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By Dr. Jim Dahle, WCI Founder
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, three-fourths of them regret their decision. Even among the general population, more than 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 never have 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?
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.
Remember as you go down the list, 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. My problem is with the way the product is sold, especially by those who sell it inappropriately while masquerading as unbiased financial advisors.
Top 10 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 expect unbiased advice when you ask whether you should drive to work or ride the train. Likewise, you shouldn't go to an insurance agent and expect the right answer if you ask whether you should max out your retirement accounts or buy whole life insurance.
More information here:
An Open Letter to Insurance Agents
#2 Better Use for Your 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 before they reach an attending physician salary, 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 $300,000 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? 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 that 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, they realize that insurance is, on average, a bad deal. This is a mathematical certainty. The insurance company collects premiums and must use that money to cover its expenses, pay its policyholders 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.
More information here:
Is Whole Life Insurance a Scam?
The Worst Financial Gifts to Give Your Kids
#5 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 $250,000) or no creditor protection for whole life insurance cash value: California, Colorado, Connecticut, Maine, Minnesota, Nebraska, New Hampshire, North Dakota, South Dakota, Washington, West Virginia, and Wisconsin.
#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 or HSA. In some states, you get 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 is not deductible: Yes, you can borrow tax-free against your policy cash value. But those terms are often unfavorable to you, and the interest isn't deductible, like borrowing against your house or your investments.
When policyholders 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 five, 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 two, three, seven, or 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 eventually will), 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.
#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, the cost of the insurance eats up more and more of the premium as the years progress. 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.
More information here:
Should You Keep Whole Life Insurance Policy and How to Cancel
#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.
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 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.
Have more questions about life insurance and what kind of policies would be the best for you? Hire a WCI-vetted professional to help you sort it out.
What do you think? Have you bought whole life insurance? Did you regret it? Why or why not? Comment below!
[This updated post was originally published in 2019.]
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/
What steakhouse are you inviting people to, in order to give them a presentation. I love getting those free steak dinner cards in the mail. I attend them just to ask the questions nobody else can think of, and I love to see the presenters face when I call him out on pretty much everything he says.
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.
My grandmother paid $400 a
Month for 25 years for LTC she never used,
It was for her and my grandad. With the chronic care rider I have, I have the option to use LTC, but if it’s not needed I have several other options with my whole life as well
I bought whole life young, but I’m going to let the dividends start paying my policy in retirement at roughly 65.
I will have paid roughly $80,000 in premiums and if I don’t use the chronic care, then I’ll have several hundred thousand in life insurance and relatively significant cash value. For me, it’s a no brainer that the whole life is better than LTC insurance, but I realize not everyone buys it at 28 like I did
Glad you’re happy with your policy.
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.
Earnest and Young, a fairly reputable accounting firm
Would disagree with you.
They see cash value life insurance or fixed annuities as a valuable part of a portfolio, in fact, they calculate that having a fixed guaranteed portion of your wealth in these products will actually leave you with more money
https://www.ey.com/en_us/insurance/how-life-insurers-can-provide-differentiated-retirement-benefits
I don’t sell insurance and I’m not a doctor, I am in medical sales, I max out my 401k and I have a VUL I bought 4 years ago, and a whole life policy I bought when I was 28 from New York life, I’m 44 and I’m pretty happy with it.
The dividends could already make the $2,100 a year payment if I wanted them to, but I’ll just continue paying for now
Let’s see how your policies have done shall we? Can you tell us what your cash flows and dates have been and what the current cash surrender value of the policy is? Let’s calculate your return and then everyone can decide for themselves if you’ve had an attractive return.
I’ll be glad to look at my statements and post where my policies are, however,
It isn’t a 0 sum situation for me. I bought the whole life young, and at that time I knew very little about investing.
I bought it as insurance, it started at a $240,000 death benefit and it had a long term care rider that enables me to use all but $10,000 of the death benefit for LTC if needed.
At the time I could have cared less about that, now, I Al very glad I added it.
My argument isn’t that whole life is some amazing investment.. in fact, I’m not really arguing anything at all.
I was discussing investments and financial things with one of my clients, and he shared your website, I have read some great things, so I am not here to argue.
I was just sharing, that my whole life policy is something that I have been happy with.
Most of of my life insurance is term, but I value having guaranteed death benefit, with the Whole life and the VUL, the cash value is just another added benefit.
I max out my 401k, and I can’t do a Roth, I have a brokerage account. Above and beyond that, the roughly $6,000 of life insurance premiums every year, isn’t something that’s cramping my lifestyle
Why can’t you do a Roth?
Glad you’re earning enough that your premiums don’t matter and that you value what you’re buying with them.
My whole life policy, current cash flows have been $34,000 and change, this is the 14 year of the policy that started at $240,000 death benefit and $230,000 long term care benefit.
The Cash Value is $40,000 and change, so, not great growth. The DB is up to $263,000
By 65(my planned retirement age)
It is projected my cash flow into the policy will be $91,723 and projected Cash value of $195,852 with a DB of $377,000
My VUL, I actually started it at 37 I thought it was5 years ago, that show how fast time goes, this is year 7,
Cash flows into the policy are $26,920. Current cash value is $32,852. If I surrender the policy now there would be a $2,500 fee roughly. By the time I’m 48 there will be no surrender fee.
My death benefit is $239,000
I doubt the S&P will be quite as strong over the next 20 years as it was the first 6-7 years of this policy, if it was, my projected cash value appears to be $634,000 at age 65, at that time I would have put $112,000 into the policy.
So much better potential than the whole life, but, it’s variable, so nothing is guaranteed
So I’m putting about $6,400 a year into these premiums
So it’s always enlightening to calculate the returns on these things. They’re usually lower than most owners of policies think. For example example, let’s consider your whole life policy. You’ve paid $34K over 14 years. To make it easy, we’ll call that a $2,429 payment a year. It’s now worth $40K. That’s a return of 2.45% per year. Actually better than plenty of policies I’ve looked at, but kind of depressing when you consider the return on another commonly used investment (the stock market) over the last 15 years has been 10.66% per year.
The VUL you’ve paid $26,920 into it over 7 years (approximately $3,846/year) and it is now worth $30,352. That’s a return of 3.97%. That’s actually really good for the first 7 years on a cash value life insurance policy, lots of them haven’t even broken even. But it’s obviously much less than what you would have had without the life insurance wrapper. 5 and 10 year returns on the stock market are 11-12% per year. Basically the cost of the insurance for these 7 years was 7-8%, or 2/3 of your return.
You’ve got to really value the guarantees and death benefit to accept such low returns on a long term investment.
Funny you cite that “study.” I wrote all about it here:
https://www.whitecoatinvestor.com/ernst-and-young-insurance-products-study/
We don’t meet the income guidelines, I know there is some work around. I just haven’t really been that interested in doing it, the vast majority of my 401k is Roth
More info on the work around if you ever decide you want to do it:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
This was my 14th year doing it.
Thanks WCI, I probably need to bite the bullet and do it. In 6 years I can do catch up contributions and I don’t need to leave that money on the table
True, not great returns. There is some good news. The whole life return will get better and better from here on, it will peak at about 4.2%.
Still not great, but again, I do value the long term care rider.
Also, I had my agent send me a summary of cost in the VUL, the life insurance cost working the policy are about to start reducing drastically.
Basically the life insurance company makes most of its money in the first 10 years, then the life insurance expenses drop a lot, so, based on what the S&P does, the returns on that policy could improve significantly over the next 8-10 years.
Again, the cash value within is good, I think there will be a big chunk in 15 years, and even more when I retire at 65.
But for me that is something went terrible in my plan money.. it’s not money I’m counting on for retirement.
I hope to live a long love and leave both of those policies to my family with whatever other assets I have left.
Agreed and of course when making a decision about whether to keep it, all you should care about is the return going forward.
The agent commission drops off but the insurance company charges for cost of insurance do not get better with time. They get a ton worse. actually. The hope is the returns going forward will keep the csv high such that there really isn’t any insurance since you don’t get both the csv and the death benefit. The csv is in essence part of the death benefit. I think there was an article by an insurance insider called like unmet promises of life insurance. When you see how drops in the market instantly effect the csv and at the same time charges for insurance go up and now drastically bc insurance is based on csv amount csv the death benefit, the risks are pretty high especially if you take out money in retirement.
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.
As I’ve said elsewhere in comments on other articles: whole life WAS perhaps a good thing for families before current investing tools were available. I expect my FIL, a retired Sergeant Major, would not have saved up the $1m or so his wife received from 3 whole life policies at his death. Probably they would have had nicer cars or homes along the way and higher living expenses instead. But if he had gotten term life (only until no more need ie kids grown up and on their own and couple reaches FI) plus index mutual funds he wouldn’t have had to die or borrow (or be widowed but had paid double by covering his wife) and would have had a portfolio much larger had he put in the same amount of money as in the whole life policies.
But times have moved on and unless we suddenly start owning some business or farm worth more than the estate tax threshold and want our heirs to inherit without having to sell it, we have no need for whole life. And luckily we are smart and disciplined so we needn’t settle for a crappy return to force us to save for the future. (Besides, if you haven’t the discipline to put aside say $1000/month for the future + $200/month term life expense then you are even more likely to abandon a $1500/month ((higher amount needed to get same returns)) whole life policy to have more for current spending.)
I’m not sure I agree with that particular argument (“forced savings”) for whole life. I’ve heard it used to justify expensive houses too. Your last line explains my thoughts on it exactly.
It’s actually false. The forced savings ie monthly pay lapse rate is higher than those who pay yearly and don’t need forced savings. It doesn’t really work for 401k . People take it out or stop contributing.
what about somethiing like Whole Life Legacy 10 Pay insurance? Is it good because of the tax stuff it has? From what I get, this insurance lets your money grow without getting taxed unless you take it out. And if you borrow money from it, you usually don’t have to pay taxes. Plus, when someone gets the payout when you pass away, they don’t have to pay taxes on that money either. Sounds like a good deal for people who don’t want to pay a lot of taxes, right? Or are the fees to much?
Did you read through the whole article? Any time you borrow money, you don’t have to pay taxes, because it’s a loan, not income.
Hi Michelle,
Thanks for your reply. I did read through the whole article, and it makes some excellent points about why whole life insurance may not be the best option for many people.
However, I’m still curious about the potential tax benefits for certain scenarios. I understand borrowing money is not taxable since it’s a loan. But the tax-deferred growth and tax-free withdrawals in retirement seem advantageous, at least on the surface.
I’m especially interested if there could be a niche case where the tax benefits might outweigh the high fees. For instance, someone who has maxed out all other tax-advantaged accounts, does not have any debt, and wants some fixed income exposure. In that situation, could the tax deferral from the whole life policy provide enough extra returns compared to a taxable account to justify the fees? Or would an annuity be a better bet?
I’d be very interested to see the article explore the economics for scenarios like that, where someone has limited tax-advantaged space left. Perhaps the commissions and fees still outweigh any tax benefit in the end, but it seems worth quantifying for those niche cases. Just wanted to offer that perspective for consideration.
It’s been discussed many many times and the answer is no. Limited pay policies don’t even currently illustrate better than other policies designed for cash value at this time . The tax deferral isn’t worth much bc the return is so horrible and that difference between true investments compounds over decades. The guarantees on loan rates are not attractive. Better performing companies on paper use direct recognition and reduce your dividend on loan amounts so loans cost even more. You even risk lapse if loans done early in retirement. Likely pay more in interest than you would have in taxes especially if you are careful how you withdrawal from your other accounts. WL has been around for over 100 years and the reason good non biased data in favor of it doesn’t exist is bc it doesn’t exist. It’s all white papers and case studies filled with biases towards WL. If you read through all the other WL articles which I grant you is a lot, you will probably understand. The only agents who don’t like WL are those who push IUL or VUL.
Thanks Rex for your reply.
I read this article on the site earlier, https://www.whitecoatinvestor.com/friday-qa-what-about-10-pay-whole-life-insurance/
However, it compared 10 pay whole life with a stock index fund in a taxable account. What I was wondering is how the analysis compares if compared with a bond index fund in a taxable account. If we assume someone has maxed out on tax advantaged accounts and also already has stock index funds and is looking for the best way to get fixed income exposure.
Hey Tom I think Jim already went through scenarios that would make sense in this post:
https://www.whitecoatinvestor.com/is-whole-life-insurance-worth-it/
None of the appropriate scenarios that Jim cites in his articles utilize whole to maximize tax benefits when investing. I can’t see a scenario where you utilize whole life for just a tax benefit despite not having any more tax advantage space. Investing in taxable accounts still outweight a whole life policy, no matter how little a death benefit and the costs and commissions. In the end, you are losing money in fees that is not being invested.
Its a terrible idea for that too beyond what i could type in one reply. To begin with, it doesnt do what bonds do so it isnt even appropriate. I dont buy bonds bc i want crappy returns over multiple decades even longer than i would use them for since you must hold until death and not just in retirement. I own bonds so i can rebalance amongst other things which you frankly cant do with WL. If you said i dont care and tried, then in the short run way inferior and in the long run guaranteed levels way inferior and illustrated is complicated but likely low end of bonds but possibly much lower. Maybe you think there is no way you will just get the guaranteed results (notice im not even considering insurance company go under). Well Ohio National who specialized in this kind of sale for people focusing on cash value, did force all customers to the guaranteed rates relatively recently. Also EVERY insurance company begged for a change of the statutory guarantees (to lower them) in all WL because THEY didnt think they could continue going forward in this environment. They got it changed. The insurance companies also changed their overfunding in the last decade either limiting it, increase the rider cost, increasing load for PUAs, making it more tricky like you cant miss a year of overfunding and others and these rules are not guaranteed in the contract so they can continue the changes.
As i mentioned before a limited pay does NOT illustrate to perform better than other cash value strategies at the moment and there are several lipsticks on this pig (limited pay, overfunded, early high cash value, blended with term, combinations of these depending on company). You can buy a life policy and overfund it and trigger paid up at year 10 or 20 and at the moment illustrate better ( i actually havent checked in about 4 years but not much has changed and certainly what has changed hasnt been favorable). Currently MYGAs and other fixed beat even a WL thats been in place for a decade.
You know the insurance industry paid a well known economist, Wade Pfau, to produce a paper showing how WL could help with a retirement strategy. You should look that over and the evaluations of that “research”. You wont find as many papers on limited pay but they again wont necessarily do better so i wouldnt focus on that. Every attempt frankly is an attempt to limit the actual amount of WL you purchase bc WL itself is toxic. Thing is you dont need to buy any of the toxicity at all. Send Jim the illustrate if you want just like many of the agents in the past.
Thanks Rex for your reply.
If someone has maxed out their retirement accounts and is considering 7-pay whole life insurance primarily for fixed income portfolio exposure due to its tax advantages, but is wary of the high commissions and fees, what would be your recommended avenues for bond exposure?
Municipal Bonds?
Tax-Managed or Tax-Efficient Bond Funds?
Laddered Bond Portfolio?
Deferred Annuities?
CRTs?
Does it matter if the person is above estate tax thresholds (once those rates reset in a few years)?
The intention is to guarantee an amount that covers all future post retirement expenses.
Its interesting that you keep fixated on the limited pay WL…
IF your intention is to GUARANTEE for retirement then WL is one of the WORST. The guarantees are pathetic. I guess you decided not to think about what just happened to Ohio National. Guaranteed WL returns are below inflation returns and im talking normal inflation. Now technically nothing can guarantee that all expenses will be covered except a ton of money bc you dont know what inflation will do and what those costs will be but using WL is a terrible way on a guarantee basis bc it locks you into a situation with poor guarantees for income over your entire life. Didnt the last few years make that clear?
WL is NOT exempt from estate taxes. You need an irrevocable trust for that and anything can be put in that. WL is also a bad choice even amongst insurance for putting into an irrevocable trust since it is no longer your money. Better to put a no lapse gUL in there assuming you wanted to use insurance at all since you cant loan out the money.
On a guaranteed basis WL currently has lower returns then everything you mentioned and it even has illustrated returns lower than many of them. You seem to want to purposefully confuse guarantees from other products with non guaranteed returns from WL.
If you are young, you just shouldnt do this. You should fill your tax advantage accounts with whatever bonds you want and put equities in taxable. You for some reason want to pretend somebody should be looking for higher bond exposure to justify purchase or sale of WL which isnt guaranteed to perform bond like. If older lets say 50 then currently id purchase MYGAs. They can lock in reasonable rates to get you to retirement or close enough. Places like fideltity have low cost VAs if one wants to use that instead or needs to 1035 when the MYGA guarantee runs out.
Best way to secure income in retirement assuming healthy is delay SS until 70 since that is inflation protected and not to do stupid things like using WL as an investment.
I’d prefer all of those to WLI for “bond exposure.”
And no, there’s nothing magic about WLI for estate taxes. It can help if you have a liquidity need at death though (i.e. an estate tax problem and a family business or farm etc.)
It’ll look better if you compare to something with lower returns, like bonds. But only over long periods of time. Bonds don’t take 5-15 years to break even like whole life does.
Considering the foundation of it is long term corporate bonds, I am not sure anyone would compare to anything else.
And yes, it is over long periods of time, but what’s the problem? If someone wants best returns within 5 year period, go get 5 year bond; if they are looking for something great for the long term then limited-pay dividend paying whole life can be great due to long historical performance and the foundations of it (tax advantage, long term corporate bonds, insurance side business etc…) Also takes away the hassles of rotating CDs and bonds for 30+ years of life and paying income tax on them. Or worse, paying some “fiduciary” 1% on that 4% CD rate he got you, after paying income tax on it.
Yes, bonds don’t take 5 years to break even, it’ll just take life time to do so as people keep locking up the money as some become matured. There is no guarantee that they would end up getting the same amount of money they put in, you don’t need to ask Silicon Valley Bank for it as there are many less extreme cases of such being not the case.
If you want “something great in the long term” then stocks or real estate is likely to provide much better returns.
People aren’t putting everything they have but weekly grocery bills into stocks/real estate investments. No one who is in favor of WL is arguing it can replace stocks and/or real estate investments for the potential for better returns; it is a bond/bank replacement.
Most people will have a significant amount of money in banks/bonds for a significant chunk of their lifetime (30+ years), whether before or during retirement. Dividend-paying WL is very attractive alternative to rotating CDs and bonds for 30+ years, having the money locked up over and over, and having to pay income tax on them. When a bank is giving you 3%+ CD rate, they are safely getting around double that elsewhere along with the mutual insurers, I’d rather be with the mutual insurer who’d give me the profit and have it come out tax-free.
Also, it need not be either WL or stocks/real estate, one can do both or all three at the same time, whether to use the cash value to “buy the dip” or real estate opportunities. No one is putting all their money in either bank/bond/stock/real estate, the money is spread out as it should.
I think you need to talk to more agents if you think no one is in favor of WL over stocks and real estate. I hear that all the time. Accounts too, 401(k)s, Roth IRAs etc. Heck, half of them don’t even know about the Backdoor Roth IRA process.
I agree WL returns over many years should be somewhat similar to CDs and bonds. No surprise, that’s what most of the insurance company’s portfolio is invested in.
I’d say there are more WL detractors who keep comparing it to stocks/real estate than WL agents, that’s practically what the saying “buy term and invest the difference” is all about. Meanwhile, everyone ends up having significant amount of money in either banks/bonds for practically half their life time, and many are now getting excited about getting taxable rates that WL policyowners have been getting without taxes when the interest rate environment was near zero for 15 years.
There are no tax free withdrawals of earnings in retirement. But you get to take out your principal first. Withdrawn earnings/gains (i.e. in a full surrender or a partial surrender after principal has been withdrawn) are subject to ordinary income taxes.
Here is a post about the niche cases where whole life could make sense:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
Since there is no limit on investing in a taxable account, no, just maxing out tax protected accounts is not a reason to “invest” in whole life.
Buy whole life because you want a death benefit. Buy an annuity because you want guaranteed income. But if you’re looking for an investment, stocks, bonds, and real estate are the place to look. That’s what whole life insurance companies invest their money in.
I like 10 pay (or even 7 pay) better than forever pay, but it still shares most of the downsides of whole life.
If you are more interested in not paying taxes than in having more after tax, then sure, whole life works great for that. So does losing money though.
what commissions do an insurance salesperson get on whole life policies generally?
Depends on how policy is structured and the agents contract but for a vanilla WL policy 100-120% of the the first year premium and 10% for the next decade then nothing.
50-110% of the first year’s premium.
The author writes: “This is a mathematical certainty. The insurance company collects premiums and must use that money to cover its expenses, pay its policyholders 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.” — Really? Why do you not need to insure against it? Everyone is different. Some 85 year old’s still work some of them are providing for their children or grandchildren or more. But don’t insure against it. Really? There is a lot of assumption. The reality is this product works for some people and for others it does not. Just because you have a problem with the way it’s sold is really the motivator for this article? 10 reasons not to go to the emergency physician. P.S. I don’t have a problem with emergency physicians themselves just the way they interact with their patients. C’mon son.
Let me guess what you do for a living….
What percentage of people have someone else depending on their earned income at age 85? Since much more than half of people are dead by 85 and almost all of the rest are no longer working, I’m going to go with less than 1%. And most of those are probably so wealthy from working for 65 years that their nest egg will more than provide for their spouse or anyone else currently living on their earnings. But if you can find someone who actually has a life insurance need at 85, sure, sell them some whole life and still be able to look at yourself in the mirror in the morning.
If you want to start a blog about lousy experiences at the ER, knock yourself out. I assure you that you will have plenty of material.
Oh now we’re talking percentages. You didn’t say anything about percentages in your 4th reason. Another tone deaf comment. I’ve browsed this web page and can already see what’s up and what time it is. You have a good one.
Thanks for stopping by. I guess you don’t have much a counterargument to that point then?
I definitely have a counterpoint but you DID not address my point sir. Can you explain why you don’t need to insure someone that’s 85 years old? Their death could cause a financial catastrophe for some people. Correct me if I’m wrong but it sounds like you’re assuming someone that is 85 should be well off financially?
Yes, I’m assuming someone that is 85 is no longer earning income needed for that person or dependents. If that is not the case, then this could be (an extremely rare) use of a whole life policy.