Half of this info reflects facts, but too much is left to opinion which just shows a lack of knowledge around the subject if you actually truly study this stuff. Whole life is purely a tool in a toolbelt. You wouldn’t use a tape measure to hammer a nail now would you? You probably could get the job done, just inefficiently. Same goes for utilizing any financial tool. Perhaps this would take out the opinion from this article and actually just present all information.
Bryan,
The Flowbee haircutting vacuum was also a tool. Just because something can be described as a tool doesn’t give it credence.
Do you sell life insurance by any chance?
+1000, hilarious
My MIL actually uses a flobee when cutting the FIL’s hair. Now I understand why my brother in law decided to shave his head bald: so he’d never have to use that tool again
Great analogy
Whole life may be a tool (ironically sold by tools), but its use should be reserved for exceedingly rare cases
Bryan, rather than take potshots at the author’s “opinions,” why don’t you tell us where you disagree and why. That would actually be a useful comment–tell us when and how this “tool” is the right one to use.
What task do you see this tool as ideal for and what percentage of my readers need to accomplish that task?
That’s the important question. And it turns out that for every task you can use this “tool” for, there is a better tool available. Those tasks where this tool may be the best are very rare.
I have found that purchasing a hammer can be very difficult. My experience with trying to purchase term life and disability were multiple multiple emails/phone calls/powerpoint presentations on purchasing whole life/variable life etc…products I had no interest in purchasing. I had to repeatedly refuse the product and redirect to the products I wanted before they were sold to me.
oh and yeah my mamaw used a flobee too…..she bought it at rummage sale
Term4sale. Found a broker, told him exactly what I wanted. Set it all up over email. Super easy.
As a Regional VP for the past 10 years and a financial coach for 28 years in Primerica, a company that now has only 130,000 no fee representatives, I would say the author of this article is spot on. They have obviously done their research and they know what they are talking about when it comes to WL/UL policies. My dad had 4 UL polices because he was sold the idea this is a good thing to do for your family. When I realized how much they took advantage of him and how badly they ripped him off, I chose to join PFS and crusade against the life insurance industry.
One thing the author left out. On a Universal Life product or a Variable Universal Life product, the cost of insurance goes up every year, The trick in the UL industry is they tell their clients the premium stays the same which is true. What they don’t mention is that the cost of insurance goes up every year, Since some of the overpayment of premiums initially goes into their cash value account it looks good in the beginning. Again what they don’t tell their clients is that as the cost of insurance goes up, the cash value in their account will start to bell curve out because the UL insurance company has the legal right to pay their premiums first out of the cash value account before they add any benefit to the client. Ie when the client starts the UL, to keep the numbers simple, let’s say they pay $100/m in premiums. The cost of insurance is only $50/m so $50/m goes into the cash value account. As the policy matures, 5-10-15-20 years down the road, the cost of insurance goes up, but the premium stays the same. Ie the client still pays $100/m but now the COI is $200/m. The insurance company legally is allowed to take the extra premiums from the clients cash value account. Eventually the cash value account will go to zero, and now the client has no CV, no investment, the policy will cancel within 30-60 days or the client will have to pay an new giant monthly premium just to keep the policy active.
Now here’s other thing they don’t mention. The insurance company took all your money out of your cash value account. Read your policy, this is considered a loan to you that you have to re pay to the life insurance company at 6-8% interest, and from the point it bell curves it is considered income and is now a tax able event. So for example if they took $20,000 of your money to pay for the continual increase in the cost of insurance over 20 years, you now have no cash value, no insurance, no investment, a loan that has to be re paid at 6-8% interest, and a $4-6,000 (depends of your tax bracket) tax liability.
I have several 1000s of clients from all different occupations, not just physicians, that we as a team have helped get out of WL/UL/VUl and taught them how to invest their money properly, many of them are now millionaires. I know for a fact, You will be WAY better off, perhaps 100s of 1000s of $$ better off, purchasing a level term insurance product for 10-35 years, with monthly premiums about half what you would pay for CV/UL and investing the difference in the premium you would have paid for ul product in tax deferred investments,
Wow! Thank you so much!
I just read your response to a subject on white coat investor. I’m not a Dr. But I fell for whole life policies when I became a widow at a young age. I need to get out of them …any advise I dont thinkni can do it alone. As I can’t wrap my mind around all of it.
If you need a financial advisor, I’d try one of these folks:
https://www.whitecoatinvestor.com/financial-advisors/
If you want to try to do it yourself, check out these posts:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
I’m not a doctor but even if I am I would buy a life insurance because there is no guarantee that I would be alive in the next 20 – 30 years and if I have young children, they would be able to continue with the lifestyle I am able to give them while I am alive as the insurance money will replace the income that is lost when I’m gone. This article made me remember my young dentist who died in a vehicle accident. If he had no insurance, I wondered what had happened to his young family.
Perhaps people who lives past retirement age might regret buying an insurance when they were young, if they knew how to invest then they might have more money 20 years later if they’re alive. But how many knows how to invest and how much time do advisor spend time educating investors? I lost money in 2008 because my advisor couldn’t care less when I decided to withdraw my money. Last year, I decided to again withdraw my investment and again my advisor did not tell me that it is not a good time to make a withdrawal. You’d think 10 years later, I’d learned my lesson.
Investing is a gamble just as Life Insurance is a gamble. If you are planning to invest in GIC, basically know nothing about investment, I’d say life insurance is a better choice. If you’re good at investing and you think you can double your 1k in 100 days, hopefully you don’t die accidentally in 100 days then happy Investing.
The point of this post is not “don’t buy life insurance.” It’s “don’t buy whole life insurance.”
Well, Whole Life Insurance is the base form of life insurance. There’s term too, but that’s another story. The opinion-based article is basically saying don’t buy life insurance because of these reasons. But to sum up life insurance – you buy Whole Life insurance for just that: your life. The company offers dividends? Cool, that’s a bonus. They don’t? Ok, I died 5 years into having this plan, only paid around $5,000.00 over the course of owning this policy, and now my beneficiaries get $100,000.00. sounds like a win to me (well for my beneficiaries). The word choice the author used just comes off as someone who wasn’t aware what they bought, or intended for it to be something else. For example, they call beneficiaries “heirs”. This isn’t a trust. This is so my family can figure out what do when they no longer have my income. In the end, this just sounds like a disgruntled writer who didn’t do their research, or at the very least, read what they were purchasing.
Did you read the whole article? The author doesn’t say “don’t buy life insurance because of these reasons.” Jim advocates buying sufficient term life insurance while you need it. The second of ten points lists the types of insurance you should have early in your career, including “disability, term life, and malpractice insurance”.
Do you seriously think that $100K in whole life death benefit will help a high income surgeon’s family figure out what to do when they no longer have that provider’s income? Go back to flogging commissioned products to uninformed consumers. Better still, please don’t.
The $100,000.00 was more of a mathematical example, but ok, you can be irate about that. Also, my comment was more of a reply to the contributor above me. And to add something on term insurance: term is great, and it’s cheaper. But for a little extra each month, why not take advantage of benefits the company offers? Like dividends for example. It’s potential numbers left on the table. And you don’t know what’ll happen in the future. What if you need to take a withdrawal? The whole life policies have cash value which you can access via loan or withdrawal. Is it ideal? There are pros and cons, but it’s something readily available to you and it’s still insuring you and your family.
It’s not a little extra a month. It’s generally 8-20X the price depending on the term product you compare to.
If I need a “withdrawal” I go to all that money I saved by using smart investments instead of whole life insurance. It’s added up to hundreds of thousands so far in my life.
Yes, there are pros and cons, but the cons dramatically outweigh the pros for almost everyone.
You seem shocked to have come to a blog and found that it contained the author’s opinion. Did you mistake a blog for wikipedia?
Somebody above asked you what you do for a living. Would mind answering that question for readers so that they might better understand your conflicts of interest?
Eric…can you provide an example of a person that needs life insurance for their entire life?
Also, you mention that the whole life insurance is so your family can figure out what to do once they no longer have your income…if that’s the goal, wouldn’t it be cheaper to use term insurance to cover your working lifespan rather than a policy that potentially goes forever?
I can give a few reasons. One spouse has a pension that gets cut in half for the surviving spouse who additionally will lose one social security benefit. Thus at death, there is a need to create money for income replacement and a term policy, like it states is for a term designed to end . The ROR on the death benefit for the one you love is guaranteed and quite higher than other guaranteed investments.
I disagree that the return is necessarily higher than other guaranteed investments. In the long run, the return approaches bond returns, in the short run it’s terrible. A treasury bond bought in the 80s would have outperformed a whole life policy over the next 30 years and that period had the best return that whole life has ever seen. No surprise there, it’s just math since the insurance company portfolio is mostly composed of bonds so after their expenses/profit, your return has to be less than the return provided by bonds.
Another reason: Because of a morbidity issue one is unable to get a long term care policy. Their retirement is made of investments and SSI. Placing a whole life plan in an ILIT with HEMS provisions can keep an estate eaten by care of one spouse from ruining the retirement of the other.
You can put other investments besides whole life in an irrevocable trust. And if you have a morbidity issue, it will also affect the cost of whole life. Assuming you can’t self insure against LTC expenses like most readers of this site can, I’m not convinced that WL with a LTC rider is a better option than LTC insurance by itself.
And another: Your children were not blessed with desire or talent or skills to have a job that can provide them with a good retirement. You love them and seem to always be needed financially by them. Maybe by moving 10% of your estate into an ILIT won’t change your lifestyle and it gives you peace of mind knowing you can help them from the grave. Again, the death benefit in most cases is right up there with returns of bonds, cd’s and most diversified conservative portfolios.
I agree a desire for a guaranteed amount of a permanent death benefit is a good reason to buy a permanent life insurance policy, although you will likely leave them more money using traditional investments. Expected long term returns on a whole life policy bought today range from 2% (guaranteed) to 5% (projected.) If you’re happy with those returns, than WL works fine. Personally, if I’m going to tie up money for decades, I expect a higher return.
I disagree that “whole life” is the “base form.” I would argue that annually renewable term is the base form, but I guess you’re entitled to your opinions, just like I am.
Your heirs are generally also the beneficiaries of your life insurance policies and retirement plans. Most people understand that in my experience.
If you don’t like my writing, don’t read it. There’s plenty of other stuff out there on the internet to read.
What?
Term life solves the die young issue.
If you’re trying to double your money in 100 days, that isn’t investing, it’s speculating. Try Bitcoin or Roulette.
I agree that whole life insurance is not appropriate for physicians and others in similar income ranges. However, the author of this article did say that it is “inappropriate for the vast majority of people on this planet,” implying that it may be useful for somebody. I have found that others who write about the topic also have similar disclaimers.
Can somebody who is not an insurance salesmen describe the scenario where whole life is an appropriate product?
WCI had a post a few years back detailing situations when it may be appropriate:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
Thanks InfoRPh! That’s a great post and should be sent to anybody considering purchasing whole life.
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
I don’t know why I bother writing new stuff. I should just keep republishing the old stuff. 🙂 I guess that’s what the new Throwback Tuesdays are for.
Thanks InfoRPh and WCI! That’s a great post and should be sent to everybody considering purchasing whole life.
Hey DEEP, my opinion is that whole life insurance (or “permanent” life insurance) may be useful to the individual who really REALLY wants a guaranteed death benefit. But make no mistake, you will most certainly pay for that guarantee.
So if someone is willing to pay for the guarantee that their beneficiaries will receive proceeds from life insurance even if they die at 95, whole life insurance can provide it.
At issue is the fact that secondary features of whole life insurance are often touted as primary reasons for its purchase.
As an aside, I used to sell insurance. The promotion of whole life insurance by the company I worked for was one of the reasons why I decided to leave.
A story I hear over and over again from the Secret Society of Real Financial Advisors. “I used to sell crap until I saw the light.”
I feel like this debate has occurred on this site at least dozen times. Probably more than that. It’s the same every time, but for some reason I keep following along.
One thing I’m trying to get a better sense of is what percent of the whole life pushers are true believers. My feeling is that most sell it to make a living. And they’ll do whatever it takes to sell it, even though they know that a particular client likely has better uses for their money.
But I’m convinced there are a certain percentage that really are completely deluded into thinking it is a great product that lots of people should buy. Now don’t get me wrong. These people understand there are flaws also, but they have done some sort of mental cost/benefit analysis and they have determined that it is on balance better for anyone they would sell it to. Generally, they have made a mistake somewhere in their analysis, but getting them to see it or acknowledge it is impossible. Their whole world view is tied up in it, and if they were some how convinced that all they were doing is ripping people off that would be a hard pill to swallow. So they just have a blind spot that can’t be overcome.
I remember reading a study related to political beliefs that if you showed people evidence that something they believed was wrong, it paradoxically made them even more likely to continue believing it. Or it was something along those lines, it’s been a while since I read it. I suspect something similar is going on with the issue of permanent life insurance.
I don’t know what percentage of whole life defenders are these types, but I’m sure there will always be some. So the cycle will continue. WCI will make a post like this and we get the same arguments every time. Same as it ever was. For some reason I find it amusing enough that I’ll keep following along.
I think most actually believe they’re doing their clients a favor.
I absolutely think they are true believers. To a hammer, everything looks like a nail. To an insurance salesperson, every financial situation can be addressed with insurance. The benefits of permanent life insurance are institutionalized and deeply embedded in the industry psyche. I was reading the CFP course content on Life Insurance and Annuities, and right in this theoretically graduate-level material is an 8-point list of reasons why you shouldn’t “buy term and invest the difference.” Four of the points simply suggest that individuals won’t invest or will invest inappropriately without the permanent life policy. Imagine you’re a young insurance salesperson, trained to believe these products are in the clients best interest (or at least “suitable”) and then read this tacit endorsement of permanent life in the study materials of the highest certification in your profession. What I would challenge the insurance salespeople to consider is the alternative tools available to better accomplish the same goals. If they flip the script, I think they will find very few circumstances where permanent life insurance makes sense.
>> Imagine you’re a young insurance salesperson, trained to believe these products are in the clients best interest (or at least “suitable”) and then read this tacit endorsement of permanent life in the study materials of the highest certification in your profession.
Tim: Are there generational or historical change issues in play as well? Wasn’t JMKeynes head of an insurance company early in his career? When I found that out it made me wonder that though I thought I had a rough layman’s appreciation for the history of things, that maybe finance had changed even more than I thought. What do you think?
I’m no financial historian, but I’m old enough to know you’re right. When I started in financial services in the mid-1990s, essentially the only way to make money giving financial advice was through commission-based sales. You were either a stock broker or an insurance salesperson. I was a stock analyst, so not precisely in that world, but I worked at a brokerage firm and got to see how the sausage was made. It was churn and burn. The stock brokerage commissions were high too, like $0.06/share and even higher for public offerings. There were terrible incentives to constantly trade clients’ account. The world is changing, but very slowly. There are still hundreds of thousands of brokers and insurance salespeople compared to low tens of thousands of fee-only advisors. There are very few flat-fee advisors. Older brokers/salespeople are stuck in the old ways. Older clients often feel just as stuck (with their brother-in-law Bob from NML, ha!). I think the industry as it exists today will be dead in 20-30 years as younger people bring a more cynical and sensible eye to the market.
Yeah sounds right. I have whole life. I’m one of those ones WCI says should just keep it. I’ve made it work for me because I’ve had to since I bought early and had it a long time before I got into aggressive investing with other vehicles. It wasn’t until then that I learned about financial and tax stuff and realized some of these 10 points myself. But fortunately these later other investments pull the load for me and WL is in comparison a tiny part for me now.
ROTH’s didn’t even exist when I bought mine, though as he shows that doesn’t help so much. Since I’ve owned WL for so long I’ve seen how polarizing the debate is. WCI is one of the only ones I’ve seen who actually shows you the problems with WL and is reasonable. Tells you why. The fact is that many investment advisors stridently say “WL isn’t an investment, you should buy term and invest the difference” with them! WL is like a house, whether it’s an investment or not I guess depends on how you’re using it. It’s not a good one for most people as WCI shows. And the vast majority should by term, but the invest the difference part is where advisors and brokers get ahead of their skis and promise what they typically don’t deliver. I’m a DIY investor and I’ve done well, much better than I’d ever have done by having these idiots construct a diversified portfolio for me. You know efficient frontiers and all that.
The problem as I see it is that half the financial advisors are no less conflicted than WL agents. I have a sibling that also bought WL about when I did. Yep, you guessed it, another sibling was an agent. After some years she talked to a local investment group that told her WL wasn’t an investment and they should be managing her money. She’s happy with them, but I wouldn’t be if I were her. So she sold out her WL and I kept mine, but my portfolio vastly outstrips hers. I don’t pay fees and I’m a Buffet style investor.
So anyway, just realize that most advisors don’t grasp the historical context, and they’re not doing their clients any favors by not elucidating the problems with WL, as has WCI thankfully, and basically being as partisan as insurance agents and as blind to financial reality. WL probably made sense at one time for many people, possibly even most, but if so that time has past and it’s a different world now. But the fact is that if you can’t manage your money yourself you’re never going to have very much of it and someone else will be getting wealthy off of you, and it doesn’t matter if it’s insurance agents or financial planners. That’s my view of it anyway.
Yes!
WCI: Term life+invest the difference>whole life
Insurance salesman: Whole life> not saving at all
Technically both are correct! But I know which was more applicable to me!
Great article with detailed explanations! My aunt has purchased whole life insurance a couple of years ago. BUT going over the reasons why she did so and her health, age and weight, it turned out to be the best/only option for her. I would love to get your feedback on her situation if you don’t mind. My aunt is 54, she immigrated to us 10 years ago with no prior savings. she’s considered extremely overweight for her height – so the term premiums they quoted for her were too high. and she also makes very little annually as a TA, about $20K a year. What she was trying to achieve with the whole life insurance is really just a end of life payout for her burial expenses. The whole life insurance was offered to her through work, for $50 a month with no doctor examination for a $19k payout. Now when i evaluated her options: term is too expensive and she is still young enough that she can over-live 15 or 20 year term. If she puts that same $50 in a index fund or invests in some kind of stocks, even with the average to high payouts in the next 20 years, she will hardly get close to $19k. So really in her case this was the only reasonable solution. Can you please let me know if my thought process sound? Or am I missing something? Thanks for your feedback in advance.
This is exactly why I think people who make blanket statements “never buy this” or “always buy that” are silly. They’re appropriate times for whole and appropriate times for term, a good physician can assess the customers needs and respond accordingly…..
I guess if she dies with absolutely nothing that would be worth $19K then that would ensure you didn’t have to pay her burial expenses. However, given she only makes $20K a year, I would assume she’s already partially dependent on you so what’s the big deal if you are making up the difference between the value of her estate at death and the cost of burial? $600/year is a lot of money when you only make $20K.
The following is meant as helpful advice, not criticism: Burial expenses are the least of your aunt’s problems. She has a crisis of both wealth and health!
She didn’t become extremely overweight overnight. Likewise, some combination of income and expenses resulted in her having not a dime to her name at age 44. After a decade of (presumably legal) residency in the United States, she still only earns $20K per year. You didn’t mention how much she has saved or how many hours she works per year, but from what you’ve described she hasn’t been able to save $19K in her first 54 years of life on this planet. That would only be $1900 per year for the decade she’s been in the U.S.
Does your aunt live with you? Do you financially support her? If not, she should consider moving somewhere with a lower cost of liiving. She should moonlight, work overtime, pick up a second job, or otherwise do something to increase her income and savings. If she isn’t staying with familiy, she should get a roommate or rent a room (not an apartment) off of craigslist. Likewise, she needs to get her extremely overweight situation under control if she wants to live much past 54. Eating less, walking more, and running cost little or nothing.
At this point, it sounds like Social Security is her main plan for retirement. That isn’t as terrible as it might sound, since she should have 40 qualifying quarters of earnings. She is below the first notch point, so Social Security will return 90 cents on the dollar for her Average Indexed Monthly Earning (AIME).
It sounds like your aunt has overcome a lot of adversity. Hard work over the next 10-15 years and the help and support of her family could provide her with a decent retirement. Spending $600 per year on whole life insurance when she can’t save $1900 per year for her life in retirement doesn’t sound like a prudent use of her time and money.
I agree with EVERYTHING in your comment (honestly, it’s full of so many hard truths that I hope the OP will be able to convey as compassionately as possible to his aunt)… Except the point about “no savings in 44 years”. I think this is a uniquely American perspective because most of the time Americans can emigrate and convert the purchasing power of their savings into other currencies, so sometimes it’s difficult to grasp that that’s not universally applicable.
I for example am in the upper 1% of savings for age in my country. Based on my local currency, at my average high savings rate, I will be able to retire early. But only if I retire in my home country.
But if my country’s politically and economic instability gets to boiling point and I choose for non financial reasons to emigrate (safety, human rights etc) my relative wealth will hardly get me through my recertification let alone the costs of moving to a developed country. That’s not an indictment on my behaviors or savings habits, it’s merely a fact of the value of different currencies internationally. It’s difficult for immigrants in America, no matter how disciplined they may have been in their past lives in their home countries, to start from scratch because it’s literally starting from scratch. Savings that may have bought her financial freedom in her home country can be paltry when converted to USD and used to fund the cost of living in the US. Just a perspective that I think you should consider the next time you hear of a muddle aged immigrant with “no savings”.
Cash value life insurance can make sense for people whose business or estate planning require permanent insurance.
There used to be a legitimate application for those who expected estate tax liabilities and used a ILIT plus permanent insurance to pay the bill. The policy needed to be in force at death, so permanent policy. Very few people need this now that the estate tax exclusion is so high.
Whole vs univeral: they are basically the same thing with universal showing the owner how premiums, expenses and investment returns combine to determine the cash value. With whole life, the same thing is going on, but behind the scenes. In both, the insurance company promises a death benefit and some, low, investment return. If costs, mortality experience or investment returns are better than the guarantee, then cash value goes up faster.
Both are usually sold with high commission costs, although some claim there are ways around this with universal life.
But if you don’t need permanent insurance, you can get bond like investment returns at lower cost.
Whole life truthers are akin to chiropractors who believe what they offer truly is a panacea. Unfortunately, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
What do you think about private placement life insurance?
It’s just cash value/permanent life insurance by another name, usually a universal policy such as a VUL. Maybe you get slightly better pricing, but you can run the numbers the exact same way. More info here:
https://www.wealthmanagement.com/insurance/private-placement-life-insurance-explained
More info on VULs here: https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/
In Canada PPLI is a much better deal since you can have investment control over the premium/asset-accumulation, throughout the period where you do own the PPLI. The frictions of agent commission and state insurance premium tax are avoided with PPLI, to let more of the client’s funds flow into the insurance mechanisms. Canada’s provinces collect similarly to the states. From an efficiency perspective, PPLI is the best (least bad?) method of purchasing permanent life insurance. Domestic USA and Canadian permanent insurance sales agents never mention their commissions or the insurance premium taxes remitted to governments. That’s a shame.
Hi WCI, it’s nice seeing you showing such distate for whole life insurance hahaha. I have seen plenty of unscrupulous so-called financial professionals out there pitching unsuitable products, so I understand the general animosity towards life insurers. But this product is very carrier-specific and design-specific. I think it’s pretty versatile and can play a unique part in most people’s financial plan. How about I email you a specific illustration and you tell me why I should get out of the profession ;).
You won’t be the first to do so nor the last. So far I haven’t seen one that really changes my general opinion on the product. But knock yourself out.