Whole life insurance has been a pillar of income to life insurance salesmen for years. It is often recommended, particularly to high earners, as a guaranteed investment with some wonderful tax benefits. Alas, its flaws generally outweigh it’s advantages. Here’s why:
1) The insurance costs too much.
When a whole life insurance policy is sold (and they’re always sold, never bought), the buyer and seller generally focus on the investment portion of the policy, not the insurance policy. The silly buyer just naturally assumes he’s getting the insurance portion at the going rate (such as what he would pay for term insurance.) Fool. Like any business, they charge what they can get away with. If you’re not paying attention, you’d better believe the price gets jacked up. A bigger problem is that young people can’t afford enough whole life insurance to cover their actual need for insurance, so they end up buying a separate term policy anyway, or worse, they don’t and walk around under-insured.
2) The fees are too high.
You don’t pay the fees directly, but you do pay them with lower returns. For example, the commission on a whole life insurance policy is generally 100% of the first year’s premiums then 6% of premiums every year after that. That’s money that doesn’t get invested on your behalf. By comparison, the commission on a term policy is about 50% of the first year’s premiums, then 4% of premiums after that. It’s pretty easy to see what the financial incentive is. Sell whole life instead of term, and upgrade the policy at every opportunity. 100% of a new policy is far better than 6% of an old one. “But you don’t pay the commissions, the company does” argues the salesman. Where do you suppose the company gets the money from?
3) You don’t need a middleman for your investments.
Consider what the insurance company does. It takes your premium each month, pockets its profit, puts a certain percentage of the premium into a pool to pay the benefits of those who die, and then invests the rest in a relatively conservative portfolio, such as bonds. You can invest in bonds directly. Which return do you expect to be higher- the one where they shave off some profit before investing, or the one where you invest your entire lump sum? It’s like buying a load mutual fund. In fact, some cash value life insurance policies actually DO HAVE A LOAD. Can you imagine? Not only do you have to pay for an expensive insurance portion, you then have to pay just for the privilege of investing your money with them.
4) Complexity favors the issuer.
After a while, people figured out that whole life insurance was a rip-off. So to disguise that fact, the companies just made the products so complex that only their actuaries could figure them out. Even those who have spent a great deal of time trying to figure these policies out don’t understand them. Even the guys selling them don’t ompletely cunderstand them, but you better believe they understand the commission structure. Suffice to say, the more complex it gets, the worse a deal it is for you.
5) Even when it works out okay, it takes a long, long time to do so.
Most whole life policies, if you hold them long enough, actually have an okay return. The returns often even beat inflation. Unfortunately, that usually doesn’t happen for a while. Take a look at this chart of the actual returns of a policy:
This chart, from the Visible Policy (great site by the way) illustrates 4 lines demonstrating the actual performance of the site author’s whole life policy. The solid green line is the cash value of the policy. The thin line is the total of the premiums paid into the policy. The reddish orange dashed line is the effect of inflation on out of pocket dollars, or the real total of the premiums paid into the policy. Finally, the blue dotted line is the total cash value of an investor who bought a cheap term policy, and then invested the difference between the whole life insurance and term life insurance into a good bond fund.
There are several things to notice. First, it took this particular policy owner 8 years just to break even, 12 if you actually consider inflation. 12 years is a long time to have a negative return. This was particularly true for me. The policy I once owned was still in the red after 7 years when I cashed it out after realizing the error of my ways. It should be noted that this policy owner has done all he could to minimize the effects of the fees. He bought a good size policy ($100K), he pays annually instead of monthly, and he bought it from a mutual life insurance company. And still, after 14 years in the policy, he is barely beating the total of the inflation-adjusted premiums and cannot even keep up with the guy who bought term and invested the difference in lowly bonds. I’m a pretty patient guy, but that’s a long time.
Now, these policies eventually do give you a decent return after 30-40 years, especially when considering that the proceeds are tax-free. Unfortunately, almost no one sticks with them that long. But if you’ve had one for many years (say, more than 10), think twice before cashing it in.
6) Your return will be much closer to the guaranteed amount than the projected amount.
When you are shown an illustration, they always show you the projected amount, but you don’t ever get that. There may or may not be a chart of the guaranteed amount, which will be significantly lower. But you ought to pay far more attention to that, since the company has just about zero incentive to pay you any more than the guaranteed amount. In my limited experience, I barely made more than the guaranteed amount, and didn’t get anywhere close to the projected amount.
7) You are not adequately paid for the loss of liquidity.
Stocks, bonds, and mutual funds can generally be cashed out any day the market is open. You can change investments or use the money for living expenses without much hassle. There are only two ways to get money out of a whole life insurance policy. The first is to surrender the policy. Since your returns don’t even start becoming decent until after the first decade or so, it doesn’t make sense to be surrendering policies frequently. That just enriches the salesman and the company at your expense.
The second way to get to your money is to borrow it from the policy. This has a few issues. First, borrowed money is no longer available to your heirs as part of your death benefit. Second, just because it’s your money you’re borrowing doesn’t mean the interest you’re paying on that money goes to you like with a 401K. Some of it usually does, but not all of it.
Lastly, in some complex cash-value policies, borrowing too much can actually require you to have to put more in each year to keep the policy in force. Heaven forbid the policy collapses on you and then you have to pay back all the money you’ve borrowed. Not a good thing when you’re obviously short of cash (or else why would you be borrowing the cash value in the first place.)
The buyer of a whole life insurance policy should be well paid for giving up this liquidity. Unfortunately, he is not. In fact, he won’t even perform as well as an all-bond portfolio.
8) You probably don’t need the income tax or estate tax benefits.
Insurance salesmen are quick to point out that since loans from your insurance policy are tax free they’re somehow better than 401K or IRA money. Never mind that you paid all those premiums with after-tax dollars. The proceeds should be free! The death benefit is also tax-free, which provides a way to avoid estate taxes for wealthy people. Of course, under current law, a couple doesn’t even start paying estate taxes until $10 Million, a sum most doctors won’t reach. And if you start getting close, there are other things that can be done, such as trusts and gifts to reduce the size of the estate. You could even, heaven forbid, spend the money on something fun or give it away to charity.
Pros of Whole Life Insurance
Now, as promised, 4 reasons why I recommend whole life insurance.
1) You don’t have the discipline to save enough money.
The idea behind buying term and investing the difference is that you actually invest the difference and then at a certain point are wealthy enough to self-insure against your death. If you can’t do that, or don’t want to, then you might be better off buying whole life insurance. Like a mortgage forces you to accumulate equity, a whole life insurance policy forces you to accumulate cash value. It might not be at a very good rate, but at least it accumulates. Many people don’t save any money. Many of those who do bounce around from investment to investment, trying to time the market unsuccessfully. You’re better off slightly under-performing a bond portfolio long term than dramatically under-performing a bond portfolio by being a crappy investor.
2) You like guarantees.
A whole life insurance product has a guaranteed return, no matter what happens in the markets. That guarantee is worth something. Probably not as much as you’re paying for it, but it’s worth something. If the next 30 years looks like the last 10 in the markets, those who bought a big fat life insurance policy instead of investing in stocks and bonds might have the last laugh.
3) You have already been in a policy for a long time.
As mentioned previously, after a decade or two, remaining in a whole life policy can actually be a good idea. The commissions and fees are water under the bridge now, so you might as well take what you can get. Especially in an era of low interest rates like now.
4) You have a need for permanent insurance, especially as part of an estate or business plan.
Many undersavers have a need for permanent life insurance because they never become financially independent and have someone depending on them, such as a disabled child, even in their later years. If your child or spouse is dependent on your social security or pension payments, you’d better have a policy in place to protect that income stream. Most of the time, your spouse will get at least 50% of your benefits, so that doesn’t become a big issue. If you save adequately, you can provide for a disabled child’s future using your savings instead of life insurance proceeds.
More commonly, a wealthy person might have an illiquid asset, such as a farm, some rental properties, or a business. When that person dies, the asset may have to be liquidated rapidly at an unfavorable price to pay out the will proceeds or perhaps even pay the estate taxes. The death benefit of a whole life insurance policy can cover those costs. A partnership might also buy a whole life insurance policy on each of the partners so that in the event of death, the proceeds of the policy can be used to buy out the heirs of the deceased, avoiding turbulence in or even failure of the business. A term life insurance policy can often be used for these purposes, but not always.
There you go, 8 reasons to avoid it, and 4 to consider it. Share your own experience in the comments below.
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Excellent and well balanced post. Having recently married an ER doc, I have been busy extracting her from the clutches of the financial industry. Northwestern Mutual had its claws in her pretty good. Upon first blush, I thought for sure I was going to jettison the 500K Whole Life policy ASAP. Instead I concentrated on getting rid of the crappy fund of funds investment she had and the accompanying front end load and high expenses. I’m keeping the whole life policy for now because of how I weigh a few of the factors you list plus one you miss. I believe most of these policies are secure from personal injury judgments. Moreover, for those who are lucky enough to have higher assets, there is something to be said for the Guarantee. For you Interventional Radiologists and the like, you only need to get rich once. I don’t think it hurts to have a portion of the portfolio in a good policy like this and know it is rock solid (I am assuming a policy with a very good company). The long and short of it in my mind is that they are most well suited (though certainly not a necessity) for the well-heeled…
8 reasons to avoid Whole Life
1- Insurance cost too much.
Since you are analyzing this policy based on economic efficiency then the problem is most of them are poorly designed, concentrated in highest debt benefit at the lowest premium.
That is why insurance cost too much, a well design policy concentrates on CV growth, the insurance coverage is reduced to allow efficiency on the growth of CV.
2 The fees are too high.
Fees are determined by amount of base death benefit, the lower the base debt benefit, the lower the fees.
3-You do not need a middle man for your investments.
A company promises interest and pays non guaranteed dividends as earned.
On a policy designed for banking, the investments are up to you. One of the safest ways to grow your policy is financing your own needs: Pay that car loan to your policy at 8%, pay that credit card balance to your policy at 16%, You pay that to the bank, don’t you?
4- Complexity favors the issuer.
I give you this one, but learn to borrow from your policy to pay for what you were going to buy anyway and pay it in the same terms you would pay the banks and you will do great.
I do not think that is too complex.
5-Even when it works out OK it takes too long to do so.
Want quick profits? go buy the lotto. Nothing great in the world has ever been achieved without put in the time and effort. A well design policy will give you liquidity and protection so you can engage in your own projects and profit overtime.
6- Your return will be much closer to the guaranteed amount than the projected amount.
That goes for most products out there from stocks to mutual funds, why singling on whole life insurance? Plus with a whole life designed for banking the returns are up to you not up to a glorified manager that makes money when you win and when you lose.
7- You are not adequately paid for the loss of liquidity.
I do not know what you are talking about here since in a well design policy for banking you have access to at least 90% of your deposits within 30 days of the policy being funded and approved.
8-You probably do not need the income tax or the estate tax benefit.
How do you know that? You do not know who is reading your article and badmouthing a great tool can prevent many families to benefit from it.
Your pros are OK except the first one so I go along with those. But there are many more pros:
Liquidity, use and control
Legal protection in many states
Collateral for a bank loan
Tax free withdrawal
High contribution limits
Disability protection
Educational end economic legacy
Works as a check mechanism for inflation
Protection for your loved ones.
Documentation: “Becoming your own Banker” by Nelson Nash
“How Privatized Banking Really Works” Carlos Lara & Robert P.Murphy Ph. D.
“Pirates of Manhattan” Bary J. Dyke
Jorge-
Thank you for your long and extended comment. I note to readers that Jorge (based on his link) is some type of a promoter of the concept of “bank on yourself” which has been discredited many times and in too many places and most likely makes his living selling insurance policies. I limit my comments to his criticisms of the article, rather than the whole bank on yourself concept.
1,2) I agree most of them are poorly designed. Yes, it seems pretty clear that when you get less insurance, the fees should go down.
3) This involves the bank on yourself idea. I have a better idea than borrowing from a whole life policy to finance stuff you want to buy. It’s called “Saved Money.” It’s not like it’s a free loan. There are fees on loans from most whole life policies. Plus, any borrowed money is simply subtracted from the death benefit at your death, reducing its value as an insurance policy. Readers need to think about what an insurance company does. It takes the money, pays its profits, puts some money toward insurance, then invests in the same stuff you and I can invest in. That’s called a middle man. Cut him out and your expected profits rise.
4) Same terms I’d pay to a bank? Show me the policy loaning money at 2% after-tax. That’s what I get from the bank for my mortgage. I don’t borrow from banks for other stuff.
5) Few would argue 12 years just to break even is a good investment. Pretty gutsy. Nice try though. I don’t think anyone is going to buy that one.
6) I’m not sure you understand how stocks and bonds work. There isn’t a guaranteed return.
7) A “well-designed policy for banking” isn’t a typical whole life policy as I understand it. It’s much more of a universal life policy (which isn’t usually a good idea either). The article is about whole life. And certainly 90% of the first month’s premium IS NOT AVAILABLE to the investor within 30 days. It’s in the salesman’s pocket.
8) I’m confident I know my readers better than you do. I’m not worried I’ve badmouthed a good tool.
As far as your pros:
Liquidity, use and control–Not liquid, much harder to use and control than similar investments.
Legal protection in many states–True as noted by previous commenter, but so are 401Ks, IRAs, and sometimes even home equity. This is a much smaller issue than most docs believe, especially those with a malpractice and umbrella policy.
Collateral for a bank loan– Avoiding bank loans is probably a good idea anyway.
Tax free withdrawal- Borrowing is not the same as withdrawal. I’m concerned you seem to not be aware of the difference. There are some tax benefits to cash value insurance, just usually not enough to make up for the downsides. The withdrawal might be tax free, but they usually aren’t fee free. So basically, you pay money to borrow your own money. Doesn’t seem so smart to me.
High contribution limits- Yup. You’ll sell us as much as you can.
Disability protection- Uhhhhh…….I’m confident there are better ways to cover this important need. Again, complexity favors the issuer.
Educational and economic legacy- there are lots of ways to leave a legacy. Cold hard cash works fine.
Works as a check mechanism for inflation- Better ways to do this.
Protection for your loved ones- Better ways to do this (such as term life)
All in all, you’re entitled to your opinion that a whole life or other cash value policy is a great idea. But I have yet to meet someone who doesn’t directly profit from selling life insurance that thinks these are good investments. A wise reader needs to ask himself, “Why is that? Is everyone else just too dumb to realize how good these things are?” Then he’ll realize how unlikely that is.
This is the most irresponsible faux attempt at finance writing I have seen. Compound that with the hubris of the writer and its downright dangerous to those who are uninitiated.
Have you done any real research? Do you have any idea what a modified endowment contract is? How executive bonus plans structure these contracts? The difference in expense ratios from one carrier to another? How insurance planners can strip out comission and insurance cost to increase the IRR? The billions that corporate America plows into these plans you say are worthless? Not to mention banks for their tier 1 capital reserves? The difference between portfolio based policies versus variable? How a dividend works? The difference between public and mutuals? Do you have any working knowledge of the tax code or it’s impact? Can you explain the difference between Universal and Whole life? Do you understand their different expense structures?
Not knowing the answers to these concepts is not a crime, but purporting to be the final arbiter for every physician who reads with respect to the viability of this asset class is insane and reckless.
Do you realize that it is a matter of public record that Ben Bernanke, Chairmen of the Fed invests the vast majority of his own personal retirement dollars in fixed annuities, an instrument that gains him access to the very same general accounts that you are claiming are so poorly performing. Maybe you can offer him your counsel.
You actually suggest a single investor can easily achieve a superior performance and asset diversity by buying bonds compared to a carrier spreading out 150 billion dollar portfolio worldwide across myriad asset classes – public and private equity, real estate, preffered stock, income producing assets, fixed income, etc.
Have you spent ANY time looking at the investment reports of these companies to see how their portfolios are allocated?
How can you tell investors you have never met what they should or should not be investing in? Do you realize that we’re you securities licensed or a fiduciary you could be sued and or criminally charged for throwing out such reckless and uninformed “advice”? but since you are simply a blogger you a free to throw out this egregious junk and physicians may take your lead because you both carry and MD.
im so glad the insurance sales people have come to the party since they show how desperate they are to sell whole life to us physicians. By the way, i personally understand all those terms. While i agree that the blog has some errors, if one buys permanent life insurance and the primary reason isnt a permanent death benefit then they have made a mistake. If you want to take some loans out then buy whole life overfunding it with maxing out PUAs just below MEC level from a non direct recognition company possibly with a limited like 10 pay option or blending it with term. Sadly most agents dont present policies that way bc they dont want to reduce their commission. If you dont want any loan possibilities but want to pass wealth then buy a no lapse gUL but realize you have less flexibility. Too bad insurance agents arent held to a fiduciary standard. The biggest scam they try on physicians are 412i and 412e plans with whole life insurance within the plan. Avoid insurance agents at all costs for your investing advice and make sure you research insurance before purchasing it since so many shouldnt be trusted.
I’m an accountant.
That either also sells whole life or unfortunately recommends it to clients as an investment. Did your favorite agents send you a nice Xmas gift?
Welcome Ray. Thank you for your comment. The MOST irresponsible financial writing you’ve ever seen? Really? I’m honored to be considered tops among all the financial porn out there.
I don’t recall calling any plans worthless my friend. Nor do I recall discussing fixed annuities (which I think can be great) or MECs. My assertion is that they are inappropriate for the vast majority of physicians.
My audience is also not a bunch of corporate executives earning millions per year for whom these policies may be quite beneficial.
It’s noteworthy that I have yet to meet a doc who didn’t regret buying a cash value life insurance policy, and I know a lot of doctors. Why do you suppose that is? Surely some ought to be happy with their polices, no?
Luckily for a lot of the guys selling this stuff, they’re not fiduciaries either. Those pesky bloggers, shining lights where they shouldn’t be shined…
Wow, Ray. Your comments really crystallize why so many us that read this blog are distrustful of people like you. You didn’t explain or refute anything. You basically threw out a bunch of terminology you probably learned once and now struggle to understand yourself. Please feel free to explain. All I see is a baseless attack with words like “insane” and “reckless” without any justification. And why is it at all relevant to physicians how Ben Bernancke invests his retirement savings? Presumably he has the background to make educated decisions regarding his investments without having to rely on a self-serving financial adviser or insurance salesman to make recommendations.
Wow I think White Coat Investor touched a nerve! Keep up the good work, I plan on staying far away from whole life.
The bottom line on whole life is always that you shouldnt buy it unless having a permanent death benefit is the primary reason. A small percentage of people actually need a permanent death benefit and some want it even if that means they have to skimp for themselves. Since these groups arent too many people, agents and the like need to come up with all sorts of twists and bogus logic to make you think you still need or want it. Most of these people get 100% of their “education” from the insurance companies and that “education” is just what angles to push it on you. They arent required to understand the policies in much detail. Those guys above likely wont come back since those of us who really know the topic could just put them to shame.
Something you should know: I got into the Infinite Banking Concept as a consumer.
All I have learned was done on my own research. No insurance company teaches the IBC or Bank on Yourself (The IBC is a financing concept). They teach and sell life insurance.
On the other hand Insurance companies promote and teach solutions to owners of companies and businesses that use permanent life insurance as means of promoting business stability, liquidity enhancement and removing uncertainty from the business future with protection and access to capital.
Insurance Companies make more money on Term life insurance. What is wrong with receiving low premiums with 97% probabilities of having to give nothing in return like University studies document.
A little bit of a challenge here: I read Pamela’s Yellen book a while ago and I know how famous Dave Ramsey and Suze Orman are condemning whole life insurance and pushing people to gamble in stocks and mutual funds.
Well, Dave and Suze still haven answered the challenge that Pamela threw at them in her book and openly on the internet.
Pamela challenged Dave and Suze to debate and prove that buying term life and invest the rest was superior to growing wealth by using the IBC concept (bank on yourself).
The bet is $100,000.00 dollars.
You guys can accept that challenge also.
I would like to learn from somebody with real proof that I have been deceived and should embrace a different way to protect my wealth and loved ones.
Go ahead and make some money; You do not have to fork any money if you do not succeed.
We are prayed on by the insurance industry! “Easy Doctor money” as we are known to them. Enough!
I have read that book in addition to several others on the same darn concept. Just to clear something up that is different than what WCI posted, typical BOY strategies at the moment use whole life although the concept doesnt preclude using other insurance products.
Sadly that book doesnt tell you the full truth. There is nothing special about BOY. It uses the concepts i mentioned above. They prefer Lafayette and then NYL if memory serves me correctly. They have reasons for this beyond their own concept.
Nobody here is promoting dr or so for investing. They stink at that. They are good motivators to get the poor out of debt. Using them here is ridiculous.
Finally nobody can actually prove which is better bc the actual return on whole life is never know ahead of time. That being said, it doesnt make any sense for it to provide better returns. Why not have them prove the opposite? They cant.
Couple points.
First, Bernanke’s personal investments are irrelevant for two reasons. One, he has more limited options for investment in his position. He can not simply put money or take money out of a bond fund or equity fund for instance without at least the appearance of a potential conflict of interest. It is common for individuals who are in such positions (ultimate insiders) to put their money into a blind trust. It could be that an insurance policy might be a better option for him in such a scenario. Second, he is presumably in the late accumulation phase vs distribution phase of investing and thus his investments would not be relevant for a physician in the accumulation phase, which is I think the target audience of this website.
Second, I have looked at the dividends profile for a major insurance carrier going over 100 years back. If you look at the dividend rates, their increases and decreases have generally trailed the bond market peaks and troughs by at least a couple years (and provide sig. lower yields overall, not considering the other fees). This makes sense. It would take time for a portfolio of bonds from the 1950s/1960s/1970s to be replaced with bonds paying double digit interest rates in the early 1980s. Today, as the insurance company has to replace their higher yielding bonds from the 1980s/1990s/early 2000s with today’s government bonds yielding in the 2%-3% range, they will have to a) increase the risk of their portfolio (equities, real estate, high yield bonds, etc); b) offer lower dividend yields going forward and/or c) increase insurance rates (which could take the form of stricter underwriting) going forward. There is no free lunch.
Above is my personal opinion only–not to be construed as investment or insurance advice. Usual disclaimers, etc.
Jorge-
Thanks for sticking around for a conversation. I’d be interested in reading the “university studies” on the bank on yourself concept. My impression after reading Yellen’s book was awfully similar to Rex’s.
The problem with “proving” anything, one way or the other, is you can’t know in advance. By the time you’ve proved it, it’s too late to go back and choose the other path. So you have to evaluate the merits a priori.
The truth is most people are better off “not banking at all” than “banking on themselves.”
mark is exactly correct.
In particular with regards to BOY and Lafayette…They also reduced their dividend scale yet again. To help the BOY crowd that focuses on their product, they also reduced the loan rate to 5%. I would anticipate the trend to continue for multiple years (Id guess around 6). There is a multiple year lag and given the low interest rate environment, this could have major impact on that strategy. Now they might continue to just reduce the loan rate but that isnt necessarily going to work. Imagine those people who took out a large loan (bc they were given the idea that it was safe to do so), now have some issues bc of the economy themselves, and then find out their policy goes bust. They could get an additional slap in the face tax burden to boot.
Now with that said, one shouldnt necessarily surrender a whole life contract even though it was a bad purchase initially. Strangely enough its even worse to surrender a policy as a financial move.
I see that you guys did not post my last comment with information on the Pennsylvania University study on term life insurance.
Thanks for the exchange of communication. I got to keep using my whole life policies as the most efficient way to park and grow my money and being able to sleep at ease while the markets tumble all around. I see that you guys engage in evaluation of processes and products without enough investigation so I do not feel encouraged to follow your recommendations.
Jorge, I assume you did not have your policies with AIG a few years ago. I doubt their policyholders were sleeping soundly prior to the government bailout. Your insurance company could be in a similar situation 30 or 40 years from now when you need the money and not be bailed out. Unless you have policies with multiple different insurance companies, you have got a lot of eggs in one basket–the opposite of diversification. I will take a well diversified portfolio that I have control over and can adapt to my changing investment objectives (as I go from early accumulator to late accumulator to retirement) any day.
BTW, I hate to break it to you, if all the markets are falling in value (bonds, equities and real estate), your insurance “investments” are going to get hit too.
While this is not my site, I’m not aware of any attempts to hinder information here ever. I hope people are happy with their purchases even if they are poor choices.
Jorge- I have not deleted nor even edited any comments on this thread. Please post your link to studies again as it apparently didn’t post. I’m very curious to read them.
Here is something interesting:
SPECIAL REPORT
Tax-Saving Ideas
for Doctors
Carole Foos, CPA
Kim Renners, CPA, MBA
David B. Mandell, JD, MBA
Christopher R. Jarvis, MBA
CASH VALUE LIFE INSURANCE: THE TAXFAVORED
VEHICLE THAT CAN OUTPERFORM
MUTUAL FUNDS
If you Google the phrase “buy term and invest the difference” you
get 20,500 results. What this “common sense” adage means is that, when
considering buying cash value life insurance, you will be better off buying
the cheaper term life insurance product and investing the difference into the
market. The difference is determined by subtracting the cash value
insurance premium the minus term insurance premium. Though not
explicitly stated, this generally means that you should invest the difference
in mutual funds.
Yet, investments within a life insurance policy grow tax-free. As
you saw above, eliminating the tax drag on investments makes a huge
difference over time.
Here, we will prove that life insurance is a wiser investment for
building wealth in a tax-advantaged manner than buying term and investing
the difference in mutual funds.
These guys present a comprehensive study on financial planning that it is too long to post it here.
Also here is information on the Pennsylvania University Study on Term Life that I quickly googled:
Life & Health Insurance/Whole Life 1/3/2004
Advertisement
Expert: Dave Bowman – 7/26/2006
Question
Dave,
I read your 1/3/2004 response on the subject of Whole Life Insurance. I have heard before the statistic you mentined where only 4% of death claims were paid by Term Life and I was curious of the source for this statistic. I appreciate your help. Thanks!
Kerry Kisslinger
(417) 3540-0956
Answer
Kerry: Here’s the story on that:
In the spring of 1993, Penn State University completed a study regarding the fate of term life insurance policies. The study includes over 20,000 term policies with an aggregate face amount of $4,000,000,000. It includes 1-5 year, 10 year, 20 year, and term to age 65 contracts which contained renewal and/or conversion features.
Here are some interesting results of the study:
1. More than 90% of all policies are terminated or converted.
2. 45% of all policies are terminated or converted in the first year.
3. 72% of all policies are terminated or converted within the first 3 years.
4. The average duration before termination or conversion is 2 years.
5. Less than 1 policy in 10 survives the period for which it was written.
6. After 15-20 years exposure, less than 1% of all term life policies are still in force.
7. Only 1% of all term insurance resulted in death claims.
Considering the above findings, the odds are 100 to 1 against term insurance ever being a death claim!
As you can see, my statistic of 4% was actually too high. Please let me correct the record on that account.
Yours truly,
David S. Bowman, CLU
i assume this is a cut and paste and not your actual thoughts so ill try not to insult you personally although that is so poor an attempt i really dont know what to say.
The fact that term doesnt pay off is meaninngless. It isnt supposed to. All that info on term policies is garbage to this discussion. It has nothing to do with proving buying a permanent policy is a smart decision. My car insurance, home insurance, and everything but my health insurance hasnt paid anything yet in my life. Additionally only a small percentage of permanent policies are kept until death which some how they dont mention. Frankly if you do things correctly, what you do is obtain 20 or 30 year term with the idea of cancelling it early if projections on investment/work do as well as you hope and keep it for the full term if they dont since you should have some fudge factor in your calculations on how long you need term.
The cut and paste says the money grows tax free. That isnt true. It is tax deferred and the death benefit is tax free. Accessing your money within a policy costs money with the typical best way as loans but again there is a cost. We could discuss that if desired but sadly this “expert” article actually has a glaring error in the part you pasted.
Where is the actualy study and not this cut and past? You didnt post a single link. If the insurance industry could actually prove this, they would plaster it all over the planet. They cant and anyone who actually understands whole life, knows this to be the case.
I’ve held off whole life despite constant emails and calls from our term insurance company. I was skeptical due to the pressure from northwestern. These agents are bombarding upper level residents. I’m planning on sending an email about this website to my residency program. Great site!!
Here’s the link Jorge is apparently pasting from: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Fwww.docworthy.com%2Febooks%2Fload.php%3Fformat%3Dpdf%26id%3D3&ei=Z-EUT6P2JYmOiALHu4iEAg&usg=AFQjCNGSiZTXjHyCv6LvE5sdm3unJrhOTg
Thank you for posting this publication. It gives me a lot of ideas for future posts.
There is some misleading information in this private publication (not a study in any sense of the word doctors are used to.) For example, a graph that suggests 50% of a physician’s IRA is going to go to estate taxes. More likely, NONE of it is going to go to estate taxes under current law.
The relevant section of the publication to this discussion starts on page 23. This is a comparison the authors made comparing an investment in an equity-indexed life insurance product to an investment in an S&P 500 index fund. The careful reader will note this isn’t a comparison of whole life to index investing. The careful reader will also note the primary problem with the study- the mutual fund investor apparently has no 401K, 403B, 457, IRA, Roth IRA etc. For some bizarre reason, 100% of his portfolio is completely taxable. Eliminate that strange assumption and the conclusions are all thrown out. 1.2% extra return is huge over the 30-50 years of the comparison. The mutual fund investor wins in a landslide.
Equity-indexed life insurance has a lot of problems, probably best described by Larry Swedroe in his Only Guide to Alternative Investments You’ll Ever Need
Another important issue with the published comparison is that there is no discussion of the cash value for those who cash out of their life insurance policy in the first 30 years. It simple isn’t put on the chart. I submit the reason why is that it wouldn’t be flattering to the insurance option.
But if you’re going to submit a study about whole life insurance, please do so. You haven’t yet.
Who cares about cancellation of term insurance except for the companies you leave? I have cancelled 3 term policies and replaced them–each was appropriate for my situation at the time. I recently set up two policies–a 2M 30 year term and 1M 20 year term policy. I hope to be self insured well before the 30 years are up and would be happy for both to lapse unclaimed.
wm77, one thing to look out for is the comparisons to the SP500 returns that they use. They will often try to compare returns to the SP500 without dividends reinvested which is dishonest. They also count on people not understanding real values vs. nominal values.
I agree with you, there is wrong use of language by calling the growth of the CV as tax free.
IT is indeed tax deferred but contrary to all other investments the tax deferred growth can be taken out free using loans that will be repaid by the death benefit.
Mark’s comment about who cares if the term policy is cancelled or expire without a pay-off is because you guys do not take in consideration loss opportunity costs.
I have let myself been led away from the real purpose of using whole life as a financing platform and not investing, because once you have accumulated capital, you can basically do all the strategies you name and put back the profits inside your policy to grow it and do it again.
You have again posted incorrect information. The loans are not free. Which insurance company allows you to tell clients loans are free? I perfectly understand non direct recognition and the loans are not free. Many policies actually collapse bc of poor decisions involving loans. Your additional opportunity cost comments about term just dont even make sense. It seems like you just throw out information, much of which isnt true hoping something sticks as a reasonable idea. Additionally 33% of whole life policies are surrendered within 5 years all for huge losses, around 50% by year 10 many with losses and all with losses if you include inflation and true opportunity costs, and still yet additional policies get surrendered such that likely only about 25% of whole life policies are in force at death. No one lead you into anything. You either dont understand whole life as much as you should or you dont care that its a poor investment and just want to make more money pushing it on doctors. Nice wording on financial platform….completely meaningless term.
Very interesting discussion. I am glad that I ran across the website. I am just out of fellowship for couple years, and looking into getting life insurance. My insurance agent just told me yesterday to consider 20 year term and investing in Mass mutual whole life.Their dividend rates do look impressive, especially because I do not think I can beat those by trying myself. What do you guys think about mutuals, where the proceeds goes to policy holders rather than the shareholder companies?
Here is the published article about their divident rates, especially last two pages:
http://www.twintierfinancial.com/site/wp-content/uploads/2011/03/Mass-Mutual-Dividend-Study.pdf
THose rates look good. But I guess is the catch is in the statement “Dividends include an investment component, a mortality component and an expense component.”
Does this mean those are not the actual rate of growth that we will see?
will Appreciate your help
Sam……
If you dont need or want a permanent death benefit then buying any whole life product is a mistake. You can not buy the product as a strict investment unless you want a very poor decision. The primary reason for a permanent life insurance policy must be a permanent death benefit for it to make sense. The basic reason is as follows: When you buy Mass Mutual or any whole life, you are buying bonds but are paying also for insurance to cover your entire life but on a level basis, paying also for a very pricey middle man, and decreasing your liquidity. A plain vanilla whole life policy takes 13 years for the premiums to equal the cash surrender value. Why do you think you cant do better than that over 13 years? Most over funded policies take almost a decade to break even. I dont think you understand dividends that well. It isnt a return on your “total investment” and each company actually calculates it differently so they arent completely comparable.
Sam-
Welcome to the site. I agree with Rex’s comments. His explanation of the dividends is right on. The dividend is based on the cash value, NOT the total of your premiums. Big difference.
That said, the dividends are real, and are generally higher than what you would make in a bank account or a CD with your cash value. It’s just that unlike with a CD or another traditional investment, not all of your payment goes into the investment, only part of it. The rest goes toward insurance costs and fees.
And I do prefer mutuals in general, but with term life insurance, it really comes down to price. Term life is a commodity, like gasoline. You buy the cheapest of the type you need. I suggest you go to term4sale.com and compare other policies to the one your agent is offering. If he can’t sell you all of those policies, you need a new agent.
Also, your agent is recommending a 20 year level term policy. If you don’t plan to be financially independent in 20 years, I suggest you get a 30 year level term (assuming you need insurance at all). You can always cancel it early and it doesn’t cost that much more. In fact, I bet you could get one for nearly the same price as what he is selling a Mass Mutual 20 year level term for.
Also, remember that the brochure is demonstrating PAST dividend rates, not future ones. Given our low rate environment, you are very unlikely to see this high rates going forward. How will the insurance company provide them? It did it in the past by buying 30 year treasuries and other bonds, taking their cut, and passing the rest on to you. 30 year treasuries currently yield less than 3%. Don’t expect 7% dividends in this environment. Someone above mentioned that dividend rates lag behind about 6 years. I don’t know if that’s true, but if it is, a lot of people expecting 7% dividend rates are going to be very disappointed in a few more years when their dividends drop to 2%.
You guys are awesome. This now makes lot is sense. I am going to get 30 years term for now and then think of investing rest at some point.
Both of us at one time made a serious mistake and trusted insurance agents. While i dont know WCI personally and we dont agree on all things, i think i can say that neither of us wants other physicians to fall for the same garbage. He does a great job with this site and i hope others find it and make use of the good information. Many agents get their claws into us via disability insurance (which is likely a good idea to acquire) and then we make the mistake of trusting them with our financial decisions. Always keep the insurance agent away from your investing. They typically do not have your best interest at heart.
Hi Rex, you try to show yourself as very knowledgeable, but you fail in reading comprehension, I did not say the loans were free. The word “free” was there in reference to withdrawing the money on a tax free basis.
At retirement age loans can be taken on the policy and that does not trigger tax on this money. These loans do not even need to be paid because the death benefit will paid them at your demise.
For you, the financing features of a whole life policy might be meaningless but it is not meaningless to guys that follow Austrian economics.
I think the experience was interesting. Thanks for the information shared.
no matter how you slice it you said taken out free and you made no mention of the cost of accessing that money. you pretended like it costs nothing or that cost is meaningless. I understood perfectly what you tried to do. everyone can read your comments and its clear what you wrote. im sure you will soon disappear from this conversation bc you have no evidence, just insurance agent talk. when the truth comes out, people like you run for the hills.
Well, I am one of those ‘just graduated from residency’ folks who bought into a whole life policy. So reading through these comments, I am still not sure if I made the right decision or just got suckered. I felt that my 401k, Roth and standard IRAs, investment accts, 529s were basically all in the same pot – the market (domestic and international funds). I own a house, i have a rental home, I have a paid off car. I am a very good saver (in the work force for a few yrs before going back to residency)… But the recent market tumbles have only brought disappointment in unrealized capital losses and any realized capital gains get whoomped with a 33% tax. So, the idea of earning dividends through paid up additions and not getting taxed seemed like a nice addition to balance out my portfolio… It also offered piece of mind that my children would get the death benefit if I passed early. But, did I just get suckered? Can someone enlighten me as to what all these magical places to ‘invest the difference’ are??? I have been invested in no-load, diversified funds for a long time and they looked great until about 2008. Any advice on other ways to invest? Anyone have thoughts on DFA funds?
What you are missing is that there are no magical places to invest. None for the insurance company either. Thus if lets say bonds poorly perform over the next 40 years of your life (which is what they mainly invest in), they might not be able to make good on their guarantees and you would have to hope the state guaranty assoc can get another company to cover your policy. This is one of the reasons why dividends are continuing to drop on whole life and likely will do so for years to come. There are no magical investments for insurance companies. They dont necessarily invest better than any other company. Now i dont think that most whole life companies will go under. I think what will happen is that you will get a poor investment but you will get a death benefit if you are one of the few that keep a policy in force until death. Hopefully you purchased plenty of term in case you die early since whole life isnt about dying early, its about passing money when you eventually dies which statistically will be several decades from now. For investing advice, besides here, id go to bogleheads.org and read up on the recommended lists. DFA is fine in my view if comparable to vanguard. The problem typically is that many advisors charge you AUM fees to make it such that it isnt worth it. If you can cut that out or reduce it or make it flat rate then im more in favor of them. Again there are no magical investments for anyone or any company.
Kathy-
Cash value life insurance is a much worse investment for those passing up obvious tax breaks like their 401Ks, 529s, Roth IRAs etc. I’m surprised how many docs don’t even know if they have a 401K (or don’t bother setting one up if in private practice) and have never heard of a Backdoor Roth IRA. If you’ve maxed out ALL OF THAT and then want to put some into cash-value insurance, there are worse financial choices. Keep in mind that after a few years, you’re often times better off STAYING in a policy. You should order a current illustration from the company (and pay attention to the minimum guaranteed returns) to help you make a decision. But if you’ve already been in this policy for 10+ years, you probably ought to keep it.
Keep in mind that not all publicly traded asset classes got whomped in recent years. My TIPS fund surprisingly returned 12% this year, for instance. Also, for those who didn’t bail out at the bottom (and added more in late 2008 and early 2009) the recent bear market worked out just fine.
DFA offers some great funds. They’re a bit pricey for me after the ER (which is usually added onto at least a flat fee, but often an AUM fee), but there’s a lot to like about them. Magic? No.
I’d also avoid realizing short-term capital gains. In fact, I try to avoid long-term capital gains. That 33% tax rate is relatively easily avoided for investments. Using widely diversified, low turn-over, primarily index funds in the taxable account also helps minimize the tax burden.
Thanks for the replies. I max out all of those (of course, now I am out of the Roth IRA salary limit). I definitely did not bail at the bottom, I’ve just left everything alone. I guess at this point, I am stuck in the WL policy, it would definitely not work to my advantage to bail. I feel like I don’t have time to read about different funds, so I just go with target funds, or large class funds. What is a backdoor Roth? is that when you put money in a standard roth and then convert it to a Roth?
in regards to your whole life, you really have 4 options.
1. continue to fund it either indefinitely or for a while and if you do fund it just for a while then you could do option 2 at some point. if during the next several years, you develop an unexpected health problem then id definitely keep it. If you are healthy and you are sure you dont want a permanent death benefit then take action 2 or 3 at some point.
2. do what is called a 1035 exchange into an annuity such as a deferred vanguard annuity. the benefit of doing this is that the cost basis is kept with the transfer meaning if you have paid 200k in premiums then all gains from the current cash surrender up to the total premiums paid are not taxed. You wouldnt have to add any additional money into the annuity if you didnt want to (and i wouldnt recommend it). This works best when the difference between the cash surrender value and your premiums paid is high but such that over the time period you want to invest, the return on the annuity will beat or at least tie the whole life’s cash surrender value. You usually cant accomplish this well in the first year or two of the policy bc there is so little cash value it will never multiply into your original investment but can somewhere a few years later. Let me know if that doesnt make sense.
3. Surrender the darn thing and move on. You must have good term in place before doing so. You dont get any tax advantages as with the 1035 exchange. I think this is best if you paid less than 1 year or when the cash surrender value is close to the premiums paid. At that point the 1035 exchange isnt as valuable an idea.
4. try to maximize your living benefit out of the policy and change your goals such that now you want a death benefit. To maximize the cash value in the policy, you need to pay it yearly (which you should do anyway bc there are fees if you pay it other than yearly), overfund it with PUAs to just below MEC levels (the insurance company can tell you how much this will cost and you should ask for illustrations showing this). Later in retirement plan to take about 90% of the cash surrender value out in loans and not pay them back. Your heirs get the difference betweent the death benefit and what you took in loans. PUAs are tiny little paid up insurance additions that come at a much lower cost. By purchasing them, you will increase both your cash surrender value faster and death benefit over time.
Just as an fyi, im in a similar situation to you.
Read more about a Backdoor Roth IRA . But it sounds like you’ve got the basic concept. I do it every year for myself and my spouse.
I am also in the same place as Kathy and Rex (as mentioned in the very original comment). Rex your last comment pretty much tracks my thought process as well. Nicely done.
I really pity the white coat professionals that listen to your rhetoric. Your talk sounds very credible but that does not make it right.
Let me document why I defend the Infinite Banking Concept:
I have three policies and the cash value grows in them very strong. I use my policies for investing, I have bought income properties and get the rents back into the policies.
I finance my needs with the policies. I go on vacation and take a loan to pay the cost of the vacation, then I set whatever terms I want to pay my policies back.
I would have had to pay credit card companies a high interest or pay cash that steals the interest that my cash could be earning.
I sleep like a baby no matter if the stock market goes North or South. I could care less.
I feel good that I do not have to pull my hair looking for what investments to choose.
I know that by just working my policies and finance my own and my family needs, we are
growing.
You can check these books:
“Becoming y0our Own Banker” by Nelson Nash.
“How Privatized Banking Really Works” by Carlos Lara and Robert P.Murphy, Ph.D.
“A Path to Financial Peace of Mind” by Dwayne Burnell, MBA.
“Your Circle of Wealth” by Donal L. Blanton.
“The Pirates of Manhattan” by Barry James Dyke.
“Money for Life” by Jeffrey Reeves.
“Tax Free Retirement” by Patrick Kelly.
in case you didnt realize, not a single doctor on this thread would pay for any of that with credit cards and allow a balance to remain. You still dont even seem to realize the costs for financing through your whole life policies. None the less, glad you are happy with your purchase.
i pitty the people who use you as an agent. You cut and paste obviously wrong information and then in your own words post additional incorrect info. What does that say about your knowledge and understanding of these products…..tons. You have yet to provide any real data to support your ideas. I wonder why? Maybe you could post some more false information…
You forgot several other books but they are all the same thing. They are filled with stories and superficial knowledge of the subject so that you are left without the complete picture. You have yet to provide any data on whole life and you dont even seem to understand why dividends have been decreasing over the years. Glad you sleep like a baby.
Please avoid the personal attacks and focus on the merits of the ideas presented.
I don’t think Jorge is the best proponent of Bank On Yourself. I actually think there is some merit to the idea. I don’t think I’d ever get into it. But I don’t think it’s the stupidest thing someone can do with their money unless they’re passing up obvious tax breaks like contributing to their 401K or a Roth IRA or making stupid financial decisions like not having enough term life insurance to actually cover their life insurance needs.
Jorge makes a couple of errors advocating this. The first is he doesn’t mention the borrowing costs. Most whole life insurance policies charge you 1 to 1.5% to borrow your own cash value. That’s a real cost to borrowing that money. No, it isn’t very high, but it counts for something. Second, he seems to advocate living the consumer lifestyle. “Now I can borrow and go on vacation or buy a car” or whatever. Better to use saved money for consumer goods. Studies show you spend less and enjoy the purchase more.
He’d do better in this argument if he focused on opportunity costs and the tax savings. The cash value in the whole life policy DOES grow
tax freetax-deferred, meaning it isn’t taxed as it grows. If you choose to surrender the policy (or it fails), those gains become taxable. 100% of your premium payment doesn’t go into the cash value obviously, and with tiny policies like the one I used to own hardly any of it does. But you can increase that percentage by buying a big policy, making paid up additions, and minimizing fees and insurance costs as much as possible. As long as you don’t run afoul of MEC issues, you also get to BORROW the money tax-free. It’s not fee-free, and if you decide to pay the money back into the policy you do so with post-tax dollars, just like the original premium payments. But you don’t have to pay that money back nor do you have to pay taxes on it. There’s some value there. Yes, much of it is just the return of part of your premiums which were already taxed anyway, but not all of it, eventually.The other key thing that makes this whole concept reasonable is the concept of non-recognition. That means that even if you borrow the money out of the policy, the policy still credits dividends on the amount you borrowed. So let’s say you’ve got $20K in cash value, and then you borrow $10K from the policy. If the next dividend is 5%, the cash-value account in a non-recognition policy gets credited with $1000, not $500. Now, the insurance company isn’t going to give you that feature free. I’m sure they make up for it with a lower dividend scale or higher fees. They’re not stupid. But in essence, you’re creating money. You could pull the cash value out and use it to buy index funds or buy investment property. So the $10K in an index fund provides you dividends while the insurance company is still paying dividends on that $10K. That’s worth something. Is it worth more than the costs, hassle, and illiquidity of the insurance policy shell? I’m honestly not sure, but I doubt it. So obviously there’s an opportunity cost to leaving the money in the policy. It seems to me you’re better off pulling it out and investing it elsewhere ASAP. I don’t know if you can add more paid up additions when you’ve got a big chunk borrowed, nor am I entirely clear on the intricacies of keeping the thing from becoming an MEC, which would be financially devastating to someone who had borrowed a lot from a policy. I’m also not clear on how the borrowing fees work if you never pay the money back. Is that 1-1.5% taken out of the remaining cash value, or just subtracted from payments you do make back into the policy? It would make a big difference in the financial viability of this approach.
There are also two very big risks to doing this type of a thing. First, the insurance company can change many of the rules. For example, it can cut dividends to nothing. That seems pretty likely if there really is a 6 year lag between bond yields and insurance company dividends. Second, Congress can change the rules. They did it in the 80s to prevent life insurance policy “abuses” not so dissimilar from bank on yourself. If this becomes really popular, it’s possible they’ll do it again. Then what are you stuck with? A crappy whole life insurance policy. At least if you had the money in more liquid investments you could just cash out and move on to something else.
Overall, there are big red flags to doing this. The first is that it is complex. It is a general rule that the more complex the product, the more likely you are to be screwed over using it. The second is that very few credible investment authorities (possibly none) advocate doing this. The only real advocates out there have a financial stake in it. Bad sign. Third, there’s nothing magic about what an insurance company does. It isn’t scalable to pay out huge dividends every year on empty cash value accounts. Eventually the company would go broke doing this. It isn’t logical. So eventually, somewhere, the company is making up for those losses, or they go out of business. Both are bad for you.
My Guardian policy is 8% if i were to take one. Now Lafayette (the typical chosen BOY company) actually reduced their loan rate to around 5% bc they are trying to create a situation where it is a near wash given their current dividend rate when you consider non direct recognition but it is not free but similar to what WCI mentioned. As dividends decrease this may or may not be harder to maintain a good balance for them as a company. Its a moving target since in a bad economy maybe more people are forced to surrender their policies. This is one of those strange situations of bad for them but okay for you if you already have a policy. Many companies also have reduced loan rates after 20 or 30 years. In general most non direct recognition companies have slightly lower dividends than direct recognition to cover this cost of business. If you know you will never take a loan and still want to use whole life, you may wish to actually consider a strong company that is direct recognition instead although you may prefer a no lapse gUL policy if you want permanent insurance and dont have to worry about paying the premiums since this would be cheaper for the same death benefit but near zero cash surrender value. Finally, if you have a policy and want to see what taking loans will probably do to it, have the agent create an illustration with the loans. Remember these are dividends are not guaranteed and the illustration will be with the current dividend scale. if dividends continue to go down, you will have to re-evaluate how you are doing this but it will show you what reductions in cash surrender value and death benefit may be occurring on your policy by taking the loan vs not taking any loans. With money coming and going out of a policy, it can be very difficult for an individual to predict the total costs of doing so. In general it is best with whole life to take the loans out later in the policy if possible to reduce risk that the policy could go bust. For instance if you took a loan out in year 10 that was substantial and couldnt pay it back then with reduced dividends your policy may actually go bust before you die. If you take out a large loan at a much older age, chances are less that over the fewer years you have remaining for there to be drastic changes in the dividend rate and thus its easier to predict taking the loan will be “safe”.
I recently have been in conversation with an agent from Northwestern regarding whole life insurance and I thought I’d throw what they told me into this convo. One thing he kept repeating was that the cash value would grow (guaranteed) at 4% annualy, which was better than inflation (which he quoted as 3%) and would be better long-term, especially if taxes rise. That, along with the tax break, was his major selling point
He gave me a print-out showing a $25,000 annual contribution to a whole-life policy. IT’S NOT AS GOOD AS THEY MAKE IT SOUND. I crunched the numbers myself and verified with my brother who’s a CPA and it amounts to 2 things:
1) It will take 33 years to break even b/w premium payments and guaranteed cash surrender value; 13 yr to break even with non-guaranteed value (agent could’t elaborate on discrepency)
2) At 50 years in policy guaranteed value is 1.5million, non-guaranteed is 5.1million. That’s a .004% and .006% return annually, respectively.
I’ve decided that this avenue of investment is not for me. I hope that anyone who is considering this as a new form of investing or diversifying your portfolio analyzes it closely. They make is sound very attractive but crunch the numbers and see what you find before you sign!!!!!!
P,
Let me say that your conclusions about it being a bad investment are correct although the math on your return isnt exactly accurate. To try and explain the discrepancy for you….Dividends are technically a return of overpaid premium. This is a technical classification to get the tax benefit and what happens is that if the insurance company makes money over the year, at the end of the year they declare a dividend and credit your account some of this money. The company gets to decide how much they are returning to policy owners and its a black box how they compute this. At the moment, companies have been returning dividends for multiple decades so its likely at the moment that you would receive a dividend. It has practically become expected at this point although they do not have to give you a dividend. Dividends have also been on a steady decline for a very extended period of time. The policy shown to you at the moment would perform greater than the guarantee. I would personally bet that in the short term that it will perform worse than illustrated initially since interest rates and dividends continue to decrease. Over the long haul, its not possible to predict how it will do since maybe interest rates and dividends will rise(although i wouldnt predict this in the next few years personally) over time. If one were to purchase a policy at a time period when interest rates and dividends are at their lowest then a policy will actually outperform the illustration in the end. Thus it can be difficult to actually know the true costs to you over time. Agents like to pretend there are no risks but underperformance is a risk since it costs you more money. With typical whole life, a premium is paid for that insurance every year. Over time, it may come from the dividends but if a policy doesnt perform as expected then it comes out of your pocket. This of course doesnt even take into consideration risks that the insurance company goes under. Again only buy whole life if the primary reason is a permanent death benefit. If you already have one, dont immediately surrender it but carefully consider your options as ive listed above.
The thing that I find the most shocking is that an insurance agent or financial planner would even propose that a resident or fellow purchase a Whole Life Insurance policy. Generally, unless the client owns their home, is maximizing their pension plan, is doing a “back door” IRA, is funding for their child(ren)s college education, and still has a few thousand dollars left over every month, there is no reason to consider it at all.
Kathy above mentioned about DFA funds and someone responded that you have to watch out for AUM fees which I think is very wise. There are however, a few firms out there that charge flat fees for their advice and management. I have been using one of them for a few years and have been very happy with it and with its low fees. I have a portfolio of (mostly) DFA and (a few) Vanguard funds that have done well. Google DFA advisors and find these firms if you are interested. Merriman has a good site on DFA for education (fundadvice.com) and I have used Cardiff Park Advisors for my advisor (flat fee). There is also low fee only advisor named Evansson and his website has good, but very technical information. I just found this website have enjoyed all the information on it. I’m so glad that WCI is providing this kind of financial help to us docs.
Lawrence while im in agreement with you (except for people with a permanent need), that wouldnt make as much money. If im not mistaken the majority of policies still sold are permanent. The industry is such that there is no accountability for improper advice.
In my practice, I sell much more term life insurance than I do permanent for the reasons I mentioned. Nothing upsets me more than meeting with a potential client that has a small amount of Whole Life along with a small amount of term insurance when, clearly, the need for insurancewas much greater and the only one that benefitted from the coverage being structured the way it was – was the insurance agent.
I guess the way that I see it is that volume is a substitute for pressure and if I am providing a high level of service and putting the interest of my clients first, I will always be rewarded either by repeat sales, referrals to their friends and colleagues or both.
Another reason that potential clients need to do their homework in order to make an informed decision and not go on good faith alone.
I imagine you can make just as much money selling a $500K term policy as a $20K whole life policy.
You know the answer to that one – Not at all.
However, in the time that I would spend speaking to the client about Term, Whole Life and all of the other variations, answering a ton of questions I probably could have written 5 disability insurance policies along with the term insurance and been in the same, if not a better, situation financially – and the doctors would feel very good about their purchase as oppossed to questioning it for their lifetimes (and mine for that matter). This is just my opinion based on experience. I am sure that many others in my profession do not share this viewpoint.
and the doctors would feel very good about their purchases as opposed (typed too fast) to questioning it for their lifetimes (and mine for that matter).
I am current medical resident and have met the financial advisor at my hospital a few times re: various insurances. I have a pre-existing medical condition that likely will disqualify me from getting approved for disability insurance. (Have not applied yet, per my financial advisor’s advise, but he’s made a few calls and is not that optimistic). As he said if I got approved for life insurance, this might help my case when applying for disability insurance. Now I was approved for the life insurance through Guardian, and he’s really pushing me to get the whole life insurance along with the waiver of premium incase I do become disable. He said I should get the whole life insurance, then apply for the disability insurance. And even if I get turned down for the disability insurance, I can then decide to keep the whole life insurance or cancel afterward. Is this something I should consider doing? Or should I just get term insurance regardless, and also apply for disability insurance and see how it goes?
So you’re asking if buying whole life insurance in order to somehow be more likely to be approved for disability insurance is a good idea even if you only need term life insurance? Perhaps some insurance salesmen can comment, but I kind of doubt that it works that way. Guardian probably isn’t the best company to buy term insurance from either. They never seem to be on “the short list” when I personally compare prices, but given your medical history, it might be the best thing for you.Have you compared prices on term4sale.com for your health category?
Also, keep in mind that “waiver of premium” for whole life is not disability insurance. It just means if you’re disabled you don’t have to pay your life insurance premiums. My life insurance premiums for $1.75 Million in insurance is something like $100 a month. So basically it’s like having a $100 a month disability insurance policy. Not quite useless, but pretty close.
Thanks for responding, White Coat Investor! Exactly, I’m not sure if getting whole life insurance is going to help with my application with the disablity insurance, or if it’s just what my advisor says to get me to buy the whole life. I understand the “waiver of premium” clause. I didn’t think it was such a big deal because it at best will save me a few hundred for my term life, or a few thousand for my whole life. But the advisor guy harped on the fact that “the policy is self completing.” He literally said it’s as if I won the lottery to get this clause…really? I was quoted a rate for whole life, with all the clauses for $250,000 coverage for $2,700/year. The rate I was quoted for the term life for 1 million, year to year, starts out at I think $550. I’m not sure if I wanted a 20 year term what the rate is. But that seems high. As after I did all my blood work and met with the nurse, my advisor told me they rated me as the healthiest rating there is. The more I read about whole life insurance, the more I don’t like it. Question though, say I were to buy a max 20 year term life insurance. At the end, do I need to have another medical exam if I wanted to review for another 20 years ? (I know the premium at that point will be significantly higher).
If you think you’ll need more than 20 year term, just buy thirty. It won’t cost that much more. Perhaps $750 or $800. If you’re in the healthiest category, you should get a great price.
You don’t mention your age, but $1 Million of coverage for a healthy 30 year old can be as low as $425 a year for 20 year term and $705 a year for 30 year term.