8 Reasons to Avoid Whole Life Insurance

[A Note From The Author: This is the most visited post on this blog.  If this is your first time here, welcome!  This post has generated more hate mail and hate comments than all of my other ones combined.  There are over 700 comments on it, which may take you over 4 hours to read.  However, after two years of arguing with whole life insurance salesmen in the comments section of this post, I did a series of posts called Debunking The Myths Of Whole Life Insurance that quite frankly is better written than this post.  I suggest you read that series instead of this post as it includes all the useful information in this post as well as in the lengthy comments below it. ]

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 completely understand 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.  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.  The left axis is in dollars, the bottom indicates the policy holder’s age.

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 an okay 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, I can think of a few reasons why whole life may be beneficial to you.  Here are four: 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 2000s 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, but keep it polite or your comments will be edited or even deleted.


8 Reasons to Avoid Whole Life Insurance — 820 Comments

  1. 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…

    • Matt P,
      Congrats on your your recent wedding. Northwest Mutual is a good company in the Insurance industry. The 500k WL policy is good to have, if you request an In-forced Illustration from the company they will send you an updated Illustration showing how the 500k Death benefit portion has grown through the years and how it will continue to grow. That being said your premiums are based on the 500k not what the death benefit is today. So like a house you are paying less then what it is worth down the road.
      You are right the cash value is creditor protected. Most Larger Mutual Life Insurance companies have a modest return of about 4% Based on dividends. The cash value can be withdrawn tax free and grows tax deferred. You don’t get a 1099 at the end of the year for the growth in these policies. You have the ability to fund more the the premium which allows your cash value to increase and to protect more of your money.
      A 401k has a 10% early withdraw penalty, is 100% taxable, and is tied to the market. In 2008 people with $$$$ money in their 401k took a huge hit. but people with Whole Life Insurance did not.

      • Bill (Voss)-

        It’s inappropriate to use two different names on a thread on the internet. Please pick one and stick with it.

        A 4% return is reasonable for a cash value policy, but a policy bought today will require decades before the annualized return gets up to 4% due to the very poor returns in the first decade from commission and insurance costs.

        • J. it is a pleasure to meet you :-) I loved your about it was interesting. I would like to stick with Bill if you wouldn’t mind? I understand where you are coming from in a sense I am not a doctor as you know. But I was in concrete for over 20 years. Financial guys don’t go knocking on concrete works doors all that much. I left that job to pursue more knowledge about the financial world that was a mystery to me, like you did. You are helping your fellow doctors and I am trying to help my fellow construction workers. I am still learning but it seems as things change we all have to keep learning or the world passes us by. I don’t claim to be an expert, but a student.

          I loved reading through your blog and the banter seems to be interesting. I love learning all sides of things. For me I didn’t get in it for the money but for the know how. I love learning about new things, medicine has always facinated me. I do have a few personal friends that are in the medical field, They know what I do these days for a career and if they have questions I’m more then happy to help.

        • I did specify that there really isn’t a % return its a dividend. But like any financial product you purchases there are always some expenses wouldn’t you agree? The wl is not an investment by any means.

  2. 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

  3. 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.

  4. 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.

  5. 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.

  6. 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?

  7. 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…

  8. 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.

    • Distrust? Northwestern Mutual has averaged a 8% return on investment since 1929(don’t quote me on that exact year) while the stock market over that same period averaged just over 10%. What’s the difference? The taxes! What were people doing in 2008 cause they had no guaranteed income? They were working when they were suppose to be retiring!

      • Dividends are NOT returns. This is a key point to understand with cash value life insurance. Even the dividend rate isn’t 8% on average. Take a look at this chart:


        1872-2006 there were only 22 years with 8% or higher dividends. I don’t see how you get an 8% average out of that. I don’t have time to add it all up and divide by 134, but I’m confident it’s well less than 8%. At any rate, the likely “return” on cash value for a policy held until your life expectancy going forward today is ~2% guaranteed and under 5% projected.

        • Whit coat, you are right there is not rate of return on WL policies it is based on a dividend from the Mutual Life insurance company, when they make a profit you receive a dividend based on the amount of Death Benefit that year. But In WL policies the death benefit also increases when the cash value does. Lay-mans terms people use the words Percentage. But it is not. In percentages 2.5% is the low guarantee up to about 4.5% max. You do have to remember a Dividend is not Guaranteed, so the strength of the company is important to look into if you are basing things of dividends.
          the reason your cash value is lower then what you paid in is more based on the cost of the actual insurance, in the first year the commission plays a part. The owner of a company doesn’t receive the full amount of a product they sell since the have to pay expenses first.
          Would you agree all people are different?
          That being said, there isn’t one type of policy that fits everyone. Each person should take the time to see what is in their best interest and how much Death Benefit they will need for the years to come. Whether that is a term policy or permanent. Also based on their budget.

          • No, the dividend is NOT based on the death benefit. It is based on the cash value. Look at an illustration. Let’s say you have $50K cash value on a policy with a $1M death benefit. The company pays a dividend of 6%. Are you suggesting your cash value increases by $60K? Of course not. It increases by $3K.

          • WCI,
            The dividend is base both on the cash value and the death benefit.

            For instance if 2 people bout stock in the same company but one bought 50 shares and the other bought 100 shares at the end of the year which of the 2 will get more back? (if all things equal) The one with more skin in the game will. They will get the same % but based on the one with more shares, he will get more of a return.

            Same goes with Permanent life Insurance(PLI). The more DB you have the more skin you have in the game from the jump (both being equal)

            But you are right when using a % its based on the CV. If you have more DB then you will get a bigger dividend then the one with less DB

  9. 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.

    • Rex,
      If I may ask you a question with out offending, You said you really know the topic, how did you come by this information? I am interested in learning more.

      People shouldn’t have to skimp on themselves you are right. But what twists and bogus logic do they say to get people to think they need it?

        • WCI,

          I was just asking a simple question it seems he is an expert(without saying expert) but what I have read was more generalities then facts. So just a Question.

          To answer your question, yes. We go through extensive training and education before we get to the selling point. As I said before I am not an expert. If questions do arise that I can not answer I go back to my office and research before I answer them at a later date.

  10. 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.

  11. 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.

    • Rex,
      You are right you can do better in the market then in WL, The difference is the market is riskier the a WL Policy. Permanent life insurance is for safe money. It gives a better percent then the banks offer, it has a death benefit attached to it. In case you don’t make it home tonight your family with be able to keep their same life style in most cases. It has a waiver attached with it that says if you get disabled the insurance company will pay your premiums, so the death benefit stays in force. You mentioned NYL they are the biggest and strongest Mutual life insurance company in America. I have been doing my research because I am looking into the best for my family. But I do like this blog.

      • You should mention you’re a New York Life insurance agent when making statements like that. You really lose a lot of credibility when you don’t do that.

        I agree that whole life insurance is pretty safe, but I disagree that it provides a better return (I assume that’s what you mean when you say percent) than banks offer for at least 10-15 years when it breaks even.

        You can protect your family’s life style just fine with term insurance.

        • WCI,

          Credibility or not I was speaking the truth about that LI. If looked up you would find that as well.

          What is the % return right now from a bank..? maybe 1/2%

          When what breaks even? The wl both term and perm can protect your family, the difference is that as you pay in to the term for 20-30 years all the money you put in you never get back (unless you die then your family gets the $) say you pay $50 a month for 30 years and you didn’t die, you paid in $18,000. With wl you will pay more up front because the DB will pay off (the company understands that risk so that is why it costs more) but say the same amount of insurance DB costs you $50 a month and you pay in 30 years and you don’t die you have paid in $18,000. But as you stated you break even in 10-15 years and you will have accumulated more then you put in by the 30th year. You are allowed to pull out the $18,000(get it all back) you put in and use it for anything you would like. But there is still more $$ in the policy.

          The DB of the term stays level for the 30 years but the DB of the wl increases during the 30 years. In which case you are actually paying less premiums in then the amount of DB you have. Kind of like building equity in your home.

  12. 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.

  13. 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.”

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. Here is something interesting:
    Tax-Saving Ideas
    for Doctors
    Carole Foos, CPA
    Kim Renners, CPA, MBA
    David B. Mandell, JD, MBA
    Christopher R. Jarvis, MBA
    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


    Expert: Dave Bowman – 7/26/2006


    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

    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 don’t think the point of term insurance is to have it pay out. When I buy term I am not hoping to die and ‘beat’ the insurance company! I am hoping that my policy never pays out but it protects my family if I were to die in the period before I have accumulated enough to provide for their needs. So it goes without saying that most term policies do not pay out! During the average users lifetime they might have several term policies between age 25 and 60 before they no longer feel the need for life insurance. For the vast majority, there will be no payout. That is not to say that one doesn’t ‘get anything from the policies’.

      • I’m not surprised to see that a very small percentage of term insurance is kept in force to the end of the term, nor that an even smaller percentage ever pays out. The point of a term policy, unlike a permanent policy, isn’t to keep it to the end of the term. The point is to keep it as long as its needed. But a whole life policy, by definition, should be kept your whole life. The fact that is isn’t kept by 80%+ of those who purchase it should be a big red flag to anyone contemplating purchasing one.

        I don’t plan to keep my term policies to the end of their term. I plan to surrender them when I am financially independent. By design I chose a term a few years longer than that just in case my projections were a little off.

        Also, some of the surrendered/cancelled policies are simply people who were sold an expensive or inappropriate term policy. I had a 5 year level term policy I was once sold. When I realized that was stupid, I bought what I should have been sold in the first place, and surrendered that one.

        Still….45% of people surrendering the first year is awfully high. Hard to explain that one.

  20. 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.

    • Rex,
      I have heard that only 1% of term pays out, but in your post you bases alot on HOPE, hope that your investments pay out in the long run. Hope is a good thing to have but not something you can count on. Especialy if you are planning on retiring at 65. Hope wont pay your bills.
      You are right though there is an expense on borrowing money from a permanent policy just like borrowing from the bank, but the difference is you dont have to qualify to get the money, nor have to pay it back. As long as you are paying your premiums the money you borrowed will be taken off your death benefit. If you do pay it back it wont.
      Some insurance companies have a none direct look on your borrowing, which means they dont recognize the fact you took money out and your cash value so to speak still grows based on the money you had in before you took it out. Wouldn’t that be a good option to have??

  21. 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!!

    • wm77,
      If you dont have a need for Whole life then you should tell them put you on the do not call list. But may I ask, if they were not bombarding you so much what would be your reason to hold off from the whole life or your reasons to get whole life?
      Thanks :)

  22. 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.

  23. 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.

    • Mark,
      Every day as we age life insurance premiums increase. one reason to keep it is that if you terminate your policy your next policy will cost you more based on your age. but if you have health issues along the way you may not be eligible for life insurance at all. Again I Hear the word HOPE, I hope to be self insured well be for the 30 years. The question to that would be What If you are not? But then again there are ways that you can get all the premiums you pay in back so you are not just paying for something and in the end they lapse and you still haven’t become Self Insured. Just something to ponder. That I have learned though the years.

        • WCI,

          I would like to keep my buddy out of this if you don’t mind, But I am in that industry. I didn’t see your rules of engagement until tonight so I apologize if I said or did anything to offend you in any way.

          People do ask about the return of premium but generally speaking you are right it is not a hot idea. Just an option to look into if that is what the person really wants. After the pros and cons most people don’t go with it.

          I will read through what you wrote though, thank you.

  24. 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.

  25. 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.

    • Rex,
      You are right, when you borrow or take a lone from your whole life policy you have an interest rate tacked on to the amount to be paid back. Such as you would from a bank. If you are still paying your premiums your policy will stay in force, based on your premiums and the dividends giving back to you from the insurance company. There is still more money going in then the interest you are billing. Where did you get your Percentages you talked about? I would love to read about all that.
      Whole Life Is a pour investment, you are right. In isn’t meant to be an investment. It is a form of life Insurance that will stay enforce for up to age 121, based on you paying your premiums.
      On the other hand what if you could have a permanent life policy that acted like a term policy? Term policies you pick how many years you would like to keep a level premium right? What if you could have a permanent Life policy that you only pay in for say 10 years and after that time you don’t have to pay in any more premium. But it still keeps growing and stays enforced for the duration of your life? Now that would be interesting….

  26. 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?

  27. 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.

  28. 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%.

    • white coat,

      Dividends are based on your total Death Benefit at the time the dividend is issued not the cash value. Just a note to clarify.

      The reason for life insurance is to protect the ones you love if you were to die tonight. Your total amount of death benefit should be a should cover all your liabilities and expenses. That way when you die your family will not have to bare the financial burden alone.

      A question to anyone, how much of your yearly income does your family depend on for living the life they have? Besides the clothes on your back and the food you eat…. it would most likely be all of it.

      Question 2, goes to your spouse and family. How much of that salary would you like to come in every year after you are dead. (if you are not including liabilities and expenses just based on yearly salary or income)

      A couple year? 10 years? Till the kids are out of school? Till retirement age? Or the rest of their life?

      Life insurance is about the death benefit. If you have accumulated enough money in savings to cover all your liabilities and expenses and cover your loss of income to your family, at the time of Death, then there is no need for life insurance. But who here can tell me the exact date of when they will die?

      And Just a thought but most Americans live their life styles based on their house hold income. How much money would you need to have in savings/liquid form in say 10-20 years (if you don’t die tomorrow) to cover your loss of income to your family? for the rest of their lives?

      Term is good to cover short term goals in life permanent is good to have for after your term has expired(but term doesn’t expire until about 90 years old just your level premium, term premiums after your 10,20,or 30 years is up are based on your age)

      Life insurance gives your the piece of mind that your financial goals will be self completing upon your death (if you have enough to cover everything)

  29. 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.

  30. 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.

  31. 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.

  32. 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.

  33. 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?

  34. 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.

  35. 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.

    • WCI,
      Your tax break for 401k is that you dont have to pay tax on the money now going into it. But you should mention that you will have to pay the tax on every penny you put in and every penny of growth later. The Question that you would need to ask yourself is…. If you were a farmer and you bought a bag of seed, the cashier says would you like to pay the tax on this bag of seed or would you rather pay the tax on the Whole Harvest later on??? which would you rather pay tax on??

      Do you know of the 3 products that are funded with after tax dollars grow tax-deferred and if structured correctly have tax free withdrawals????

      What is the cut off income level for a Roth IRA and how much can you contribute a year?

      On your portfolio you said you have 12% gains how much of that was taxed? What was your take home % after Taxes?

  36. 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?

    • Kathy,
      I hope you didn’t dump your WL just yet. There are other options. Yes a Roth has an income limit and a limit on how much you can put in. WL doesn’t have an income limit but the limit for contributions into it peaks at 2million dollars a year I believe. WL can be structured in ways to accommodate your financial growth through the years. Yes they don’t have a tie to the market, but if you desire a safe place to put your money with growth potential (on a conservative basis) WL is a good place for it. However everyone’s situation is different. That being said there are different ways to set up a WL policy, but for starters you would have to find the largest and strongest mutual life insurance company to see what all those options would be.

      Annuities are also a good path to save money for retirement. They buy a pay check for life upon annuitizing them.

  37. 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.

  38. 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.

  39. 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
    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.

  40. 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.

  41. 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 free tax-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.

  42. 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”.

  43. 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!!!!!!

  44. 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.

  45. 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.

    • Mr. Kelley, While you are a broker, I still agree wiith your comments and I feel that “whitecoat” does a very fair job on this site of stating the true reason to get whole life, vs. term vs. investing in your 401k, Roth IRAs, your 529as, and stock/bonds etc. The reason should only be a death benefit, unless you are already so diversified as you list, that this is a reasonable option as a hedge, but knowing its not a great investment, more like a passbook savings account (with a death benefit)-and that is if you get get a good policy and company for WL!
      Given the pretty solid advice here (even if I had it 20 years ago), I still have exercised the conversion to WL, of my employer term policies, as in that time, the advice “you get it if you need a death benefit applied.”

      I would have been savvier and asked better questions…and finally likely rejected the more costly of the two WL policies.. I eventually did drop the more expensive WL policy (from CG) as it was virtually the same price as a policy providing a 65k (30%) larger death benefit for only a small amount less annually than the other policy. I can not fathom how insurance could vary so much on a guaranteed conversion other than its an unpopular policy to sell and they want to discourage folks as much as they can without drawing scrutiny from widely varying state insurance commissioners. This is an area the ugly underbelly of life insurance shows and a reason I would strongly encourage folks to get a level term policy while they are young (before considering WL ever, and then only after you have done all of the accounts mentioned before this).

      So, just to show an example of the untruths presented (even if my premiums and WL policy are not perhaps as cheap as a healthy appiicant applying for their own WL policy). The second policy required I meet with an agent (Metlife) and broker was amiable, discussed all options but finally got that I needed the WL
      policy at that time.
      I was shown 2 illustrative (projected cash value/dividend/amortization) charts, mainly to show
      how the premiums, eventually disappear, being a good selling point in that the polcy eventually becomes paid up (if one does not want to increase the value of death benefit or CV etc.) and in no case was I shown
      any projection of a guaranteed cash value, or guaranteed minimum time to be “premium free”!
      and included if I paid to age 65, at which point I could convert to an annuity and use to supplement retriement income etc. The two illustrative value charts shown were:

      A) conservative estimate, I thought it was the guaranteed value/worst case (there was nothing presented about any “CV” cash value guaranteed benefit but I assumed chart A was it, foolishly.
      Showed years from then to age 65,with dividends ramping much more quickly after first 7 years
      and the cash value increased until by year 22 the equity/CV dividends covered the 2k a year payment and I was essentially “Paid UP” on the face value of 175k. Told, then I would have to make no payment to keep the full death benefit if I died. I noted the Cash Value/Surrender guaranteed amount was not close to the
      value of the death benefit, but given the dividends (of the conservatice) estimate covered the annual bill, I was
      satisfied and have held the policy, expecting a sudden jump so I do not have to pay the premiums! Wrong!
      B) estimated benefit if dividends were more in line with typical years past (or so I was told), That schedule showed me reaching the tipping point of dividends covering annual premiums at 17 years (forgot the dividend amount but it must have been in the 7% range I am guessing). Either way, I never assumed that the second chart was vaild, but did assume the first chart was-so wrong. I never got a guaranteed value chart from my insurer, their broker or anyone and still can not seem to even after calling the servicing center (they say to call my original broker-now replaced and long gone). So I am now in year 20, with “allegedly” , in conservative estimate I was given, 2 years left to make a a dividend that will cover my premium fully!
      Well, reality is, my dividend is about $500 at most (I did borrow a small amount against the CV, and been repaying that, but I also did not use dividends to reduce premiums until 3 years ago when I noticed they set it up to buy more paid up insurance, and not apply to reduce premium. So even if the loan reduces dividends slightly, repayments should shore that up eventually, and also the added paid up insurance bought should increase dividends (and cash value) such that by now I would have reached the “tipping” point of no premiums even sooner!
      Well, finally called Met life customer service yesterday, and was told they could not provide anything on my polciy history in terms of, how they dividends were arrived at, why the illustrative values were so far off, and above all ( I believe blog author and others have said one can request the guaranteed Cash Value forumula of one’s policy from the insurer)- I realize the dividend payment is not divulged clearly at all but one should at least be able to come to a relative idea of when one’s WL policy dividend would cover the premium, if not 22 years, what 30 years-as at 65 one is not going to pay any more in and taking an annuity is only for those that already have wealth to leave their families as the cash value is no longer yours after you elect annuities (then if you die it goes back to the insurance company
      .Anyway, central processing center of MetLife referred me to my original broker’s replacement in the office I initially went to. in other words the servicing center claims to not have access to my basics? Every other insurer’s electronic servicing has my homeowners, my auto, and any other insurance I carry online with a printout of the policy available right from the web-why is it different for a whole life policy? I fail to get
      I get they do not want to own up to bogus illustrative values but why can’t they explain to me how my policy has underperformed or how it has met some “guaranteed cash values” spoken of in these threads?. I do not want to speak to broker whom I never dealt with about illustrative values, I want to obtain the bottom line (and if I do not have it why can’t I get it as it has to be in writing someplace right? Without knowing what he actual guaranteed values (or minimum, or how they varied based on the reality of last 20 years and why), how can I make a reasonable choice to continue to hold and pay on the policy:other than taking the general consensus that its a bad idea to surrender once you have paid in as long as I have…entered this policy for right reasons and want to exit it, if need be, for right, not wrong, reasons…
      Metlife setlled a big class action lawsuit, and I was a member by default and got about 8 shares that were worth maybe $300 dollars (so add that to this years dividend and premium is 1200) but that was a one time payout that I assume was precisely for the use of illustrative values not at all in line with reality. Still why is it that 13 years is listed as avg. for CV being what you paid in, when it seems for me its 20 years?
      Lengthy comment, but I think I am first person to put forward hind sight view of my WL, and seems not to be a very positive endorsement of them as anything but a means to a guaranteed death benefit, not an investment option for any but the most well heeled (and even many doctors will not find that a needed choice).
      Thanks in advance for any useful feedback. My editorials are based on my experience and I do not care to debate my experience, only to understand what I can do to help me get the data I need from my insurer so I can make a reasonable choice…as for now, i plan to hold on to it, but I am none to happy about the way things are going….:0(

        • You can get the policy evaluated independently by Mr. James Hunt:
          James H. Hunt, CFA/IG
          8 Tahanto St.
          Concord, N.H. 03301-3835
          He has also published a few articles on his observations of whole life insurance policies. We had him evaluate a whole life policy for us in 2011 and at that time we had held it for about 20 years and had the same concerns as yours.
          His latest article is titled:
          Further Observations on Life Insurance
          James H. Hunt, F.S.A., Retired
          June 2013
          His website is:http://www.evaluatelifeinsurance.org

      • I confess that I find your post confusing, but think the gist of it is that you’re unsure how your current policy is performing.

        When you are first considering life insurance, the agent will provide an illustration that projects values. The insurance contract is specific as to the guarantees provided and the illustration will note these values. For example, in a permanent whole life policy, you will see columns that show guaranteed values (including, yes, cash value and death benefit). It’s a unilateral contract, meaning that that the insurance company makes an express promise: you pay your premiums and you will receive the guaranteed cash value and guaranteed death benefit.

        Some–not all–whole life policies are participating, meaning that the policy owner may received dividends on his policy. THIS IS THE ONLY VARIABLE WITH A WHOLE LIFE POLICY. Slight digression: insurance companies are either stock or mutual companies. Stock companies pay their stockholders, then their policyholders. Mutual companies are owned by the policyholders and dividends flow directly to the policyholders. Met Life is a stock company; Guardian, Mass Mutual, NYL, and Northwestern are the big four of mutual companies.

        You can elect how the dividends are applied to your policy, the default is usually “Paid Up Additions,” meaning the cash value gained will also result in a higher death benefit (“Additions”). Dividend options include choosing to reduce premiums or having dividends paid in cash.

        There usually is a point where the cash values in the policy are sufficient to make the policy self-funding. Some call this “offset,” others may refer to “vanish.” Depending on how the policy is designed, this could occur within 15 years. It’s quite possible to add enough PUA (Paid Up Additions) so that this could occur in six years IF THAT WAS YOUR EXPRESSED INTENT IN DESIGN. Or you could purchase a limited pay policy–10, 20, or Life Paid Up at 65–that would guarantee that no premiums would reoccur after those periods.

        Borrowing from the insurance company will add a loan to your policy and interest and will, as you can imagine affect the offset.

        You can request from your insurance company an “in-force policy projection.” When you receive it, you’ll see how your policy has actually performed and how it’s projected to perform in the future. And please don’t tell me that they will refuse to do this: I do this all the time for clients and have never once had my request refused by any insurance company.

        There is a broad brush on this forum that paints insurance and insurance agents as bad actors. To me, it’s like saying guns are bad or automobiles injure people. It’s all in the way they’re used. Too many people see numbers on a page and take them for reality or blindly accept “the stock market will give you an 8% return.” If you’re a medical professional, I hope you’re skeptical men and women of science and ask questions like, “what are the guarantees?” and “what would have to happen to make the projections occur?” And, “what are the repercussions if I decide to stop funding?”

        If anyone has a policy they want examined, I’ll do it. It will require that you ask for an “in force” from your insurance company. I’ll tell you exactly what you have and give you your options.

        • I don’t think I’m painting either insurance or insurance agents as bad actors. I publish multiple guest posts a month from insurance agents, and have several advertisers I refer docs to regularly. I also advocate that doctors go and see highly-qualified, independent insurance agents and purchase large insurance policies, such as term life, umbrella, disability, and malpractice. However, insurance companies and their agents often try to sell doctors insurance policies that are inappropriate for them, often for dubious reasons. Whole life seems to be the most common. It is sold using myths that while perhaps true in rare circumstances, aren’t usually true for that particular client. It wouldn’t have to be such a broad brush if there weren’t so many agents out there doing it.

          • Well, the crux of all this is that you think a 4 to 5% after-tax IRR sucks. I don’t and I’m consistent in saying that it works well as part of your overall investment strategy, and especially when spending down in retirement.

            I reviewed your initial observations about whole life insurance–those that preface all these comments and visited the website you mentioned, The Visible Policy. At the end of a pretty exhaustive appraisal, the author states that after 14 years, he likes and is fully satisfied with his purchase. I hope the link below appears, but if not, just Google “The Visible Policy” and go to the final page. http://r0k.us/insurance/vp/vl12.html

            • It’s not after-tax. If you go “after-tax” it’s much lower. That’s the return if you borrow from your policy (paying interest.) Apples and oranges.

              I agree that for money I’m planning to invest for over 5 decades, 4% sucks. The 2% guaranteed return especially sucks. If you think 4% is great, then feel free to buy whole life because I think that’s a realistic expectation.

              • The build-up of cash value in a whole life policy is free from taxation.

                The distribution of cash value from a whole policy is also tax-free, and is accomplished by by using a “To Basis and Borrow” strategy. If you wished to only distribute to your basis, then no borrowing occurs. If you do borrow, full dividends are still paid (in fact, with direct recognition policies, the dividend is enhanced).

                I support the idea of buckets of money. Some of my money is in IRAs, some is in a deferred annuity, some is in savings and checking accounts, some is in the cash value of my life insurance. If I needed access to $50,000 in cash–some emergency or some opportunity arose–I can have that $50,000 wired to my account within 48 hours from my life insurance. Simple, no questions asked. In the meantime, I’m making a plus 4% return.

                When I do retire and take distributions from my IRAs, I’ll do so only in up years of the market. In down years, I’ll supplement my income from distributions from my whole life insurance. I can take a larger distribution without fear of running out of money.

  46. 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.

  47. 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.

  48. 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.

  49. 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.

  50. 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?

  51. 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.

  52. 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).

  53. 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.

  54. Applying for Whole Life (or even Term Life) will in no way improve your ability to get a disability insurance policy with Guardian or any other disability insurance company.

    If you are a graduating resident, I have the ability to provide you with Guaranteed Issue disability insurance through MetLife. If you would like to chat, feel free to call or send me an email.

    Additionally, unless you are taking advantage of your hospital’s 403(b) plan and/or are contribution to a Roth IRA (“Backdoor” or otherwise), I don’t see any real advantage to you purchase a $250,000 Whole Life policy.

    However, if you really want Whole Life, you can always purchase term from Guardian, MassMutual, Northwestern Mutual, New York Life and subsequently convert it to Whole Life in the future – but, keep in mind, you will be “overpaying” for the right to do this compared to purchasing coverage from a company that specializes in low cost term life insurance.

  55. regarding Ray’s comments about Bernanke:

    Economists & academics are pretty bad at investing. But unlike most doctors, they know it.

    I had an extremely smart (& quite pretty) professor of global macro-economics at b-school. All of her money is in her zero-interest checking account. It’s not even in a short-term bond fund or money market.

    Given that perspective, maybe economists are better off buying whole life insurance. Especially if they’re worth tens of millions.

  56. And instead of buying whole-life insurance, you’re probably better off buying stock in Insurance companies.

    As Buffett said, BRK gets paid 17B over a decade for the plesure of investing 70B of other people’s money and gets to keep the profits!

  57. The linear extrapolation of compound interest on the investment into a “good bond fund” based on your definition is only correct if you take the investment without the affect of taxes. Taxes compound as does interest and this needs to addressed, a better measure would look at the cash flow. This would normalize what the true cash an individual has at their disposal. Also, if you decide to invest into a municipal bond fund or create a latter of munis, the IRR would still favor whole life in the later years. A would never suggest that whole life is the Holy Grail, for it is not.

    The ability for individuals to self insure is limited at best and as an investment practitioner, the company has a whole life policy on life, to which there are the beneficiary. If you have a chance to invest the difference into bank stocks, take a look at their balance sheets. You will see that a JPM, BAC, and countless other banks have a significant portion of their tier-one capital invested in whole life. It is the Federal Reserve, OTS, and the OCC limited what a bank can invest in WL up to 25% of tier-one capital. You need to ask yourself if the banks and c-suite executives invest heavy into WL, it might be appropriate to consider it part of an individual personal strategy.

    Taking anything in isolation, be it an individual stock, insurance policy, bonds, real estate, is improper and one needs to incorporate the prudent investor rule. It is important to look at the interconnectedness of ones entire life and how each components works in totality of individual personal policy statement.

  58. pflynnharv-

    You’re a little tough to follow due to typos, misspellings, and grammar issues, but I think you’re suggesting that an investor should invest in whole life (well, like most agents you qualify everything as “might”) because
    1) Bond fund returns are taxed
    2) Most investors can’t really self-insure (although you don’t specify against what) and
    3) Bank executives use cash-value insurance policies

    Those seem like pretty weak arguments IMHO given the the relatively strong reasons listed above to avoid whole life insurance policies. In fact, I think the second one is patently false, the first one often false (since bonds are generally put into tax-advantaged retirement accounts), and the third one irrelevant to a typical physician.

  59. I did a comparison of VUL life insurance comparing it to putting your money into a 529 and paying the tax at the end with the 10% penalty over 30 years and then collecting a payment for 30 years. For the VUL to be better, you would need to earn approximately 7% on average and have to deal with an effective tax rate of about 50%. Since I have kids, I’ll use the 529 for them and then for the grandchildren, so there won’t be any tax anyway.

    For all the complexities of life insurance, MECing the policy, and lapsing the insurance policy, I will hold off for now unless something better comes down the pipeline. Now, if there were no MEC limits, I think the insurance as an investment is a great opportunity for tax free growth and withdrawal. And in the 70s, that is what people did.

  60. I think that Whole Life can be a great product and so can term. It boils down to what the individual needs and how he/she feels about the volatility in the market. Buy term and invest the difference is outdated, the markets over the past 15 years have been so unreliable and unpredictable. If the current tax law changes back (as it is set to do in 2013) then doctors and many others will have a very real estate tax issue. I would also like to comment on the many times it has been pointed out that 12 years with a negative return is bad. If you were buying a whole life for strictly an investment, that would be a correct statement. But the payoff is that you are getting both investment growth and death benefit. Also, the author states that you can invest in the same bonds the insurance company does. True, but you can’t invest the $250/month in them. You have to pay a lump sum OR buy a bond fund which charges fees as well so the Whole life, IMO, is a good way to diversify your portfolio, get some death benefit coverage and invest at smaller amounts in regular increments. Anyone who puts all of their money into WL isn’t maximizing their return, but it isn’t as bad as the author is trying to say. If I were a DR. I would put as much as I could into my 401k/403b plan, at least to the match, fund a Roth IRA (if I were under the income limit) and then I would put some into a WL policy and some into a taxable MF account to properly diversify. That would make the most sense and would give the best hedge against inflation as well as market volatility. BOB OUT!!

  61. BOB-

    Buy term and invest the difference is only outdated in the minds of those who make money selling permanent life insurance. Of course the financial markets are unpredictable. That’s why you get paid to invest in them. If they were predictable, you’d get exactly what you get by sticking with very safe investments like FDIC insured savings accounts (less than 1%), treasury bonds (less than 2%), and whole life insurance (negative for at least the first decade.)

    You’re right that whole life insurance contains a death benefit in addition to an investment-like component. The problem is that not only is the investment component too expensive, so is the death benefit.

    Investing $250 a month into a bond fund is no big deal, especially since many bond index funds charge less than 10 basis points a year to manage your investment. Hardly a significant issue.

    And as has been discussed on this blog many times, you don’t need to be under the Roth IRA income limit (a majority of docs aren’t) to do a backdoor Roth IRA.

    Please don’t advise your clients to buy cash-value life insurance instead of maxing out their 401Ks and using a backdoor Roth IRA. It’s bad advice. Permanent life insurance is for those with a need for a permanent death benefit. Most doctors won’t need that. Even if estate tax laws change down the road, and if the doctor cannot then qualify for a permanent policy, there are other ways to deal with having too much money.

    • BTID is the only way to go- there is one life insurance company that ONLY sells straight level term PRIMERICA life- A+ rated by AM BEST- BBB rated – compare on findthebest.com
      And PFS investments received the DALBAR mutual fund service award 10 in a row-also money magazine Gold Nova award- NYSE(PRI)

  62. I would also love to add when you do not actually have an insurance policy otherwise you do not take part in any group insurance, you will well reap the benefits of seeking the assistance of a health broker. Self-employed or those with medical conditions usually seek the help of an health insurance agent. Thanks for your blog post.

  63. I have found this blog very informational and one of the best sources of information on whole life since I began researching last month. I am researching whole life after what I feel may have been a poor financial decision. I have a whole life policy that was opened just over a year ago. Now after some research it seems I should max out our 401 k and other investments instead. I believe it may be the best decision to get out, however I am now nervous of making another bad decision. My agent says the best decision is to keep it open. Any advice from this group?
    Details are as follows:

    – 290,000 death benefit ( which really is not enough coverage for our situation anyway)
    – 973 cash value
    -339 monthly premium
    – the 2012 dividend was 321
    – p.s. I already opened a new term 750,000 policy on my husband for ~400/year (33yr male with excellent health)

    As I see it my options are:
    1 . Close it and lose money ( or to look at it more positively .. I paid for one year of very expensive insurance)
    2. Call is paid-up for and have 4,820 for a death benefit and the account would be a MEC ( but would this be an issue as I do not plan to borrow against it ? )
    3. Reduce the coverage to 25,000 ( as this is the minimum I was told I could reduce to) and reduce my monthly premium to 29.

    Any opinions from this group would be very appreciated!

  64. So you’ve paid $339*12= $4068. It’s worth $973. $4068-973= $3095.

    Dave Ramsey would call that a $3095 “stupid tax.” A year from now, your stupid tax will be nearly double.

    I’d cash out now and move on (assuming you have an adequate amount of term life in place.) Sometimes, after a decade or so, you’re better off keeping a whole life policy. But not after a year. Especially when you aren’t maxing out the 401K.

    What were you expecting the agent to say?

    Don’t mix insurance and investing.

  65. Amy-

    I think your statement “$290,000 death benefit (which really is not enough coverage for our situation anyway)” should give you your answer.

    Putting the possible need for permanent death benefit aside, I am shocked by the number of insurance agents and financial planners that put their own needs first and not those of their clients.

    First and foremost, life insurance is not purchased for your benefit, it is purchased to protect your family. Purchasing an inadequate amount of Whole Life Insurance for a substantially higher premium compared to the proper amount of term insurance simplydoes not accomplish this task.

    Additionally, until you own your home, max out your retirement plans, fund Roth IRAs (back door or otherwise), fund for you children(s) college education(s), Whole Life Insurance should not even be on your radar.

    Changing the policy to Reduced Paid-Up status or lowering the death benefit to $25,000 is meaningless as not only are both amounts too small, the will also be eroded by inflation.

    Based on the limited information you provided, you take the little cash value you have and purchase an adequate amount of 20 or 30-Year Level Term, fund your retirement plan and find yourself a new agent.

    Consider the lesson you learned worth the price of admission.

  66. Amy n,

    I would not recommend trying to fish for free advice on public forums, especially when thousands of your dollars are at stake.

    If you act on someone’s advice from here and later find out it didn’t apply to you and you lose lots of money, you’re out of luck. What happens to you is of little consequence to the person whose advice you took…. that is unless you sue them I guess. lol

  67. While I agree you should be skeptical of anything you read on the internet, advice found in “free internet forums” sometimes has one advantage over advice received from professionals- the person giving it isn’t generally trying to sell you something.

    If you’d like a professional’s opinion on your whole life policy, you may try this guy (he’s not trying to sell you anything but his opinion):

    For a flat fee of $90 he’ll (almost surely) tell you to cash out your whole life policy.

  68. Thanks for the comments. Although calling it a “stupid tax” is a bit offensive. After all if I pay a trained profession to work with me then I expect them to have my best interest at heart. I don’t research the chemicals the lawn guys lay down on my lawn but trust they are doing their job correctly. I don’t have time to second guess every professional I work with. But yes, I am obviously wondering if I was misguided a bit due to someone trying to earn more commission.

    I am in the process of seeking another professional’s advice. But that is just one more person’s opinion. Thus I am doing some online research and it never hurts to get a few opinions in the process. After all this forum is all about whole life and I thought I could throw out a real life example and get another perspective.

    A couple of things that may have been missed in the feedback …. while ~5,000 is not a large death benefit, it is permanent and will continue to pay dividends and can probably pay for my casket if I make it to 90 :)

  69. Sorry Amy, didn’t mean to offend. I’ll tell Dave Ramsey to quit calling it “stupid tax” too! Don’t feel too badly. I paid nearly the same amount of stupid tax into a whole life policy. It took me 7 years to realize it was a stupid thing to do. You figured it out in just 1. :)

    If you’d rather have $5K in 60 years instead of $1K now, that’s okay. But realize it’s the same thing, more or less due to the time value of money, and represents quite a low level of return.

  70. My wife and I both have $100,000 whole life policies from Northwestern Mutual. We have had them for 20 years. Our premium payments are $115/month for each of us. So we’ve both paid in about $28,000 over the past 20 years. Our current policy death benefit has increased to $146,000 and our cash value is $43,000 each. Not bad. We’ve paid in $56,000 over the last 20 years and I can cash out for $86,000 if I want. This policy has been a great savings vehicle for us. Northwestern has exceeded their projections every year and the cash value continues to grow exponentially. According to the projections, these policies will each be worth more than $100,000 in cash value in another 10 years. Not bad. A return of over $200,000 of an $80,000 investment. In this economy, I’ll take that any day.

  71. DJ-

    I’m glad you’re happy with your policy and its return. Truthfully, after 20 years, you ARE probably better off keeping it. But you ought to be aware of what your return really is.

    You say you’ve paid in $56K over 20 years, so $2800 a year. That’s now worth $86K if you want to cash out. That’s a return of ~4.3% a year. You have also gotten a small amount of life insurance for that price which isn’t worthless.

    You shouldn’t necessarily be happy with just getting a return of $200K on an $80K investment. If you invest $80K today, and in say….40 years, that investment is worth $200K, it means you got a return of 2.3%. And if inflation over that period were 3% a year, you’d actually have a negative return. You always have to calculate in the time value of money and other downsides, such as the loss of liquidity and the seriously negative returns you endured in the first 10 years of the “investment.”

  72. I understand what you are saying. I was however, just rounding off to make my point. My actual cash value is projected to be more like $229,000, for an $80,000 investment over 30 years. Not to mention that my death benefit will be much larger, and I will have the ability to stop paying the premiums while the policy continues to increase in value ( although at a slower rate). I would think that running these numbers makes the policy a little more valuable. Also, my $80,000 “investment” was not a lump sum payment, but a small monthly payment over a long period of time which changes everything. Inflation is not as much of a factor then because todays dollars that I am putting in have a lot different value than the ones I put in 20 years ago. I do agree that it takes a long time for one of these policies to be worth it, which is what insurance companies rely on. Most people don’t stick it out for that long. I do however believe this policy has become quite valuable, for me at least. I am now reaping the benefits. Over the next 10 years, I will be putting in about $28,000 and getting a return of $143,000. More than a 500% return, not to mention the pure value of the life insurance policy. I’d like to see anybody match that.

  73. DJ-

    You’re making things seem better than they are. First, if you keep the policy until you die, you get the death benefit and not the cash value, not both. Second, if you decide to have the dividends pay the premiums, the cash value will grow slower and the death benefit will eventually be less than it otherwise would be. You can’t have your cake and eat it too.

    The policy is definitely valuable (worth $86K now), but that doesn’t mean that an alternative investment wouldn’t have been better in retrospect. Let’s say you put $2800 a year into a stock index fund that returned 8% over the last 20 years. It would now be worth $128K instead of $86K.

    Also, keep in mind that your $28K investment over the next 10 years does not give you a return of $143K. Your $28K investment over the next 10 years PLUS the $86K you could take out now, gets you a return of $143K over the next ten years. Not counting the (relatively low) value of the life insurance component, that is hardly a 500% return. In fact, using your figures ($86K now, $2800 a year for 10 years, worth $229K in 10 years) I calculate it out as about 8% a year. Now 8% isn’t too bad at all (thus why you should probably keep this policy now), but it’s nowhere near 500%.

    Also keep in mind that you’re probably using the projected future value, not the minimum guaranteed value. In my experience, the policies generally grow at a rate a whole lot closer to the minimum guaranteed rate than the “projected rate.”

    Like I said, you’re probably at the point in the policies where it makes sense to keep them. But don’t kid yourself that they are some kind of magic investment.

  74. I still think FROM THIS POINT FORWARD, this policy is a good “investment.” Ignoring its present cash value. Every day I put $1 in, it turns into more than $5, over the next 10 years. AND…..I continue to have a life insurance policy with a death benefit of $150,000+ that increases every year. And if I keep it longer than 10 years, those numbers are much higher.
    Also, over the last 20 years, this policy has not only EXCEEDED it’s MINIMUM guaranteed cash value, it has beaten it’s PROJECTED cash value. EVERY year for the last 20 years. It is nowhere near it’s minimum guaranteed value.
    Even using your figures of including it’s present cash value, your 8% annual return for the next 10 years is something a lot of investors and mutual fund mangers would kill to have.
    Maybe I will just keep this policy until I die. By then, this policies cash value will be worth about a million dollars…….and so will the death benefit, which increases yearly as well. Then I can have my cake AND eat it too! This is some kind of magic investment.

  75. NWM dividends have been decreasing for decades. When treasuries/bonds returned 8% or more then these typically returned 6% on the death benefit. Someone purchasing today should realize the return is at least currently going to be much lower unless interest rates rise substantially and stay up.

    And no you cant get both the cash surrender value and the death benefit. Every dollar you loan out of the policy (which is at 8% interest) means a dollar less of death benefit. If you loan out too much and the policy crashes then you dont even get that difference but instead just get a big tax bill as well.

    • Just an FYI, northwestern mutual charges an 8% interest rate to get to the cash values, but they credit your account a borrowed rate dividend of 7.45%. So the loan you’re taking out is really only .55%. Not too shabby.

  76. Rex,

    You have to look at both sides of the coin though with an unbiased approach. You take note that NWM life policies paid out less in dividend interest rate when rates on treasuries/bonds were higher, you also have to look at the fact that NWM life policies also were consistently ticking forward when market scenarios were much lower across the board. I know many permanent whole life owners that were grateful to have the insurance in place when their market based portfolios suffered. Sometimes peace of mind is important, as well as the gaurunteed values. Not to mention if you look at the loan provisions as 8% , taking into consideration the lowest dividend rate northwestern has paid is 6.15% in the last 30 years, essentially that 1.85% net interest rate would have posed as a better alternative than a loan from the bank, as previously stated.

    I by no means am an advocate of using permanent life insurance to provide for all of your retirement goals, but with regards to a financial planning, I think that it is a good piece of the puzzle to ensure cash flow. I think it should be a conjunction of some permanent life insurance forced savings, term insurance for adequate coverage, and a sound allocation model based portfolio with investment objectives. There are very few people that can self-insure for the duration of their lives, and as stated before the majority of Americans have a hard time sticking to systematic savings.

    Before I keep rambling, the goal of this post is not to be advocate, but yet make a statement that for the majority of americans I feel, budget permitting, that their is a place for some forced savings into a permanent insurance policy. As long as it is just that, savings, and not the sole crutch for retirement.

    Just my two cents….

  77. no that doesnt work especially for NWM since its a direct recognition company. The loan will reduce the dividend furtherr. Additionally the concept for forced savings is complete insurance agent garbage. Only like 20% of whole life policies are kept in force until death. Thus almost none of the clients actually received that benefit yet they paid for it. In fact the majority dont even get to even with cash surrender value equaling premiums paid. The actual truth is that 99% of people in america would be better off if they never heard of permanent insurance. You dont need to self insure for the duration of your life and if you did well then permanent insurance has shown not to work for the majority of people who purchase it.

  78. I think “forced savings” is a very weak argument for permanent life insurance. Paying those premiums is no more forced than contributing to a 401K or a brokerage account each month. In fact, I think the reduced flexibility is a significant downside to saving in an insurance vehicle. If I lose my job I can quit 401K contributions for a few months until I get another one. Not so with a whole life policy.

    • I really don’t know what to think of you WCI. You dispense some wise advise about back door Roths, etc. But then, you say something patently false like a 401k is more flexible than a dividend paying WL policy.

      Huh? It is true that you can stop 401k contributions if needed, but please tell me how you access these funds? Oh yeah, that would a be with a 49% tax rate. (39% top marginal rate and 10% penalty…oh wait, I forgot state tax) Retirement accounts are some of the most illiquid assets you will ever own. (They’re designed that way…) On the other hand, you can stop paying your WL premiums if needed. The company will borrow the money from your CV to pay your premium. You can even take a withdrawal of cash value from the policy. This will, of course, reduce the death benefit and the accumulated value of the policy. Further, the withdrawal is tax free up to the amount of premiums you’ve paid into the policy. How much better flexibility can you get than that WCI? Oh yeah, you don’t need an excuse either like death in the family, illness, loss of job, foreclosure, etc. You can take it whenever and for whatever reason you want!

      You people need to stop comparing WL to investments, i.e. stock market averages. If you absolutely insist on comparing returns, compare them to bank CDs or bond funds. They are that safe and that stable. I don’t think I have ever heard of a life insurance company losing customers’ funds and/or failing to pay death benefits. Many mutual companies have been in existence since the 1800’s; many have paid dividends through world wars, great depressions, banking collapses, inflation, cold wars, revolutions, etc. Every single year. WL cash values should be compared and allocated the same as bond allocations and/or cash in the bank.

      If you are doing it any other way, you are doing it wrong. Period.

      Maybe you don’t want an allocation to cash or bonds in your financial plan. That’s fine. Don’t buy WL insurance either; go with the term and invest the difference. You are obviously very comfortable with risk (at least you think you are).

      Compare apples to apples and oranges to oranges, otherwise you will make poor financial decisions. That is GUARANTEED (just like CV accumulations). See what I did there? Ha!

      One last point, buying a great concept from a crappy company will always be a bad decision. Buying a hammer to cut a board will always be a bad decision too. You must utilize the correct tool for the task. Surely you docs can understand that….

      WL is one of the most amazing financial products on the market when bought from the right company and used for the right job. Have you asked yourself why Congress passed laws to limit it’s use in the 80’s? Hmmmm, makes you think! Hey WCI, can you tell me why the government limits my access to cash value policies like WL? I believe they passed those regulations specifically because docs were abusing, errrr, utilizing these types of tools. Rebuttal?

      • You’re an accountant and you have no idea how to access 401K funds? This post might help:


        The rest of the arguments you spread out over 8 comments in this long, long comments thread have been dealt with in the series of posts linked to at the beginning of this post: http://whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/ I’m not going to rewrite them for every insurance salesman (even those with CPA after their name) who comes by this post and gets fired up enough to spend 2+ hours reading and writing comments.

        If you think life insurance is awesome, go buy some. No one is stopping you. If you want to sell it to doctors as a great retirement plan in order to generate huge commissions, well, I have a problem with that, because I disagree with you and I get emails from dozens of doctors every month who have been sold crappy insurance plans that aren’t what they thought they were.

  79. I have the whole life policy from AXA -Equitable for about 17 years.It has not done very well but I guess it is too late to get out of the trap. Can someone tell me, How does AXA- Equitable as a company compare to other similar companies which compete to trap us innocent guys and gals? Did i get screwed up more than average, just average or less than average? How is their reputation?

  80. Nobody can answer that bc the true return can only be determined after your death. It is true that most people 17 years in should keep it if they want some death benefit. You have 3 options. Surrender and pay taxes on gains. 1035 exchange into a low cost annuity such as vanguard in order to defer taxes. Keep the policy and ask for in force illustration as well as one over funded up to mec limit. Your goal here is to maximize cash value and take about 90% out late in retirement leaving the difference between that and the death benefit to your heirs. James hunt has a fee service to evaluate your policy.

  81. I don’t know much about AXA in comparison to others. You’re probably right that after 17 years you’re probably better off keeping it. I’d pay Hunt to evaluate it if I were you.

  82. My wife and I have a newborn and we are starting to save for college. We were going to invest about $20k a year in our state’s 529 plan for about 3 or 4 years, and then let the principal and interest compound (hopefully) till the baby goes to college. I went to a college financial planner just to double check that this plan would work, but his main suggestion was that I not do a 529 plan and instead buy a whole life policy. His reasoning is that whole life policies are “invisible” for financial aid and scholarship purposes, while 529 plans and regular investment accounts in the parents’ names are counted against the child in awarding scholarships, grants, and financial aid generally. (I then found out that the advisor was also an insurance agent who would be selling the whole life policy.) The advisor/agent said that a whole life policy will give us the benefits of: (1) not causing the child to lose financial aid eligibility; (2) the same amount of money invested in the whole life policy will be available for funding college if we want it to be; (3) the money in the whole life policy will grow tax free; and (4) if the child gets full ride scholarships or something similar and there’s money leftover in the whole life policy, the parents have the flexibility to use the money for themselves, which they couldn’t do if the excess money was tied up in a 529 plan.

    While I am very averse to whole life policies for the 8 reasons listed above, and I really don’t like that the advisor is trying to sell me insurance, I still want to make the right decision on the merits, but can’t figure this out exactly. Despite the advisor’s conflict of interest, could he be right about buying a whole life policy under these circumstances for this specific use? Any thoughts are much appreciated as I’ve been thinking about this for weeks and the advisor keeps calling. Thanks.

  83. Purchasing a Whole Life policy with the intent of using it specifically to save for college, in my opinion, is generally a bad idea. In most cases, you won’t even break even on your premium outlay for 10 years.

    Since you have a young child, my guess is that you are also young. How are you going to take the money out of the policy to fund for the college education? If you do a partial surrender, you will need to continue funding the policy – possibly long after your cihild is out of college. If you borrow against the policy and you are young, the interest will continue to compound. This can cause major problems down the road – especially if you don’t plan on repaying at least the interest.

    You should probably use a combination of 529 Plans and a custodial account to take advantage of the income tax benefits.

    While some of what this “advisor” says is true, how many physicians do you know that qualify for financial aid?

    If you want to make sure that the education is funded in the event of your death, make sure you have enough term life insurance Inforce.

    Finally, You yourself said that you are not a fan of Whole Life insurance so why would you commit that type of money into something you dont believe to be a good investment?

  84. Whole life is a tool. However, when all the guy can do is swing a hammer, everything looks like a nail.

    But, if from one of the 4 big mutuals, it can be a good idea if the following are true:
    -You have a long term need for a death benefit and would other own term insurance
    -You are taking full advantage of qualified and roth retirement plans
    -You are not going to defund the policy before retirement unless it is a real emergency
    -You are comparing the 20+ year IRR to a taxable return of 8% or less, such as a savings account or bond fund. Do not bother comparing it to an aggressive investment inside of a tax advantaged vehicle, over the long run.

    A bond fund inside of a Roth IRA is likely a better pickle jar vehicle than whole life, if you can get enough into the Roth environment. The only caveat to that strategy is that bond funds can lose value, where as you always know where you stand with whole life.

    Lastly, in retirement planning, some whole life insurance is a valuable part of a portfolio when stocks, bonds, and other investments are suffering, because it never moves backwards. It enables you to avoid taking income withdrawals at the worst possible time, such as March of 2009.

  85. Ill address each of these:

    (1) not causing the child to lose financial aid eligibility
    99% of people who have a large whole life policy have other assets that do count so you havent improved your financial aid eligibility. This is in particularly true for physicians bc we typically have a good steady income which will always affect eligibility.

    (2) the same amount of money invested in the whole life policy will be available for funding college if we want it to be;
    This is absolute garbage. A standard whole life contract wont even have cash surrender values equal to premiums for 14 years. If you invest the money in almost anything else, you will have more money for college at 14 years. Even an overfunded policy will under perform. If you take all the cash out then the policy crashes and you get a tax bill on top of this. Any gains are taxed at normal income and not the better long term capital.

    (3) the money in the whole life policy will grow tax free; and
    It grows tax deferred. You can access it tax free via a loan if you like paying 8% on your money. If you fund it monthly then there is another 8% charge for that as well instead of paying it yearly.

    (4) if the child gets full ride scholarships or something similar and there’s money leftover in the whole life policy, the parents have the flexibility to use
    If you have that much concern over the flexibility then use taxable account. You still will have more money and more flexibility.

    Only buy whole life if you need a permanent death benefit or want one knowing that in all likelihood if you lived a normal life span per your insurance health rating that you will have less money for you and your heirs. There are no magical investments for insurance companies and to make good on their guarantees they invest in treasuries and bonds. When bonds produced 8% or more then whole life gave you 5-6% as a death benefit. It is typically a bad idea to invest so conservatively for the very long term (your whole life).

  86. im also going to address this statement from rangerover

    Lastly, in retirement planning, some whole life insurance is a valuable part of a portfolio when stocks, bonds, and other investments are suffering, because it never moves backwards. It enables you to avoid taking income withdrawals at the worst possible time, such as March of 2009.

    This isnt really true. It is another type of market timing and can be a dangerous plan especially with the direction that dividends have been heading for decades (lower). If you take money out early in retirement then this loan can over time crash your policy. You will be paying 8% interest on this loan and if the policy crashes then you not only lose the death benefit but also get a tax bill. This only works well and realiably if you take loans out late in retirement since there will be fewer years until you die and less likely for the policy to crash bc of decreasing dividends and the costs of the policy loan. Many permanent policies have self destructed bc of loans.

  87. Rex, it is definitely true that overly optimistic assumptions have caused quite a few catostrophic failures of insurance contracts. Anything that places one bit of risk or responsibility on the individual has to be monitored and managed.
    However, overly optimistic assumptions have wrecked stock and bond portfolios as well. One down year at the wrong time can suddenly put a seemingly ample retirement portfolio on very shaky ground if the stocks and the bonds go south at the same time, as they did in Fall 2008-Spring 2009. We need some of those potentially higher yielding assets in order to outpace inflation if we can afford to take the risk, but we also need guaranteed funds for food, clothing, shelter, transportation, and healthcare. Whole life insurance can provide some measure of that, as well as the freedom to live out the bucket list if we get bad news early, without worrying about spending our spouse’s retirement.

    I am not saying that your way won’t work. My main point is to dispell the negative sentiment that some seem to automatically have about whole life insurance. There is no doubt that the product is misused in a great many cases, particularly with lower income people. But the numbers bear out when you are in a 36% federal tax bracket, plus some state tax as well perhaps. That 5% bond yield gets cut to 3%.

    In summary, there reasons why someone would want to have whole life, and reasons why they wouldn’t want it. But each case is different, and as we know one size fits all doesn’t fit anyone very well.

  88. I agree that permanent life insurance is a very bad idea for college savings.

    I wanted to point out to rangerover a couple of things:
    1) Bonds did just fine in the 2008-2009 market crash, especially treasuries. The Vanguard LT Treasury fund was UP about 15% in the 9 months from July 2008 to March 2009. Even the total bond market was up 10%. I’m not sure why you think bonds didn’t do a good job of protecting investors during that bear market.
    2) There is no 36% Federal Tax Bracket. The top bracket currently is 35%. The average married physician with pretty average deductions is in the 28% bracket.
    3) You seem to think there is a safe investment out there that returns somewhere near 8%. I don’t see it, either for you or the insurance company investing on your behalf through a whole life policy. If we’re going to talk about the merits of investing through an insurance company, we need to adjust our figures for the current interest rate environment. Rex is right that an investor investing through an insurance company should expect dividends that are 1-2% lower than the going rate on high quality long term bonds, which currently yield in the 2-3% range. We cannot use historical dividend rates on whole life insurance and then compare them to current rates on bonds.
    I wish I could be more positive about the merits of using permanent life insurance as an investment but I confess that I have yet to see a policy that had sufficiently high returns to justify the expensive insurance and loss of flexibility. Most policies are sold to people who haven’t yet maxed out their eligible tax-protected accounts such as 401Ks, DBPs, backdoor Roth IRAs, and HSA, which as you mention, is an obvious mistake. I see them sold all the time to people in low tax brackets. (Mine was sold to me as a medical student. A salesman was trying very hard to sell one to my sister’s family, who hasn’t paid a cent in federal income tax in years.) Even if you treat it as an investment (minimizing insurance costs, funding it up to the MEC line and ensuring you only get a policy where the money you borrow from it is still earning interest in the policy), it still doesn’t make sense as a long-term investment.

    The most telling argument against whole life insurance is that out of the thousands and thousands of very smart financial people in the world, I have yet to hear one recommend whole life insurance as an investment UNLESS he stands to personally benefit from its sale. Yet non-stock brokers recommend stocks and bonds all the time. Why is that?

    Lastly, even you admit that someone buying one of these policies should have a need for a permanent death benefit. I submit that very few people who make enough money to be in a high tax bracket and have already maxed out their retirement accounts yet have less than the estate tax exemption amount (most doctors fit into this category) will ever have a need for a permanent death benefit simply because they have a sizable portfolio instead.

    There are way too many people selling these policies compared to the very small percentage of people who could actually benefit from buying them. That’s the problem.

    The only person that is actually likely to benefit from buying a policy as an investment is someone that for some reason cannot invest in a traditional stock/bond portfolio due to behavioral issues yet can somehow manage to pay the premiums on the policy for decades. That’s not a very flattering picture of the ideal client. Obviously there are a few situations regarding estate planning where a policy can make sense as well. But with current estate tax exemption limits, there are very few people in this category too.

  89. Lawrence,

    I was not referencing education, but whole life as an all around asset class. I can think of few scenarios where a young parent should be advised to purchase insurance in order to fund a child’s edcuation. Withdrawal of basis from a Roth IRA or using a 529 plan are much better ways, and a taxable investment account would be a second choice.
    Whole life for education funding is one of the instances I was referring to when I said, “When all the guy knows how to do is hammer, everything looks like a nail.
    I appreciate the lively discussion though.

  90. Thats isnt true about 1 bad year. It isnt like the smart idea is to all of a sudden sell all your stocks in one year during retirement. Additionally it isnt all stocks in one’s portfolio. Over time one should increase their bonds.

    The absolute truth about whole life is that any of these ideas about using it for more than a permanent death benefit are more myth than fact. You can cook the numbers/illustrations so they appear to work out for high net worth individuals but that doesnt make it the best plan and it rarely is. It only is a good idea when the person highly values having a permanent death benefit and that is the minority.

    Why look at just one year of the stock market when decades have shown that whole life dividends continue to fall and there really isnt any reason to believe that is going to change soon.

    You dont have to worry about spending too much if you take the premiums for whole life and invest them in a tax efficient index fund. Agents always like to pretend this allows a person to spend more in retirement and it simply does not. If you dont have the will power to do that then likely you would surrender the whole life (and that would almost always be a loss especially when you consider inflation).

  91. Thank you everyone. The responses have been **extremely** helpful. I have decided not to do the whole life insurance.

    One additional thing I did was compare the total amount after 20 years between regular investing with a 5% return, and investing the same in the whole life policy (advisor gave me a table of premiums, cost basis, surrender value, and death benefit). After 20 years, I would have more money in my own investment account than the surrender value in the table the advisor gave me. (I ignored the death benefit column as that wasn’t the purpose of the policy, but I even beat that.)

    Some of you asked questions, and here are my responses:
    – The advisor did not explain how the money would be taken out, i.e., whether it would be a surrender or a loan. My hunch is that he was thinking partial surrender because he never mentioned anything about interest payments on a loan from the policy.
    – I have no need to have life insurance after the 30 year term policy expires.
    – We are maxing out our 401k, and are phased out of IRAs.

    Thanks again all. You saved me a few hundred thousand dollars.

  92. If he wasn’t talking loans then it was even a worse idea. You should ask him just for kicks. You will soon realize that he is no friend of yours.

  93. Rex,

    Just curious, why would the loan be better or worse than a surrender? On the loan I would have to repay the money with interest. On the surrender, I wouldn’t have to repay it (I’m not sure how the tax thing works if it would only be a partial surrender of less than the total surrender value – prorate?).

  94. What do you mean phased out of IRAs? We’re all phased out of IRAs but we’re still using them. You do know about the backdoor Roth IRA, right?

  95. SS there are multiple reasons for this but let me try to simplify it:

    By doing what you suggested with permanent life insurance, you will guarantee that you have less money for your kids education then just putting it under a mattress. With permanent life insurance, to avoid taxes you have to remove less than what you paid in premiums. This by definition is less money that you put into the plan. When you consider 20 years of inflation then you have really lost a lot more money. This is one reason why if that is what he is suggesting with permanent life insurance, that he really doesnt have your best interest at heart. Now i imagine he actually is pretending loans are smart. They arent but they can have a small place late in one’s life. This doesnt matter if the company is direct or non direct recognition or whatever. The banking concept with permanent life insurance is a very bad idea.

    I could go on but anyone who tries to pretend that permanent insurance is the smart way to invest either doesnt know what they are talking about or is pushing it based on getting a commission. You must need or at least highly value the permanent death benefit. That is what you are paying for. It isnt something most people need or when they think about it long enough even desire but that is the benefit of any permanent life insurance. There are different flavors which really just means different methods of crediting and guarantees. The rest is smoke and mirrors.

  96. Everyone should calm down.

    Not everyone in this world is out to get everyone else. I mostly agree to buy term and invest the difference,besides for income earners in the top 5% and crank away at saving in all retirement account ts available.

    Physicians also code extra things to hit their rvu numbers and increase production. I have fellow physicians recommend surgery over other means bc that’s what they know and/or make their money. But I wouldn’t recommend not seeing a doctor even though some orall are greedy.

    In sum…buy term when in doubt and save save save. Let’s all treat each other as we would like to be treated.

  97. If your colleagues are recommending this and isn’t in the patient’s best interest then you hang around a bad crowd. I’ve been a physician for over 20 years and doctors who do such are uncommon.

    There should be zero doubt…..avoid permanent insurance unless you need a permanent death benefit.

  98. Hi,
    I have a whole life insurance policy from company A and recently was interested in closing that account and switching to a lower cost term policy from company B. My insurance agent contacted me stating that I “regret” that decision. Can someone point me in the right direction?

  99. Bob,
    If you read the entire post and the comments, you should already understand what to do. The first issue however is do you need insurance and how much insurance. If you only have whole life and are younger with a true insurance need then it is very highly likely you are under insured. You would need to list your income and what you are trying to protect such as mortgage, how many kids and what ages etc to come up with an estimate but in general people insure 10 times their income in their 30s to 40s. Assuming you have an insurance need then very likely you do need term. Id go to term4sale and get an estimate. Id go with someone cheap such as banner but it depends on age and health. Now the 2nd question is should you surrender your whole life. If you dont need a permanent death benefit then you shouldnt have purchased it but you likely dont have a time machine. Once purchased you are pretty much screwed but here are your options after you get an inforce illustration from the ins co. See how many years you have paid and what the cash surrender value is. Vanilla whole life doesnt have premiums equal csv until around 14-16 years. As a general rule, if less than a year and you are still very healthy then cancel the darn thing immediately. If you have had the policy for a long time like 20 years then if you dont mind passing on money at your eventual death then keep it. If you are in between then look at your premiums paid vs csv. If you surrender completely, you get the csv and of course no longer have permanent insurance. You can 1035 the csv into a low cost vanguard annuity and keep the cost basis such that gains until reaching premiums paid are tax free. The idea is typically to surrender the annuity once you reach that point. Dont get rid of any permanent policy until you have already purchased the term assuming you need insurance. Buying permanent insurance is almost always a mistake, unfortunately immediately getting rid of it isnt always the right answer. I wouldnt use that agent again.

  100. I bought a Global index universal life insurance last year. As agent suggusted, I deposit as much as the insurance company allowed. The company guarantee 1-13% return every year based on the SP 500. After reading the above, it looks I made a bad choice. Anyone has a experience on similiar product?

  101. Sure. That’s one of the many variations of permanent life insurance out there. Why’d you buy it? Is there a product that can provide whatever you were seeking at a lower cost? The answer is probably yes.

  102. As a Certified Financial Planner, I don’t understand why anyone thinks that depositing money into a permanent policy (when term is immeasurably more cost efficient), so that they can borrow their own money out (that’s why it’s tax-free), and then paying interest on borrowing the money (your deposited premiums) is considered a viable financial strategy.

    Besides investing in hedge funds, I couldn’t think of a more ridiculous use of your money.

    There is a reason that the insurance companies have all those big buildings.

  103. Before surrendering you should make sure you have adequate term insurance in place. If I were you, I’d surrender the permanent policy right after I did that. You’ll be out a year’s worth of premiums, but it’ll likely be a decade or two before you’re at a break even point. If it makes you feel any better it took me 7 years to learn my lesson. You learned yours in just one!

  104. If you surrender in less than 1 year then frequently the agent has to pay the insurance company back the comission. Might want to consider that if actually under 1 year.

    You really have 3 options (after term is in place):
    1. surrender and learn your lesson. id typically recommend doing this in your situation.
    2. keep the policy and make the most of it which means you will have a poor return over the long haul but its relatively low risk
    3. at some point 1035 exchange the csv into a vanguard annuity to retain cost basis. this way your gains are tax free until you reach the point of total premiums paid. you have to be okay with having an annuity.

    it always hurts to realize when you have made a mistake. ive too made the mistake of trusting the insurance agent.

  105. This is a great thread. I am licensed to sell life insurance but have not been very involved in selling anything but term. I have researched and read a lot about permanent insurance and feel that whole life in most cases is a bad deal. I think it is wrongly sold to people who need a lot of insurance. I will say that Index Universal Life is a much better product if you can over fund the policy and blend it with term to keep premiums down. Not many agents talking about that since it hits them in the pocket. However, this is also not for everyone. I think one needs to take the company match in 401k fund and then consider one of these policies or a ROTH IRA especially if they do not qualify for ROTH. I am not a fan of those who advocate the BOY concept or this concept I mentioned ( IUL over ROTH or IRA ) in all cases. Everyone has their own unique situation. Just my two cents worth.

  106. Index universal is similar to other universals just with a different crediting formula. The conclusions are still the same. Guess what happens when someone takes loans out in retirement but the market isn’t going up at the constant rate as illustrated…..the cost of insurance is of course rising, the 8% loan is adding up, and the floor is credited…..it crashes.

    Almost nobody should purchase it but any permanent insurance if purchased should be over funded to the mec limit. Few agents present this bc it decreases their commission. That isn’t unique to index universal.

    Almost everyone can back door Roth.

    After that go taxable if you have used up 401k, Ira/Roth, HSA

  107. Hi,

    First post here.

    I am a radiologist who has recently purchased a whole life insurance policy through my professional corporation. All saving/investment/retirement vehicles have been maxed out, so I decided to dedicate about 15% of my left over corporation after-tax funds to purchase a whole life insurance policy that will maximize payment into the policy for only 10 years (over funded to the mec limit), then let the policy pay the premiums itself. My intention is for my corporation to take out a 90% loan against the cash value in retirement (approximately 20-25 years from now) and then have the death benefit pay out the loan upon my death.

    It sounded pretty reasonable from what I researched, and I had my accountant look at the numbers and he agreed that it was reasonable to allocate a portion of my portfolio into this policy.

    My financial advisor said that he usually doesn’t recommend this insurance/investment vehicle (I know – “Don’t mix insurance with investment”) for the majority of physicians, but for a small percentage of high income physicians who have significant after-tax funds left in their professional corporations, then whole life insurance may be beneficial.

    After reading this website and your posts, I am now a bit confused if I made the “right” decision. Am I missing something here?

  108. One strategy that physicians might want to investigate is invest the after tax dollars in low cost tax-managed index funds. This strategy will eliminate the myriad of negatives outlined in previous posts regarding using life insurance products. Sure, you might have to pay a little in taxes on a yearly basis, but you won’t have to deal with the complexity of the insurance product that is indeed mixing insurance with investments.

    These funds can typically pay out a small amount of the NAV as distributions, usually due to dividends and interest–anywhere from 0.5-2.0%. Due to the tax managed aspect, capital gains are minimized by tax loss harvesting within the funds.

    Also, if you are still inclined to purchase a life insurance product, my advice is to pay no attention to the projected returns and only focus on the guaranteed return–this is likely what you will receive.

  109. Heparin before i tell you that you made a mistake, let me say i made a similar one.

    Just bc you maxed out other stuff doesnt make whole life a good decision. I like how there was a bunch of maybes in that sentence you either wrote or quoted about it being beneficial. That alone should tell you all you need to know. The truth is he made a bunch of money with bad advice and id consider firing him personally. Unless you need a permanent death benefit then its always better to avoid whole life. Unless your policy is guaranteed to have a limited pay period (and it doesnt sound like it) then with the direction dividends have been heading, you should expect to pay longer/more than what was illustrated and to receive less in retirement without crashing the policy.

    Additionally there likely isnt any significant reason to have your company purchase it with after tax funds as opposed to just buying it as an individual. The only good thing i can say is that its better than buying one with pretax dollars like within a defined benefit or 401k. That is actually the worse thing you can do.

    The bottom line is that you cant do better investing via insurance bc you have added the cost of insurance and you have added another middle man between you and the treasuries/bonds they have invested in. The tax angle doesnt make up for the low return over decades and the costs of those loans. Considering you are investing for a time period over your whole life, its actually longer than just retirement and thus such a conservative approach isnt going to provide the best return.

  110. Rex:

    [Rude comments deleted.] I realize that you think you know a good deal about the structure of whole life, but you seem to know very little. If you bought a product that was unsuitable for your particular situation, it doesn’t mean that you should [badmouth it.] [Rude comment deleted.]

    [Rude comment deleted.] [You] are actually recommending that people surrender an asset that will always be there for them no matter how badly their other assets perform. If I can give any advice to anyone reading this, it’s to run from this website as fast as possible.

    Editor’s Note: JohnFA- I don’t enjoy editing comments. I’ll just delete the next one like this instead of trying to get your point across in a civil manner. If you don’t like what you’re reading, feel free to browse on over to another website and warn all your clients about this one. If you’d like to debate ideas, that’s fine, but ad hominem attacks won’t be tolerated.

  111. Im not sure all of what he wrote given the edits but per what is remaining if he wrote that whole life will always be there no matter how badly their other assets perform than that requires some clarification. Most of us invest in bonds/treasuries. If bonds/treasuries go under then one would quickly realize that guaranty only means if the company is able to make good on the promise (which they wouldnt be able to then). This is considered very unlikely, which i would personally agree with, but that statement of his/hers just isnt true. I really wish agents had a fiduciary requirement.

  112. I basically said that I wish Rex had a fiduciary responsibility. I know that if he actually realized how much harm he is doing, he wouldn’t be posting this misinformation but unfortunately that isn’t the case. I am an IAR so I actually do have a fiduciary responsibility and have to carry a larger e&o policy. I am not coming to defend whole life because it doesn’t need a defender, I would like to point out though that someone makes sweeping generalizations about financial products, with absolutely no knowledge of the client’s specific financial or personal situation, it may not be advice that should be taken seriously. If there were a perfect financial product, everyone would already own it. There are just different products that suit different people and situations. In regards to bonds and treasuries, You are talking about something that pays a yield on a principal that can lose market value, unless held to maturity. Whole life is compounded tax deferred growth on a contractually guaranteed cash value and a contractually guaranteed death benefit. If one doesn’t know the difference between yield and growth or even average return, he probably shouldn’t be giving people financial advice. Comparing it to a bond is like comparing an apple to a banana. I don’t think it is productive to advice people against a fixed asset class with disability and death benefits while there are families that lost half of their life savings in 08.

    The most bizarre part of this whole thread is actually the claim that whole life is only for the small amount of people that need a permanent death benefit.. Have anyone ever met anyone that would actually choose to leave less to their family than they potentially could? I actually have but certainly a small minority.. If you are paying for term your entire life and it expires at an old age, you will find that the term is exponentially more “expensive” over one’s lifetime. That expiring death benefit is a “cost” to your family because it is money they otherwise would have had. So when running the numbers for the “buy term invest the difference” scenario, don’t forget to add that cost, of the lost death benefit, to the term premiums you paid, the opportunity costs on what those term premiums could have earned as well as subtracting the taxes paid on your side investment.

  113. Actually only people who sold their investments lost money in 2008. Buts lets talk about the facts of whole life. According to research by LIMRA and the society of actuariers, less than 20% of permanent life policies are kept in force until death. About 1/3 are surrenderederd in less than 5 years, usually for almost a complete loss. Why do agents never realize the great harm they do to people with this? The worst part is likely a bunch are under insured with term at the same time in case of premature death. Please point to any study refuting this or any published data from the insurance companies on policies kept in force until death. I wonder why they dont show this?

    Thus if people actually need a permanent death benefit, whole life has been shown not to work most of the time.

    The rest of your bond statements dont apply. The guarantee is only as good as the companies ability to pay period. You just dont like that i showed your statement to be wrong. You actually havent shown any of mine to be wrong. You dont want to waste your time…….Yes that must be it.

    Why dont you point to some actualy evidence supporting the use of whole life as an investment? Dont have any after all these years? You going to point to ups and downs in the stock market? I dont recall this blog recommending people to sell low.

  114. I never said anything about whole life being an “investment,” I said that it’s a fixed asset, which it is.. How many bonds are held to maturity relative to the amount issued? How many Stocks are held until the person dies? How any options are ever called? I’m sorry that you don’t see value in a product that will never lose value or see a negative return long term but many people do. [Rude comment deleted.]

  115. So let me get this straight: in 2008 U.S. equities (-37.23), private equity (-64.05 %) (s&p private equity index), Emerging market equity (-53%) real estate (-47.63%) International equity (-43%), Global infrastructure (-36%), Commodities (-36%), Hedge funds (-19%) emerging market bonds (-12%). All of these asset classes are good for people if they didn’t sell, yet because people took their cash value out of whole life to use before they died, whole life is a terrible financial product not suitable for anyone?? [Rude comment deleted.]

  116. again you put forth irrelevant info

    try and put forth a good case for whole life….it wont work bc it doesnt exist unless you need a permanent death benefit.

    A typical vanilla whole life policy has zero cash surrender value for 2 years and at current dividends takes 15 years to equal premiums paid. The words never loses value is insurance talk. It has significantly less value than premiums paid for a very long time. There is a loss of value from day one. You just dont want to think of it in those terms. There are of course ways to minimize that but most agents dont put forth over funded policies.

    In case you hadnt noticed, this board is for medical folks. That doesnt mean you cant join in but you likely need to bring some actual evidence to the table. Lets see it….

    You have yet to provide any evidence showing im wrong on any part of this.

  117. im at least glad you realize most whole life policies crash.

    this place is about providing the best advice…and the best advice is avoid whole life unless you need a permanent death benefit.

  118. Ohh… irrelevant?? Gotcha… (-60%) irrelevant! lol. Why would there be any cash value in the first 2 years? You are paying for the permanent death benefit and then after 2 years every single dollar you pay into it, is your own cash value.. I realize you don’t understand the product at all but surely you have noticed that the premium in the first two years is exactly the same as the cost of a 30 year term policy, from the same insurance company, all paid up front right?

    Also, please give me an example of how a person would not want to keep the permanent death benefit? Any person that has children at some point in their life.. I don’t have any children and I can’t even imagine how a person would not want to keep that death benefit in their family.

    Financial planning is a lifetime process that involves more than just the balance of your brokerage account from one year to the next, if you want big quick returns and big losses, just bet on football…

    If I told you i will give you a $1 million death benefit that you can keep until you die no matter how old you live, and also said that every dollar you pay me, you can access from day 1 like a checking account, and I will pay you a 5% return on the money, why would I do that? You would be stealing from me. Waiting two years to use your new savings account, is about as good of a deal as there is on the planet, given the fact that you have bought a $1 million estate for your family, and get to use the money after the 2nd year. [Rude comment deleted….again. Seriously John, do you talk to people like this in real life?]

  119. Any insurance agent, most of which don’t actually understand the product either, that puts all of a clients money into whole life, is irresponsible. I will give you an example of how I use it. I have a client who, when asked how much she feels comfortable saving on a monthly basis, she said 12-15 thousand per month. She feels very uncomfortable with her qualified and non-qualified investments, because the volatility of the market bothers her and actually keeps her awake at night because she can’t stomach the idea of her account losing value. She is in her mid 30’s and loves the idea of having a fixed return over the next 20 to 30 years. I suggested she put 2,000 a month into whole life. She loves the idea that her entire contribution is protected against the “own occupation” disability rider, because a disability is the only reason that she can envision that would prevent her from not being able to make that payment. She wanted to put much more into it than the $2,000 but I told her lets start with this and revisit it in a year and see how she feels. I recommended other things for the rest of her monthly savings but I would be writing a novel if I typed out everything, i hope you get the point.. What I don’t get is why you are bothered by not having “surrender value” (as you call it, even though whole life does not have surrender charges) in the first 2 years, when you don’t have surrender value without a 10% “surrender charge” on any qualified account for, if you are 30, 30 years.. that’s a 30 year surrender charge! which is much higher than the 1st year surrender charge on any annuity or insurance product…

  120. It’s really interesting to me that this thread is even here, because every physician client that I have, loves the idea of disability income insurance and most attorney clients I have hate the idea of disability income insurance. A product that protects your contribution against an own occupation disability, and is creditor protected in most states, seems like it would be very attractive to physicians. Imagine if your 401k/403b would make the $17,000 contribution for you if you couldn’t perform your own occupation due to a disability.

  121. “only people that sold their investments in 2008 lost money” he says…. Rex, do you understand the difference between yield and average return? If I ask you a few questions will you play along and answer them? 1st question: If you invest 1 dollar with me and one year later I give you back 2 dollars. What was your yield and what was your average return?

  122. [Rude comments deleted.]

    Why people dont want an insurance death benefit?
    1. since they are investing for a 30 year or more period, they will have more if they didnt use insurance even including the tax free benefit at death.
    2. bc they dont want to have to die to give a gift. many people are actually ruined by getting a large gift at once as well. If you want your great grandkids to go to college, lets not make them hope you die so they can go.
    3. dont need to pay 8% loan fee to access money while alive
    4. can bring joy to your life by giving while you are alive. hard to enjoy after you are dead.
    there are others but those are enough.

    by the way there are disability retirement plans but thats another topic. You dont need that whole life rider.

    One other thing i should make clear since you may be trying to confuse people. The ultimate return is NOT guaranteed. Nobody knows what the ultimate return will be on the whole life death benefit bc premiums are required yearly (could be paid out of dividends if possible at some point) and dividends are not guaranteed. If you want someone to give you an idea base on a current illustration then james hunt has a service to do this for under 100 bucks. Its an okay service. Returns are typically 2% less than bonds/treasuries over that time period.

    Additionally i should make clear that i have listed above the 3 options people have with whole life once purchased. Which one people should chose varies. Its a strange problem but even though the purchase of whole life (without the need for a permanent death benefit) is almost always a mistake, it doesnt always mean one should immediately surrender it.

    • I stated this above…Northwestern Mutuals loan rate is 8%, but they credit your account a borrowed rate dividend of 7.45% (even if their current dividend is lower or higher). So the loan isn’t really 8%, it’s .55%. Again….I would rather take a loan from my cash value at .55% than borrow from a bank or my 401k. especially since my cash values are going to grow as if my original aunt is still in there. If I borrow from the basis of my Roth, I’m limited to putting it back at 5500 per year…tht could take a while to put back what I took out. I’ve had a permanent policy with NM for 24 years. If taken many “loans” on my policy and it the money back within a year or two and its been the best thing. I didn’t have to go to a bank to pay for funding, and I got my money each time in under 3 days. I’ve read a lot on this thread and you all may think permanent insurance is a bad deal, but it’s been great for me. Yeah it sucked in the first 10 years…but it’s all gravy now. My dividends are set to take over the policy in 2 years, so I won’t fund another dime into it. Total death benefit I have is 425k that is guaranteed to grow and when I’m about 90 I’ll have just over 1M bucks to pass to my family. Many people think leaving mony to your kids when you die will ruin them. To may be true if I die and my son is 18. But if I live to age 90 or 95, my son and his wife will be in they’re 60s. I have no problem leaving them money to help them through retirement if they haven’t been as fortunate as I have been. Permanent insurance might not make sense for everyone…but it’s been pretty great for me. Just sayin.

      • I’m glad you like your Northwestern policy but I’d like to clear up a little confusion about dividend rates and interest rates. You do borrow at 8% and NML may enhance your dividend rate but your effective interest rate with the enhanced dividend is closer to 7%.

        The confusion, I think, is because you still receive a nice dividend even when borrowing.

      • First, as I understand it, NorthWestern is direct recognition (I’m sure someone will correct me if I’m wrong on this.) So the money you borrowed is no longer earning interest…in fact you’re paying interest to borrow it. Second, you don’t borrow from a Roth. You can take money out, but you never pay interest on the money you take out. Third, why have you had to take many loans out on your policy? Are you unable to pay for your lifestyle from your cash flow? The way you describe your borrowing, it sounds as though you have a spending problem or no emergency fund or no ability to save up for things. Last, your comment about “it’s all gravy” reflects mental accounting. You have less “gravy” precisely BECAUSE it sucked the first ten years. Would it be better to have an investment that compounded at 0% for 10 years and then at 5% for 10 years, or one that compounded at 8% for all 20 years? You don’t need to be a math major to figure that one out. I’m happy you’re pleased with your decision, and I agree you probably should keep the policy you have at this point, but the issue with whole life insurance is that the additional benefits (which are very real) generally don’t make up for the low returns, especially for policies now being sold.

        • While I’m not 100% positive, I believe NWM will allow you to choose either direct recognition or variable. Guardian is direct recognition. Under Guardian’s direct recognition, your dividends actually are enhanced when your borrow money from the insurance company because–and this is the easiest way to think about this–they “directly recognize” that paying 8% interest is above prevailing interest rates that you could get in the market, and they lessen that by increasing the dividend.

          Is direct recognition bad? I don’t think so: you know exactly what your interest rate will be–8% for the first 20 years and until you reach age 65, 5% thereafter. You can plan with that knowledge, unlike a variable rate that may be cheaper now but potentially much more expensive in 25 years when you wish to take distributions. Also, with direct recognition and the enhanced dividend you actual borrowing cost is closer to 7%.

          Should you borrow from your policy? Maybe–it’s certainly there if you need it–or you could go to a bank or credit union and use the cash value as collateral for a less expensive loan. Some people are big advocates of using WL as a personal “bank” (Infinite Banking, Be Your Own Bank, etc), but I’m not really convinced. What I do like is having the option to take distributions in retirement using basis to borrow and avoiding tax consequences.

        • “Would it be better to have an investment that compounded at 0% for 10 years”

          WCI I believe you just described the stock market from 2001-2011….

          Hey WCI, what rate of interest did you get on your emergency fund? Do docs keep 3-6 months as recommended? Let’s see, is that about $100k laying around in a bank saving account? Go ahead, calculate the opportunity cost of having that money in your emergency account for your lifetime…I’ll wait. That pathetic little 5-6% WL return looks a bit better now, doesn’t it? Compare apples to apples and you get an accurate representation.

          • I’m finding it difficult to leave your arguments in place while deleting the rude comments, ad hominem attacks, and overall inflammatory tone. If you want to talk about ideas, you’re welcome to do so. If you want to attack people personally, I really don’t tolerate that here.

            Comparing a life insurance policy to a CD, a cash account, or a even a bond fund is definitely comparing apples to oranges. For example, if I put money into a 1 year CD and then take it out in a year, not only will my entire principal be there, but there’ll even be a little interest. If I put money into a WL policy for a year and then take it out, I’ll have lost a big chunk of my principal. That sounds like a great short term investment. That’s hardly a 5-6% return. More like a negative 20-50% return. Even earning 2% a year in a 10 year CD comes out ahead of a whole life policy at 10 years. Yes, if you hold a WL policy for 5 or 6 decades until you die, you may get a 4-5% return, but if you don’t want to hold it that long, you’re going to do very poorly. But I can cash out of a CD, a bond fund, or a savings account any day the markets are open, and get both my principal and interest. That’s hardly apples and apples.

            I can tell you really like whole life insurance and think it is a great financial tool. Feel free to buy some. No one is stopping you. It doesn’t hurt me a bit if you do some or all of your investing through life insurance policies. But if you expect to convince me that it is a great investment using the same old arguments that have been repeated dozens of times in this comments thread, you might be disappointed.

  123. [Rude comments deleted.] You are free to leave less to your children because you think money may harm them if you like, but that is not the wishes of most people. If you are actually against a financial product because it will generate too much money, in any capacity, I think you have proven my point.

    Why won’t you answer my simple question above? You give me $1 I give you back $2 at the end of the year, you have a return of 100% and a yield of 100% year 1. I’ll help you out on that one.. Year 2: Your “investment” is down 50% on the year (-50%), now how much do you have in your account? $1… So your portfolio yield is 0%, what is your average return?? (what will it show on your brokerage account statement as your average return at the end of year 2?)

  124. you dont need to respond to me…try to show anyone the math/reasons why they should purchase whole life. One isnt leaving less by avoiding whole life….they are leaving more and have better flexibility. i dont know why you dont understand that but i guess you think whole life has excellent returns.
    i already told you that im not wasting more time on issues not related to this thread. I completely realize that people who sell stocks mislead folks into thinking average is actual. If you want to make a case that people who sell stocks use that trick then fine but it isnt going to make whole life worth purchasing and you should do it some place else. You have yet to provide any evidence why someone should purchase whole life (who doesnt need a permanent death benefit) and you never will. So far not one financial person or agent on this thread has agreed with you and those who are knowledgeable wont.

  125. just fyi for those that can actually use the info: Northwestern Mutual loan rate is 5%, Penn Mutual is 5% (lower than the dividend after the 11th year), and Guardian is 7.4% for first 20 years and 4.5% after that.

  126. Always enjoy the fired up ranting for and against whole life insruance on forums. I find it a pretty good product. First consider the name whole life which means it will pay , not if, but when you die. So if you absolutely want a death benefit it will provide one. Notice I said want not need. I don’t need a Mercedes but I like driving one so I do. I supose some pencil brained financial planner might tell me I would get a better return leasing a Chevy but that’s not my style and neither is renting temporary life insurance. Notice whole life builds cash value. Not stock value or bond value but cash and when one compares the return over time to a CD or savings account it actually does well. A well balanced asset allocation strategy always includes cash and using a whole life policy works well for that when matched with an age appropriate bond and stock portfolio. As for the expected returns of investments that are often praised as superior to a whole life policy reseach clearly shows that they do not materialize and why ?. Irrational investor behavior. Ninety percent of a portfolio return is derived from not the investments but human behavior or misbehavior. It is true long term returns will most likely approach their historical averages if only the damn investor would stop fiddling with things. What else has a guaranteed return, offers creditor protection, built in disability protection and tax advantaged accumulation? I’m waiting for an answer. While doing so I will pull the cork on a pinot noir and read some more of the infinite financial wisdom of other posts.

      • Yup, reread it. Still don’t agree that whole life is a good investment because some investors make avoidable behavioral mistakes. I agree that if you compare whole life insurance to something with terrible returns, that it doesn’t look so bad.

  127. while i wont question your statement that 90% of investors return is from behavior or misbehavior, the stats show less than 20% of whole life policies remain in force until death and the great majority are surrendered for a loss. Thus that is a poor argument for whole life. It does not change human behavior.

    The actual retun is not guaranteed like you said. Premiums are required every year for whole life. They might come out of dividends at some point but dividends are not guaranteed. Nobody knows what the return will be on a whole life policy’s death benefit until death. While the increase in cash surrender value has a guaranteed increase, this isnt anything super. You start at zero and dont equal premiums for 15 years (thats with dividends). Accessing it before death has costs.

    The creditor protection is very poor and state dependent. If you lose everything early in a whole life contract then the policy fails bc you cant pay for it and you get nothing. If you start taking cash out of a whole life policy then it typically is no longer protected.

    If you could provide any real data supporting whole life that would be appreciated.

    Since you dont get both the CSV and the death benefit, the tax advantage is poor when considering costs to access this money.

  128. I really enjoy the bantering back and forth regarding whole life insurance. As I have previously posted. I am very happy with my 2 whole life policies from Northwestern Mutual. I am coming up on my 21 year policy anniversary next month. I have put in $58,000 OVER THE LAST 21 YEARS (for those who try to ammortize a $58,000 investment from 21 years ago). What began as 2- $100,000 policies has now become 2 – $147,000 policies. If I die, my wife receives $147,000. If my wife dies, I receive the same. My cash value is now up to $88,000. That’s $30,000 MORE than I put in OVER 21 YEARS. Currently, every $1 I put in returns me $1.50 AND my death benefit continues to increase. This plan on keeping these policies many more years (God willing). They will allow me to take the largest joint pension option available to me when I retire. Otherwise I would have to take the 100% Joint Life Option to protect my wife. That would be close to $500 a month less in income. These policies really work for me. I know some people love to run numbers saying that it’s smarter to invest your money in something else, or buy term and invest the difference. To me, the SECURITY of having a life insurance policy in place is more important and is the most overlooked aspect of all. The ever increasing cash value AND death benefit is a bonus. When I’m 70, it will be nice for my wife and I to have the option of making a phone call and having a check for $200,000 in our mail box if we so please. It will also be nice to know that if I die, my wife will still get that $200,000. As will I if something happens to her. We also have the option of each paying $115 a month for a policy with a death benefit of $200,000, no matter how old we are. I realize that everybody’s situation is different and there are those that will swear that whole life is the worst thing in the world. But it works for me and I’m convinced it’s one of the best things I’ve ever purchased.

  129. Dave im always glad when someone is happy with what they have purchased and if i were you, id definitely hold on to those policies but buying a whole life policy and what to do once you purchased it are two seperate questions.

    For instance, you have paid 58k but now IF you surrendered it, you would get 88k. Once you consider inflation over 20 years and the fact that whole life gains are taxed at income instead of the better long term capital gains, thats a bad return. Now i realize you dont plan to do that but your example shows why it is a bad investment. As i mentioned id keep it. The basic reason is that you have already paid all the costs of it and you cant get those back.

    In regards to your pension options, make sure your wife could live off the lower difference of the pension plan you chose plus the death benefit. Some people assume they wont die until they are older and thus if they happen to die younger than expected, dont have enough death benefit to safely chose the pension option you are considering. It typically only makes sense ahead of time to plan to do it the way you have planned in specific circumstances but you dont have a time machine to change your previous decision on permanent insurance(such as poor joint options for your pension and health of spouse such that one feels confident they arent going to outlive you). The basic reason is that “two insurance” contracts (your annuity and the permanent insurance) isnt typically cheaper than the one joint annuity. There can be exceptions but it isnt the norm.

    NWM even though it has dividends falling like rocks over the last few decades is still a top performer when it comes to death benefit. Dividends for all companies are at lows and may continue further down especially if we stay in a low interest rate environment. It however is relatively weak when coming to accessing the cash since they use direct recognition for the loans and their loan rate isnt anything special. Thus if it were me id be looking to take money out as late as possible in life if necessary to reduce costs. Whatever you do, dont take enough out to cause the policy to collapse.

    For the reasons i mentioned above about who gains are taxed, i wouldnt purposefully plan to surrender at age 70. My goal if it were me would be to overfund the whole life on myself so the death benefit is as high as possible (thus making the annuity option you feel you want to chose safer). You can ask NWM if your policy is overfunded to the MEC limit. They can provide you an illustration to compare to your current situation. Keep in mind any money you take out of a policy decreases your death benefit. That is why the AND isnt so super.

    Finally dont pay monthly but yearly if you can because monthly adds on another finance charge.

  130. Rex,

    Thank you so much for the good advice. Although I am about 10 years away from retiring, you gave me some good food for thought. My pension options deserve much consideration, including the possibility of me not living as long as expected. Perhaps I will end up taking a more moderate option to provide more protection for my wife. I do plan on keeping the policy as long as possible. I never really thought about taking a loan at a later date and keeping the policy in effect. I would really have to weigh the pros and cons before touching the policies. I am not familiar with overfunding the policies to the MEC limit. It sounds like I may have to contact my Northwestern agent. My original agent is long gone and I haven’t spoken to anybody about it since I began the policy oer 20 years ago. I just wonder if the Northwestern agent would provide me with information on my best interests or come up with an alternative plan to help themselves. Maybe I should consult a neutral third party. For the time being, I’m going to just keep paying. Thanks again for your input.

  131. Dave

    look at the difference between cash surrender value and death benefit and ask yourself which one do you want? You always want the death benefit with these things of course. Its just a shame you have to die to get it. It is really what you have paid for all these years so its typically a mistake to give it up now.

    Call NWM and demand they assign a local agent. The person will likely want to sell you more insurance products. Be careful but polite. It is difficult to get an informed neutral third party. James Hunt has a service for 85 bucks or so to evaluate an illustration for you. He also gives you a paragraph or two of advice. its okay advice, ive used his service myself in the past. If you ask for them to present you with a current illustration and one overfunded to MEC limit, typically you will be able to see the reason (increased death benefit and csv) for yourself as to why you might do this. The goal is then to take up to 90% of the csv out late in retirement as a loan. The reason late is bc then there is less chance the policy will collapse bc of loan interest. If a policy collapses then not only dont you get the death benefit but you also get a tax bill too. Its a double negative event. Your heir then gets the difference between the death benefit and what you took out in loans and this gives you the most living benefit out of the policy while maintaining some death benefit and thus the greatest total benefit in my view.

    As an incomplete view on MEC. MEC stands for modified endowement contract. In essence a policy over funded beyond MEC limit wont have the same tax advantages in particular the tax free (but still costing interest and fees) loans. An overfunded policy will increase the csv faster and the death benefit.

    Im not sure if you are a physician or not but keep in mind also that i and most of the other posters are docs and do not sell these products.

  132. And apparently Tom doesn’t care enough about the reader to enlighten them as to what’s been somehow missed in the post or the 149 comments following it. Seriously, please point out the benefits that haven’t been discussed already.

  133. I’m not sure you meant it this way, but I’m going to take that as a compliment. Why is it that the only people who apparently understand whole life insurance and think it’s a good idea are those who sell it?

    Why aren’t there doctors streaming onto this comments section pointing out how glad they are that they bought a whole life policy 20 or 30 years ago?

    • I am not a life insurance salesman. I am a CPA. I have done accounting for insurance companies. I understand life insurance, including WL insurance, and recommend it’s proper place in your overall financial picture.

      Why aren’t more doctors posting their positive comments 20-30 years ago? Because docs are stupid just like other folks! (<—-ignore incomplete sentence calling other people stupid :D)Seriously, most human beings cannot stick with anything for 5-10 years much less 30 or 40. I can tell you my father's personal experience with his policy that he owned for 40+ years but all of you doctor's would poo-poo it just like you do others positive experiences with WL.

      Honestly, most of you should not purchase WL because you will not use it properly. That's my honest opinion. Quite frankly, you should avoid stock market investing too. You WILL be the ones who sell low and buy high in panic modes, earning 2-3% over your lifetime. Put the money in long term CDs and save yourself the stress and regret of a lifetime of poor financial moves.

      • I’m not going to edit that comment, so future readers can get a mild taste of what some of your other comments tonight looked like.

        I see that you recommend whole life insurance and feel it has a “proper place” in your overall financial picture. What financial purpose do you see whole life insurance as the best product for?

  134. It just isnt a good idea as an investment and they dont like that being demonstrated. When you look at the stats from the only two independent groups who have studied it, LIMRA and society of actuaries, one realizes it doesnt even typically work out as permanent life insurance let alone as an investment. Agents leave such comments bc they have nothing factual to say that would help their cause. I wouldnt be surprised if they didnt understand the product that they sell. In my experience that is common throughout the industry. DR and SO type comments are just additional distractions. Who cares what they think. I think both do a decent job of motivating people out of debt but their advice wouldnt be useful to most doctors.

  135. Actually, that was not by any means a compliment! Also, I have many clients who are high end attorneys and doctors, and they are RAVING fans for the product! Just out of curiosity, please tell me what you guys invest in if whole life is such a horrible investment.

  136. That cant be a serious question if you have looked at this site. It wouldnt matter any way since there are no magical investments in this world. Not for me and not for insurance companies. No reason for me to invest in bonds and treasuries via an insurance company. It just decreases return.

  137. So what you are saying is that you really don’t have an idea of where to invest money, just that whole life is a “bad investment.” Let’s review a few things. First of all, I am a financial advisor, not an “insurance salesman.” I manage portfolios of equities, fixed income, mutual funds, ETF’s, etc. as well as provide whole life, disability, and long term care insurance. I believe it was said by WCI that he can get a rate of return of around 8%. I know that myself, as well as many of my fellow advisors would agree that getting a real rate of return of 8% net of fees, expense ratios, taxes, etc. especially over the past 12 years is near impossible. The number is more around the 2-4% range at best. Also, you guys are big proponents of 401K’s. But do you understand that according to a 2012 article from the LA Times that approximately 1/3 of a 401K’s total account value will be lost in just fees alone. When you factor in the tax that a person has to pay on the money at distribution, they are left with less than half of the value that 401K should have been. Now that is what I call a poor investment!

  138. You chose not to read this site. It is very clear that fees are well discussed here as well as what to invest in.

    But back to this topic of whole life…
    about 1/3 of policies are surrendered/lapse within 5 years for almost a complete loss of every dollar.
    about 1/3 the same by around year 10 still for a loss
    about 20% are kept in force until death.

    Maybe your clients lose about 1/3 of their investments in fees alone but that doesnt mean the rest of us need suffer the same fate and yes you are an insurance salesman. Just own up to it. The topic of “financial advisor” is also covered on this site.

  139. Correct me if I am wrong but you do not point out at all what to actually invest in on this site. If you do, please restate them for me then as I must have missed it. Second, none of my clients have lapsed their policies, since they LOVE the product. That being said, it is a very good long term investment. Third, my clients do not lose 1/3 of their 401K’s in fees. If you read my post closer, that statistic is from an LA Times article stating that the average american, not my clients, lose about 1/3 in fees. Please get your facts correct if you are going to comment on my posts.

  140. i told you to read the site. im not going to baby you. Ill give you a hint. Reduce the fees and use index funds. This is a thread about whole life, not your attempt to confuse people. Nobody needs to lose 1/3 in fees period. Of course more people actually lose a higher percentage with whole life as the stats from LIMRA and society of actuaries demonstrate.

    Only people who dont understand whole life or sell it, love the product. Im sure you are good at confusing people. It is a horrible long term investment. Its fine for permanent insurance if you need that. Few people do. This is a thread about whole life. You have given zero facts or evidence to support its use as an investment and you never will.

  141. Once again, you misrepresent the numbers. The article as previously stated 2 times was from the LA Times. The average American loses 1/3 of their total account value of their 401K’s in fees and expenses. That is not my attempt to confuse people, but an actual proven fact from a legitimate source. If you want to really use true numbers, then when you take taxes into effect, the actual account value will be less than half of what it should have been. These are not misconstrued numbers, but pure FACTS. Also, what kind of real return do you get with your ETF’s, which are indexed funds with low expense ratios as you stated. After taxes, and even the low expenses over the last 12 years, it cannot be greater than 4%. I agree that this might have been a great investment 15-20 years ago with high equity rates of return, but I do not feel this is the case today. Please correct me if I am wrong.

  142. Sure it is. First off there are dividends. Second, you cant cherry pick dates when it comes to retirement accounts like that. When you purchase whole life, if you get the permanent death benefit then thats at least 40 years away in most cases yet you have locked yourself into this low return which is why its an even worse decision as an investment(death comes after retirement in the non premature death scenario). Even with dividends, current vanilla whole life contracts dont have csv equal to premiums for 15-16 years (and dividends arent guaranteed). That’s still a loss when you consider 15 years of inflation. Finally dividends for whole life have been falling like rocks for decades. The return on whole life death benefit is not guaranteed but it continues to trend down and down with lower and lower dividends. If you use real numbers then use the stats that LIMRA and society of actuaries have shown multiple times…..those are real numbers and they show whole life doesnt even typically produce a death benefit but lapse/surrender for huge losses.

  143. Thank you for sticking to a discussion of ideas rather than personal attacks.

    Jimmy, I suggest you refer your clients to this page and see if they still “Rave” about the product. I think readers would also be interested to know how you make your income, what percentage from insurance/annuity commissions, what percentage from mutual fund loads, what percentage from AUM fees, annual retainers, or hourly fees etc. It would help you appear unbiased, unless of course those numbers are skewed in the “wrong” direction.

    I point out to Rex that whole life is probably not the product of choice for someone needing a permanent insurance solution. I suspect a universal policy that doesn’t accumulate cash value would be a better option. Lower premiums, same death benefit, no cash value. That leaves whole life purely as an option for someone wanting to use life insurance as a low-return, but guaranteed investment. Rex and I agree that insurance companies don’t have access to any magic investments. Therefore, the return available through a whole life policy is always going to be lower than the return available without the policy, with the only advantage of the whole life policy being that there are some tax benefits and sometimes some asset protection benefits when compared to a taxable account. Our argument is that the costs/lower returns and loss of flexibility of the policy outweigh the tax benefits, especially when better tax benefits and asset protection may be available inside unused retirement accounts.

    Now I’d like to argue against a few of Jimmy’s points.

    First, that this site “doesn’t tell anyone what to invest in.” Seriously, that’s almost insulting. I understand not everyone has read all 300 pages of this site, but here’s a link just to get you started: http://whitecoatinvestor.com/the-default-portfolio/

    Second, that you are a “financial advisor” and not an “insurance salesman.” Answer the question above about how you are paid and readers will be able to determine for themselves what you are.

    Third, the fees in many 401Ks do eat up 1/3 of the return in those 401Ks. Not 1/3 of the original principal by any means, but over decades, losing 1/3 of your return to fees will have a dramatic effect on the size of the account. Minimizing fees is an important part of successful investing. I’ve managed to get my 401K fees as low as $200 a year, plus ERs of less than 0.10%. So all 401Ks certainly don’t have outrageous fees. I’ve yet to be shown a whole life policy that didn’t have what I consider to be outrageous fees. Perhaps as an expert in the field you could link to the one with the lowest fees you know of. Since you’re obviously a very fee-conscious “adviser”, I assume you only use low-fee policies, right?

    Fourth, I find it hard to believe you’ve never sold a life insurance policy that lapsed. Really? How many have you sold? Or do you just mean that none of your current clients have let their policies lapse. That I’d probably believe.

    Fifth, 8% over the last 12 years is not impossible, but admittedly unlikely granted that this period of time was cherry-picked to include two bear markets. Why not use 20 years, or 10? Oh…because that wouldn’t prove your point. Let’s be fair when we discuss these things. An easily bought retail investing fund available to every reader of this site is the Vanguard Total Stock Market Index fund. It’s return is 7.64% a year for the last 10 years. Correct me if I’m wrong, but that seems awfully close to the 8% discussed. The return over the 20 years since its inception is 8.42%. And that’s without branching out into riskier but possibly more rewarding asset classes like emerging market stocks (15.84% last ten years) or small cap value stocks (9.43% last ten years).

    Sixth- You may feel that whole life insurance or even perhaps bonds may have better returns than stocks going forward, either absolutely or on a risk-adjusted basis. You may even turn out to be right in 10, 20, or 30 years. That does not, however, provide an adequate argument to invest in whole life as opposed to a traditional portfolio. An investor can simply replicate the portfolio used by the insurance company, shed the fees and costs of insurance, and outperform the policy.

    Let me help you with your arguments for whole life.

    First, never argue that it is better than using a 401K or similar tax-advantaged retirement account. The lifetime tax benefits of a 401K are far bigger than those available for any insurance product. So only compare whole life to taxable investments.

    Second, never argue whole life will have a better expected return than equities. It can’t. The insurance company is investing mostly in fixed income with perhaps a dollop of riskier investments. So the secret is to compare it to fixed investments.

    Third, don’t argue with people who have actually owned whole life policies. They’re quite aware that the typical returns are far closer to the guaranteed values than the values initially projected. Rex and I fall into this category, by the way. My return was decidedly negative after 7 years. To make matters worse, the agent who sold it to me didn’t bother selling me what I really needed, a low-cost 30 year level term policy.

    Fourth, only argue using “the long term.” As Rex pointed out, cashing out of a whole life policy in less than a decade and a half (longer if you include inflation and don’t subtract out the cost of what is probably unnecessary insurance) is guaranteed to provide a negative return. The only time it appears even reasonable is for periods of time longer than 30 years.

    Fifth, don’t argue anyone is “thrilled” with the returns. Whole life returns are never thrilling. Close to bond returns perhaps in the very long term, but never thrilling.

    Sixth, argue on behavioral terms. Argue that many investors buy high and sell low and by hiding market fluctuations inside the policy the investor won’t have an emotional response to losses. The subject simply can’t be argued on a mathematical basis. But if you can get an emotional investor to exchange negative returns due to his own behavior for the low returns available in whole life, perhaps you’ve done him a service.

  144. Thanks for your comments Rex and WCI. We can go on like this forever, so I guess we will just have to agree to disagree as we obviously have totally opposite viewpoints on this topic. I know that what I am doing is a great service for my clients, and they are all very happy for what I do for them (which is why I have such a good retention rate). I just wish that you wouldn’t discredit a product that has very beneficial components for many people. Thanks for the discussion.

  145. If you don’t want to answer the questions, that’s okay, but declining to answer them is somewhat revealing to anyone following this discussion. I’ve noticed most reasonable discussions with whole life proponents end at about this same point every time. They can never show me a policy with reasonable fees and they’re a little embarrassed to admit just how much of their income really comes as a commission from the products.

    It’s just very rare to find an informed person advocating for investing in a whole life policy unless that person actually makes money selling them. I’m sure there’s someone out there. I just haven’t found them yet.

  146. It is not that I am embarrassed, or anything along those lines. I just don’t feel like wasting my time and energy arguing in circles, which is all this is. I have better things to do with my time. Have fun bashing products that are very beneficial to many people.

  147. There is no bashing going on. Neither you nor any agent has ever been able to provide any evidence that whole life is a good investment and you cant. You just dont like this being pointed out especially to physicians who might otherwise realize the truth before another improper sale is made. You have to try all kinds of distractions but never answer the real questions. It wouldnt take any time at all for you to answer those questions.
    Again the stats from both independent agencies, LIMRA and society of actuaries, show that very few people get much benefit from the product. Thats the bottom line truth.

  148. It isnt non productive. People are learning the truth here. The truth is that whole life is a very bad investment. You cant show otherwise and you know it. It really isnt a debate.

  149. Let your “readers” review the following article provided by one of the carriers we use, and let them decide for themselves if whole life really is a “very bad investment.”

    Debunking The Myths
    About Whole Life

    Taking a Fresh Look
    at a Time-Tested Product


    The economic downturn has forced many Americans to rethink the way they plan for their
    financial future. In this more fiscally conservative environment, a growing number of consumers
    are returning to a financial product whose worth was recognized by their grandparents: whole
    life insurance.

    Whole life insurance, which provides a broad range of financial benefits, has proved its long-
    term value over generations. While other financial instruments faltered recently, whole life
    insurance provided small business owners with a much-needed source of funds and retirees with
    access to additional income — all the while, continuing to pay death benefits to beneficiaries.

    For the last two decades, financial pundits and journalists have discounted the benefits of whole
    life insurance in favor of trendy, equity-oriented vehicles that seemed to offer higher returns at
    lower costs, but in fact were high risk. Throughout this time, a number of myths about whole
    life insurance have been perpetrated, with the result being that many Americans are unaware
    of the flipside of the story — the benefits that make whole life insurance one of the most valuable
    and flexible financial planning tools available.

    Myth #1:
    You only benefit from whole life
    when you die.

    Facts: Wrong! Mutual whole life
    policyowners enjoy substantial “living”
    benefits during their lifetime of

    Myth #2:
    Whole life is a lousy place
    to put your money.

    Facts: Um, No…

    • Mutual insurance company policyowners generally receive
    annual dividends after the first policy year. For example,
    Guardian declared a dividend of $712 million at the end
    of 2009 and has paid dividends on whole life policies
    every year since 1868. 1

    • A 25-year Guardian policy begun in 1986 and tracked
    through 2010 provided a 5.19% historic cash-on-cash
    return, along with strong guarantees and low volatility.
    Keep in mind that past performance does not indicate
    future results.

    • Dividends can be used to fund policy premiums or to
    buy more permanent increments of death benefit and
    cash value.

    • Access to the policy’s cash value is typically available
    through withdrawals or tax-free loans. 2, 3

    • The cash value of the policy can be pledged as collateral
    for a tax-free loan.

    • Small business owners may borrow against their policies to
    provide working capital.

    • Wealthy individuals use whole life in their estate planning
    by setting up an insurance trust to pay estate taxes from
    proceeds of the policy. 3

    • The value of a whole life insurance policy is uncorrelated to
    the stock market and is guaranteed by the insurer, so that
    death benefits and cash values are not affected by declining
    markets. Therefore, a whole life policy can serve as the
    stable component of an overall financial plan.

    • The accumulated value in whole life insurance grows tax-
    deferred. Accumulated values on a policy may be withdrawn,
    up to the cost basis, tax-free. Any withdrawal in excess of
    cost basis is taxed (this assumes the policy is not a Modified
    Endowment Contract which has different tax implications). 2, 3

    1 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

    2 Policy benefits are reduced by outstanding policy loans or policy loan interest.

    3 Guardian, its subsidiaries, agents or employees do not give tax or legal advice.

    Myth #4:
    Whole life is too expensive.

    Facts: In considering whether to purchase
    whole life or to “buy term and
    invest the rest,” you must take into account
    not just the premium cost, but also
    the length of time you want coverage and
    your ability to “invest the rest” profitably.

    Myth #3:
    Once you retire, you should
    cash your life insurance policy in.

    Facts: We hope not!

    • For longer periods—an entire lifetime—whole life insurance
    is substantially less costly than a lifetime payout for term. If
    the need for life insurance is for less than 30 years, a term
    insurance policy is cheaper.

    • Term insurance isn’t designed for lifetime coverage. In fact,
    term insurance is prohibitively expensive to maintain for the
    average U.S. life expectancy of 78.9 years—never mind to
    age 100. Term costs average a staggering 70% of the death
    benefit to life expectancy, or $700,000 per $1 million of
    death benefit, and more than 400% of the death benefit, or
    $4,000,000, to age 100 for a $1 million policy. 5

    • While term life is typically affordable during the primary
    premium guarantee period (5 to 30 years), annual premiums
    quickly escalate to an unaffordable degree once the
    guarantee period ends.

    • With term insurance, the policyholder does not accumulate
    any lasting cash value. At the expiration of the term of the
    insurance, the policyholder owns nothing, in contrast to
    whole life insurance, where premiums build cash value that
    belongs to the policyowner.

    • Whole life insurance provides a disciplined means of
    accumulating cash values that are guaranteed (with respect
    to the base policy) and subject to the declaration of
    dividends for that complementary portion of a long-term
    policy values projection. To achieve returns equivalent to
    those of a Guardian whole life policy in a 25-year policy
    study from 1986–2010, an individual investor would have
    to achieve returns in the apocryphal “difference” fund
    of at least 10% before-tax each and every year — over a
    long period of time — a feat requiring serious investment
    acumen, as well as discipline.

    • Through the loans and withdrawals available to whole life
    policyowners, an individual can supplement retirement
    income with tax-free funds. 2, 3, 4

    • Having whole life as part of a financial plan provides an
    additional level of security, financial freedom and a legacy
    for loved ones.

    • Many people have estate liquidity problems that can only
    be met through the availability of immediate cash. Heirs can
    use the proceeds of a whole life policy to pay estate taxes. 3

    • Whole life also provides a good source of tax-free funds for
    big-ticket items that could put a dent in a tight retirement
    budget — such as a grandchild’s college tuition or wedding.

    • Some families must establish “special needs” trusts to
    provide financial care for certain family members, and life
    insurance is ideal for that purpose.

    • Families with real estate, closely held businesses, leveraged
    investments or margined stock portfolios — to name just
    a few categories — often use life insurance to offset the
    significant cash liquidity demands on their estates.

    • Today’s healthy Baby Boomer couples have — on
    average — as much as a 30-year life expectancy (for at least
    one of them) past an age 65 “retirement.”

    • Retirement is no longer the appropriate time to drop life
    insurance — today it’s the time when many people realize
    the importance of buying it!

    4 Assumes the policy is not a Modified Endowment Contract (MEC).

    5 Source: Life Insurance as an Asset Class: A Value-Added Component of an Asset Allocation

    Myth #6:
    Once you buy life insurance you
    don’t have to think about it again.

    Facts: Sticking the policy in the bottom
    of your file cabinet and never thinking
    about it again, isn’t the best way to
    approach your life insurance purchase.
    Leave the ‘set it and forget it’ tag line
    to infomercials — sit down with your
    financial professionals at least on a
    bi-annual basis to review your situation.

    Myth #5:
    All life insurance is created equal.

    Facts: It just isn’t the case.

    • The safety and security of your whole life policy depends
    on the insurer you purchase it from. It makes sense to buy
    whole life from a well-established mutual carrier that has
    decades of experience in the industry and maintains a high
    credit rating.

    • The four major mutual insurers, including Guardian, are
    at the very top of the financial rating spectrum. Their
    “COMDEX” — an arithmetic compilation of the four
    major rating agencies’ ratings — is 98 to 100 (With respect
    to these ratings, 85 is considered “reasonably safe”, 95 is
    “extremely safe.”)

    • One of the reasons the mutual companies are so highly
    rated is that they invest a high percentage of portfolio assets
    in “safe-haven” government-guaranteed investments and
    other high-quality fixed return instruments. In comparison
    to stock companies’ quarterly earnings pressure, mutual
    companies can take a long-term investment and
    management view.

    • Whole life insurance policies can be customized with a
    variety of “riders” or special features, such as a guaranteed
    insurability rider or an accelerated benefit rider, that match
    an individual’s financial goals and protect from different risks.

    • Economic realities can affect your policies cash values. As
    you review your other asset classes to check performance,
    you need to review this one.

    • Gain reassurance of your life insurance portfolio. Life
    changes. Make sure your policy still fits. Whole life is
    generally designed with the built-in flexibility to make

    – New family member?

    – New career?

    – New windfall?

    • Performing due diligence is also critical

    – Positive health changes can sometimes lower previous
    quoted premiums

    – Policy with loans and withdrawals should be monitored

    – Policies held in trusts need review, too

    • Performing policy maintenance can help link your advisors
    together. Strengthen their relationships around you. Cross
    check ideas between your investment, tax, estate, and
    insurance advisors.

    • Of course, if you purchased term insurance, discuss your
    options soon! When the term period runs out, premiums
    can go way up…

  150. From personal experience, i can say Guardian Retirement services is the last people id recommmend anyone use for retirement planning.

    Of course you never answered any of the questions or provided any proof. You just cut and paste Guardian propaganda. Is that really the best you can do? Sadly it is typical where they dont tell the whole truth. As a for instance… They fail to mention Guardian’s interest rate on those tax free loans. Its 8%. What a great deal !!! They forgot to mention guardian has a long history of decreasing the dividend over the last 20 years. They forgot to mention that bc they are a direct recognition company those loans will additionally adversely affect the performance of the policy. They didnt mention how these loans easily could cause the policy to crash and then the investor doesnt get the death benefit and he/she also gets a tax bill to boot. They didnt mention that if you “invested” monthly like many need to do with their 401k that guardian charges another 6% interest which pretty much wipes out the return. While nobody knows what the actual return on a death benefit will eventually be, a good guess currently will be under 5% given the current dividends and current interest rates and that assumes you pay yearly and dont take out any loans. Thats the truth and not your propaganda. You still never answered any of the questions. I wonder why? Any chance you can find one non proganda but independent study? Nope. How long has whole life been around. A very long time but still not one independent study shows its value. Isnt that interesting.

    • Rex, you bash Guardian yet will not share your negative experience. You’re entitled to your own opinions, just not your own set of facts. If it was bad, share your experience but–and this is the important part–tell us EXACTLY what transpired so we can make our own judgments. You post all the time–really, all the time–but it seems your motivation is not to help people, but only to denigrate whole life insurance. Can you really be that upset about a product that provides insurance for your whole life, has a respectable rate of return, provides protection from lawsuits, has easily accessible loan provisions, and flexible funding provisions?

      • I find it very interesting that you say Rex posts “all the time-really, all the time” when you have written, I dare say, 10-20,000 words in comments or in emails to me in the last month on a single subject. :)

        I disagree that whole life insurance has a respectable rate of return, I think “provides protection from lawsuits” deserves a really big “may” in front of it, and find “flexible” a poor description of the funding provisions of the typical whole life policy when compared to a typical investment.

        • Well, is 10,000 or 20,000? Sort of like getting a 5% or a 10% return? My bet is that Rex has logged many more posts refuting the efficacy of WL than I have defending it and my frustration with his posts–absent of his ability to punctuate–is that he manifests that he got a raw deal with the WL he bought but he refuses to provide any documentation.

          I don’t know what you consider respectable. I saw an ad today in my local paper from a bank that boasted they could provide a 1.15% interest rate. How about that? I also note that Mass Mutual’s 2104 dividend rate is 7.1%, up from 2013’s 7.0. Now, don’t confuse a dividend rate with IRR, but everything considered, a higher dividend rate will correlate with a higher IRR.

          I repeat for the Nth time, very few people will buy WL as their only investment choice. You never know what life will bring you. Having a portion of your dollars allocated to WL makes sense because, yes, you can die early and, if you don’t, the 4 to 5% IRR can allow you to maximize the distribution of other retirement assets and allow you to accomplish legacy goals.

          The protection from lawsuits is state dependent, as is the homestead exemption. I’ll be happy to provide a comprehensive overview of both, should you care to post. Good info for whitecoats.

          • I’m not going to count all your words, but given the additional pages of stuff you emailed me today, it’s probably over 20K. :)

            The info on state by state homestead exemptions and asset protection for insurance would make an interesting guest post.

  151. That’s an interesting approach to an article. Make up some easily-debunked “myths” and then debunk them. Why not spend some time “debunking” actual valid criticisms of whole life? I agree the “study” is simply Guardian doing some marketing.

    It isn’t that a whole life policy has no value. It does. But the question isn’t “Is whole life valuable or not?” The question is “Is whole life a better investment alternative?” The answer is that it isn’t. It combines inferior insurance with inferior investments. The combination isn’t pretty.

  152. mine should say value as an investment. That is where it has no value.

    if you need permanent insurance (and almost nobody does) then whole life typically is better if you are younger and no lapse gUL if you are older and dont care at all about CSV. I should add pricing for no lapse gUL is going up soon bc of increase reserve requirements and bc the low interest rate environment makes it pretty darn challenging for the insurance companies to invest and guarantee at the same time.

  153. This is the last post because no matter what I say, and I can argue every incorrect accusation you make, it is still not correct in your eyes. Good luck ruining your clients, I mean “readers” financial lives, since you have no licencing or valid training.

  154. Right……Lets review….You have never answered any of the questions and you have never provided any independent study showing it as a good investment. [Ad hominem attack removed.]

    Hopefully the readers also visit WCI’s post on financial advisors. They will understand exactly what type of training you have and who you really represent. The best you could do was cut and past a guardian advertisement which says a lot about your training. I actually limited my concerns about it to just the most obvious problems. The stats from LIMRA and society of actuaries show many more people are hurt by whole life then benefit from it.

  155. [Profanity removed] [Multiple ad hominem attacks removed.] Like i said before, be a professional in your area of expertise and let others be the expert in theirs. You’ll see very quickly that your portfolio will increase because you’ll be making more money at YOUR job!

  156. Other than a few individuals who can’t seem to appreciate a thoughtful discussion on an obviously hot topic without resorting to name calling, this is a great blog. Here’s my bias – over the past four years, I’ve worked for one of the Ogres (those “evil” life insurance companies…gasp!), so I’ve been exposed to the myriad of methods used to sell whole life. As a former IT software developer with an analytical bent, it took some time for me to appreciate the benefits of whole life until I learned how to design it properly. For example, let’s take a look at the following scenario to compare money in the bank vs money in a whole life policy:

    1) Emergency fund of $60,000 (6 months of $10,000/mo of expenses)
    2) need to keep emergency money safe – the principal cannot be affected by the market
    3) If you pull money from your emergency fund – for whatever reason – you’ll want to replinish it with a
    little extra to make up for inflation.

    Option #1 – keep all $60k in the bank

    Option #2 – consider keeping 50% in the bank and another 50% in WL

    Policy Details:
    Create a life insurance policy – $5000/yr for 7 years guaranteed paid-up for a Male Non-smoker age 37

    Purchasing a $20,000 new roof in policy year 8 at age 45

    Option #1
    Paying Cash for the roof from a bank paying 3% interest (wow!) & subtracting 25% of the gain for taxes from the interest.

    Beginning Bank Balance after $20,000 withdrawal = $11,910.

    Replinishing your bank account in 4 years with the following deposits:
    Year 9 – $6000
    Year 10 – $5750
    Year 11 – $5500
    Year 12 – $5250
    Total deposits = $22,500

    Bank Balance at the end of year 12 = $36,842.45

    Option #2
    Paying for the roof from a policy loan using 50% of the insurance company’s current dividend scale and a 5% policy loan interest rate.

    Beginning Cash Value Balance after $20,000 loan = $11,910 (same as the bank in Option #1 above)

    Repaying the loan with the following payments:
    Year 9 – $6000
    Year 10 – $5750
    Year 11 – $5500
    Year 12 – $5250
    Total deposits = $22,500

    Cash Value balance at the end of year 12 = $39,476 <– $2,633.65 more than the bank in Option #1

    Keep in mind that I'm giving the bank 3x current national savings rates and I'm cutting the life insurance dividend by 50%.

    Considering this type of policy becomes more efficient as you age (meaning the cash value increases more each year – both guaranteed and non-guaranteed values), there is a legimate case here for splitting your safe money into two different vehicles with one BIG caveat:

    The policy must be designed properly and fit within the individual's specific financial plan. I'll go back to the swamp now…

  157. anonymous,
    i have no idea what your question was but ive never seen legit conversation removed here.

    let me put whole life in a way other physicians can understand…..
    if a drug rep came in and said this drug that has been around for over 100 years works great but still there are zero independent studies to confirm its a good drug and the best the rep can say is they recommend it or we have some information back on file at the company…well then every physician would know what to think of that drug.

    Think the same when it comes to whole life as an investment.

  158. shrek

    as you know, you have tried to create a situation where the policy is max overfunded just below mec levels. almost no agents push that type of policy bc of the reduced commission. unfortunately there just isnt a fiduciary standard in the insurance industry. In essence what you have done is reduced the horrible part (the actual normal whole life) as much as you currently can given the MEC regulations. You have also made several assumptions with the worst being that its okay to wait until year 8 as though those first 8 years dont count. Typically for a vanilla whole life policy with current dividends, it will take 15-16 years for the CSV to just equal the premiums paid and that doesnt even account for inflation. It has been said here many times that when a whole life policy is already in place for a long time, it isnt always the best thing to just get rid of it. You have tried to create a situation where that time period is shorter than the normal whole life policy. Additionally most physicians reading this blog dont need a 5% loan period. They can do better.

  159. It’s nice to see agents willing to discuss ideas instead of just post insults. People don’t seem to understand that you can’t work very long in an ER without developing very thick skin.

    Shrek’s ideas relate to a common scheme (not necessarily a scam) out there frequently called Bank on Yourself. I’ll be discussing it more in an upcoming post. As Rex mentions, you minimize the downsides to a whole life policy and use it as a savings vehicle. You get a relatively low expense policy, overfund it, make sure it is “indirect recognition” (meaning you can borrow from the policy yet the policy cash value still grows at a dividend rate as though you didn’t borrow it), with a decent guaranteed dividend rate, and then borrow money from it instead of a credit union to buy cars or house downpayments or boats or whatever.

    I don’t think it’s a great scheme because it introduces unnecessary complexity and risk to the process, but I can understand why some people are into it. As Rex points out, most whole life policies sold are not of this type. Here’s a nice, relatively objective, write-up on the subject: http://enjoyyourmoney.blogspot.com/2010/03/infinite-banking-and-bank-on-yourself.html

    And Shrek- make sure you point out where that bank paying 3% is right now. I can’t seem to locate it. :) I suspect if you run the numbers that the whole Bank on Yourself concept looks better now with 0% rates on cash than it did a few years ago, even with decreased dividend scales from insurance companies.

    One other thing to keep in mind is that guaranteed rates on these policies are very low. One I looked at today had guaranteed rates of 1%. When you buy life insurance, you’re looking for guarantees. If you wanted more risk, you’d be investing in non-guaranteed investments like equities. If I’m going to tie money up for decades, I think I ought to be guaranteed something a whole lot closer to the rate of inflation, but that’s just me.

  160. There is one more very important benefit that was missed and actually cancels out some of the reasoning to avoid whole life insurance. When you die and leave this money to your beneficiaries…it is tax free….so the “return” is much higher than this article would lead you to believe. Say someone 40 years old pay $150 month/thirty year payment cycle whole life policy of $250,000…..now assuming this person even survives to 70 to make all the payments they have only paid $54,000….if they die at age 80 the return has been 5.04% annual COMPLETELY RISK FREE! The fed is only paying 2.75% annual for thirty years and you WILL be taxed. If this “person” dies sooner than age 80 the returns could reach into the thousands of percentage points of return. A whole life policy is wealth creator.

  161. That hasnt been missed at all, however, you are wrong on many counts. First it isnt completely risk free. The guarantee is only as good as the company’s ability to pay. Thats a real risk. It may not be market risk but it is real especially if we have a prolonged low interest rate environment. The state guaranty assoc is not backe by real money. 2nd if you pay monthly there is a 6% finance charge tacked on. This will guarantee that your return will be below inflation. You forgot to mention it. 3rd if they actually qualify for that rate then then very likely will live beyond the average which is 78-79 years of age and thus your return calculation is a lot lower. Since you are investing over a 50 year time horizon which is a lot longer than just retirement, you should never put the majority in treasuries. Its a bad idea and a bad comparison. You should actually have a higher percentage in stocks then your retirement account bc the money wont be used for such a long time period. Finally you are using non guaranteed dividends in your calculation. That isnt risk free. Dividends have been falling for decades and very likely will continue to fall or stay low for a long time. Nobody knows the final return on a whole life contract until death but given the current dividends, one should expect below 5%. That is tax free but it isnt an investment you can access without aditional costs regardless if the policy is direct or non direct recognition.

    Whole life is a wealth creator for insurance companies and agents. For individuals it is a permanent death benefit. If you need that, then either whole life or no lapse gUL (before the price increases) is the way to go. Almost nobody needs or wants a death benefit once you realize what it means and costs.

    • Great! If it’s a wealth creator for insurance companies, surely you understand the value of being an owner of the company, i.e. buy your policy from a mutual insurance company.

      Which is it, Rex? Do I make money in my policy or as the owner? I have just told you a way to be both….I dunno, perhaps you think that insurance is a bad business? [Ad hominem attack deleted.]

  162. I have been watching all the bantering going back and forth on whole life insurance. I chimed in a little while back in favor of whole life. I understand the arguments on both sides.
    I just received my latest yearly statement from Northwestern Mutual. Here are my updated numbers. I have what started out as (2) $100,000 whole life policies. One for my myself and my wife.

    Monthly Premium : $230
    Total Paid Over 21 Years : $57,960
    Updated Death Benefit : $299,890
    Updated Cash Value : $91,498
    Past Years Cash Value Increase : $7220
    2012 Dividend : $3177

    These numbers are all higher than last years :

    2011 Death Benefit : $292,036
    2011 Cash Value : $84,277
    2011 Cash Value Increase : $6921
    2011 Dividend : $1901

    I recently asked Northwestern Mutual for an Inforce Illustration which shows me having the ability to stop making premium payments in 10 years (age 61) with the dividends covering these payments. The Death Benefit and Cash Values will continue to rise.

    I feel that these policies have really worked for me. The values are increasing way beyond the premiums I am paying in. I realize the argument of buying term insurance and investing the difference, but at this point I feel this is a good “investment” for me. When the day comes that I no longer have to make premium payments, I will have an ever increasing cash value and death benefit. I will also have the ability to select a workplace retirement option (husband/wife) that gives me the most monthly income, while protecting my wife if I should pass before her.

    I just thought I would chime in here and give my opinion what has seemed to work for me. Maybe I am wrong, but I feel that I am now being rewarded with sticking with this policy for so long. My intent is to keep the policy until I die, unless of course I am in need of a large amount of money before then. It’s pretty nice to know that I can make a phone call right now and have a check for close to $100,000 in my mailbox any time I want. I do realize the gains would be taxable but it is still a nice security blanket.

    Just my opinion.

  163. DJ,
    Im always glad when someone is happy with their purchase. But lets review, as you mentioned, you have paid 58k but the CSV is 92k over 21 years. If you consider inflation and the fact that gains are taxed as income instead of capital gains then you have pretty much lost purchasing power. Now with that said, if i were you id hold on to the policies. Its a different question as to whether or not to purchase or if you should surrender after purchase especially after being held for a few decades. You have eaten the loss. That cant be changed. Of course the actual amount of dividend has increased but you dont seem to understand the percentage continues to decrease. Also it can take months for an insurance company to provide you with a check but typically it is weeks. Now i personally wouldnt surrender it period unless i really had to. What i would do is the following: if i want income and not insurance then id 1035 exchange into an annuity at some point. If i think i can keep these until near death then id take a loan out for almost 90% of csv very late in life. Late in life so the loan doesnt cause the policy to crash. Your heir will get the difference between the death benefit and the loan. Keep in mind NWM is a direct recognition company and the fixed loan rate is 8%. If its late in life, then not as big a deal. At this point you want to do your best to get the death benefit bc it is significantly higher than the csv.

    • “If you consider inflation and the fact that gains are taxed as income instead of capital gains”

      Gains are not taxed, Rex. (assuming you didn’t screw up your policy along the way to your death….)

        • Really glad we returned to this post.

          1) Cash value gains in a policy are not taxable unless the policy is surrendered.
          2) If you wish to take tax-free withdrawals from a policy, then the order is from basis to borrow (from the insurance company), so that the tax-free status is not affected (or you can simply borrow from the insurance company if you have a short-term need).

          Let’s look at the values that DJ presents. His stream of premiums, annualized, has been $2,760 a year and current cash value is $91,498. That’s a 3.976% IRR on cash. His death benefit has increased from $100,000 to $299,890 which is a 13.293% IRR on DB. Currently, he still pays $2,760 in annual premiums and his last cash value increase was $7,220, or a 161.59% increase over premium and his cash values–and incremental ROR–will continue to increase.

          Within 10 years his policy will not only be self-funding, his cash values and death benefit will continue to increase (DJ you could do this sooner if you needed to but I like your current plan just fine).

          DJ, if you need cash for an unexpected event or opportunity, it’s available within days from the insurance company if you request it (Guardian allows borrowing 95% of cash value and will wire into your checking account within 48 hours–I would guess Northwestern’s policies are similar). If you borrow, it’s a non-taxable event as long as the policy is kept in-force.

          Part of the work we do is with teachers, government employees and the few who still have private pension plans. Virtually all defined benefit plans (pensions) allow you to select either yourself as sole beneficiary or survivorship with the spouse receiving benefits after your death. The cost of survivorship is a reduced payout. With a pension-maximization strategy, we compare that cost to the cost of insurance. Without going into excruciating detail at this point, it often makes sense to buy the life insurance and have the enhanced payout. You just have to do the math.

          There seems to be confusion about direct-recognition. If there’s interest, I’ll post an explanation.



          • Gains are taxed if you surrender the policy. Everyone agrees on that, no one is confused on it. People are just phrasing things differently.

            DJ tied up his money for 21 years in order to get a 4% return. If folks find that attractive, investing in whole life insurance may be right for them. In my opinion, that’s a terrible return for tying up your money for the rest of your life.

            Your return calculation for a death benefit (increased from $100K to $299,890) fails to account for the fact that he paid premiums each year. If you actually do the calculation correctly, you’ll find that rather than a very attractive annualized return of 13.3%, he actually got a return of 3.7%. You would expect that to be very close to the IRR on the cash value, and it is. Again, if a 3-4% return on money tied up for decades is attractive to you, then whole life insurance is a pretty good way to get that. Remember when he bought this policy in 1991 that a 30 year treasury was yielding 9%. $10K invested at 4% over 21 years grows to $22,788. $10K invested at 9% over 21 years grows to $61,088, almost 3 times more. Your rate of return over long periods of time really matters.

            This example is a good illustration of what an insurance agent may tell you when he sells you a policy. “The IRR on your death benefit will be 13%!” Of course that sounds good. It’s just that it isn’t true and he probably doesn’t even realize it.

            I also love that you think it is good that an insurance company will let you have 95% of your own money. What if you went to the bank or a mutual fund company and they only let you have 95% of the money you have in there? Would you consider that a good thing? Of course not. All these little things add up and make whole life insurance a lousy investment.

          • I believe that my DB IRR is correct. Think of this way: What would the IRR be if he died after the first year? His premium was $2,760 and his DB would have been $100,000. Isn’t that about a 3500% return? If he funds $57,960 over 21 years and his DB is now $300,000, that’s 13.3%, right? So, no, I don’t expect the IRRs for CV and DB to be similar until very late in the policy years. The two IRRs will converge eventually.

            It bears repeating that the CV gains within a policy are not taxed, so the fair comparison would be to a Roth IRA.

            This also helps explain a fundamental issue. You’re amortizing the cost of the insurance in the first few years. Obviously, dying in the first few years is a great return on investment–for your beneficiaries at least!–but it’s not so good as a cash value component. In later years, the incremental rate of return is excellent, as demonstrated in this policy.

            I’ve never had a client ask me what the IRR on a DB is and I don’t tell them, either, although I would if they were to ask. What I do tell them is this: accumulation and decumulation are two separate issues, and accumulation is the easier problem. You know when you wish to retire and can plan for that. What you don’t know is how long you’re going to live in retirement and, therefore, how long your retirement assets have to last. I like the idea of devoting a PORTION of your accumulation to WL insurance and having it self-funding by or before retirement age. You now have the permission to spend more freely because, 1) If you die, the DB fills the bucket back up for your survivors; 2) if you live and fall short of retirement funds you can tap the cash values within your WL policy.

            Finally, on the 95% thing. If the insurance isn’t inforce, your loan becomes a taxable event. Even when borrowing 95% of your cash value, there is still a death benefit so your total return is in excess of 100% of the cash value. They didn’t keep 5%.

            • It isn’t fair nor reasonable to compare it to a Roth IRA as discussed in this post: http://whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/. The benefits of a Roth IRA as a retirement account are far superior to whole life insurance. Passing on a Roth IRA in order to buy whole life insurance is a mistake.

              As mentioned before, you don’t get the cash value and the death benefit. The death benefit is reduced by the cash value borrowed out. I know you know this, but it may not be clear to others reading your comment. If I can’t have the 5%, they kept it. Sure, my heirs get a death benefit, but the only way for me to get that 5% without dying is to surrender the policy, generating a taxable event.

              I think it is silly to calculate a return on the death benefit of a life insurance policy unless you calculate it using the life expectancy of the purchaser at the time of purchase. So if you buy it at 30, and your life expectancy is 53 years, then it should be calculated as if you die at age 83. Your 3500% figure seems really good, unless you compare it to a 1 year term policy bought the day before. Then it looks really low. At any rate, if you wish to calculate the IRR of a death benefit, you have to actually use the premiums paid to do the calculation, anything else is just mathematically incorrect.

          • By the way, I looked at yields on 30-year treasuries. The highest yield in 1991 was 8.4%. Current yield is 3.65%. So what will it be in 10 years? I don’t know either. I had a bunch of bond ladders in the mid 2000s paying 4.5 to 5.5%. They look pretty good now.

          • 1) So is my Death Benefit IRR correct or not?
            2) Roth IRAs and WL policies are both funded with after-tax dollars and the gains are tax-free. That’s my point, not that one should choose one over the other as you’re suggesting. I don’t advocate that. I like Roths and I like WL and I understand the value of both.
            3) Scratching my head regarding your fixation on the 95% loanable amount. Of course you don’t get the cash value AND the death benefit upon death, but the living, not death, benefits are such that you can use the cash values to collateralize loans from the insurance company IF NEEDED, or you can use the strategy of going from basis to borrow IF you wish to use your WL policy to supplement income and receive that income tax-free.
            4) If you know when you’re going to die, then by all means buy a term insurance product. It will have a better IRR on DB. None on CV, because it has none. It will be another expense like car insurance, home insurance, or disability insurance that you hope you won’t use. It won’t be an asset like Whole Life, however.

            • 1) No. If you’re going to calculate a return, you’ve got to include the premiums.
              2) You don’t have to borrow from a Roth IRA. If you actually want to withdraw money from life insurance, you have to surrender the policy. Yes, you fund both with after-tax money. Yes, both grow in a tax-protected manner.
              3) You can’t have all your cash value while you’re alive unless you surrender the policy. I know that seems like no big deal to you because you place significant value on the death benefit. Imagine someone who didn’t. Who was using this primarily as another “retirement account.” That is a significant downside.
              4) A significant portion of whole life insurance is “just another expense” as well. It just happens to be that that expense is combined with a lousy investing product.

              Look, if you want whole life, buy it. But don’t pretend it is some kind of magic investing account with great returns. There is nothing whole life does that another financial product doesn’t do better. It is vastly inferior to a Roth IRA as a retirement account. It is vastly inferior to term life insurance as a means to insure against the death of a breadwinner prior to reaching financial independence.

              I can’t even recognize the horse anymore, it’s been beaten so badly.

          • 1) They’re included. The DB IRR decreases as the policy ages and the CV increases–that’s the point.
            2)You don’t have to borrow from an WL policy either. You can just withdraw to basis. As a matter of fact, you can recover all your premiums and have a robust, self-supporting policy.

            The saying I embraced last year was, “You don’t know what you don’t know.” I admire your skeptical viewpoint but, as you point out, you’re not a financial professional, you’re an enthusiast. A financial professional I admire said, “Investing isn’t like brain surgery… it is far more complicated than that!” Investing is one part finance, one part statistical science, one part business, and 3 parts human emotion all mixed together.”

            I would also point out that the bulk of your criticism of WL and your overall strategies are all devoted to the first half of the game, accumulation. You give short shrift to the second half, decumulation, when WL really comes into its own.

            Accumulating assets for retirement is not about one thing–as you know–it’s about creating buckets that can serve various purposes and that have preferential order when spending down (wish I could bold that). Roth IRAs? Great, but I bet most people who visit this site wish to fund more than Roths will allow–even “back door Roths.” Traditional SEPs, IRAs, and 401(k)s will more than likely come into play and so will tax-planning strategy.

            I’m 57, 58 in April. I can’t afford “market corrections” over the next ten years. Yet many planners assume an 8% “average” return from 35 to 65 from the equity market. I REALLY can’t afford “market corrections” when I start distributions from retirement account. Are there strategies that could maximize my distributions and protect my assets? Absolutely and incorporating WL into my financial planning helps me to do that.

            • This one was addressed in the myths series. SPIAs are far better at managing the withdrawal phase issues you describe. It doesn’t matter what “decumulation strategy” you use if you can’t accumulate an adequate nest egg due to low returns.

              Returns on the death benefit make no sense unless you calculate them at life expectancy. They start out far worse than term life insurance and they converge to 3-6% at your life expectancy. The returns on the cash value start out very negative and increase to 2-5% at your life expectancy.

              Whole life is a lousy way to accumulate money.
              Whole life is a lousy way to protect your income prior to financial independence.
              Whole life is a lousy way to protect against longevity risk.

              You can use it for all of those things if you like. Your choice.

  164. Rex
    “almost no agents push that type of policy bc of the reduced commission”
    -> Right – and I’d like to think that’s what makes me better than most agents. I’m also licensed to offer more than just life insurance, so I don’t need to rely on a fat commission check from a large “vanilla” whole life policy.

    “You have also made several assumptions with the worst being that its okay to wait until year 8 as though those first 8 years dont count.”
    -> You’re absolutely right – I had to make some assumptions to illustrate the point using a real policy without getting too lost in the numbers. Without a doubt, those first 8 years count – just ask any inmate with a 10-year sentence (ha ha). That said, I wanted to keep the example simple (wait until the policy was paid-up before taking a loan), but in a properly designed policy, a policy owner would have access to his cash value within year 1. Obviously there is a cost of insurance (considering the policy owner could die in the first 7 years and end up with a $140,000 death claim), so only a percentage of the premiums paid is available as cash value in the first few years. Yes, I know – the cost includes the commission and all of those greedy fees that keep the ogres (life insurance company) financially sound so they can pay those death claims. Wouldn’t you agree, however, that you can make up for the inital cost in those first eight years by taking policy loans and subsequently paying them back throughout your lifetime and recouping that cost in the dividends/cash value increases? I just showed one example where $2600 was returned back to the policy owner using relatively conservative numbers.

    So, where do you bank and what is the interest rate you are currently receiving on that money? If you don’t mind sharing, how much do you keep in an emergency fund (use percentages if you’d rather not share a specific number)?

    I’ve read your previous posts and you’ve mentioned the following:
    “It is typically a bad idea to invest so conservatively for the very long term (your whole life).”

    Wouldn’t keeping an emergency fund in a bank earning 2% below inflation for your whole life considered a “bad idea”? No, of course not – it’s an emergency fund, not an investment.

    I think you might be making the same mistake that most folks make in the “buy term & invest the difference vs. whole life” arguement. There are different catagories (purposes) of assets in a sound finanical plan based upon tax treatment and risk/return which means that you shouldn’t “invest” in a whole life policy at all. That doesn’t make any sense for all of the same reasons mentioned already – most notibly the poor “returns” when compared to other investments (stocks, mutual funds, bonds, etc). It’s the other benefits of whole life (when designed properly) that make it a worthwhile asset in a sound financial plan (in addition to term – which is the best/cheapest method of replacing income in the untimely death of a young father or mother).

    “Additionally most physicians reading this blog dont need a 5% loan period. They can do better.”
    -> Again, you’re absolutely correct. You can get loans as low as 2.75% (or lower) and you don’t even need to wear a white coat! I think you’re missing the point, though. In the example I provided, did the policy owner end up paying 5%? Look at the example again – the policy owner ended up with approximately $2600 more than if he paid cash withdrawn from a bank account (paying 3% interest mind you). Strictly speaking, yes, he had to pay some interest back to the life insurance company and it was 5% (those evil ogre bastards), but they ended up paying him back much more in the form of cash value increases and dividends.

    It’s obvious that you’re an intelligent dude, Rex, so I hope that I’m keeping up with you. Not sure if I’ve adequately covered the holes that you’re punching in my example, so I’ll anxiously await for your next response.

  165. DJ-

    It’s not that it’s “bad” or that value goes down or anything, it’s just not “all that and a bag of trix.” Take your change from last year for instance. Last year’s cash value was $84,211. You added $230*12=$2760. It’s now worth $91,498. What’s the return? 5.4%. Not bad, but certainly not spectacular. And that’s after TWO DECADES in the policy. Total Bond Market has had a 5% return in the last year and Total Stock Market has a 14.75% return in the last year. A very conservative mixture, the Wellesley fund, is up 11.72% this year. And that could have been the first year in those funds.

    It’s like having a 4% mortgage. It’s not bad, I just think there’s a better way out there. I wouldn’t dump your policy at this point, by the way. I wouldn’t flip over someone using whole life for some small percentage of their money, but I think it’s dumb to be investing in whole life instead of a backdoor Roth for instance.

  166. White Coat Investor –
    “People don’t seem to understand that you can’t work very long in an ER without developing very thick skin.”
    -> I hear ya, brotha’. I put on a few extra layers of epidermis working as a consultant for a couple years in IT support. In the ER, you actually deal with life or death, but if there’s a technical problem generating the TPS report – with or without the new coversheet – watch out…some Lumbergh in accounting is going to kill someone.

    “I don’t think it’s a great scheme because it introduces unnecessary complexity and risk to the process, but I can understand why some people are into it.”
    -> Yes, this concept is definitely more complex than simply depositing your savings at a local credit union or a local bank. I also agree with your reason #4 above that complexity typically favors the ogres. That said, if you allow me to mix metaphors, let’s see if we can pull back the curtain and figure out what levers the Wizard is pulling so we can beat this “scheme”.

    First of all, we have to change your paradigm (slightly) when it comes to this Bank On Yourself concept. You mentioned above that you “borrow money from it instead of a credit union to buy cars or house downpayments or boats or whatever.” You can certainly do that, but what if we shifted from a consumer mentality and INVESTED the $20,000 instead of purchasing a car or a roof? Let’s also assume that it’s no longer part of your emergency fund strategy, so we can take on some additional risk. Nothing too crazy, though – most ogres are terrified of taking on too much risk.

    Secondly, let’s use a hypothetical bond mutual fund with SWAMP as the ticker symbol that tracks the Barclays Capital Aggregate Bond Index from the beginning of 2003 until the end of 2007 where bonds were one of the worst performing asset classes – if not THE worst – during that time frame.

    EXAMPLE #2
    We take out the $20,000 policy loan at the beginning of the year (2003 in this example) and invest it in SWAMP in a taxable account where the annual gains are taxed at 25%.

    Here are the historical annual returns from the index and the associated after-tax gains in SWAMP:
    2003 – 4.11% -> [No loan repayment] Gain = $ 616.50 SWAMP EOY Bal = $20,616.50
    2004 – 4.34% -> [$6000 loan repayment] Gain = $ 671.07 SWAMP EOY Bal = $21,287.57
    2005 – 2.43% -> [$5750 loan repayment] Gain = $ 387.97 SWAMP EOY Bal = $21,675.53
    2006 – 4.33% -> [$5500 loan repayment] Gain = $ 703.91 SWAMP EOY Bal = $22,379.45
    2007 – 6.96% -> [$5250 loan repayment] Gain = $1,168.21 SWAMP EOY Bal = $23,547.65

    Not sure how to calculate an overall compound annual return including the cash value increase, but we started with $31,910 in cash value before the $20k loan and ended with $40,523 ($39,476 cash value + $23,547.65 SWAMP balance – $22,500 in loan repayments). It’s somewhere in the vicinity of 4.9%

    4.9% – Not bad for a relatively safe return in a poor performing asset without taking on too much risk. Imagine the leverage and the possibilities if your risk tolerance was greater than your typical ogre? You could also use muni bonds to avoid the tax ramifications of SWAMP and increase your return. This is just one example with one policy loan. Keep in mind that you can have multiple loans in one policy and multiple policies on one person.

    Yes, as Rex will be quick to point out, there is some risk in not being able to make the loan repayment, but that’s a fairly contained risk because there is no loan repayment schedule required by the insurance company when you take out a policy loan.

    Certainly there is risk in nearly every financial decision we make, but this type of leverage/risk is similar to the type of leverage/risk involved when you own rental properties (by using other people’s money). I’ve owned two rental properties since 2002, and, in hindsight, I would have been better off buying two whole life policies (significantly less hassle and considerably more return). That said, I’m confident that those two investments will pan out now that we’re coming out of the real estate mess and that there is a greater supply of quality renters. I digress.

    Anyway, does that example make sense? What am I missing?

    “And Shrek- make sure you point out where that bank paying 3% is right now. I can’t seem to locate it.”
    -> Oh man, I long for the days when I had a 4.4% interest rate from my online bank in 2006/2007. You get the Delorian – I’ll get the flux capacitor and we’ll get ol’ Doc Brown to take us back…

    “I suspect if you run the numbers that the whole Bank on Yourself concept looks better now with 0% rates on cash than it did a few years ago, even with decreased dividend scales from insurance companies.”
    -> Yes, it’s considerably better, but I knew Rex would point out the declining rate of dividends being paid out, so I wanted to account for that AND the possibility of interst rates rising.

    Using 0.25% interest rate with a 50% dividend scale, the policy in my original example returns $4,800 more than paying cash and redepositing the money back into the bank (~$2,200 more than in my original example).

    “One other thing to keep in mind is that guaranteed rates on these policies are very low. One I looked at today had guaranteed rates of 1%.”
    -> Yes, guaranteed rates are not very attractive, but if the policy is designed correctly, those guaranteed rates – while not great – will be better than what you’re seeing in a “vanilla” whole life contract. Also keep in mind that once the dividend is paid and the policy owner uses it to buy paid-up additions, the corresponding increase in cash value and increase in death benefit is now part of the guaranteed values.

    “When you buy life insurance, you’re looking for guarantees.”
    -> Yep. And as Rex mentions above, the guarantees are only as good as the claims-paying ability (ie financial strength) of the insurer. Life insurance is a promise, so you want to make sure those ogres can deliver on that promise in 20 – 80+ years from now. If, after reading my reply, you’re now considering a whole life policy (ha ha – yeah right), please make sure it’s from a company with a long history of paying dividends.

    “If you wanted more risk, you’d be investing in non-guaranteed investments like equities.”
    -> Couldn’t agree with you more. I’m a firm believer in capitalism and in a capitalistic society, wealth flows to owners of well-run companies. The easiest way to own a well-run company while wearing a white coat during the day (or on the overnight shift) is to own stocks/stock mutual funds – preferably in a tax-advantaged account (gotta’ love the Roth).

    “If I’m going to tie money up for decades, I think I ought to be guaranteed something a whole lot closer to the rate of inflation, but that’s just me.”
    -> So how do you feel about keeping your emergency fund in an account paying 1% (guaranteed by FDIC) which is essentially 2% lower than the historical rate of inflation?

    I’ll ask you the same question I asked Rex above – assuming you have your emergency fund in a bank:
    1) Where do you bank and what is the interest rate you are currently receiving on that money?
    2) If you don’t mind sharing, how much do you keep in an emergency fund (use percentages if you’d rather not share a specific number)?

    Great discussion – I love this thread, but the ogre is tired…the swamp is calling (or maybe that’s Fiona?)

  167. White Coat Investor –

    In your latest response to DJ above, I have to call you out with your comparison of the returns from a whole life contract with the returns from a stock mutual fund. Yes, the YTD and 5-yr trailing returns for VWINX are great, but look at the trailing returns in the last 4 weeks (-.77%) and the ~16.82% drop in 2008.

    You know that even in those first few years of the policy, DJ never received a statement that had a – (minus) in the cash value. Just like you wouldn’t expect to see your savings account balance drop on your statement if you didn’t take any money out it this month.

    Apples and oranges are at least the same fruit, but the purpose and benefits of whole life and stock mutual funds have very little in common. I believe whole life has much more in common with a bank account considering the guarantees and similar rates of return. Do you agree?

    You are absolutely 100% correct that you should invest in a Roth (front door or back door…I think there may be a side door as well) if you are not already doing so. As I mentioned to Rex in my reply to him above, there are different catagories (purposes) of assets in a sound finanical plan based upon tax treatment and risk/return.

    Putting stock or bond mutual funds and whole life – as well as bank accounts – in their respective catagories (pre-tax/tax-free/taxable & aggressive/safe) within an overall financial strategy is significantly smarter than trying to compare the merrits of one type of asset in a category versus another asset in a different category.

    I don’t know of anyone – other than Barney – who would compare their savings rate of their account at Goliath bank (safe) to the returns from a Vanguard stock mutual fund (aggressive). Seems kind of silly, doesn’t it?

  168. In makes no difference where i invest my emergency fund for this conversation. Ill say i limit mine to 3 months bc thats when disability insurance kicks in and that is my only real risk. I can always get a “new job” before then if necessary. As ive already mentioned, loans can take several months to process. I believe they are allowed up to 6 depending on the state but i havent look at that in a long time. At the minimum its gonna take 2 weeks really to get money in hand if everything goes smoothly. I dont find that an acceptable emergency situation for most folks. You would at least need to couple that idea with a credit card limit and it would need to be the amount they allow for cash advance in case the emergency doesnt take cc and of course you would have to be okay with the costs of all that for it to be really some sort of emergency plan. Thus to me it isnt an acceptable situation for most. You also continue to use non guaranteed numbers comparing to guaranteed. That also isnt appropriate.

    in the end, if you are talking a real small amount of money, it isnt a big deal. It isnt magical and im gonna wait until WCIs post on BOY to get more into it. The problem is that most agents are doing anything even remotely close to what you are talking about. Its like less than 1%. Thus if you want to be mad or make silly comments then be mad about what most of your fellow agents and insurance companies are doing. They are well aware that most policies fail. They are well aware that most people lose money on whole life. They know they are responsible for 99% of the training agents get but they do nothing about the problem. Agents want to be treated like professionals but they dont normally act that way. They dont make sure the client could pay monthly [I think he means yearly-ed], they dont overfund, they rarely explain limitations and list goes on and on. How come none of the agents are shooting down any of the other agents really bogus ideas on whole life?

    • “At the minimum its gonna take 2 weeks really to get money in hand if everything goes smoothly.”

      [Ad hominem attack deleted.] Many insurance companies will ACH the money to your account in 24-48 hours. (For a small fee, they will FedEx you a paper check overnight if you are old fashioned.) [Ad hominem attack deleted. Please self-moderate your tone on your posts. It is getting old having to moderate every other comment you make due to rude tone and ad hominem attacks. There are real people on the internet here.]

  169. DJ did receive statements with a minus value by the way and frankly still is if he is cashing it out. Whenever CSV is below total premiums paid including the costs for paying monthly and inflation then really there is a minus. Its just hidden. This is in particular true if you dont need the insurance. The question is never term vs whole life. Its you almost certainly need term and should we discuss whole life. Most people shouldnt even discuss it.

  170. As mentioned on other threads, my E-fund is a low 5 figure amount at Ally Bank making 1%, plus whatever is in the checking account, plus a little cash in the house (not enough to pay for me to pull out the shotgun pellets in your butt if you come to get it.)

    As Rex mentioned, I’ll defer the discussion of BOY for a few more weeks as I wrote the post yesterday but it won’t run for a while yet.

    I agree that comparing mutual fund returns to whole life returns is a bit of apples and oranges, but the money I spend in retirement doesn’t care where it comes from. If the WL returns were 8-10% instead of 2-5% I wouldn’t be nearly so against tying money up for decades to get it.

    I’m also not a huge fan of borrowing to invest. Leverage cuts both ways. Even if you’re investing in real estate I think minimizing leverage is a good idea. All the guys who go broke in real estate seem to be doing some variation of zero-down. You still have to service the debt when borrowing from your whole life policy.

  171. Rex –
    “As ive already mentioned, loans can take several months to process. I believe they are allowed up to 6 depending on the state but i havent look at that in a long time. At the minimum its gonna take 2 weeks really to get money in hand if everything goes smoothly.”
    -> Taking several months to process a loan would be aggrevating to say the least. In my experience, the policy owner has received the money within 3 – 5 business days (similar to an online savings account).

    “I dont find that an acceptable emergency situation for most folks. You would at least need to couple that idea with a credit card limit and it would need to be the amount they allow for cash advance in case the emergency doesnt take cc and of course you would have to be okay with the costs of all that for it to be really some sort of emergency plan. Thus to me it isnt an acceptable situation for most.”
    -> Keep in mind that I’m not suggesting 100% of a person’s emergency fund be in a WL policy for the same reasons you mention. If you refer back to my original example, I suggested 50%. The other 50% would be available from a local bank or credit union (or online bank).
    I agree – using credit cards as an emergency fund is not an acceptable solution (especially those reading this site).

    “You also continue to use non guaranteed numbers comparing to guaranteed. That also isnt appropriate.”
    -> I think my examples have been more than appropriate. I’ve cut the dividends in half and I’ve always compared values against extremely conservative numbers. Look, only a fool would try to convince Nancy Pelosi to accept Paul Ryan’s budget plan and I’m certainly not interested in trying to convince you to buy into ANOTHER whole life contract.

    “The problem is that most agents are doing anything even remotely close to what you are talking about. Its like less than 1%.”
    -> Thank you, Rex – I’ll take that as a genuine compliment coming from you.

    “Thus if you want to be mad or make silly comments then be mad about what most of your fellow agents and insurance companies are doing.”
    -> I’m not mad, Rex – not at all. In fact, I’ve enjoyed the discussion. I know you’re mad at the agent who sold you (in your opinion) a crappy whole life policy, but you and I should have no ill will towards each other. Silly comments? Really? That hurts…I thought we were having an intelligent conversation about whole life. Perhaps my sense of humor is a bit off for your taste – that’s fine. We’re still buddies.

    “How come none of the agents are shooting down any of the other agents really bogus ideas on whole life?”
    -> I believe you and WCI have done enough shooting…and rightly so. I agree – there have been a lot of “bogus” ideas (mostly WL marketing propaganda from the ogres) posted on here from other agents. That’s why I was compelled to post a reply because I wanted to share a legimate example of where whole life could fit into a financial strategy. Obviously it’s not a solution for everyone, but it is worth consideration for some.

  172. WCI –
    “…the money I spend in retirement doesn’t care where it comes from. If the WL returns were 8-10% instead of 2-5% I wouldn’t be nearly so against tying money up for decades to get it.”
    -> Right – the money spent in retirement should hopefully come from a couple of different sources. However, I’m a little confused by your statement because you make it seem like you don’t have access to the cash value for “decades” when you know that’s not true. Plus, I’m more interested in WL as a financing tool/emergency fund rather than a retirement vehicle (although there are some benefits there, too, of course). I thought I clearly stated that in my earlier posts.

    Looking forward to the discussion on BOY.

  173. Im sure we could go back and forth and then im not really waiting for the upcoming post or just trying to get the last word without playing fair. Thus ill leave the BOY as an emergency fund but non investment until then and say if you are true to your word about it being an extremely small piece of the puzzle for just that then there are worse things one could do. There will need to be a lot of caveats and it will need to be a relatively small amount of money to make it even a considerable idea.

    The bottom line with all permanent insurance except no lapse gUL, is that you should practically always over fund them right up to the MEC limit. This helps eliminate all the horrible parts (the actual whole life policy in this case) and it protects people from the typical lapse/surrender issues to some degree. The problem is agents wont do that unless you force them to. Permanent insurance is one of those products that you cant just trust someone to do the right thing for you. It wont happen 99% of the time.

  174. I’m not sure why we’re commenting on the cash value? I don’t really care about the cash value of my policy because I know the death benefit will fall onto my balance sheet for my wife when I die. I don’t have to worry about stretching my qualified money over two lifetimes because I can distribute my ira’s to myself at a higher rate. I can pay myself the same retirement income with half the capital, and I guess I don’t think I’m a stupid guy and I don’t buy into sales tactics. The numbers make sense to me and I think too many dumb dumbs are comparing cash values to investment returns when the real beauty is the guaranteed dollar amount at death. Just my two cents.

  175. If that was your intent then you should have purchased no lapse gUL. It would have been much cheaper for the same death benefit assuming you want permanent insurance to accomplish that goal. Of course non insurance routes typical provide more money but then there isn’t insurance.

  176. Person sold- It’s pretty easy to calculate the return on the death benefit too. I have a post coming soon that does this. If you live to your life expectancy, the guaranteed return is less than 2%. The projected return is around 5%. If your goal is to leave the most money to your wife, traditional investments are likely to be better. If your goal is to leave a guaranteed amount to your wife, gUL would be better.

  177. This is a good read and for the record I’m licensed to sell life insurance, stocks and bonds. Too many “wealth managers” or whatever they call themselves can only sell insurance and annuities, so that’s what you get regardless of your situation. Buying whole life strictly for death benefit is the silliest thing I’ve ever heard. Guaranteed UL products get the same death benefit at half the cost. Then you can go and invest your money and make 2x the dividends on a whole life product.

    I’m not a Dave Ramsey fan, but he’s right when he says “buy term and invest the rest.” A diversified portfolio will give you double the return of whole life.

  178. So…3.5 hours of reading later, I feel like I should probably be able to start my own Firm!

    I’d like to start by saying despite some heated exchanges, blogs like this one (with educated and experienced individuals) really are ‘hitting home’ and affecting the financial futures of those in need of advice…so for that I thank you WCI!!

    Secondly, based on the original post date, I hope I’m not too late to the party to get a response….but here goes nothing:

    I realized this blog was created for other Medical Professionals, which I’m not…but I’m hoping that if I throw my current scenario out there, either WCI, Rex, or Lawrence (the seemingly only minimally biased insurance agent!) would be able to offer their best advice. Again, as noted in one of the above 85,833 posts I will take the unsolicited advice with a grain of salt.

    So here’s my M.O….I’m a washed up professional baseball player that essentially put my entire financial life on hold in attempt to chase down the dream. Almost made it, but a couple injuries later…i’m doing what most who can’t play are…coaching. (cue ‘glory days’ by Springsteen here…) In any case, i’m now 30 and just getting around to trying to live like a normal adult. Recently married to a teacher, bought a house, and first kid en route….thus the whole life insurance research. I think its safe to say that being a collegiate baseball coach that is married to a Kindergarten teacher removes me from some of the higher level conversations that you all are having. Here’s my basic questions/current plans of action….if anybody could weigh in on my thought process…the intellectual property is much appreciated (I mean after all ….you guys are DRs after all!! ha!)

    combined income of $100k and looking into whole life vs term or a combo of the 2
    Both currently invest in our 403bs but minimally based on Financial Adviser’s advice.
    Instead both have Roth IRA’s, but currently aren’t maxing them out (limited means after all..)
    Will be putting limited monies into a 529 once Slugger is here …I think**see below please**

    Just had a NWM rep at the house today (who’s one of my old player’s bros….so that makes it kind of sticky…) and he really pushed whole life on me. Equated Term life to “renting” vs owning. Seemed to make sense. He did however suggest a mesh of the 2…$100k in whole life and $462k in term. $600k for the Mrs. Again, seemed reasonable. However, after reading this extensive post, it seems that may not be the best plan. I definitely like the stability of the whole life, but it seems I would be better off just getting term insurance and putting the rest into our Roths?? Is that what you would suggest?

    **from above** on the 529 plan… This is obviously a long shot, but just humor me… I’m 6’4″ and was a professional athlete, and my wife is 6’3″ and was an all american volleyball player. Her dad is 6’5″ and a former collegiate basketball player. Her sister was all also a 6’0″ all american volleyballer…her youngest is 6’6″ and a collegiate baseball player, and her other brother is 7’1″….and hates sports; go figure! Anyways, I was reading the above posts and one mentioned a custodial account (or at least a taxable account…not sure of the difference) as a potential better option to a 529 if there’s a potential for not needing the 529 money due to scholarship. Again…..WAYYY down the road but not completely out of the question…after maxing out my Roth (assuming that’s the right plan of action in the first place vs investing in whole life) is putting my money in a 529 the best college savings plan??

    Again…an enormous thank you for any positives/negatives and suggestions on where to go from here. I feel incredibly more knowledgeable about the benefits/negatives of whole life…yet find myself even more confused than when I started. Guess I should have been better at throwing balls at people for a living!! I’ll be an avid reader hence forth! Thanks WCI!

  179. Coach-

    I think after all of your reading, you know your answer but need confirmation. So, here it goes: Based on your family income, child on the way, minimally funded 403(b) plans, non “maxed” Roth IRAs, you are a perfect candidate for (you guessed it) term life insurance.

    What is $100,000 of Whole Life going to really do for you? That recommendation is purely for the benefit of the agent and not you! $462,000 of term? Where did that number come from?

    You should purchase at least $1,000,000 of Level Premium Term Life insurance (not annual renewable term that their agents push for conversion later) for 20 or 30 years. As you are young and may have additional children down the road, 30 year would be a better choice as it is more conservative.

    Even at approximately $600,000 of death benefit assuming a 5% rate of return, your wife would only have $30,000 of income from the proceeds. How does that adequately protect your family?

    Finally, if you want 30-Year Term, you must go elsewhere as NML does not sell that product.

    Hope this helps.

  180. I see no reason for you to buy a whole life policy. I would politely say no. Especially since you’re not even maxing out your Roth IRAs, much less your 403Bs. You need a big fat 30 year level term policy. If $500K is enough (perhaps it is if you get that much on you and that much on your wife), that’s what I’d get.

    You also need to be saving more for retirement before worrying about 529s. Given your income of $100K, I’d put your first $10-11K of savings into Roth IRAs, then your next 9-10K into your 403Bs, and perhaps even Roth 403Bs if available, but that’s a separate question. Make sure, of course, that you’re getting all of your matching 403B dollars from your employers. Once you’re saving 20% a year toward retirement (well, at least 15%), then you can start talking about 529s and UTMA accounts. Truthfully though, retirement needs to be a much bigger priority than kid’s college savings. You can’t get a loan or a scholarship for retirement, and the tax breaks associated with a 529 plan are generally pretty small compared to a Roth IRA and 403B, especially in your income range.

    I bought my NWM whole life insurance policy at age 28. At age 35 I cashed it out for about half of what I had put into it. I suspect you’ll end up with a similar experience if you make the same mistake I did. Have you read this post?:


  181. i have very little to add. i personally think the advice they gave was spot on. keep in mind wci and i are doctors and not in the financial field even though both of us have researched this topic. Lawrence of course is in the field.

  182. Thanks for the prompt and informative responses guys! I appreciate it!

    I guess I didn’t clarify…he suggested $562k for each of us…so over the $1M that Lawrence mentioned. He got that number by adding the mortgage, cost of burial, car loan, school loan, “lifestyle money”, and the projected cost of college tuition in 18 years. Is the $1M+ enough, or do you think more?! Or..should I just purchase more as the kids keep coming?

    WCI, I haven’t read that post yet, but I’m about to as soon as I hit “post comment!” This was the first post…of many to come…that I’ve read.

    Thanks again and please know that your knowledge and advice is helping many of us!!

  183. That’s a very personal number IMHO. Larry suggests more, but he’s also an insurance agent! I think the way to do it is to decide exactly what you need money for in the event of each of your deaths. Then add it all up. For example, if I died, I’d like the house paid off, I’d like my wife’s retirement taken care of, and I’d like her to be able to not work for a few years, then only have to work part-time until retirement. Someone who wants his spouse to never work again and his children to be able to attend Harvard Med without taking out any loans or working a day in their life might want more insurance. But at a certain point, I think you can definitely be overinsured. I don’t see any reason for my wife to have a better lifestyle with me dead than she has with me alive. Nor do I want to pay for my childrens’ entire education.

    Just remember that it takes a lot more capital than most people think to sustain an income for decades. An aggressive mix of stocks and bonds is likely to let you withdraw 4% a year, indexed to inflation for at least 30 years. So figure out how much income is needed, multiply it by 25, then add on the cost of educations or paying off debt (not including your own student loans since they disappear with death) and there you go. Perhaps round it up to the next half million for good measure. $2 Million seems toward the upper range for a $100K income to me, but it’s still reasonable. But I also think $1 Million is a reasonable amount. $500K definitely isn’t enough and $4 Million is definitely too much. Good luck choosing your number!

  184. Based on your age of 30, many insurance companies will issue death benefits up to 30 times your earned income. Many companies also have a band (less cost per $1,000 of death benefit) at $1,000,000. Therefore, the cost of a $1,000,000 policy will not be double the cost of $500,000.

    For example, assuming age 30, assuming the best underwriting classification, Banner Life would charge $245 annually for a $500,000 20-year level premium term policy or $400 annually for a 30-year level premium.

    Banner Life would charge $425 annually for a $500,000 20-year level premium term policy or $715 annually for a 30-year level premium.

    Therefore, as you are young, assuming your income and family situation will change, I would take the conservative route and go for the $1,000,000 policy.

  185. Buy term now rather than whole life and you will be buying your
    replacement insurance (when you are old, lost your health, and still need coverage)
    from people like Ed McMahon, who sold insurance for Colonial Penn on
    TV for those over 50 (oh wait, he died in bankruptcy and was broke).


    I don’t want to tell you how much insurance I carry with the Prudential,
    but all I can say is: when I go, they go too.” – Jack Benny, comedian (1894-1974).

  186. The one thing I havent seen mentioned as a point for whole life is potential tax rate hikes. New to business, and its been emphasized a lot to me the tax history and how we are at low levels now with big deficits and dwindling work force tax rates could increase significantly. How contributing to qualified accounts when rates are high is a great idea, but when they are low maybe really bad idea. That we have no idea where tax rates are going and the government dictates how much of the money in those account actually will be ours. Therefore, you might very well be better off in whole life where death benefit is likely tax free giving us control of our own money the way most people would want it to be. Also that most think they will be in a lower tax bracket when they retire, but how people may accumulate to a point of being in a higher bracket with less deductions now that kids are out and house is paid off, along with the government being in complete control and showing that tax history of %s in the 80s and 90s for the highest income earners. Wont mind if you tear this point up at all, just havent seen it addressed yet. Is it valid?

  187. You’re right about the relationship- the higher the tax rates the better the deal tax deferral, whether inside a retirement account or inside an insurance policy, becomes.

    Be sure you understand the difference between marginal rates and effective rates when discussing this though. Even if my marginal rate goes way up, I’m still going to be better off paying taxes later because my effective rate will be lower.

    The tax benefits of whole life aren’t as great as most agents like to point out. You put after-tax money in, and most people who surrender their policies early don’t have any gains to pay taxes on when they take it out. If you cash out decades later, you pay taxes on the gains at regular rates. You basically have to hold the policy to death to get the real tax benefits available.

  188. The idea of paying taxes now, or waiting until you take distributions from your 401K for instance, follow along the same decisions one makes when choosing between a regular or Roth IRA. The single most important concept to pay attention to is the thing called “mandatory distributions”. Roth IRA has no mandatory distributions so in my book, it is a better investment. I also see no sense in deferring tax when I currently live in a state that has no income tax, and b) I have three children I can claim as dependents. Who knows what state I will be living when I retire, or what the tax rate will be. It is here the concept of “mandatory distribution” comes home to roost…..If you have contributed to your 401K for a long time and have done well with your returns, you will have a rather large fund that will now be divided by your life expectancy, creating mandatory distributions, thereby determining your tax bracket for you. The Roth IRA requires no distributions and can in fact be held until death and given to your children. Your cash value life insurance also does not require distributions and can be held until death, then passing tax free to your children, which by the way is the true purpose of any type life insurance. If you want to hedge your bet, you can still contribute to a 401K, particularly if you have a matching contribution from your employer, but it is also wise to consider other options.

  189. So the roth is a good way to go in that regard, but has contribution limits. This is where the life insurance comes into play. In essence, if you believe taxes are going up in the future, why defer the tax now? Pay the tax now and dont worry about it later. They say a tax deferral is a tax postponement not a tax savings. So, pay tax on the seed, or pay tax on the tree. If one isnt worried about surendering the money, doesnt seem that bad and quite good protection from market swings and uncertainties with gov’t in control of what future taxes will be, when you have to take distributions regardless of how well investments are doing. Cant you surrender up to basis without taxes and take loans to a point where there is no lapse in retirement. Also spend down investment accounts for some benefit. Again need some clearing up on this. And isnt effective tax rate not necessarily going to be better than marginal if you have less deductions in retirement. No business write offs, children out, home paid off. Please enlighten me on that, sincerely.

  190. Vanguard and Mark-

    A couple of things that ought to be corrected in your comments. They’re not necessarily wrong, just vague enough that they leave the reader with the wrong impression.

    I disagree that the “single most important thing” about choosing between a Roth and a traditional retirement account, whether IRA, 403B, or 401K, is the mandatory distributions. The reader could be left with the bizarre idea that the point of retirement savings is to leave money to your heirs, not spend it. Mandatory distributions aren’t necessarily a bad thing. I’m saving money for retirement so I can withdraw it and spend it. How much is a mandatory distribution? At age 70, your RMD is 3.6%. Wow….that’s pretty darn close to the “4% SWR” isn’t it? Sure, a stretch Roth IRA is better to receive as an heir than a stretch traditional IRA, and it’s easier to leave more money since there are no required RMDs in the years leading up to your death, but the point of retirement accounts is to pay for your retirement, so I don’t view RMDs as necessarily a bad thing.

    If you are currently living in a tax-free state, and plan to retire in a high-tax state, then perhaps an argument can be made for favoring Roth type accounts more than you otherwise would. But this idea that “I don’t know future tax rates so I’m going to pay tax now” doesn’t pass logical standards. First, marginal tax rates could go down. They certainly did for people who were saying in the 90s what you’re now saying. But more importantly, for typical middle class folks, your effective tax rate will be far lower in retirement than your marginal rate now. I expect to put money into a 401K at ~38%, and take it out at ~ 15%. By using a traditional 401K instead of a Roth 401K, I end up with 23% more. I think you’re making the mistake of severely undervaluing a tax break now. When I put $15K into a 401K, that’s $5K in my pocket that wouldn’t be there if I put the money into a life insurance policy or some taxable mutual fund. I can invest that $5K, or spend it on something I want NOW, instead of in 30-40 years. There’s real value there, and it’s important to recognize it.

    So it’s not just “betting” on future tax rates. For many (and I include the vast majority of doctors in their peak earnings years) it’s a no-brainer to defer tax now. Marginal tax rates can go up and you’ll still be better off taking the tax break now.

    Mark- This whole idea about “paying tax on the seed” is misleading. Let’s say you’ll pay 20% tax now or later and you get to choose. You have $100K now, and it’s going to grow to ten times it’s current value. You’re given the option to pay the 20% now, or later. With which option will you pay more tax? The second option ($200K vs $20K). But which option will leave you with the most money? Doesn’t matter. You’ll end up with $800K either way. Investing in life insurance in order to “pay tax on the seed” isn’t particularly bright IMHO. I’m not sure who your “they” is, that says a tax deferral is a postponement and not a savings, but as mentioned above, for most people, a tax deferral is both a postponement and a savings. You postpone some of the tax, and you save the difference between your current marginal rate and your future effective rate, as well as the tax drag as the money grows within the tax-protected account.

    The idea that you have to “take distributions regardless of how well investments are doing” is also kind of silly. An RMD says you have to take the money out of the 401K, not take it out of the market. If you take $10K out of stocks inside your 401K, you can turn around the same day and buy stocks outside of your 401K. And guess what…if you hold on to them until you die, they pass to your heirs tax free.

    You would have to have A LOT of retirement income in order for your future effective rates to be equivalent to your marginal rates. We’re talking significant pensions and/or millions of dollars in tax-deferred accounts here. Not the more typical $1-2 Million in a 401k and $500K in a Roth IRA and some social security. Basically, your retirement income has to be pretty close to the income from your peak earnings years. What’s the likelihood that a doctor making $300K during his peak earnings years has $300K in taxable income in retirement? Let’s assume a 5% real return on the investments, a 30 year career, a 4% withdrawal rate, and $30K from SS. That means this doc has to put $98,000 a year into tax-deferred accounts for all 30 of those years. That’s 33% of his income. Do you know anyone doing that? Me neither. There are a few out there I’m sure, but most aren’t going to do it for 30 years. They either started late or they’re planning on an early retirement. It’s just not realistic for most docs. Now if you have a pension or are married to another high earner, perhaps it becomes an issue, you’d have to run the numbers, but for most people, deferring taxes now is a good idea. The effect of the lower income in retirement is typically much larger than the effect of losing deductions for your kids, business expenses, and mortgage interest.

    There are real tax benefits to a permanent life insurance policy. But they shouldn’t be blown out of proportion. They pale in comparison to retirement accounts, and they also aren’t all that great unless you hold the policy until death. There’s no upfront tax break. The avoidance of capital gains and dividend taxes as it grows is available in 401Ks, Roth IRAs, variable annuities, and even some very tax efficient stocks, stock mutual funds, savings bonds, muni bonds, and muni bond funds. And if you cancel prior to death, there’s no tax break at withdrawal. This idea that the basis can be withdrawn tax free is silly. You’ve already paid tax on the basis. It went in post-tax. Of course you ought to be able to withdraw it tax free. That’s like saying you put $20K into your checking account and didn’t have to pay taxes when you took it back out after a few months. There is the benefit of tax-free loans, but they’re not interest-free loans, so you have to weigh the two factors. And of course the death benefit is income tax-free (although not necessarily estate tax free.)

    Even knowledgeable advisers who are relatively pro-permanent life insurance won’t recommend you choose a life insurance policy over a retirement account, they recommend it be done in addition to your Roth IRAs and 401Ks. But you must either need or want a permanent death benefit.

  191. The pro insurance people like to use the scare tactic that taxes will probably go up (not even talking about all of wci’s points) but forget to mention there are just as many politicians looking to remove the tax free benefits of life insurance and pretend that grandfathering is a certainty. Bottom line is that there isn’t a good reason to believe taxes will change to the benefit of multi million dollar life insurance holders.

  192. I appreciate the comments. And by the way it has not been recommended to use life insurance as retirement only but rather qualified accounts and life insurance. There are a few points Id like to address. I dont understand you get to save the difference on the current marginal rate vs future effective rate. Why wouldnt it be effective on both? Also, you said you dont have the tax drag in qualified accounts. Well it seems you have uniterrupted compounding in a life insurace contract as well. So money isnt in volatile stocks but still growing at competitive rate over long haul, safe place for the money. Also please address that when you take out money at rmd you can turn around and invest it right back and pass on gains to heirs tax free. First I would think that paying a tax at that initial point by an abundance of baby boomers will have a significant effect on the stock market. Second is that tax a true unique break at death(dont understand that one).
    How do the tax benfits pale in comparison. Avoidance in captigal gains taxes and dividends as money grows is available for a period of time. But that doesnt mean you avoid paying tax, eventually you do pay the piper. Cant avoid that. Avoiding for a period of time isnt avoiding the tax.
    Interesting how you talked about income most likely being lower in retirement. My father who has had some good investments is actually earning around the same in retirement vs his peak years and has that couple million. Also know of others who are couples of doctors and lawyers. Just not sure of what is really so common. Also not really thinking in terms of cancelling these life policies. I guess you pay penalties if you need to take the money early in qualified acconts. No penalties with life. Lastly, I would find it hard to imagine that current life contracts would not be grandfathered in since they are contracts, whereas the qualified plans you know from the beginning what the deal is.

  193. Competitive rates from whole life….that must be a joke? You might want to look at WCIs post on returns on this product. No penalties to taking out cash from a life insurance policy…is that another joke? 8% interest rates on that money. also if you couple that with the ever decreasing dividends these products currently suffer and you easily can get a policy that crashes. When it does, if you are one of the few that actually has a gain then its taxed as income and not the better long term capital gains rate. When you add in the huge costs of the front end, and the additional costs for accessing the money, this just isnt any reasonable definition of growth. The tax benefits arent in the contract so you have no basis for that statement about grandfathering. In fact most companies explicitly have statements to the effect that they arent giving any tax advice etc etc etc just bc they know they dont control this as well as other factors.

  194. Mark-

    I don’t want to just say “It’s bad, it’s bad, it’s bad, you should avoid it.” I want you to understand the very real issues with investing in a life insurance product. I find that most (but not all) who understand how it works choose to invest elsewhere. Let me see if I can answer your questions.

    1) Marginal vs Effective Tax Rate. This is a critical component of personal finance for you to understand. I tried to explain above, but apparently didn’t do a very good job. Perhaps this post will help:


    2) You avoid the tax drag of a taxable investment account in BOTH retirement accounts and insurance policies. This includes paying tax on the dividends and capital gains the investment kicks out each year.

    3) Avoiding volatile stocks is nice if by avoiding them you can get similar returns. Unfortunately, risk and return are generally quite well correlated. Insurance companies typically invest mostly in bonds, and a little in stocks. Then the company takes its cut, perhaps adds in a little more money due to others cancelling their policies, and you get the return that’s left on the portion of your money that went toward the cash value. The insurance company invests in the same stuff you and I can. If you invest mostly in bonds, you mostly get relatively stable, but low returns, just like the insurance company. The volatility of the returns is still there when investing through an insurance company, you just don’t see it. But I assure you the investment managers at the insurance company do.

    4) Different types of investment accounts are like different types of luggage. Investments are like different pieces of clothing. Think of an IRA like a duffel bag, a taxable account like a suitcase, and a stock mutual fund like a sweater. You can put the sweater in either the duffel bag or the suitcase. So if you don’t need to spend your RMD on living, you just take it out of the duffel bag and put it in the suitcase. Of course some portion of the withdrawal does have to go toward paying taxes, let’s say 25%. But you didn’t really own that 25% anyway. You were just investing it for the government for the last 20 or 30 years. So paying that tax isn’t really money lost by transferring the money from an IRA to a taxable account while the market is down. Some percentage of your IRA (hopefully as low a percentage as possible) isn’t yours. The government shares in your gains and your losses.

    5) I think it’s folly to assume that baby boomers selling stocks are going to cause some type of generational low returns in the stock market. There are plenty of people in the rising generation in emerging countries that will be more than willing to buy the stocks that boomers are selling. But even if I’m wrong on that point, the low market returns will affect other available investments, including those the insurance company is investing in anyway.

    6) When you die, investments in a taxable account get a step-up in basis to the value on the day of your death. So let’s say you buy a stock for $10, die 30 years later when it’s worth $100, and leave the stock to your heir. He sells it immediately. How much does he owe in capital gains taxes? That’s right, $0. All that growth you experienced is now tax-free.

    7) The tax benefits do pale in comparison. Let’s compare:

    Tax-deferred retirement account
    A) Completely tax-deductible contributions- so you get a tax break now
    B) You save the difference between your marginal tax rate at contribution and your effective tax rate at withdrawal. Perhaps as much as a 20%+ boost in return.
    C) No taxes during the growth phase

    Roth retirement account
    A) No tax during growth phase
    B) No taxes due upon withdrawal
    C) If left to heirs, especially young heirs, the money may compound for 150 years or more completely tax free
    D) No required RMDs

    Insurance Policy
    A) No tax during growth phase
    B) No tax due on death benefit (no benefit to you, but it does benefit your heir)
    C) Tax-free (but not interest free) loans from the policy
    D) No required RMDs

    You may view those tax benefits as somehow similar, but I see the tax benefits of an insurance policy as distinctly inferior with regards to money you need for your retirement. They’re not too bad for money you plan to leave for heirs, of course.

    8) It is possible to have similar income during your peak earnings years as in your retirement years. It’s pretty unusual though. You saw the equation above, right? Remember that SS isn’t fully taxed, Roth income isn’t taxed at all, and taxable dividends and capital gains are taxed at a lower rate. Only withdrawals from tax-deferred retirement accounts are taxed at your full rate. But you get to apply your deductions to that and fill the lower brackets first. Your dad and the other successful investors you know may very well have enough income that they have the same income as they had in their peak earnings years. It’s not impossible. But I’d bet their inflation-adjusted income is lower. $200K of income now is taxed much heavier than $200K of income in 30 years. You always have to think in real, after-inflation, terms.

    9) I doubt Congress is going to start taxing life insurance proceeds. And perhaps even if they did, you might be grandfathered in. . No guarantees of course, but anything is possible.

    10) I’m not sure why people think the penalties associated with getting your retirement money out before age 59 1/2 are such a big deal. First, this is retirement money. You probably don’t need it until you’re retired, and most people don’t retire until 59 1/2 or so. Early retirees usually have other sources of income such as taxable accounts or 457 accounts. So this won’t apply to most people. Second, for nearly every good reason for which you’d want to pull the money out early, you’re allowed to do so without penalty- medical problems, disability, house downpayment etc. Third, you can take money out of many 401Ks as soon as you retire, no matter what the age may be. IRAs don’t allow this, of course. Fourth, even if you pay the 10% penalty, your effective tax rate plus 10% is probably STILL lower than the marginal tax rate at which you put the money into the account. Fifth, the SEPP rule allows most early retirees to get into their 401K/IRA without paying a penalty. Read more about this subject here:


    11) Finally, it’s your money. If you think the benefits of investing in life insurance outweigh the benefits of investing in other ways, knock yourself out and put your entire portfolio into it. It doesn’t affect me one bit. Your comments almost sound a bit like you’ve already made your decision and are trying to justify it. Maybe that’s not the case, I don’t know. But the fact that you don’t seem to understand the concepts I discussed in this comment makes me wonder if you didn’t make (or aren’t making) a completely informed decision about investing in whole life insurance. That’s all I want for you. If you know what you’re getting when you get into it, you’re much more likely to stick with it, which is absolutely critical with just about any type of investing to be successful.

  195. The current rates from whole life reflect what is happening across the board (5.7% is the current dividend rate from Northwestern on un-borrowed funds, down from it’s peak of 10% in 1990). Have you checked your money market rate recently? I will agree that the 8% loan rate was much more attractive 20 years ago than it is today…..although there is something nice about not having to trot down to the bank every time you need a short term loan for a new car, or your child’s college tuition bill comes due. Nothing worse than needing to liquidate an investment position at an inopportune time, when access to cash can be had within 3 days (that is how long it takes to get a check in the mail from Northwestern Mutual). As for the tax advantages to whole life, it is true that nothing is written in stone regarding current tax law, but then the same can be said for mortgage interest deduction, charitable contributions, capital gains or income tax for that matter. Government can and does pass laws each year that impact investment strategy (as you will see starting in January). For those who want to spend their money in retirement rather than save it for your children and grandchildren, nothing new here. The world has alway’s consisted of “spenders” and “savers”. In fact, my investments depend on you spending your money, so please feel free to indulge to your hearts content. As for me, I learned how to make money, but never learned how to spend it.

    In closing, I think it is wise to point out to the average middle class income earner (that 99% group), the pitfalls of any “pre-tax” deduction from their paychecks, be it 401K, Medical spending accounts, child care spending accounts, etc……these deductions add up over the years. So while your employer will love you for them (he does not need to make his matching SSN contribution on pre-tax deductions), these figures can in fact impact your Social Security benefits long term, and that can get expensive. I only mention this because no one else has, and not everyone is a “doc” that makes $300,000.00 a year. In fact, those making that kind of money on a regular basis could just throw a dart at any investment option and be ok. It is the average earner that is in need of sound financial advice.

  196. You might be interested to learn that a doc making $300K is actually in the 99%. :)

    You might also be interested to learn that 401K contributions do not decrease FICA taxes, for either you or your employer. So your employer doesn’t give a rat’s butt whether you contribute to the 401K (except for the match, of course.)

    There are lots of twists to investing when you’re doing it for the next generation and not for yourself. For example, you might do more Roth conversions, buy more permanent life insurance, use irrevocable trusts etc. It’s good that you know what you’re investing for. But it’s important to not confuse investment advice geared at someone investing for his heirs with investment advice aimed at someone investing for his own retirement.

    As far as “a rich doc” not needing advice as much as a middle class earner, I completely disagree. It’s far easier to find good advice for the average joe than for a higher earner, thus the reason I started this site. Investing is a lot easier when SS might make up 50% of your retirement income, and when your biggest decision is whether to put money in your Roth IRA or your 401K. The more you make, the more complicated things get in my opinion.

    I’m not sure what your point is about the dividend rate and the loan rate on a NWM policy. Are you suggesting that because the dividend rate on a life insurance policy is 5.7% and a money market fund has a yield of 0.03% that one should put all their money into a life insurance policy and none of it into a money market fund? If so, one should consider that #1) the dividend rate isn’t applied to the whole investment, only the portion of the investment that goes toward the cash value, #2) borrowing from your cash value at 8%, especially with a direct recognition company like NWM, isn’t very smart, #3) no point in having any money in a MMF at 0% when you can put it in an FDIC-insured bank account at 1%, and #4) there’s a reason no informed investment authority suggests you put an emergency fund/cash reserves into a life insurance policy. If I needed an 8% loan, I could use a credit card. If I want cash, I usually don’t want to wait 3+ business days for it. Heck, with 3 business days I could have a credit card offering 0% for a year.

    Your comments seem to center on using a life insurance policy to bank on yourself. If you’re going to do this, perhaps the most important piece is to use a non-direct recognition company, not NWM.

  197. i find that people frequently confuse the dividend rates with the actual return of the product. Its probably purposefully made confusing but people should realize the return on the death benefit is currently projected around 5% (assuming dividends dont further go down which doesnt seem likely and of course guaranteed a lot less) and the cash you could get out of this before death is also substantially less even before figuring out the cost of those loans.

  198. I appreciate the feedback, and some thing are becoming more clear. But everytime I read something new, new questions come up. Isnt a 4.5 percent return with a tax free benefit to heirs an equivalent to a 6 percent return in a taxable account. I would think that is pretty competitve since most managed accounts have maybe 2 percent in fees. So dont you have to do better than 8 percent in the market to get that? And I dont understand the assumption that if investment do bad so will insurance. Have read that over 10 thousand banks failed during the great depression and over 3000 thousand banks failed during savings and loan crisis. to my understanding life insurance comanies have withstood the test of time much better, in fact very well during those times. It has been explained that because insurance companies have actruaries who overestimate the amount of people who will die each year or in the future along with overestimating their costs, as well as underestimating on their ivestment projections and taking into account recession and things of that nature that your money is in fact very much safer. Another person earlier wrote about how they have wholly owned subsidiaries which produce income as well. So isnt that a reason that insurance money is safer and not neessarily invested the same way as you and I can do. and what about that they need to have much more money in reserves compared to banks. Banks seem to me canbe down right scary. Also unless Northwestern is different, isnt one borrowing agaist his cash value not from it. So your not paying interest on your money at all, but rather from the insurance company because they are using your cash value as collateral. Seems to me the cash value could be used as collateral for a bank loan or a loan from insurance company. And you might just want to take a higher interest rate loan from insurance company if you want an unstructured loan you can pay back as you wish. Plus what if your credit goes bad, then how are you going to get the loan from the bank. And cant that higher rate along with giving you the flexibility of paying it abck how you like be ok if it was for a a good reason such as making an investment that returns a much higher rate? Yes these are bank on yourself concepts I have read about. But I am also studying for series 7 and just searching for some real truths. Open minded to the ideas being good ones or bad, just hoping for them to be good. It seems as though the truths arent so simple and it does take a certain understanding of all the inestment information along with the right individual to make a smart endeavor. Thanks everyone so far.

  199. By the way between the management fees and in and outs with mutual funds, I thought i heard someone say that bonds have outperformed the market.

  200. Your arguments don’t make sense.
    People don’t need to spend 2% on management fees. You might want to read the other posts at this site. Investing in index funds even in an after tax account likely will do better than whole life. I don’t know anyone who has lost money in a FDIC account regardless of a banks status. There are of course limits of this protection of 250k which is 150k higher than the state guaranty assoc limits typically on cash value and that 100k isn’t govt backed. At bogleheads there recently was an article linked which showed the results of the state guaranty assoc and it isn’t perfect.

  201. Also, I dont quite get savings on marginal rate now and effective later. If you didnt get to defer marginal, you would have paid effective and had left over to save or invest. So doesnt seem that you would save anything more above effective than if you had done nothing. Only now you can get compounding on the growth but you are also getting compounding on the tax. With insurance you get compounding on the after tax money with no compounding of a tax because it was already paid. Maybe i need to go back and read if it said something about rates being different the older you are… I appreciate that link though.

  202. I stand corrected on the 401K contribution reducing your FICA. My original research in that area was related to the disadvantages of utilizing pre-tax federal medical and child care spending accounts. Employers love these accounts and push them rather hard. Granted you have the immediate advantage of tax free spending, but at what long term cost? Most people are so short sighted, they don’t consider the long term disadvantages to lower FICA withholdings.

    My point about Northwestern’s declining dividend was as a reflection of the overall market. Someone was complaining about the declining dividend rates offered by mutual life insurance companies, but what investment has not been in decline? I would further speculate the dividend rate will continue to decline for the forceable future, since the federal reserve is buying bonds in bulk, with no end in sight. Back when Dividend rates for Northwestern were in the 10% range, I used to make my agent reprint them with a 6% rate. Perhaps I should have had him recalculate with a 4% rate instead.

    Marks point about losing your credit rating and being unable to borrow from a bank or credit card is certainly valid. It is the exact same concept as becoming medically uninsurable, which is really inconvenient when your 10 or 20 year term runs out, particularly if you still have children in college at the time. Granted, high risk credit does exist, but at what cost. They make 8% seem like “Prime+1” in comparison.

    It is obvious there are certain disadvantages to whole life insurance, which is why the age old “buy term and invest the difference” argument is with us. But there are also numerous advantages that need to be recognized as well, something term defenders seldom mention. Examples include having access to funds for premium payments regardless of your current employment status, or your credit rating, and being able to maintain a death benefit for your family despite that recent heart bypass surgery, or breast cancer diagnosis. Those advantages should cost something. They provide a certain level of financial security that other investments can not.
    “Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss”.

  203. Mark-

    1) Yes, 6% pre-tax is equal to 4.5% post-tax for someone in the 25% marginal bracket. Yes, 6% isn’t a bad return. But keep in mind your return on whole life insurance is negative until about year 15. For current policies being offered, the expected return on your cash value at your life expectancy should be between 2% (guaranteed) and 5% (projected.) But that’s after 50 years. It isn’t 2-5% the whole time.

    2) Paying 2% fees in today’s investment world isn’t particularly bright most of the time. But you’re right, that might be average. My investment fees run around 0.15%. Why would an informed consumer settle for average fees when fees are the best predictor of future returns?

    3) It’s hard to follow the rest of your paragraph. You’re jumping so quickly from one concept to another. I particularly liked the worry about “What if your credit goes bad?” as though you have no control over that. I’m not sure the rest of it requires a response.

    4) Why trust what you “hear about the market?” Why not look it up yourself? There are periods of time where bonds outperformed stocks, but as a general rule, stocks outperform bonds over any reasonable time period, especially time periods required to get a decent return out of a whole life policy (multiple decades.)

    5) You’ve got to get this concept of marginal vs effective rates. It’s really important. Perhaps this post will help:



    1) Agree that dividends are likely to drop as they have been for the last couple of decades.

    2) The point of buying term and investing the difference is to have term until you become financially independent. 10 years usually isn’t enough time. Who cares if you’re medically insurable if you don’t need the insurance? If you expect to need life insurance for 50 or 60 years, then you probably ought to look at a permanent policy. The typical investor with a reasonable plan and an adequate savings rate should be able to reach financial independence within 30 years, and so can get by with a 30 year term policy. “Losing your credit” is hardly the equivalent of suddenly becoming ill. Bank policies can change, of course, but that’s why I recommend you avoid borrowing money for most of the stuff the Bank on Yourself crowd borrows money for.

    3) Are you seriously arguing that one should buy permanent insurance instead of term insurance because it will be easier to make the premium payments? Really? Trust me- If you just got diagnosed with terminal cancer, it won’t be hard to make term life insurance premium payments. If nothing else, you can sell the policy. But really, how much of an issue is this? A $1 Million 30 year term policy is as little as $550 a year. Under $50 a month. Now, coming up with thousands of dollars to pay your permanent policy premiums- that might be an issue, don’t you think? Sure, if you’ve already got a ton of cash value because you’ve been paying for decades, then you can stop paying premiums and let the dividends pay them, but what about that first decade or two?

    4) Nobody is saying there are no benefits to using a whole life insurance policy. That’s a straw man argument. I’m arguing that for almost everyone, there’s a better way to accomplish what the investor wants to accomplish.

  204. The idea that these are useful in case your credit goes to pot is false. If you go bankrupt then you can’t pay your heavy premium and the policy fails. This idea that it will give you easy credit when others won’t just isn’t practical.

    If 2% have to lose money for management fees then over 80% have to lapse or surrender and we know what that return looks like.

  205. WCI and Rex, thanks for making this the most important and best Google I have made EVER! I met with a set of new financial planners right before the Xmas Holidays and of course received the Whole Life Pitch. I told them I currently have 500k term with 10 years left on it and 200k permanent via Universal Life (told this is much worse than whole life). My 200k Universal Death benefit expires at age 92, I am now 47 so no real biggie. Prior to my meeting with them, I didn’t even know that my Universal Death benefit had an expiration date. To feel fully stupid was an understatement. I have avoided whole life for a long time, but these two guys were really good. Glad I took the time to read your blog… I will work on Maxing out my 401k, IRA, Roth accounts and keep playing around with my few mutual funds. If they will not assist me in that direction, I will simply find different FPs.

    I am a Real Estate Agent and not a doctor, but many of the same issues with investing and retirement coincide. Thanks again, Mark

  206. You’re welcome Mark. You should get an award for reading this entire page.

    P.S. If I were a real estate agent a good chunk of my portfolio would be in rental properties.

  207. Mark

    Just be sure you are looking at the guaranteed column for your UL. I assume they are not the agents who sold you this policy. I assume what you mean is that either the current illustration or guaranteed column shows the policy collapsing at that age. Be sure to know which one since if its not guaranteed then it could fail even sooner.

  208. Regarding the second Mark’s comments (I am the original Mark from earlier in the thread) and others’ comments, there seems to be a major under-appreciation of the risk of insolvency of life insurance companies. California’s Conservation and Liquidation Office lists 252 (yes over TWO HUNDRED AND FIFTY) insurance companies that have been liquidated and closed since the late 1970s: http://www.caclo.org/perl/companies.pl?closed=1

    They list an additional 20 companies based in California alone that are in receivership or liquidation but are not closed (since 1985):

    For those docs looking at potentially large dollar policies, you need to also be aware that there are limitations on how much a state’s guarantee association will allow you to claim if your company is liquidated. If you have say a two million dollar policy and your company is liquidated you might only get 350K (or less) out of it for example. You need to check limits in your state.

    Finally, don’t be fooled that an old company is necessarily more stable than a newer company.

  209. Original mark it is true that many companies over time go under. Percentage wise it’s low and yes the limits are important. The death benefit values protected via the assoc are typically around 300k but the cash value is less typically around 100k.

  210. I see I added a First Mark and a Second Mark distinction to the group. How about Mac? WCI, interesting that you brought up rentals. I shared my plan to acquire a few inexpensive condos for CASH with fairly good cash flow and a good chance that they will triple in value in a few years. That’s when I got the double talk about using ‘other’ people’s money and why I need to purchase Whole Life, etc… I believe the ‘Financial Planner’ pretty much wanted to have input before I spent any money moving forward. I am just trying to figure out if he is looking out for me and my family or himself and his family.

    With respect to the guaranteed and non-guaranteed illustrations, you both are correct. The Death benefits for guaranteed expire at 80 and 84 while the non-guaranteed expire at 92 and 94. I am okay with that and now I at least know what I have in terms of protection if I die early.


  211. MAC you already know the answer about this so called advisor. Keep in mind no matter how good of a negotiator you are, these companies are masterful at convincing you to put money into their product even if it isnt the right thing for you. Thus the more you talk to this person, the more time you will waste. If your primary goal isnt a permanent death benefit then permanent life insurance isnt the answer. If you have any questions why this is the case then post them.

    Once purchased, especially if held for a long time, permanent life insurance should usually be kept in force. That doesnt mean one should buy it in the first place. Its just the costs are sunk. With the ULs however the cost does keep on rising. Id ask to see how much it will cost to get the guaranteed into the mid 90s. If you arent comfortable with that then id bail. With the curren interest rates and current outlook for the future, these products will continue to perform closer to guaranteed.

  212. Thanks for the response, Rex.

    I am not so sure that the percentage rate is low of companies that go under. Do you know of any data? Besides, even if the historical rate has been low, that would not mean the future insolvency rate will be low over the lifetime of someone purchasing a policy. If you have a convergence of low equity, low bond market and low real estate returns for an extended period, how many companies are going to survive, especially as dividends would have to drop?

    You really would need to look at a high economic stress period to get a better idea of the risk of default. I would be curious how many insurance companies that were doing business in 1920 even survived the Great Depression.

  213. ill have to look for that again. It wasnt anything like LIMRA or society of actuaries or some other truely independent group that looks at insurance stuff long term but it was some article from either wsj or something like that. While im no fan of life insurance companies and their tactics to get people “to invest” via life insurance since this is almost always a mistake, i do have to say from a stability standpoint they have historically done well. Why is that the case one may ask? Well if you notice only a very very small percentage of whole life polices are kept in force until death. You combine this with the very low failure rate of long term treasuries and high quality bonds over the long haul and thats pretty hard to mess up. Looking at the LIMRA data, it seems that almost 1/3 of whole life purchasers lose almost every dime they put into the polices given that they surrender before 5 years. Most of the others who surrender (even those with a gain) probably dont even beat inflation. Thus while i think its a very bad investment, i dont want to pretend it isnt fairly safe since they arent paying out that much money compared to what they take in. Besides what you really care about isnt if the company goes under but what are the chances the state guaranty assoc doesnt fix the problem for you.
    Looking over the article it appears 96% of the time, the assoc was able to make people whole for life insurance if the company went under. It seems if under the limits, its pretty much 100%. Thus just another reason to limit any policy to below 300k of death benefit and 100k of cash value (varies from state to state). I do share your concern that given where we are today, the road doesnt appear pretty for treasuries/bonds going forward and thus isnt pretty for insurance companies (this is of course a reason why purchasing whole life is not diversification since you are just buying more bonds/treasuries but adding an expensive middle person). I personally think polices will just be a lot closer to the guarantee collumn and of course thats a horrible return. Dividends would probably need to disappear before some of the really strong companies go under.

  214. hilarious that White Coat Investor has MetLife Term Insurance advertisement. Know the source guys, this “Doc” is in business to sell his stuff too!

  215. JSn-

    I’m not sure what advertisement you’re referring to. MetLife is not an advertiser on this blog, although it’s possibly you saw one of their ads served by Google Adsense/Adchoice on the website somewhere.

    I do have a Metlife term policy which is pretty reasonably priced.

  216. JSn, on WC peddling a company:
    which do you think makes him more money – working one extra shift or spending a 6 months on this blog? He’s extremely transparent on things as well. Would it be worth his integrity to get people to buy a dinky insurance policy? If you think so, I’d bet you’re on of those people whose fat commissions are being diminished by the availability of good, honest information on this site. Having sat through a Northwestern Mutual sales pitch, I remember how their WL policies are championed as the greatest things ever.
    The person that referred the NW Mutual scumbag to us, of course, has a nice bloated, fat policy with them. He tried so hard to pass along the, “She’s doing it, so you really should too,” garbage, but having somewhat luckily been burned on a smaller WL policy, there was no chance we’d work with anyone wishing to get us again. I can see how green docs, short on time and short on desire to research this can get totally hosed.

  217. So I ran some numbers.

    5 Million Dollar Whole life Policy on a 30 year old costs about 45,600 a year. 1,368,000 over 30 years.
    5 Million 30 year term policy at 4269 a year. So 128,070 in total payments over 30 years.
    Difference in cost = 41,331 a year
    – If invested this 41,331 per year for 30 years @ 5% (interest is explained below) = $2,745,984
    Qualified Plan
    – So everything taken out after retirement is taxed at your income rate.
    – 2,745,984 * .60 (40% tax bracket) = 1,647,590
    – 1,647,590 – 128,070 (total term payments) = 1,519,520 after taxes.
    (I can’t figure out what I am doing wrong in the roth. Kept getting the same number in the end for the roth as compared to the traditional, which in some ways makes sense but I feel like there should be some tax free growth in there I am missing. And tried to do a non tax deferred account but couldn’t figure that math out with taxes paid every year on dividends then might be capital gains.
    – 41,331 converted to a Roth every year.
    – 41,331 *.60 (Because you have to pay taxes when you convert) = 24,798
    – 24,798 invested yearly for 30 years at 5% a year = 1,647,550.54 – 128,070 = (kept getting the same number as the qualified plan so I feel like I did something wrong.)
    – And since everything in a Roth is tax free after retirement that is your after tax number.

    The Whole Life policy’s Guaranteed Cash Value after 30 years is 1,725,000.
    – Surrender it and Pay Taxes on the Gains
    – 1,725,000 – 1,368,000 (Total Paid into WL policy) = 357,000 gain on policy
    – 357,000 * .60 (40% Tax Bracket) = 214,200 + 1,368,000 = 1,582,200 after taxes.
    Non-Guaranteed Cash Value in illustration of Policy is 2,784,225. A 4.5% yearly return.
    – Gains are 1,416,225
    – 1,416,225 * .60 = 849,735 + 1,368,000 = 2,217,735 after taxes.
    The dividends are currently decreasing just like said before in an earlier post because the company uses a bond ladder. It is very reasonable to say that over the next 30 years interest rates will probably rise, which is bad for bond mutual funds, or anyone buying and selling bonds and not letting them get to maturity (correct me if I’m wrong, but explain why please). It makes a huge difference just going from 5% a year to 7% a year, which is what funds like PIMCO total return have even beaten in the past 30 years, but again that was with falling interest rates, which is good for the value of bonds. Because of this I felt 5% is actually a pretty middle of the road yield, especially since we are comparing it to a Guaranteed Value. But as interest rates rise the Whole Life policy will be reinvesting into higher yielding bonds so the yield inside the policy will begin to rise. And I know you are going to say you can get a much bigger return than that if you invest the difference in the premiums into stocks, but the whole life policy is invested in bonds, so if you are paying the premium out of what you would be allocating to your bond portion of your portfolio that shouldn’t be the case. So tear that apart and tell me why it doesn’t make sense.

    I know you all have said that after you have maxed out all other tax deferred avenues then maybe a WL could work but this doesn’t look that bad when the guaranteed number is where it is and there truley are no guaranteed returns in any markets.

    – I have a question also.
    1. In Estate Planning for an older person, is it beneficial for them to already have this Whole Life policy, or any permanent policy for that matter, they bought at age 30?

  218. Let’s address your question first, because it’s going to take some serious brain power to figure out where you were going with the rest of it.

    Insurance salesmen like to mention “estate planning benefits” when selling permanent life insurance. But they don’t really spell it out very well. Life insurance is useful in estate planning in 3 ways.

    1) When you have no portfolio, it creates an instant estate upon your death to take care of your loved ones. This is what term life insurance is for.
    2) When you want to decrease the size of your estate prior to death you give assets away before you die. If you take the assets and put them into an irrevocable trust, you can then buy a life insurance policy on yourself inside the trust. So you could reduce your estate by say $20K a year, and then when you die, that trust is all of a sudden worth a million bucks as the life insurance matures. Guaranteed no-lapse universal life is probably the product of choice, but whole life wouldn’t be bad. I wouldn’t do this in my 30s though. I’d consider it at 50 or 60 or so if I knew I was going to have an estate problem. Right now “an estate problem” means a married couple needs more than $10M, indexed to inflation. Most docs aren’t going to be anywhere near there.
    3) When you have a very illiquid asset, like a family-owned business or a farm, sometimes a life insurance policy is bought to provide liquidity. Again, no-lapse universal is probably best, but whole life isn’t bad. When you die, you can give the farm to one heir and the money from the insurance to the other heir. Also, if you have an estate tax problem and an illiquid asset, you can use the insurance money to pay the estate taxes.

    As you can see, there’s a good chance you won’t ever need a whole life policy for estate planning, so I don’t understand why someone would want to buy one at age 30 for “estate planning” purposes. If it really looks like you’ll have one of these issues, you can buy a policy later (assuming you remain insurable, which is obviously always a risk.) It’s not like there are no other ways to deal with estate planning even if you are uninsurable.

    As far as your calculations, you’re taxing all qualified plan withdrawals at 40%, which is almost surely excessive as you need to “fill the brackets” as you withdraw the money. Your effective tax rate on withdrawals is much more likely to be on the order of 15-25%.

    What you’re doing wrong with the Roth vs whole life is you’re not subtracting out the taxes for the money you put into whole life. Remember you buy an insurance policy with after-tax money. So if you want to subtract some value for your taxes now, you need to do it for both types of accounts.

    If you tax your Roth contributions and your deferred-tax withdrawals at the same rate, then of course you end up with the same number in the end. Why should that surprise you? If $100K grows to $1Million, and you have the choice to pay $40K now or $400K later, which would you choose? It doesn’t matter.

    I am curious how you plan to get $41K into a Roth account though. I guess if you and your spouse did Roth 401Ks and Roth IRAs each year you could get to that figure.

    It doesn’t necessarily make “a huge difference” when rates go from 5% to 7%. You need to understand the concept of duration. If the duration of a bond fund is 4 years, then if rates wet from 5% to 7% all of a sudden you should expect to lose 8% of the principal of your bond fund ((7%-5%)*4)= 8%. If your duration were 2 years, you’d only lose 4%. If your duration were 8 years (basically a long-term bond fund), you’d lose 16%. If your duration were 0 years (like the G fund or a money market fund) you’d lose 0%. Total Bond Market Index Fund has a duration of 5 years. So you’d lose 10% right away, and after 5 years, you’d be better off with the higher rates than the lower rates because you’d be making 7% a year instead of 5%.

    Insurance companies don’t invest all in bonds, just mostly in bonds. I think 15/85 is pretty typical.

    It looks like with your calculations you’re trying to figure out if you’d be better off buying bonds in a retirement account or buying a whole life insurance policy, am I right? What exactly are you going to do if you learned that WL were more likely to give you more money? Buy a whole life policy and then make your 401K all stocks? How do you plan to rebalance? Also, why are you planning on withdrawing your money from the WL policy? You’re almost surely better taking loans out late in retirement to access your money rather than cancelling the policy. I just don’t understand your reasoning behind doing any of these calculations. But if, for some reason I cannot fathom, you want to make these calculations AND you want to make them with the assumption that your retirement portfolio is going to make 5% a year for 30 years, then I’d do it like this:

    Roth account

    Let’s assume a 40% marginal tax rate. You’re going to put 41K a year in rather than buying a whole life policy. $41K a year at 5% a year for 30 years equals $2.86M. No taxes due so gross = net.

    Whole Life Insurance

    You make $41K contributions each year and after 30 years it’s worth somewhere between $1.58M and $2.78 Million. You, for some bizarre reason, decide to surrender it. You now pay taxes on the gains ($41K*30=$1.23M so gains are either $1.58M-$1.23M=$370K or $2.78M-$1.23M= $1.55M) at 40% (not a lower capital gains rate) leaving you with something between $1.43M and $2.16M.

    Tax-deferred Account

    You decide to put money into a 401K like account each year instead of paying taxes on it now. $41K after-tax = $68,333 pre-tax. So you put $68,333 pre-tax into your 401Ks each year for 30 years. After 30 years at 5%, it’s worth $4.77M. You gradually withdraw it over years and years at an average effective rate of say 20%. So let’s take 20% out for taxes. That leaves you with $3.81M. Easily the best of the three options. Note that if you, for some bizarre reason, wanted to pull all your 401K money out in the same year and had to pay taxes on it at 40%, that you’d end up with $2.86M, exactly the same as the Roth option.

    I hope that makes it very clear why you shouldn’t be buying life insurance as an investment when you’re not even maxing out your retirement accounts. A more realistic comparison would be to assume no taxes due on the loans take out on the whole life insurance and assume the retirement accounts have a higher rate of return than the insurance policy, at least by 1-2%.

  219. If one has an estate tax problem, is married and uninsurable, Survivorship Guaranteed Universal Life (SGUL) Insurance may be the solution.

    As the policy insures two lives and pays on the second death (when the estate tax comes into play for a married couple), one insured can even be uninsurable and coverage would most likely be available.

    As mentioned earlier, the owner and beneficiary of the policy should be an Irrevocable Life Insurance Trust (ILIT).

  220. It appears that WHITECOAT has not read the book Pirates of Manhattan as suggested.
    A properly designed participating whole life policy for financing your “living” needs far outweighs “buy term – invest the difference” or even retirement planning usng traditional qualified plans. I am NOT an insurance salesman. I have successfully purchased investment real estate and cars using this model vs a traditional mortage/loans and have so any cash flow benefits than I have time to describe here. Everyone is entitled to their opinion…but unless you truly understand the benefits and strategy to properly use a tool like CVWL, you are only perpetuating the “follow the carrot” model that puts most Americas in a very vulnerable position for asset growth, retirement planning, and cash that is liquid, safe, and guaranteed…especially if you join the strategy with available equity in real estate that is not safe, isn’t liquid, has no rate of return.
    Pulling out equity and using with the whole life strategy is huge for asset growth. Just need to be educated a bit in how to do it. Read the book and start the education.

  221. No matter how you design a whole life policy (from a mutual company that uses non direct recognition, max over funded to mec limits, etc), the cost of the loan is the cost of the loan. There is no magic. EVERY doctor reading these threads can get a way better rate on a car loan and even home loans that would make it silly to borrow even from their whole life policy if they had one at the moment (which most should not unless they have a need for a permanent death benefit). Heck insurance companies would love for more people to borrow from them since its a higher yield then they can get out of their other safe investments. If you dont pay then the policy collapses and they only allow you to loan against the CSV. You are taking a loan from the insurance company. While non direct recognition allows them to credit the same dividend, it does not change the fact that the loan costs money and non direct companies typically provide lower dividends.

    There is a recent thread at fatwallet where a junior agent tried to promote this idea after a poster asked a question and he was squashed by the community AND all the senior agents who actually know that its a bad idea.

    Im already educated. Ive read many of the infinite bank type books (it goes by several names) and its a huge mistake for most physicians. There is a good reason why you cant find one independent financial expert recommending that strategy. Its not that you dont have the time to describe your cash flow advantages, its that they would be proven poor strategies for 99% of doctors. The ability to take out a loan from a whole life policy is an okay part of whole life but it is a horrible reason to purchase one in the first place.

  222. Interesting you bring that up Tom. I just finished a book advocating that an investor take all the equity out of his real estate (and 401K accounts) and invest it in cash value life insurance. Then I wrote a 7000 word post about it. I’ll probably run it next month. The conclusion is quite clear- that dog don’t hunt. Read the post and let the education begin. ;)

    I don’t think anyone needs to read Pirates of Manhattan to know that Wall Street is corrupt. Too bad it didn’t bother exposing the problems with the cash value life insurance industry while it was at it. It’s interesting that he condemns all these Wall Street based financial products, pointing out that many bank executives have golden parachute cash value life insurance policies. Perhaps he should point out that all the insurance companies are buying these wall street based financial products like stocks and bonds. What exactly do you think the NMLs of the world are investing in? Check it out:


    89% bonds, 3% public stocks, 4% REITs, 3% private stocks. Looks to me like everyone is in bed together. Banks buying life insurance policies and life insurance companies buying securities from the banks. That’s why I consider the insurance industry part of Wall Street on this blog where I try to give those who wear the white coat a fair shake on Wall Street.

    I’ve addressed the Bank on Yourself/Infinite Banking elsewhere on the blog:


    I conclude that it isn’t a horrible way to run your finances, but it certainly is no magic bullet.

    • OK, you say it’s not magic bullet. What is your magic bullet? Is that shared somewhere else on the site?

      If I re-phrase your statement, it’s a good way to run your finances but not your investments. Fair enough?

  223. Larry-

    The more I think about irrevocable trusts, the more I don’t see the point of buying life insurance in one. The point of the trust is to get the money out of your estate before you die. Instead of taking the money and buying life insurance in the trust, why not take it and buy risky assets in the trust. Yes, the trust would have to pay income taxes, but if buying risky assets you’d expect the higher return to outweigh the additional tax costs compared to a life insurance policy, at least over the long term assuming you die near, at, or well beyond your life expectancy. Maybe the risk-adjusted returns wouldn’t be higher after-tax, I don’t know. I guess if the goal is to provide a definite amount at death, perhaps a guaranteed universal life inside the policy would be best, but if the goal is to provide as much as possible at death, I’m not sure life insurance is the best investment to put in the trust. There’s no additional estate planning benefit I can see to putting life insurance in the trust. Once the money goes into the trust, the effect on your estate tax is nil. You’re just deciding between a probable higher amount of taxable money (probably higher after tax) and a more guaranteed but likely lower amount of tax-free money (with the obvious death benefit should you keel over earlier than expected.)

  224. Larry,

    You hit the nail on the head. The reason to use Life Insurance in an irrevocable trust is to remove the asset from the estate and provide a guaranteed amount to a beneficiary. That’s the strategy. Your analysis is correct, however, most people are looking to leave a guaranteed amount and are not willing to risk at least this portion of their assets in the markets.

  225. I agree purchasing a life insurance policy in an ILIT would not be used as a means to create wealth.

    I was responding your previous post where you stated “if I knew I was going to have an estate problem. Right now an estate problem means a married couple needs more than $10M, indexed to inflation”.

    Estate planning, in a situation like this, would be about setting up gifting programs and using other techniques to reduce the value of your estate. Then when you got to the lowest number, you would assume a certain growth rate on your estate and a tax of 40% above the 5.12 million per person exemption.

    You could then purchase GUL or SGUL (if married) in an ILIT to be used as a means to pay the estate taxes with discounted dollars or if you had an illiquid asset and needed money to pay the estate taxes.

    You are right in that with the exception of high income, high net worth specialists, most docs will not have an issue at all.

  226. It sounds nice to say “buy with discounted dollars” but you’re doing that whether you buy life insurance in the trust or not. It just comes down to whether you want the guarantee or not (realizing it is likely to cost you something.)

  227. Although, to be fair, one reason to put life insurance inside an irrevocable trust is that the tax rates are so high inside it- the top bracket (39.6%) starts at $11,950 of income. But if you could limit income to long-term capital gains and qualified dividends it wouldn’t be as bad.

  228. Even dual professional docs would have a hard time needing this for estate purposes. They would need to both be in high paying specialties, both be excessive savers and together chose to have very non liquid assets that they are also passing on.

  229. Rex-

    I agree with you entirely.

    At the end of the day, the only real reason for someone to even purchase a GUL or SGUL policy is that they want a permanent guaranteed death benefit for one reason or another. After all, either product is essentially a permanent term insurance policy.

    The ILIT just makes the death benefit estate tax-free in addition to the normal income tax-free death benefit.

  230. Thank you for the very good information. I was going to sign up for a whole life policy next week where I will give $220 per month to get $ 170,000 in death benefit. I have decided to stick with my current term life instead and put the $220 towards my 401k. Cheers.

  231. I’m very interested in what White Coat Investor or anyone else has to think about my upcoming decision on buying a Universal life insurance policy.

    I agree with almost all of the advice on the site, and I actually agree that for most people this type of insurance is a bad idea. I still have some thinking and calculations to do, but I think it might be a good idea for me.

    The product I’m looking at is an indexed universal life policy. The way it works is that the cash value (i.e., everything that I pay in premium that accumulates after the cost of the insurance and fees are accounted for) is invested in account that is indexed to the S&P 500. The interest you accumulate is equal to the appreciation of the S&P 500 index for that year with two twists:

    1. If the S&P 500 goes down, you don’t lose any money, you just get zero interest
    2. If the S&P 500 goes up, you get whatever appreciation that is upto 15% (i.e., if the S&P 500 goes up 20% in a given year, you only get 15% appreciation).

    If you look at this scheme historically vs just taking exactly what the S&P 500 gives you, it is almost the same (+ or – 1% depending on the time interval you choose to look at), but there are less swings. There is an option to just take exactly what the S&P 500 gives you if I desired that.

    Anyway, what I’m looking at is a $4 million policy that has me paying $10K per month. Obviously I could pay much less than that, but I am trying to put in as much as possible without turning it into a Modified Endowment Contract to take advantage of the cash value.

    If we assume appreciation in the S&P 500 of about 7% a year (I know it could easily be less), here’s how the policy works out.

    1. It takes about 9 years for the cash value in the policy to equal what I put in (not including inflation)
    2. After paying 16 years of paying premiums (i.e., 16 yrs x 120 K per year), then I can start withdrawing (first by partial surrenders and then later as policy loans) about 150 K per year for 37 years. At that point I just let the policy lapse and I get no death benefit (and I don’t have to pay back any of the policy loans).

    However, if I die before that I get the 4 million + the cash value in remaining in the policy. All of these withdrawals are tax-free.

    This is kind of an early retirement scenario (in mid 30s now), but given the above data you can extrapolate what things would be like if the return were slightly lower, or I contributed for a longer period of time. Or if I contributed for a longer period of time, but waiting on taking withdrawals.

    Here’s some other things you may want to factor into your evaluation of this.
    1. I have and will already be maxing out all of my other retirement account options. This is just money that would be going into a taxable brokerage account where I’d probably be buying the S&P 500 or some other indexed funds.

    2. I will almost not certainly need to take out a loan against the policy for any other reason (e.g., buying house, car, paying for kids college, etc). Unless something very unexpected happens, I will be able to comfortably cover these types of things from my income and non-retirement account savings. I save a lot more than $10 K per month.

    3. The main reason I like this is the tax savings. If I just invested this money in my brokerage account I would be paying tax on the dividends and then paying tax again when I sell. The asset protection is also nice.

    Seems like this is probably better for me than buying $4 million of term life insurance and then just investing the rest in the S&P 500 in my taxable brokerage account. Of course it really only is better if I hold this policy for a very long time (at least 15 years).

    4. I’m not really concerned about the death benefit in the long run. If I were just buying term, I would only get it for about 20 years and then I hopefully wouldn’t need it as I probably will have amassed enough wealth that the family would be taken care of if I die. I’m really only doing it for the tax advantages.

    I’ve still got to do some calculations on this and actually writing all of this out has helped me think about it more clearly. But I’m definitely interested in any thoughts anyone may have.

  232. This is probably worth a whole post rather than being buried here in a comment. An insurance product indexed to an equity product is a great idea in theory (give up some of the upside in exchange for no downside). It’s in practice that it becomes not such a good idea. The devil is really in the details with these things. You see it in both universal life insurance policies as well as annuities.

    First is the cap. You don’t get all of the upside. Okay you say, you can live with that in exchange for no downside. You say yours is 15%. What percentage of the time does an S&P 500 index fund do better than that? Let’s take a look. In the last 15 years Vanguard’s S&P 500 Index fund has had a return greater than 15% eight times. Over half the time. When you’re missing 26%, 28%, and 30% years, you’re giving up an awful lot of upside.

    Second is the fact that these policies are indexed to the index, and they DON’T count the dividends. Dividends currently make up a relatively small portion of the stock market return, but historically, that’s not the case. So if an S&P 500 fund makes 8%, well, 2% of that might be dividend. So you’re only getting 6% now.

    Third is the participation rate. These vary, but are generally between 50% and 100%. So if the S&P 500 goes up 10%, and you have a 50% participation rate, you get 5%.

    Fourth is the minimum guaranteed return. Yours appears to be 0% from what you say. That’s not very high. Sometimes that minimum return only applies to a portion of the investment too, but I don’t know how this works with insurance as opposed to annuities (where it is often applied just to 90% of the annuity.)

    Fifth, be aware that different contracts calculate the “change in the index” in different ways, each of which has advantages and disadvantages.

    Sixth, sometimes these policies credit you based on simple interest, not compound interest.

    Seventh, sometimes these policies credit you based not on where the index is at the end of the year, but on the average of the index throughout the year.

    Eighth, sometimes there is a “spread.” So if the index gains 10%, and the spread is 3%, you only get 7%.

    Ninth, commissions on these suckers are fairly high for agents. In general, the higher the commission, the worse the product. Vanguard doesn’t have to offer a commission to get someone to sell their Total Stock Market Index Fund. People walk right up to the “counter” and buy it every day with no help from a salesman. But an insurance company has to pay an agent, and handsomely at that, to sell equity indexed annuities and life insurance. The more they pay the agent, the worse you can expect the deal to be for you.

    Tenth, it’s still life insurance. So remember that 100% of your “investment” doesn’t go toward the investment portion of the product. You still have to pay for the insurance. So a 9% “dividend” is NOT a 9% return, especially in the first few years while the cash value is relatively low.

    Now, you appear to be doing a few things that should help maximize the value for you. You’re already maxing out your retirement accounts, you’re presumably funding it right up to the MEC line, you’re presumably paying annually, and you’re presumably in a very high tax bracket. But there are a couple of comments that you’re making that worry me. First, you’re doing it “primarily for the tax benefit.” You should understand exactly what benefit you’re getting from this that you can’t get elsewhere. If it is tax-protected growth you can get that from many tax efficient mutual funds in a taxable account. If it is the tax-free death benefit, you can also get that from a mutual fund- the step-up in basis at death. If it is the tax-free loans, then you’d better get a lot more interested in them than you appear to be in them. It bothers me that you’re buying permanent life insurance when you don’t appear to need or want a permanent death benefit. If you must buy life insurance as an investment, at least do it with money you’re planning to leave behind (which improves your returns.)

    Last, it bothers me that you’re spending $120K a year on this “investment.” Perhaps you just have tons of money that you have no idea what to do with, but that seems like an awfully big commitment to any one thing. Are you sure you believe in this thing that much? Remember with a permanent life insurance product you’re really committing to this thing for the rest of your life. What percentage of your annual savings will this be? I’d say if it is more than 5-10% you’re probably putting way too much into it. I can’t imagine you’re a physician saving >$1M a year. You do realize that as soon as you sign the first year’s check that your agent is going to walk away with something like $50-70K, right? How can he possibly be objective when he’s looking at a commission like that? I’d get a second and third opinion and have it reviewed by an attorney and a fee-only adviser before I ever made a commitment to spend 6 figures on it every year. I’d also read the whole darn prospectus, all 200-300 words of it.

  233. Thanks for all of the thoughtful comments. You actually had many of the concerns I first had, so let me go through them and tell you my thoughts on them. I’m kind of playing devil’s advocate here, but I want to make sure I have thought of all the pros and cons.

    I’ll go through the concerns you enumerated in the order you posted.

    1. First, with regard to the capped upside issue you can decide whether it is worth it or not by just taking any time period that you wish and seeing what you would have got if you just took this type of investment (i.e. downside zero and upside 15%) versus what you would have got if you just took the full benefit and downside of the index. I checked several twenty year periods from 1970 and the difference was never much more than one percent. I’m working on making a spread sheet so that I can calulate this better for any time period.

    [Not surprisingly in the illustration that I got, they picked two periods where the the capped upside, no downside was a little over 1% better. I eyeballed some twenty year periods to try to pick the one that would be the worst possible (i.e., lots of high upside years and few losing years) and I got a difference of a almost 2%, but I think this was absolutely the worst 20 yr period possible.]

    Also, if this scheme (no downside, capped upside) proves to be bad, there is an option that I can just take the full upside and downside of the index (I just choose which one before I set up the policy).

    2. This dividend issue is frankly my biggest concern. My plan here is to find some historical data that tells me how much the difference in appreciation between an S&P 500 index fund would be over a given time period with and without automatic dividend reinvestment. I think this is most likely to kill the deal.

    3. I can pick whatever participation rate I want. I can allocate 100% to the index or I can allocate 50% to the index and then 50% to the guaranteed fixed rate (~3%) or anything in between. I would probably go with a 100% participation rate since I’m looking very long term here.

    4. Yes, the minimum guaranteed return is zero if I choose 100% participation. I’m not too concerned about this. My alternative would be basically to put this money in a taxable brokerage account buying the S&P 500. The minimum guaranteed return there is even less than zero, but that doesn’t worry me either if I had to do that.

    5. I definitely need to check this out as I was unclear on it myself. I’ve got the prospectus on a CD ROM and I assume the answer is in there somewhere.

    6. Interest is compounded in this product.

    7. This is the only issue you brought up that never crossed my mind at all. This plan does go by where the index is at the end of the year. I am confused though. Why does this matter (as opposed to it going by the yearly average). I understand that that the two values will not be the same, but I don’t think that one is systematically worse than the other. In other words I think that sometimes using the average would be to my benefit and other times using the year end value would be better. As long as they are not switching back and forth, why would it make a difference.

    My guess (and I’ll need to check this out) is that over some time periods one approach might be slightly better and over other time periods it would be worse however over a very long time period they should be almost the same. But this is just a guess and I need to check it out. However, if you know why using the year end value is worse than the average, then I’d appreciate it if you could explain it to me.

    8. No spread in this product.

    9 . The commission is definitely high and the cost is passed on to me mainly due to the fact that the premium for the insurance alone is so much higher than it would be for term insurance. However, the scenarios that I gave you (e.g. 9 yrs to break even at 7% appreciation) include all costs and fees (obviously some of which will make their way to the seller in the form of commission).

    In a more general sense, I don’t really care what the commission is. I ask about it because the higher the commission, the more incentive the seller has and therefore the more wary I should be (by the way, you’re right about the amount that goes to the agent, it’s $60K). But I don’t really pay the commission directly. I just pay the specified fees and the commission comes out of that. So the fees are what I base my decision on and I use the commission to guide how alert I should be. But at the end of the day, all I care about is how much I pay (i.e., the fees). Once I pay it, it doesn’t really matter whether it goes to the underwriter or the agent.

    10. Agreed. That’s why I mentioned the 9 yrs to break even at 7%. Those first few years are terrible. This is not going to really have been a good idea until at least 15 yrs. The 7% in this case is a 7% return on whatever cash value is in there, and of course in the first few years you’re paying a lot of fees, so not a lot of your premium ends up as cash value.

    All of the assumptions you made are correct by the way (high tax bracket, maxed out all other retirement options, funding up to MEC line, and paying annually)

    Next as far as the tax benefits I want, there are only two:
    1. I want tax protected growth. You say that you can get this through tax efficient mutual funds, but I find that most of them have lower returns. At least the ones I have researched are not much better than regular indexed funds on which you pay taxes on the dividends. Of course as dividends are taxed at a higher rate now, the tax efficient mutual funds may start to have a more significant advantage. I haven’t looked into this recently.

    Actually, my main strategy in the last 4 years to get tax protected growth is to just buy a lot BRK. Since they don’t pay a dividend, I never have to pay taxes until I sell. It is pretty diversified (so it’s kind of like a mutual fund) and it’s run by the best investor ever. Of course, holding too much of any one security is never a good idea, even if it is BRK.

    2. Tax free withdrawal.

    If we assume that I just put everything my taxable brokerage account in BRK (and they never change and start paying a dividend), then I will get tax-free growth. However, if I want the money, I would eventually have to sell it, which means that at that point I would pay a tax on it (15-20% if the tax code stays the same).

    With this insurance, the appreciation would be taken as a loan against the policy, which for this policy is about 3-4% per year. My guess is that for many withdrawal strategies, this is much better. But I’ll need to make another spreadsheet to figure it out. The best thing of course would be to take it all out close to when you’re going to die, but since I don’t know when that’s is going to be, coming up with an optimum strategy is diffiicult.

    Your final paragraph pretty much sums up my fears in a nutshell. I have got to be convinced this is clearly better than buying term and investing the rest in a taxable brokerage account. If it’s a close call I’m not going to do it because 1- I may have missed something and 2 – It is such a long commitment.

    If, after finishing my analysis, I decide that buying it is probably a good idea, I’d like to find someone trustworthy to review it. But that is easier said than done. I haven’t found anyone trustworthy and very knowledgeable about them. People I trust tell me they don’t have a lot (or any) experience with these and the people I find are most knowledgeable about them are unfortunately the people who sell them. But I’ll keep looking.

    Thanks again for your insightful post. It was very helpful.

  234. I think you’re thinking about all the right things with this. Just a few more comments.

    First, I think a long term expected dividend rate (much less return) of 7% is overly optimistic. I’m not saying it couldn’t happen, just that I don’t think it will. The insurance company is offering you the “fixed rate” of 3% or a variable rate depending on what the S&P 500 does, right? They don’t care which one you pick. Why do you suppose that is? Their actuaries clearly don’t expect to be paying out 7% returns on this. The insurance company portfolio is mostly bonds.

    Second, using only the last 40 years of data to make a guess on how this will perform in the future is far too little data IMHO. You’re going to be holding this thing for what, 50-60 years? Also, remember that this was designed to look good when back-tested. If it didn’t look good, they wouldn’t be able to market it well. But that doesn’t mean much going forward. Why not look at the ones they sold 10 years ago and see how they did over the last 10 years? It seems it would be more helpful.

    Third, it seems clear that this is retirement money for you. You plan to invest it for a long time, then spend it in retirement. You don’t say exactly how many years you’re planning to fund it with $120K, but I’m assuming based on all this that you’re putting something like $200K a year toward retirement. How does this play into your retirement goals? How much do plan to spend in retirement, and starting when? What other assets do you have? I think you should consider these questions in designing your whole plan. You say you plan to put off borrowing from this policy as long as possible, but someone saving $200K a year doesn’t sound to me like someone who wants to put off his retirement for a long time. If this is over half your retirement stash, how can you put it all off until the end? I just sense a lack of an overall plan. You may have it and just not feel like revealing it on the internet, but I think it’s important to look at such a huge commitment in an appropriate context.

    Fourth, you mention your alternative is to invest in a tax-efficient mutual fund in a tax-protected account. Let’s say a total stock market index fund. Let’s say that this investment gains 10% a year, and you lose about 0.6% of it to tax-drag each year. (2% dividends taxed at say 30%). So it compounds at 9.4%. Optimistic? Perhaps, but certainly no more so than projecting a 7% return on this life insurance product. Even if you managed a long-term return on your insurance product of 7% as you are projecting, you’re still falling short by 2.4%. So let’s say you put $120K into either investment for 10 years, then let it compound for 30 more. Where do you end up? With the mutual fund you get $30.1M. With the insurance product you get $13.5M. Even if you tax the mutual fund at the current 23.8% LT capital gains rate, you still end up with $22.9M, or $9.4M more. As you can see, if there is significant disparity between the returns on the two products, the higher return can easily dwarf the tax effects (the difference would be even bigger if CG rates go back to 15% or if you die and leave this heirs, providing a step-up in basis.)

    This whole thing just doesn’t seem to be clearly better to me for someone in your situation. There are a ton of moving parts to keep track of. You seem perfectly able to run equity risk and don’t seem to need or want the guarantees that life insurance is best at providing. The tax benefits, in my opinion, don’t outweigh the probability of significantly lower returns compared with just buying index funds. The “no downside” benefit is pretty minimal when you’re looking at a 50 year horizon. When’s the last time equities had a negative 50 year return? So you’re really just getting the tax break during the growth (minimal) and the tax break during decumulation (significant, but probably not enough to make up for the lower returns.)

    Good luck with your decision. It seems you’ll at least go in with your eyes wide open.

  235. If one evaluates what the insurance company does with the investment component then they will realize why this doesn’t work out. They take like 96% of the money and put it in their general account which is mostly bonds/treasuries. They take the other 4% and purchase options. If the market goes down the options are worthless but hopefully the 96% can allow them to meet the guarantee. If the market goes up then they credit your account. If the market behaves in a manner that isn’t how they predicted then they are allowed to change the caps and participation rates. There is a reason these are labeled fixed bc that is what they are when you peel back the fog. You can’t get market like returns without the risk. Add in the unknown but ever increasing cost of insurance and odds aren’t in your favor.

  236. By some stroke of luck I found this website Saturday morning when doing a bit of research prior to signing up for a whole life plan with Guardian. I’m 29 and was *this* close to signing up for a WL plan. After reading every last word from Rex, WCI, Lawrence, DJ, Dan the Marks, et al., I feel like a weight has been lifted off my shoulders and I’m so thankful I came across this site.

    I’m not a doctor — though as a scientist I have worn a white coat for a good portion of my life; however, with that said, I’m so fortune to have come across this website prior to signing on the dotted line for a 500k, $6,000 a year plan which would have tied up my money for the rest of my life.

    Thanks so much for the service you provided here on this site, WCI and everyone else. You’ve all saved me a lot of money! It took me just over three hours to read in detail all the comments, so I’m certainly appreciative of how long it took everyone to contribute to this useful thread.

    Thanks again.

  237. You’re welcome Pey. I’ve found that I don’t even need to be negative about whole life insurance. If I just explain how it works in an unbiased way, most people will make the same decision you did.

  238. I was just looking through another policy that I was offered. I’m actually going to have one of the people that Lawrence mentioned review it so I can decide whether or not to proceed.

    I’m trying to keep this post short, so if you need some context please look at my prior posts.

    Basically this is a Variable Universal Life policy in which the cash value can be invested in a variety of mutual funds. The interesting thing about these funds are they seem to be specially designed for this type of policy. This particular policy has about 20 -30 possible choices for funds. Many of the Vanguard funds listed on the page below are funds that could be chosen.


    There are some funds from other companies as well, but I’m a big fan of Vanguard, so I suspect that if I do this, I would allocate almost everything to one or more of the Vanguard options. Of note all of the funds seem to have reasonable expense ratios, all but one are below 1% and many are below 0.5%.

    So it seems to me that this setup allows a much cleaner comparison. All I have to do is compare what the policy would yield compared to what would happen if I just invested all of the premium (~120 K/yr) in a similar fund in a taxable account and bought much cheaper term insurance.

    At first glance it seems the major benefit of the insurance is the tax advantage. No tax on dividends and when I want to withdraw, I take it as a loan (which is not taxable, but there is some interest to pay).

    There are also the minor advantages of a permanent death benefit and asset protection, but I don’t assign much value to those.

    The downsides seem to be
    1. All of the fees associated with the insurance product, which make it take a long time to even reach the breakeven point (~9-10 yrs).
    2. I still am limited in my investment options. I’m just starting to read about these particular funds and what make them different from regular Vanguard funds.

    One of the differences between this and the prior policy I described is the objection that Rex raised. In the other policy, while gains were tied to an index, it did not seem like the cash value was actually invested in the index. Admittedly that seems very odd, but I’m still not sure how important that is if your account credited in the manner stipulated.

    However, in this case, it looks like the money is actually being invested in the chosen funds, so there is no question about where the insurance company is going to get the money from. It is coming directly from the funds which are chosen.

    Anyone have any thoughts about or experience with this type of policy with regards to its differences from the one I described earlier. On one level, I suppose one could claim that they’re pretty much the same thing in a slightly different package. But this does seem like a better package to me.

  239. I’m not sure exactly what type of policy you are looking at and I’m no insurance expert, but I have had two Flexible Variable Life Insurance policies from John Hancock for just over 20 years. They are both $100,000 policies. Over the last 20+ years, one has cost me $18,0000 and it’s current cash value is $18,000. My wife’s policy has cost about $13,000 and has a cash value of $11,000. So basically I am out close to $2,000 after 20+ years. As a matter of fact, I am thinking of surrendering these policies to pay off some debt. I requested an in force illustration weeks ago and haven’t received anything yet. I have a feeling I am throwing away money on these policies and was hoping to have them reviewed by a professional. I have 2 Northwestern Mutual Whole Life Policies (which I have previously posted about). They are both also $100,000 policies and my cash value is about $16,000 more than I have paid in on each….and the death benefit on each policy has increased to $150,000. So basically, the 2 John Hancock polies still have a $100,000 death benefit and I am out about $2,000. The 2 Northwestern Mutual policies now have $150,000 death benefits(that continue to go up every year) and I am up $32,000. No comparison. I don’t know if this helps you but I figured I’d chime in. If anybody on this board can give me some advice on whether I should surrender the John Hancock polices, I would appreciate it.

  240. DJ- While obviously the return on the variable policies is crap, I’m curious what your return is on the NML policies. While $32K sounds great, it doesn’t necessarily mean the return was good over the last ? 20 years. It’s easy enough to calculate. All you have to do is post the cash value, how many years you’ve paid on, and how much each payment is.

    Edit- The poster sent me the info and the return calculates out to 4.1% per year. Not horrible, but not exactly great given either equity or bond returns over the last 21 years.

  241. Hey again,

    -Sorry it’s been so long. This is in regards to my post earlier on Jan 11th.

    -Sorry not a doctor, but you’re exactly right about putting it 41k a year into a qualified plan, probably not going to happen unless a SEP or something along those lines.

    -I’m using surrendering it after the 30 years as an example because I am comparing it to a term policy, which will be completely gone in 30 years. Obviously I would do whatever is most tax efficient when that time comes.

    – But I feel like if someone has enough money to allocate 50K a year just to their bond portion of their portfolio (not to mention in their 30s, where the bond portfolio would probably not even be half of their portfolio), then it is very safe to say they are already drawing enough income to filled up the tax brackets, so I think paying 40% is a reasonable assumption. But like I just said, you’re right, I wouldn’t just withdraw it all anyway, roll it into something else tax efficient.

    – And over a 30 year period, a 2% difference in average yearly gains is a very big difference.

    – 41,331 per year no taxes at 5% = 2.745 million

    – 41,331 per year no taxes at 7% = 3.9 million

    -No one really ever mentioned the policy to me in regards for using it for estate planning, I was just curious if it was beneficial in some way I wasn’t thinking of for someone to already have it, rather than get it in their 50s or 60s and pay an amount I am really not sure I want to know.

    -So we will forget about the Roth conversion and the pre-tax examples.

    – Sticking with my 5% per year gain in a bond fund in a rising interest rate environment. We will say you pay taxes every year on the dividend income at 30%, plus the sweet new Obama care tax. I picked 30% because I am saying half the 5% average gain per year is from dividends and the other half is from capital gains, which is probably generous as I doubt half will be from capital gains.

    – This comes out to be $2,136,580. Minus the $128,070 you paid in premiums, you get $2,008,510.

    – Compare that to the guaranteed minimum of 1,725,000 before taxes if surrendered. But even if you rolled it into an annuity or anything else you would still have to pay the taxes on your gains I think. I’m not sure which the gains would be taxed at, capital gains or income rate. So taxed at 44% income rate, that puts us back at the $1,567,920, at a minimum. Taxed at 24% capital gains, $1,639,320.

    – Or the illustrated non-guaranteed policy value of $2,784,225, which sure is probably unreasonable. But, taxed at 44%, $2,161,086. Taxed at 24%, $2,444,331.

    – Obviously this is not a normal circumstance, but in this case, would you say it is not that bad? Or please again, rip it apart :)

  242. I’m not really sure what you’re asking. You’re tough to follow. I agree that if a 30 year old can allocate $50K just to bonds that he’s saving enough that he can save it in whatever he wants and do fine. He probably doesn’t even need his money to grow, as long as he doesn’t mind working for 30-40 years.

    I’m not sure why you think bond returns would be half capital gains. I would assume your entire bond return is likely going to be taxed at your regular rate. But if you’re in high tax brackets and investing in a taxable account, you should probably just look at munis and skip the tax adjustment.

    However, your suggestion that he would be better off investing in a whole life policy instead of mutual funds, especially inside a tax-protected account, is probably unreasonable. I think it is unfair to assume a whole life policy will have a return that is very different from the going rate on long-term bonds, which is primarily what these policies invest in. But that’s the fun thing about investing. You get to decide what assumptions you want to make, then you make your decisions and you live with the consequences.

    This stuff isn’t as complicated as it seems. If you want to leave a specific amount of money to heirs, buy life insurance. If you want to leave as much money as possible to heirs, invest it. If you want to have money for retirement, put it into retirement accounts. It truly does work out best if you use these various products as they’re intended to be used.

    • I would say that if it were as simple as you just put it, then this discussion would have never been posted in the first place. And there are too many people reading this discussion and opting out of whole life without thinking twice about it. Don’t get me wrong, not your fault. You have done a good job of explaining situations. All my posts are saying is that there absolutely is value in buying whole life, even at a young age. I’m a huge believer in the market over a long term, but it has to be understood that it is never guaranteed. Neither is putting money into one company, but when buying life insurance you’re not just buying one company. You’re buying into an industry, and if one company goes under and defaults on its contracts it looks very bad on all companies so there is big incentive for other companies to not to let that happen, which is one reason why the Hartford life book of business was just purchased by prudential.
      – also if you’re judging which is a better idea and choose term because you can invest the difference and make more probably…you ACTUALLY DO HAVE TO INVEST THE DIFFERENCE to make it a better decision.
      – if to buy the whole life you are going to be cutting into your retirement savings, like would be the case with most lower income people, then don’t buy whole life, buy term. You take care if yourself before your children when it comes to both your futures.
      – but if you’re already maxed out on your retirement accounts savings, then it is not a bad idea for tax deferred growth esspecially when it costs much less per year when you are young.
      – and since we have decided you should save for retirement first, then after you have maxed out those accounts, you can’t compare whole lifes to investing the difference in stock funds as the Whole Life’s I have looked at are invested in bonds, so you have to compare it to bonds or bond funds. Which, do not look very enticing as interest rates should be on the rise in the coming years.

      And per your question about capital gains, bond mutual funds have the potential for capital gains taxes to go along with the dividends taxes. As I’m sure you know, I may have just not been clear.

      • 1) I agree that you do have to invest the difference. If you are so undisciplined that you need a mortgage or a whole life policy to get you to invest, then I agree you are better off doing that than nothing. That’s a pretty low hurdle to get over though.

        2) Regarding comparing to bonds, I think that’s a bit of a silly argument. What kind of an asset allocation should you use for money you don’t need for say….50 years? 90% bonds? I don’t think so. You can probably be pretty aggressive with it. 90% stocks seems a whole lot more appropriate to me for money I don’t need for decades. You also need to make sure you’re not comparing PAST returns for whole life with CURRENT bond yields. Assuming our low interest rate environment persists, future whole life returns are likely to be much more similar to current long bond yields than past whole life returns. If interest rates go up, those capital losses will affect the insurance companies portfolios just as much as the private investor’s portfolio.

        3) Yes, a taxable account gets taxed more than an insurance policy. I don’t think we need to reiterate that on comment # 286 on this thread. But the game isn’t about paying the least taxes. It’s about having the most money AFTER the taxes are paid.

        4) Just because you’re young doesn’t make choosing a whole life insurance investment smarter than a traditional stock/bond investment. Those same factors that make starting young work well for whole life have the exact same effect on a traditional portfolio. You’ll spend about the same amount of time-adjusted money on a permanent insurance portfolio is you start young as if you start at an older age.

        As I’ve said before, if you want to invest in insurance, knock yourself out. But you’d better be prepared to stick with it for the long, long term. Anything less than 20-30 years is likely to be an investing disaster. If you choose to invest in a traditional portfolio and change your mind in 5 years, no big deal.

  243. DJ keep in mind the cost of insurance in the VUL will continue to rise. Thus while the last 20 years have done poorly the next 20 could do even worse. VULs typically are a combination of very expensive insurance and very expensive investments. Hard for it to work out in your favor. It seems WCI already helped you compute your return on your whole life.

  244. Via Email from DJ

    Thanks for the advice. I think I am going to begin the process of surrendering the John Hancock variable policies. I am definitely going to hold on to the NWM policies. I realize that paying monthly is a smarter alternative. I do pay an extra $4.87 a month because of this. When I began these policies, it was difficult for me to come up with the entire premium for what was 4 policies total all at once, which was more than $4000. I could afford to do that now so I will look into paying my premiums all at once from here on out. I had a feeling that my “returns” weren’t that great for the money I have put in, but just the fact that I do have a rather large cash value at all is a positive for me. Other than my retirement accounts, I do have difficulty saving so this was, in a way a forced saving vehicle for me. I also did, and do continue to need some life insurance. By keeping the NWM policy, I will be able to select a pension plan from work that will allow me the greatest monthly income for the rest of my life. The drawback of selecting this option (50/50) is that my wife’s benefit from my pension will be cut in half should I die before her. But using the NWM policy as a backup, she would be compensated enough to make up for this. By looking at the inforce illustration, in 9 years (60 years of age), I no longer have to make any more premium payments. The policy pays for itself. If I die, at let’s say 79, which is about the national average, my wife will get $296,000. Also, at age 79, I have the option of cashing out for a guaranteed minimum $108,000. Even if I die early at age 70, my wife gets $234,000 and we have the option of cashing out at a minimum of $88,000. And these numbers just reflect my policy. My wife’s policy is identical to mine, so these numbers are all doubled for minimum cash values, and also for death benefit which would go to my daughter. This is very comforting also. To know that if something happened to both my wife and I at the same time, my daughter would receive a fairly large amount of money. All these benefits, especially not having to pay premiums for them in the near future, really seem to make the policy work for me. “Returns” since policy inception aren’t really a concern for me now. “Benefits” moving forward are more of a concern for me. It seems like a no brainer to keep the NWM policy. I do believe I am going to get rid of the JH policy though. It would make my life a lot easier. Thanks for the advice. Anybody else who has an opinion on this would really be appreciated also. Thank you.


    That was definitely a concern for me on the JH variable policy. I wasn’t real sure. I bought this policy off a neighbor and “supposed” friend. I don’t remember being told the premiums would change. I think I will be lucky to get even close to my money back. It looks like it’s time to cut my losses and surrender the policy. Thanks.

  245. in my opinion, i think its important that people need to realize that often it isnt a smart move to pick a single person pension vs joint using permanent insurance to bridge the difference just in case. The basic reason is that two insurance contracts arent cheaper than one since a pension is really a lifetime annuity. Most pension plans are such that you arent penalized for picking joint all things being equal meaning they anticipate paying out the same amount of money and frankly most pensions were previously setup with expected higher returns for the company which you would now have to get on your own or via a current insurance contract. There could be times when it would make sense to pick the single person pension option. For instance lets say my wife is older than me and isnt in good health but im in great health. Well very likely she will pass away before me and thus id go for the single pension on my life and have insurance just in case. The big problem typically is when someone picks the single and dies soon after retirement. The insurance then likely isnt enough money to allow the spouse to live at the same level. People assume that they both will live quite a while into retirement. This sort of defeats the purpose of having insurance in my view.

  246. Nice post. I was checking continuously this blog and I’m inspired! Very helpful information specially the remaining section :) I take care of such info a lot. I used to be seeking this particular information for a long time. Thank you and best of luck.

  247. Via email from DJ:

    I definitely understand your point of view and I may end up choosing a more moderate pension option, perhaps 66 2/3% or 75%. I may end up just taking the 100% joint pension which would give me the lowest monthly benefit but more security for my wife. After looking at the numbers (choosing the 50% option), if I were to die after my first year of retirement, my wife’s payments from my pension would be cut by about $20,000 a year but she would receive about $200,000 from my NWM policy. So that would make up for about 10 years of the loss of payments. Although that $200,000, earning interest, would offset the reduced pension by much more than 10 years, probably closer to 15. If she were to live past her mid 70’s and I died immediately after I retired, I would have made the wrong decision. But that would be the worst case scenario. I would think if I lived just 5 years after retirement, the 50% option would be worth it. 5 years of a markedly greater income, and a death benefit from NWM now increased to $225,000 would probably make it worth it. My wife would probably have to live to close to 100 for me to have made the wrong decision.
    The bottom line is, I’m a long way from even having to make these decisions. But I do beileve my NWM will play a big part in these decisions when the time comes. I just like to kick around some numbers and hypothesize what path I may take in the future. Our overall health and financial situation will surely come into play when the time comes. Thanks for your input.

  248. Although i find it odd that he doesnt post directly, i just want to make sure others appreciate the concepts and that he makes the best decision. First insurance is for the worst case scenario. When you make decisions that dont take this into consideration, typically you havent used insurance correctly. As you may know, if you had taken that money and invested it then this conversation would all be unnecessary bc you likely would have had more money to help with your decision. That cant be changed now and i personally thing whole life contracts that have been inforce for many years should be kept if at all possible and you are willing to leave some cash behind after your death. The costs are sunk and at that point the return going forward for a conservative investment can be appropriate. That doesnt mean someone should purchase one to begin with. Its just a different question at that point.

    Things one should consider in my view (and im not a financial expert and this is just my friendly advice as always) would be to consider delaying social security to age 70 to increase survivor benefits and making sure i overfunded the policy (paying yearly) as much as possible to below MEC levels with PUAs. NWM is a direct recognition company with a high fixed loan rate so if you take out loans to access the cash before death, it is more costly then some other companys may be and thus the usable cash before death is less. Id try to take out loans as late as possible in life if your finances allow it. Also NWM released their 2013 dividend rate which is again lower so keep in mind the illustration you have may over estimate the non guaranteed amounts (only time will tell but given our low interest rate environment with little end in site, im not super hopeful). If i were looking at what the death benefit could provide then id look at how much a SPIA will provide for that amount at different ages. Id in particular do this if the social security and pension benefits (as well as anything else) isnt enough to ensure economic safety until death. If i felt the social security and whatever pension amount is sufficient then id feel better about being more aggressive with the investing.

  249. Instead of coming to the blog and typing in a reply, he is hitting reply to the emails he gets by subscribing to the comments thread. Instead of landing on this page as comments, those emails end up in my email box.

  250. Lawrence was kind enough to send me the articles that he was referring to and they are really very good. They pretty much confirmed what I already knew, but the explanations were much clearer than what I had in my own head.

    At the end of the day it seems like a VUL policy is almost always a bad idea. The key (and this is where some people have it wrong), however, is the almost.

    I think that that given certain specific conditions, a VUL policy could be the better than any alternative uses of the money. I’m still in the process of determining if my situation meets those conditions. I’m also going to have one or more fee-only professionals analyze this for me. I’ll try and post an update when I have reached a decision.

    Thanks for all of the advice that everyone has given me on this.

    • Well, the vague answer was in one of the articles Lawrence sent. It is by the guy who runs evaluatelifeinsurance.org. As you know he is a fee-only advisor.

      “The writer has performed long-term analyses comparing the following specific alternatives, each of which is low cost: (1) the purchase of a low-load Ameritas VUL, held until death, using Vanguard’ very low cost, indexed stock separate
      account; and, (2) low cost term life with the difference between each year’ VUL premium and the term premium invested in Vanguard’ tax-managed, indexed stock fund. This comparison’ results might also apply to a VUL purchased from a life insurance agent vs. a load-mutual fund purchased from a financial planner. The choice of the
      VUL is better if substantial withdrawals/loans are taken in retirement. This is so even though distributions from the mutual fund in retirement receive capital gains treatment. If distributions are not needed, and the mutual fund is held
      until death, thereby incurring taxes only on annual dividends and capital gains distributions (which by the nature of a tax-managed fund are minimized), the term plus mutual fund choice is better. There are many varied buying situations,
      however, and we caution readers that the comparison we made might not apply in a different set of circumstances.”

      Of course this is not earth-shattering. This is the basic pitch that every salesman uses (but much more precise).

      My project for the next few weeks is to find out conditions which would make this true. Basically for a given policy you can plug in various average annual interest rates, various withdrawal/policy loan schedules, various tax rates (honestly, who knows what they will be) and then find out sets of conditions for which the VUL is better than term + investing the rest. Once you figure out those sets of conditions you have to sit down and decide how likely those conditions are to occur (lots of guess work here).

      The other problem here is that all of these policies don’t have fixed charges. So you have to account for the possibility that charges go up. This of course will further limit the set of possible conditions that make the VUL better.

      • Basically the question is do the tax benefits overcome the additional costs (assuming the same investments both inside and outside the account.) There are a few things to consider:

        1) Are the investments inside and out really the same? It would be nice to look at the track record even of “Vanguard funds” in the subaccounts and compare them to similar Vanguard mutual funds.

        2) How much do you value the death benefit?

        3) What are capital gains/dividend taxes likely to be at the time you need the money? Low-earners had 0% capital gains as recently as a month ago. High earners are now up to 23.8%. Who knows what they’ll be in 50 years? What we do know is that if you put the money into a VUL policy you’ve made your choice, and even if it doesn’t seem wise in 10-20 years, you’re still stuck with it.

        4) Don’t forget the benefits of tax-loss harvesting and the step-up in basis at death, nor the relatively favorable yields available currently from muni funds.

        5) Remember that you only pay capital gains on the earnings.

        6) Insurance costs in a non-guaranteed universal life contract are awfully likely to go up.

        I’m still waiting for a condition where the VUL is better. As you find them, please share. I don’t doubt there aren’t some, but I bet they’re pretty rare for the typical physician.

  251. Thanks for all your advice!! The article and posts are the help I needed. I am a 49 year old veterinarian ( colored lab coat, not white ) who is easily sold financial products. I have maxed my IRA and have 3 kids in college. I have $ 150,000 saved for college I am currently using to pay for college for them.
    I have wanted and needed life insurance to cover practice loans and my family. My whole life policy is 4 years in with $ 30,000 CV. It is a non recognition policy. I pay $12,000/yr for $ 1.1 M term and $ 400,000 WL . I pay the policy pre-tax through the business.
    My question is that my agent wants me to superfund my WL to the MEC, which is not a bad idea, but since I still need cash for expenses, then come back and take a loan right out. $ 2,000 in each month and then $ 2,000 out. This increases the DB and CV and still gives me exactly the same cash for expenses. The dividend currently sits at 4% with the loan/advance at 4.76% . I am losing .76% in the swing but since the 4% is on a larger number than the loan at 4.76 % the numbers work out.
    Please give me, and hopefully many other high earners, your take on this strategy.

  252. It doesn’t matter that the 4% is on a larger number than the loan. You’re still losing money on the loan.

    This bank on yourself idea depends on the loans being a good deal or else you don’t take them. It wouldn’t increase your cash value to do this. It may increase your death benefit however.

    I think buying life insurance with money you actually need for something else isn’t very wise. You’re putting yourself into a situation where you have to borrow every month (even though it’s a small amount and it’s from your own life insurance policy) to meet expenses.

  253. you are not very clear about what you are doing or why (please address Lawrence’s question)…unfortunately many people complicate whole life to make it appear better. Most of the time this is a mistake. Definitely its a mistake within a qualified plan in my non professional view. I certainly paid a serious price for make this mistake. It sounds like you are using it for accounts receivable. If so then you may wish to review this. Keep in mind this guy sells insurance.

  254. Thanks for your thoughts.
    Lawrence- the the premium payments are coming directly from my business checking like all other practice bills.

    Rex-I am in no need to borrow at all currently for any acccounts receivable. I think the agent is trying to get me to use it in a BOY manner. I am told( truthfully ? ) that the extra money put in raises the CV and thus then the dividends earned. Since I currently have much cash needs with the kids in college, he then recommends cash in and loan out so I still have the same monthly cash available for all my bills/needs.
    But as always, at what cost?? The loan interest if left unpaid then accumulates and compounds, just like earning interest does but in reverse. Does the cash into the policy increase it in a way that is better than the loan out .
    As always, I do respect your opinions

  255. Just because you are paying the premiums out of your business account, does NOT make them income tax-deductible.

    There are very few circumstances in which life insurance premiums are income tax-deductible. You should discuss them with your agent and CPA. From what you state, you are simply paying for a personal life insurance policy from your practice. This would NOT qualify as one of those circumstances.

  256. The life insurance is a requirement of my practice remodel loan and the lender is named as a beneficiary for the portion of insurance that is needed to cover the loan balance. The rest goes to my family
    Would this still qualify? Is there a tax law that would require term life over cash value life ? I have been told ( correctly? ) that this is done commonly in larger corporations for executives. My premiums are never over $50,000, heck my cash value isn’t even there yet. I am currently the sole owner of my corporation.
    Please give me your experience

  257. While you might have done a collateral assignment against your policy to guarantee that the lender is repaid in the event of your death, it is still a PERSONAL life insurance policy in which the premium payments ARE NOT income tax-deductible.

    In the event of your death, the lender would receive a portion of the proceeds as their “interests may appear”. Therefore, as the loan is paid off, the amount paid to the lender decreases and, as a result, the amount paid to your family increases.

    As an FYI, one would never make a lender the beneficiary of the policy for a specific amount. Otherwise, the lender may get a windfall upon their death (as the debt is serviced and ultimately paid off).

    Term life insurance is usually used or purchased to be used as collateral for a loan. The plan you refer to (that is used by corporations) is known as a Non-Qualified Deferred Compensation plan.

    The $50,000 that you refer to is the ability for an employer to take an income tax-deduction for up to that amount of death benefit on a group term life insurance provided to employees.

    Finally, as a result of the collateral assignment, you have transferred your right to be able to take a direct loan against the cash value of your policy. Therefore, in order to do so, you would need written permission from the lender (they, as assignee would need to sign the loan request form) in order to do so.

  258. Im curious if it was your idea to purchase the policy with pre-tax dollars. Even when done correctly, its typically a very bad idea. I wouldnt even be surprised if you had an accountant who didnt understand what can and what cant be deducted. Id get some new professional help to get you out of this jam and i wouldnt be surprised if you were under insured given what you have written. Id recommend getting cheap term. Let me also add ive made a mistake much worse than what you made in the past so dont feel bad. Just fix the problem.

    • I read almost all 200+ posts today, then I looked at the clock. Oops! It was an engaging debate for the most part. Here’s my background. I started in insurance, was taught all the sales techniques, etc. Then I started to study the product myself. I moved away from insurance and into true advising (flat fee based), part of it was because I love to build relationships and actually being available to help people (without them having to wonder what my motives were) and I could only do that by having a small client base, not moving from one sales opportunity to the next. The other reason is because I found permanent life insurance to have a very small fit and purpose as far as financial products go. When asked about permanent life insurance I like to say there is a small bit of good, a lot of bad and a ton of ugly out there in terms of product, design, companies and agents for that matter. I know, I worked beside them for a few years. I watched them drink the cool-aid without doing the math. So let me just say a few things.

      #1 – Not all insurance salespeople are bad, some really feel like they are helping people. Sometimes they just don’t even know what they should know or that they should know it. However, there are a TON of sharks out there. I spend a lot of time publicly speaking on campuses to physicians. I try to combat against those who would try to sell permanent life insurance to a student, resident or fellow and while wearing a “planners” hat for goodness sakes.

      #2 – It’s rare, but if a client is really concerned about risk coupled with a potential long term disability (BOTH), it is a potential remedy…permanent insurance that is. IF they do everything they need to do to make the policy efficient (which has been discussed at length in previous posts, such as carrier selection, policy selection, reduced premium period, overfund, etc…) They would have purchased low risk investments anyway and in the event of disability it would fund the policy so that a sum would be available for use in retirement. Otherwise, depending on the situation, someone may not have enough left over to continue saving for retirement from their disability policy benefits being paid.

      #3- When I was doing my research I found that really well devised policies can have an actual IRR (after all expenses and loads) around 5.5% long term (this was research done on actual polices “in force” over several decades and these were people starting UNDER the age of 35. If you’re over 40, forget it!!)
      Yes, that rate can fall in the future, but that would most likely mean that actual bond rates someone could invest in fell as well. So I guess they’d both suffer. In which case it would be more akin to a savings plan. (Perhaps they should ask themselves if they’d be ok with a 4% long term rate of return or should they suck it up and change investment risk/strategy)

      #4 If, for some reason, this profile was met, I would suggest finding an advisor (who had no financial incentive by adding the product) to research and structure the product accordingly. Be prepared to “buy and hold” the product for the rest of your life or DON”T BOTHER BECAUSE YOU’RE FLUSHING $$ DOWN THE TOILET if you surrender it early. And back to point #2 – it’s rare. If you are funding college or anything with a finite timeline use another product.

      I have a CFP program degree, by the way, but being a CFP doesn’t mean much either. I know a lot of CFP’s who have their CFP so they can SAY they have a CFP and sell a lot of insurance. Not that selling insurance is evil. It’s a necessary evil. :) I’m just saying – make sure you know how someone gets paid, their motivations and trust your instincts more than their flashy credentials. I would start by staying away from “advisors” who are with firms that are affiliated with insurance carriers. That’s a dead ringer for someone who could easily steer you down a road you don’t want to be on. O.k. I’m digressing. Hope that helps!

  259. The disability angle is misleading in my view. What i find happens is the doc buys disability insurance (own occ individual) and then the agent then gives them the impression that permanent insurance will provide additional disability protection and is a good investment to boot. Thing is the disability rider on these policies are only triggered if you are completely disabled and unable to do anything. Well that is a rare event (which is also why the rider isnt so expensive). Bottom line is that it isnt a good reason to be any more in favor of permanent insurance. In my view, one should just educate the client there is a reason why the rider is cheap and just go with their own occ individual disability.

  260. i should also add it is very difficult to know which advisors are affiliated with insurance companies unless you dig. The name of the company will not mention insurance in it and they wont volunteer this information in my view even if the company is a completely owned subsidary. They will give you the impression they are advisors or wealth management people or something to that effect.

  261. 1.) Great discussion thus far. I was suprised to see that this thread is still active (pleasantly). Im curious as to what your advice would be to someone who has been recruited into insurance, but is now seriously considering a career in finance for the purpose of having a rewarding career built on dignity and service in the client’s best interest. 2.)I find that the idea of earning interest on money that is not in an account seems like a great deal for people who are maybe approaching retirement and could fund something (on a healthy family member) for the seven years before they retire, skirting the MEC line, and then use the “infinite banking” while paying close attention to dividends, and having a backup to switch (or cash surrenders) to if the loan/dividend rates got upside down while enjoying a guarenteed principle. 3.) However, if people can actually get 10% in the markets, that also sounds like a great approach for 30 years while the term covers their lost earnings potential in the event of their death. 4.)How is it that some people quote the S&P as earning 10% for the last three decades, and others quote it at .25% or some horrible number? Can anyone direct me to a good resource to help me get a real sense of reasonable expectations from the markets, and how people twist the numbers to get either/or figures that suit their agenda. 5.)Also, feel free to e-mail me if you would like to make a positive impact on a young, aspiring professional. I do not want to profit from providing bad advice, nor do i want to exclude good advice due to a lack of understanding about how a particular product should be expected to perform. 6.)Is there a career in finance for someone who, 1 month into an insurance job is struggling with these kinds of questions? Or should i spare myself the burden of providing financial advice to people i care about, in a system that seems hard to understand (or agree on) for even the most seasoned financial experts? 7.) looking for unbiased direction and input on how to approach the world of finance as an advisor. Thank you.

  262. Im not sure this blog can give you the kind of advice you need although it isnt my blog and most of us including myself arent professionals in the industry. The infinite bank thread covered why this is a bad idea most of the time. You have to decide what you are and what you are not. If you are a sales person then you sell. Whenever one shops for a car every dealer says theirs is the best and obviously that isnt true. They dont feel bad about what they do.

    If i were in this business for physicians then id push term and disability. They make sense and offer reasonable reimubursement. Id offer low cost advising with the funds invested in vanguard index funds. This wouldnt add much but in combination with the term and disability id probably do okay. I would have to be able to ignore the Koolaide about permanent insurance and focus on the truth. If i wanted to sell some, id sell relatively small policies overfunded to just below mec levels or no lapse gUL but it would be a small part of the business. I certainly wouldnt get people to put tons of money into permanent insurance without a need for a permanent death benefit or a desire to have one knowing the true costs and what they are giving up.

  263. Hi,

    Great Article and great posts. Thx everyone.

    A couple of things. If you are planning to buy a Whole Life Insurance policy, make sure you buy one from a Mutual company such as Northwestern Mutual, Mass Mutual or New York Life. They are all great companies. However DO NOT buy it with a publicly traded firm. They work for the shareholders unlike mutual companies. Same applies to IRA’s. Go with companies like Vanguard. Mutual companies is always the way to go if you have that option.

    Also, I bought in Whole Life policy with Northwestern Mutual a few years back. I am 29 yrs old, I invest in my 401K, Roth IRA, Employee Share Purchase Plan through my employer and I have part of my savings in a taxable account apart from my emergency savings. The reason I bought the Whole Life policy is not because its an investment, but because it has a guaranteed death benefit for my family. Its a great diversification tool as I have no clue as to how the markets will perform in the future and how my health and ability to perform in my job will be over the period of next 30 yrs.

    If you have low credit card debt and are already investing in 401k, IRA or both then if your finances allow you to, I would recommend getting a Whole Life Policy from a mutual company. It requires patience, discipline and living below my means. You can invest the difference and predict based on historical returns but you cannot predict your ability to perform in the future. Whole Life is a long-term tool that will make sure my family gets a guaranteed death benefit incase I lose my ability to perform in my 30’s, 40’s or 50’s. With term, my policy would expire one day and if my investments are not doing too well at that point in time, then I am setting myself up for difficult/stressful times in the long run.

    • I’m happy you like your policy. I’m not sure getting a permanent death benefit is the best way to hedge against the possibility of you not being able to retire (and thus be financially independent) at your anticipated retirement date. Personally, I prefer to buy a slightly longer term than I plan to need. If I reach my goals on time, I just cancel the rest of the term policy. Downside is that I spent a few hundred dollars I didn’t need to by choosing a 30 year term instead of a 20 year term.

      I don’t see whole life as a huge diversification tool because the company invests in the same assets the rest of your portfolio does. If the markets do poorly, your whole life dividends will be low. If they do well, your dividends will be high. That’s not exactly ideal for diversity. The actual guaranteed rate scale is so low that it, by itself, doesn’t provide enough of a return to add any useful diversification.

      I do like mutual companies for the reasons you cite.

  264. Im always dissapointed when i hear people think they are diversified bc they have purchased whole life. Since insurance companies invest primarily in bonds/treasuries there is no diversification. Its more like concentration with additional costs. While it is true that one has no idea how the market will do, one can easily see that dividends for whole life have been going down for about 2 decades and are related to the low interest rate environment. Thus im not personally expecting them to rise any time soon. Typically when interest rates rise, divideds lag behind by several (about 6 from my reading) years.

  265. Dear People of the internet.

    When it comes to YOUR financials you need to engrave two points in your minds:

    Point 1. Never ever (and I mean never) seek financial advice from strangers. Ever. Public forums, blogs are even worse because you are exposed to opinions of many people that you have never met before.

    Point 2. YOU are SOLELY responsible for all your financial decisions. There are dozens of financial products – stock, options, bonds, loans, insurance contracts, mortgages, warrants, etc with dozens of variations in each. It is YOUR RESPONSIBILITY to understand what financial product you are buying/selling. It is your responsibility to research and understand how particular financial product works and apply it to YOUR financial situation at a particular POINT of your life. Nobody holds a gun to you head and requires to purchase anything. If it is a complex financial product and you do not have time/wiliness to understand its inter-workings then move on. There are number of other options available to achieve your goals. Simply declaring that a particular product is bad or good because it does not work for you or worse because you do not understand it is just amateurish.

    • It’s hard to take your second suggestion seriously after reading the first one. :) Heaven forbid someone be exposed to the opinions of people they’ve never met before. But I do agree you’re responsible for your own decisions.

      • I agree blanket statements are irresponsible, that being said I don’t agree with the owner of this websites opinions, but they’re his and he is entitled to them. Every tool has a place and its no different in the financial planning arena.

      • >>>It’s hard to take your second suggestion seriously after reading the first one. :)

        I know. And you are not the only one who does not take this seriously. This is my point precisely. You would rather blame your parents, your teachers, your neighbors, your financial advisers, your broker, your government. But never yourself.

        >>>Heaven forbid someone be exposed to the opinions of people they’ve never met before.

        :-) classical straw man fallacy.

        >>>But I do agree you’re responsible for your own decisions.

        Yes, I am.

        • It was essentially a quote of your statement above:

          “Never seek financial advice from strangers.”

          That’s hardly a straw man, and if it is, it’s YOUR straw man.

          I found the fact that you included a second suggestion humorous since you had just finished telling readers not to take advice from strangers on the internet (i.e. you.)

  266. I stumbled onto the blog and this post by accident but it is super interesting for me to read.
    I think that to view insurance of any type as an investment is 100% wrong. It is protection. Buying insurance premiums is the cost to offload risk from yourself onto an insurance company. My investment portfolio, though well diversified, also has protection. Every 6 months or so I buy protection in the form of Put options and then roll them forward as they come closer to maturity (usually on the S&P 500 as it generally correlates to the market risk of my equity portfolio). This certainly does erode my total return each year. When the dot-com bubble burst I did not lose nearly as much money (on paper) as I would have otherwise, and as I kept putting money into my equity portfolio each month as the market crashed and then recovered, I earned an even large (paper) return when the prices came back up. The same situation happened in the 2008-09 crash.
    I still buy Puts, and who knows they may never ever need to be used again. Or they might. But I am paying to give that unknown risk to somebody else. And the ones selling me those puts likely make money month after month. Until they don’t or get blown out in one month. Or they may never blow up. The fact is that a catastrophic event can conceivably happen, and as long as I can afford it, I rather pay to avoid that scenario wiping me out.
    Why do I bring this up in this thread? Because life insurance (of any sort) is a put option on your own life (or the life of a family member, business partner, etc.) At least that is how I view it. Owning a policy, you pay a premium in order to prevent a catastrophic event from wiping out your life and the human value, future income generation, and ability to repay any debts you may have had. This is the same reason you should have home and auto insurance. Or long-term disability insurance. Or health insurance. You get the idea, and so far, I don’t think anybody will disagree with me.
    The unique thing about life insurance, is that we all will die though. Not all of us will be hospitalized, have a serious car accident or have their house burn down. Not all of us will be sued for a slipper walkway or become permanently disabled. So should we stop paying for those sorts of protections? (Maybe yes, but I don’t like having that much risk on!). So since you know you are going to die, and you can get paid out to do so in excess of whatever you put in (unlike homeowners etc. which may never be claimed) it’s a great form of protection!
    (sorry this is a long comment!) The basis of modern economics (Smith, Ricardo, Mackay etc.) is that the real price of something is based on the amount of labor required to produce it. That means, if you want to get down to brass tacks, the price of your life is your ability to work and make an income over your lifetime. This may come off as sounding obvious, but most folks do not think of their value this way. They look at their stuff (or lack of stuff) that they have accumulated or the amount of money they have in the bank. They look at how much cashflow they save or invest or spend. Raising a family, supporting kids or elderly parents, taking on debt and using leverage- are all only achievable because of your labor past, present and future. I will buy a put option of that future ability, my true value on this earth, any day. Long term disability insurance in the case I cannot work, and whole life insurance for when I die (from a mutual company).
    One point regarding returns on S&P 500 that many people overlook, is that the capital gains returns have under performed even bonds over the long term. It is only when dividends are re-invested that you achieve the 6%+ annualized return: https://sphotos-a.xx.fbcdn.net/hphotos-prn1/551367_10100985274853095_1083104808_n.jpg

    And just one last point as to why whole life as opposed to term (and invest the difference). #1 I can afford it. #2 I own my home. #3 I have a young family. #4 I am in a high tax bracket. #5 I have term life through work. #6 I don’t care about the cash value as an investment, but I can draw it down after I retire IF i need to. #7 just because I CAN potentially self-insure by age XX doesn’t mean I don’t want to leave my family a death benefit, to leave them better off after I am gone, even if I am gone at age 99. #8 since i know i will die, i want the death benefit even if I don’t NEED it (for my family). #9 My dividends get reinvested automatically.

    • Reasons 1, 2, 3, 6, 8, and 9 are silly.

      Reason 4 can make sense since the higher the bracket the less bad investing (even if agents don’t want to call it that) in a whole life policy is when compared to a taxable account. Reason 5 probably doesn’t matter as you generally can’t buy enough term life through an employer. Reason 7, a desire to have a permanent death benefit is a good reason to have a whole life policy. But the assumption that you’ll leave them better off by buying life insurance instead of investing the difference is a pretty big assumption and really depends on when you die.

      I’m curious how much of your return you figure you’re giving up by buying puts? Very Talebesque technique….i.e. that people underestimate the likelihood of black swans hitting.

      • #1 I can afford it. #2 I own my home. #3 I have a young family. #4 I am in a high tax bracket. #5 I have term life through work. #6 I don’t care about the cash value as an investment, but I can draw it down after I retire IF i need to. #7 just because I CAN potentially self-insure by age XX doesn’t mean I don’t want to leave my family a death benefit, to leave them better off after I am gone, even if I am gone at age 99. #8 since i know i will die, i want the death benefit even if I don’t NEED it (for my family). #9 My dividends get reinvested automatically.

        I don’t see whats silly about his reasons for his ownership of a policy?
        1. If you’re in a high income tax bracket you probably can’t contribute to a roth account without the qualified plan conversion trick annually. Why wouldn’t you pick up the tax advantages of the policy if you already have significant assets going into the market?
        2. If he already has the mortgage paid off he doesn’t have the choice to accelerate that payment (and who would when interest rates are this low and high income earners need the deduction anyway)?
        3. If he has a young family than he has the ability to let the policy grow to what is a likely 3 percent relatively tax free rate of return he can use it for college (doesn’t count towards fafsfa) and he it gives him maneuverability that qualified plans or earning on roth accounts wouldn’t have.
        6. Is the secret to how life insurance SHOULD be used. It allows you to distribute the assets to yourself much more liberally than you would without it in place, longevity risk and inflationary risks are drastically reduced when you leverage the death benefit. Medical advancements makes distribution of assets much more difficult because people just can’t beat inflation and control market risk over a 30 year period when they’re in distribution.
        8. Is the same as six. It just gives you estate planning liquidity especially if you have property and have to deal with state transfer taxes.
        9. I’ve got nothing for nine.

        You can generate a larger net worth with buy term and invest the difference, and you may be able to mitigate longevity, inflationary,market,interest rate and taxation risk for the full 20-30 years of retirement, but all I’m saying is less things need to go right when you pick up some of the benefits from whole life insurance. At the end of the day this is all matter of opinion, but Whitecoat it would be fun to discuss this with an actual fact pattern so we all have the same context and could all use the same assumptions. Cheers thanks for the discussion.

        • 1. Because the tax advantages don’t make up for the costs and low returns.
          2. Irrelevant. There are plenty of places to invest besides paying down your home mortgage. It’s a straw man argument.
          3. I don’t see what a young family has to do with anything. If you have a young family, you need insurance, and probably a big fat term policy. You don’t need whole life insurance because you have a young family. You can buy insurance when you’re young, or you can buy it when you’re old. Actuarially, it’s equivalent.
          6/8. “Distribute the assets much more liberally than without it in place.” If you’re suggesting you can spend all your cash because the life insurance policy provides for money you want to leave behind, then I concede that’s a reasonable reason to buy life insurance (although there are certainly alternative approaches with a higher expected return). However, I don’t buy that people “can’t beat inflation and control market risk for 30 years in the distribution phase.” Even if they could, life insurance certainly isn’t the solution, an inflation-indexed SPIA is. The estate tax benefits of life insurance are highly overrated, especially given the $5M/$10M exemption currently in place. You have to have a very high net worth AND it has to be illiquid and/or with a very low cost basis for this to be beneficial. Agents like to throw out “estate tax benefits” but the truth is almost no one needs them, including doctors.
          7. You can leave them better off by leaving them a huge taxable account with a step-up in basis at your death. You certainly don’t have to leave them a life insurance policy to leave them better off.
          9. Reinvested dividends? Really? Last I checked you could get that with a mutual fund and many stocks. You certainly don’t need to buy a whole life insurance policy to have an investment with “reinvested dividends.”

          Now if he wants to put 5% of his gross income into whole life insurance and is already saving 15% toward retirement in more traditional assets, then I say “Fine.” He should do just fine. But it isn’t because he’s chosen some superior investment vehicle, it’s because he has a high savings rate.

          • To address some points, my words have become twisted already.
            I already said I don’t consider Whole Life Insurance is an investment, rather it is protection. There is no need to entertain the Expected Return or Required Returns of various investments, because that opportunity cost is already forgone and paid up as protection.
            Paying off a mortgage is not investing either, it is paying off debt. Buying the house perhaps is the investment, but the mortgage debt is independent of the market price of the house (I can buy a house for $500k today with a $400k mortgage and sell it the very next day for $600k, with the same mortgage- I have made the difference between 500k and 600k = $100k regardless of the mortgage.) Paying of debt is not an investment.
            If you choose to use the leverage created by owning your home on credit to invest in something worthwhile, that is another situation, but do not confuse paying down debt with investing. If you buy a fancy dinner with your credit card for $1000 and you choose to pay down that debt, there has been no investment and no asset accumulation either. (just an example).
            As for taxation, I strongly believe that our low tax environment cannot last much longer, despite folks like Grover Norquist’s influence on Republicans and other lobbyists who wish to sustain such low rates. Simple mathematics suggests that the country needs to raise more internal revenue to fund its obligations and near-term spending. If taxes increase, as I suspect they will, the real returns generated by income, capital gains, interest and dividends will be eroded to an extent that the tax benefits will become much more attractive. (Yes, I am in a sense speculating on tax rates and policy).
            When a mutual fund reinvests dividends for you, fantastic, but you are most likely also paying fees which erode much of those excess returns. Additionally, those reinvesting dividends back into funds carry a large tax burden. Each reinvestment is a separate purchase of fund shares, with its own tax ramifications when shares are sold. It also causes problems for fund managers because over time it causes the portfolio to become out of balance, causing excess transactions in order to rebalance the fund according to its IPS.
            As with stocks, you can set up DRIPs to automatically reinvest for you, but surprisingly a great many investors of dividend paying stocks have them paid out in cash.

            • I think I’m using a broader definition of investing than you are, but I assure you that most people purchasing whole life insurance are doing so because they feel that by doing so they will have more money to spend later than they would have to spend now if they didn’t buy the whole life insurance. That’s investing. So is putting money in the bank earning 1%. When you have a sum of money and have to decide between paying down debt with a guaranteed return of 5%, putting it in the bank and earning 1%, buying an index fund and possibly earning 8%, or buying a whole life insurance policy with a return that depends on your life expectancy and the ability of the company to pay dividends in the future (but likely on the order of 2-5% a year if you die about the time of your life expectancy), I consider them all “investments.” You’d probably only consider the index fund an investment.

          • Again, it’s impossible to have any real discussion about the merits of a strategy on a generalized basis. Every person’s fact pattern is unique so again it’s easy to discredit the other person and assume they missed something, when in fact it’s just a product of speaking in generalities. So with that said my response:

            1.Because the tax advantages don’t make up for the costs and low returns.

            I am going to disagree. If you have someone already in the highest marginal tax bracket and then you consciously decide to exacerbate that problem by heavily using non-qualified investments than Uncle Sam will love you, and your CPA is going to hate you. Even if you offset gains and losses your tax bill will be atrocious and its not just the dollar you lose unnecessarily to taxation it’s the ability of that dollar growing into the future that is really devastating. You might have something else in mind, and again we need to anchor the discussion in some hard data set because I can’t know the assumptions you’re working off of.

            2. I am not sure why the original poster brought this up, but because of the high income of surgeons it wouldn’t make sense to pay off a mortgage at an accelerated rate given the current interest rate environment. I think he was trying to illustrate that he has everything else taken care of so he didn’t want to bring the potential ancillary conversation revolving around extra mortgage payments. Either way it isn’t important.

            3. I don’t see what a young family has to do with anything. If you have a young family, you need insurance, and probably a big fat term policy. You don’t need whole life insurance because you have a young family. You can buy insurance when you’re young, or you can buy it when you’re old. Actuarialy, it’s equivalent. 6/8. “Distribute the assets much more liberally than without it in place.” If you’re suggesting you can spend all your cash because the life insurance policy provides for money you want to leave behind, then I concede that’s a reasonable reason to buy life insurance (although there are certainly alternative approaches with a higher expected return). However, I don’t buy that people “can’t beat inflation and control market risk for 30 years in the distribution phase.” Even if they could, life insurance certainly isn’t the solution, an inflation-indexed SPIA is. The estate tax benefits of life insurance are highly overrated, especially given the $5M/$10M exemption currently in place. You have to have a very high net worth AND it has to be illiquid and/or with a very low cost basis for this to be beneficial. Agents like to throw out “estate tax benefits” but the truth is almost no one needs them, including doctors.

            I am just going to say that I assumed they had the appropriate amount of term insurance even before permanent insurance was brought into the discussion. The right amount of insurance is always forced and foremost so I assumed that was taken care of. Economically maybe its actuarialy equivalent but tell that to someone who develops a serious illness. Life insurance isn’t the solution for the distribution phase of retirement because of the asset, but you’re allowed to spend the assets you’ve saved because you have the death benefit to care for your spouse (again assuming there is one). I have a hard time believing you will save your entire career and then hit retirement and purchase an inflation linked spia. What happens to your spouse if two years into the distribution you get hit by a truck? You just squandered all of that disciplined investing you’ve done for the last 30 years but making that decision. I am assuming you didn’t mean you would use all of your assets in the spia, but if that’s the case you still are chained by the inflation, interest rate, longevity, market risk and tax conundrum. You said you don’t buy it but I have clients who’ve come to me because they experienced the market crash of 2008, and the radical decline in interest rates. They’ve experienced a 50 percent drop of income through no fault of their own. I get it we need to talk about numbers but these conditions are happening right now, and what happens if income taxes rise rapidly in the next 10 years. Then they have a compounded problem. Again we would need to understand each others perspective and analyze the conversation based on a set of fact patterns.

            7. You can leave them better off by leaving them a huge taxable account with a step-up in basis at your death. You certainly don’t have to leave them a life insurance policy to leave them better off.

            No arguments with the beauty of a stepup in basis especially with the continuation of the portability rules in conjunction with the estate exemption. Its not as important to worry about estate taxes, but life insurance is especially effective when property is involved because of state transfer taxes. Yes, you could use the securities with a stepped up basis but what happens if someone dies in a major correction, do you really want to liquidate those positions to satisfy the property transfer tax.

            9. Reinvested dividends? Really? Last I checked you could get that with a mutual fund and many stocks. You certainly don’t need to buy a whole life insurance policy to have an investment with “reinvested dividends.”

            Yea I still don’t know what the original posters point was.

            Now if he wants to put 5% of his gross income into whole life insurance and is already saving 15% toward retirement in more traditional assets, then I say “Fine.” He should do just fine. But it isn’t because he’s chosen some superior investment vehicle, it’s because he has a high savings rate.
            I agree, but I don’t consider permanent mutual whole life insurance an investment. I just think it’s a safe vehicle with tax advantages that I can count on a 3-5 percent tax free rate of return with liquidity up to basis, that gives me a point of leverage during retirement distribution with a larger margin for error over the long term. Life insurance isn’t an amazing “investment” that’s going to earn 15 percent. Its just a boring old product with some unique benefits that’s going to what you expect it to do. That’s my perspective. I’d love to continue the conversation with a data set, but if we can’t do that I wish you luck on your strategy. At the end of the day rate of savings always beats rate of return.

      • I would say that in a positive return year, the puts cost me 10-15% of my positive return (If I were to make $1000 return this year without the options, now I make $850). On a negative return year, however, I only lose 15-20% of what I would have lost (If I were to have a -$1000 return this year without options, now I only lose $150). Also, by buying my long positions on the dips it amplifies subsequent up moves.
        Taleb is an interesting guy, and I disagree with much of what he has to say actually, but I do agree with him on some points. He wasn’t the first person to bring up fat tails. Equity options traders have been pricing in skew to the downside since the 1980’s, and kurtosis risk has existed since the Dutch were buying tulips.
        People (individually and collectively) do indeed make poor estimations of catastrophic and/or very unlikely events. People have no idea in general how to value risk. People are naturally risk averse, and at the same time overly optimistic and short-sighted. If I were to ask you to estimate the chances of some person out in the world getting cancer, getting a divorce or dying due to cigarette smoking, your answer would on average fall at the half-way chance mark, or at best, a little less than that. However, if I asked you to estimate your own chances of facing the aforementioned perils of life in comparison to other people, your response would be significantly different. In particular, you would feel that your odds of getting a divorce or cancer are lesser compared to any other person. This has been documented by academic research over and over. And it applies to this entire thread. It is the irrational risk of thinking we can be rational about risk that is pervasive. Even when we take the behavior of humans out of markets and create algorithms for computers to trade with other computers, we still experience erratic price movement, volatility and the now more and more frequent phenomenon of ‘flash crashes’.
        Taleb’s more recent work on fragility is very interesting in regards to something like whole life insurance, which he would call ‘anti-fragile’ in that it becomes more robust the more there is crazy 6-sigma events or black swan catastrophes. In a sense, a product like whole life benefits from shocks and volatility in the world- it actually becomes more worthwhile the more the sh*t hits the fan.

  267. I’ve been reading this blog for sometime because I enjoy seeing how people perceive the planning market place, the products and the people. I’m a 28 year old financial planner and I put 5 percent of my income away into whole life insurance(mutual company with waiver of premium and the ability to over-fund),5.5 percent of my income into roth iras (65/35 split) and 9.5(I contribute some and some of the rest is matched) percent of my income into a 401k (again 65/35 split). I feel that this give me an appropriate balance of taxation and market risk looking into the future. If income taxes increase or decrease I can increase or decrease my contribution to any of these to match the environment. The insurance coverage is roughly 500,000 and will be offset(I don’t pay anymore into it if I don’t want to) at age 40 at which point I will increase my contribution to qualified plans, or diversify into real estate. I feel the death benefit allows me to annuitize (think single premium immediate annuity) or a quicker amortization of the assets I’ve accumulated because I know when I die my better half will be taken care of. I won’t be forced into an interest only income distribution in retirement(which always turns into a forced pay down because of inflation,market risk and interest rate risk). I understand mutual whole life insurance is demonized, and if at the end of the day you don’t feel like it fits in your plan then don’t use it. Planners shouldn’t be one trick ponies and while I think the margin for error is less without the insurance, you are still able to produce an acceptable retirement if you simply have the discipline to save. I think my industry has done a terrible job of causing the general public to overvalue rate of return and undervalue the rate of savings. Lastly, for every given client the argument of term and invest the difference compared to utilizing permanent insurance is different. Each person has a different set of variables and different economic circumstances and time periods dictate which strategy outperforms the other. Whole life insurance isn’t bad because bad planners use it improperly in the same way stocks aren’t bad because some asshole churns an account. I think this is interesting and I’m happy to defend my position cordially if you wish. Otherwise keep up the good work your blog is interesting(even if I don’t agree with all of it).

  268. Ken and Brian-

    Let’s get some disclosure out of the way to begin. First, do either of you sell whole life insurance for a living? I suspect that you do, but I don’t see where either of you has yet stated it one way or another.

    Yes, individual circumstances vary, but my argument is that for the vast majority, the downsides of whole life insurance outweigh the upsides. If someone has a keen understanding of the product, and still wants to use a small portion of his money to purchase it, then fine, so long as he can meet his financial needs despite the low expected return on this product.

    Like with the estate tax benefit of whole life, the income tax benefit of whole life is also generally overstated by its sellers. There are plenty of taxable investments with minimal income tax burdens including stock index funds and municipal bond funds. A reasonable combination of these is highly likely to outperform a whole life policy on an after-tax basis when measured from the time of purchase until the person’s life expectancy and just like with the proceeds of a life insurance policy, is passed to heirs income tax-free. You can set whole life up against some straw man tax-inefficient investment and it’ll look pretty good, of course. But when you compare it to what I see as the best alternative for someone forced to invest in a taxable account who has a high marginal tax rate, it comes in second, and it’s not close.

    I recently took a look at a whole life policy bought at 30 and held to the person’s life expectancy of 83. The cash value return was guaranteed at 2%, and projected at just less than 5%. If you use the death benefit instead, it was just over 5%.

    If you assume a 50% portfolio of a total stock index fund and 50% of a long-term municipal bond fund (which has nearly the same tax efficiency), and assume a return from the stocks of 9% and the bonds of 2.2%, you can expect a long-term return of about 5.6%. Given the very low yields available to insurance companies right now, I think it’s reasonable to use a figure somewhere between the guaranteed rate of 2% and the projected rate of 5%, so let’s use 3.5%. A 53 year, $10K per year investment growing at 5.6% will be worth $3.03M, compared with the one growing at 3.5%, which will be worth less than half as much ($1.48M).

    There’s got to be something unique about the investor that causes him to highly value the insurance component of the whole life policy that he’s willing to give up what are almost surely higher returns investing without it. Perhaps it’s the guaranteed return, perhaps it is some asset protection benefits, or some estate planning benefits, but you cannot make an argument for it based solely on a higher return. It simply doesn’t pass the sniff test.

    • This is going to lead to post-hoc logic by the readers and I’m not interested in that. Going forward if you wish I’d be happy to create a fact pattern and we could compare and contrast the merits of philosophies. Otherwise we will just circle around never ending assumptions. Either way is cool by me.

      • Not interested in disclosure then? You’re kind of reinforcing the point I often make that the vast majority of defenders of whole life as an investment (or smart financial move if you prefer) make money selling it.

        • Not really, you spoke of logical fallacies earlier (straw man)and now you are trying to setup post-hoc logic as if there is some sort of causal relationship that doesn’t exist. The long and the short of it is I analyze a set of fact patterns and make my recommendations based upon that given fact pattern. I’d be happy to give a break down of my annual revenue of which 20 percent is from insurance products(whole life,term and disability) but it really doesn’t have anything to do with the comparison of our differing strategies. So again, you could respond to what I posted or we can move in the direction of questioning my credibility as a planner which is what I’m not interested in doing. Its an unnecessary rabbit hole that wastes both of our time.

          • I’m not sure why you see financial conflicts of interest as some kind of logical fallacy. Personally, I’ve found they reveal quite a lot. As Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” In my experience, that’s pretty true and that’s why it’s important. It’s not that anyone thinks you’re out to get them on purpose, it’s simply a product of your experience and profession and it’s important to disclose. From what you’ve disclosed, a small percentage of your salary comes from selling whole life insurance. Whether that’s enough to bias your thinking I’ll let the reader decide.

            That said, I’m not entirely clear what you would like me to respond to. Did you want me to make up some specific scenario and then you’d explain why buying whole life insurance in the scenario would be a good or bad idea?

            As far as wasting time, keep in mind we’re now 330 posts into this comment section. What percentage of visitors to this page do you suppose make it this far? (Keep in mind that earlier commenters stated they’d been reading for 3 hours prior to making their comment.) I’m not looking to learn from you about whole life, and you’re not looking to learn from me about it, and it’s unlikely at this point in the thread that we’re going to educate anyone else about it, so if your time is too valuable to waste, perhaps it’s time to move on to a new subject!

            That said, if you feel there is some aspect of this product that has been thus far ignored in the discussion, feel free to bring it up.

  269. You speak in generalities and that is not how it works, so do any fair analysis we have to use the same set of facts. That is all I’m saying but you’re interested in reaching many people with generalized advice so have at it.

    [Edited to keep discussion on topic. Several other posts including my own completely removed. This post is about whole life insurance, discussions of other topics belong elsewhere.]

  270. If I present strategies not in the best interest of my clients there are consequences as well. Whitecoat what type of client do you wish to discuss, young, middle age, approaching retirement, wealthy, poor, healthy, unhealthy, with families, without, mixed families, do they have defined benefit pensions, do they have qualified plans, do they live in a state with onerous probate, what are the state tax rates, what are the local tax rates, what will tax rates be next year, what will they be in 20, what will they be in 30, do we assume market returns of the 70’s,80’s,90’s,00’s, what asset mix should we use, what is the room for american growth in the next 20 years, or foreign growth in the next 20, is their spouse capable of handling complex financial decisions? I think you need to know most of these things and more to validate a strategy or product.

    • I’m not sure why you are under the impression that I want to discuss a certain type of client. I don’t really care to. If there is some point you’d like to make about whole life insurance that hasn’t already been discussed in this hours-long thread, please do so. If you need to use a certain type of client to make that point, please do so. I’m sure you can craft one where whole life will be a good idea. At that point we’ll then discuss just how common being in that scenario is for the typical reader of this website.

  271. [Edited to keep discussion on topic]

    Wouldnt it be better if insurance agents had a fiduciary responsibility? Then maybe they wouldnt push so much whole life when it isnt appropriate. Given only a small fraction of people receive the death benefit (less than 20% if you look at the independent data from LIMRA or society of actuaries and some CLU agent sites even list as low as 10%), the world would be a better place. I dont have a problem with whole life if you need a death benefit although no lapse gUL would typically be cheaper for the same death benefit. Its just almost nobody needs a permanent death benefit and only a small percentage even receive what they have been paying for.

  272. Great conversation about whole life insurance. I’m not a Dr. or insurance salesperson ( I found this site while investigating a whole life policy my NWM agent is pitching), and agree with WCI and Rex that whole life is (usually)not a good investment vehicle and is pushed because of the outsized commissions that agents earn. This thread has been very entertaining and educational and while I don’t want to get off-topic [neither do I and thus I’m editing this comment like the 12 before it on this same off-topic subject that I deleted.]

    • [Another comment arguing about physician financial conflicts of interest, which are too far unrelated to the topic of whole life to be discussed here. If more of these comments are posted, I’ll delete them as well.- ed]

  273. Here are my credentials, graduate of school of hard knocks as well as medical school. Succesfull medical practice for few decades. Started investing in stocks in early eighties. Told by financail advisors that I am too young to invest in bonds. SOB’s had me 100% invested in stocks. Black monday or was it black friday kicked my ass, but I didn’t learn my lesson. Stayed 100% in stocks, made alots of paper gains, and then Dot com bubble hit and all the so called “gains” evaporated overnight.

    This time around I learned my lesson. Fired my financial advisor. Started to manage my own money. At fairly yong age, in 2003 I cameup with my own assett allocation, that I will never change till I die, and have done better then most investors on the planet (50% bonds = 25% PIMCO fund, 5% lending club added few year later, 10 TIPS, 10% international bonds) & 50% Stocks (5% REIT, 5% commdiites, 5% MLP, and 35% divided b/ large cap/small cap and international stocks). I rebalance every 6 months without any emotion, or worry. Have made alots of money. I look forward to and rejoice every time markeet corrects. 10 – 15% correction in markeet hardly make a dent in my portfolio. I always by low, and sell high. It really is that simple.

    I have 401/403, 457, IRA, 529’s, helath saving plans, real estate, precious metals, and stakes in actual businesses.

    But nothing, and I mean nothing gives me the peace of mind, and felxibility that whole life insurance has afforded me. To be continued ………….

  274. I purchased Whole life insurance 1n 1980’s, and later added to it as i got married and had kids. Until few years ago I also had term life to provide adequate insurance.

    When markeet crashed in 2002, only liquidity I had left was in my whole life insurance. But fortunately, I didn’t need the money. When markeet again crashed in 2008, I was the happiest man alive, I took large loans from my whole life and bought stocks and couple of years later real estate properties. I have since paid back all the loans (***without any negative tax event, try doing that with 401k/IRA for few years), stocks have doubled, properties are cash flowing niecely.

    Heck, I was about to take out another loan to buy gold bullions, but they have corrected as rapidly as they declined.

    Over > 30 years of investing, I can say without hesitation that no other product has provided me more sense of security, liquidity, freedeom from tax consequences when I needed to tap into it, decent return (and in fact better return then 60/40 stock/bond portfolio over past 30 years held in a taxable account, diversification {no whole life is not “bonds”, besides intrest rates many other factors go into amount of divided pain) and above all give me optionality and will enhance my ability to tap my retirement funds and do estate planing.

    Now, to those who say whole life is expensive. It porbably is for most people. But for well to do people, with little common sense, it is a god sent. Why do you think most CEO’s compensation packages include whole life insurance premeiums (sure, they are dummies, and dont know any better), why do msot rich folks, politicians, you name it, all have whole life nsurance.

    To my fellow physicians, young and old, forget the financial advisors, when sh-T hits the fan, it will be just you by your lonesome. Not too many people actually get to keep “10%” return from the markeet. Ignore the nonsense about bonds being in a bubble (I have been hearing this for last 12 years). Invest regularly, diversify, rebalance, and take advantage everytime markeet corrects.

    Most improtatnly, wole life insurance is not investment, foucs on death benefit, with knowledge that if needed, you can tap into funds, even if your FICO score is 400 and you just declared bankruptcy.

    • Thanks for sharing your experience. It’s unclear to me how your apparently reasonable stock/bond portfolio underperformed whole life insurance for the last 30 years, even in a taxable account. Were you rapidly churning the account or something? Certainly the data does not support that conclusion, despite relatively good whole life returns for policies bought in the early 80s (~ 7%). Policies bought now, of course, are unlikely to have anywhere near that return due to lower interest rates.

      401K loans are taken and paid back without any negative tax event by the way.

      I’m also unclear as to the gold correction you’re seeing. It’s dropped from $1870 an oz to ~ $1400 and is now at $1460 or so.

      I’m unclear as well why Black Monday was such a problem for you? Did you sell at the bottom? Even a 100% stock investor made money in 1987. The S&P 500 was up 2% that year, not including dividends.

      • Mr. Whie Coat. You are very confident that you have all the right answers. I think you do know things or two, you may even be very well intelligent have alot of knowledge, but I think what you lack is experience.

        “Policies bought now, of course, are unlikely to have anywhere near that return due to lower interest rates.”

        And how much do you suppose sotcks will return over next 2, 5, 10 yrs? As I told you before, whole life companies are intrest sensitive, but have other options to diversify and pad the bottom line.

        “401K loans are taken and paid back without any negative tax event by the way.”
        Ture statemetn, but misleading. How mcuh you put away in 401K is limited by anual contributions. If stocks crash, as they do every decade or so and you need money, then 401K is lousy place to access money. Not to mention that there are limits on how much of your money you can take out, limits on number of loans (most plans only allow one loan at a time), how about opportunity loss should stock market runs up but you are not invested due to loan.

        And, if you want to change jobs, you MUST pay back the loan to 401 K, otherwise it will counted as distribution/income and not only do yoy pay taxes, but penalty to boot.

        “Gold correction”

        I buy when dummies sell. I was hoping to load up on bullions b/ I felt they will correct to around $1200. I am very successfull investor, FICO score in 800’s, but my bank for last 25 years would charge me 9.8% for “unsecured” loan given that I use portion of my equities as a collateral. I would have been able to get couple of 100 grand from my whole life without any fuss.

        Here is advise for all phsyicians, young or old, best way to beat stock market is to avoid stock market as much as possible (I became rich and started to see my money grow when I became conservative investor).

        Whole life insurance is a marvelous instruement for those who understand it.

        • I find it interesting that you seem to think having a high FICO score somehow indicates your success as an investor. I’m also unclear as to why you need unsecured loans given your apparent investing success.

          I’m not a big fan of loans, whether you take them from a bank, a 401K, or a whole life policy. As I often ask my daughter- “Do you want to pay interest or be paid interest?” Whole life fans seems to always tout this great benefit of being able to borrow from your policy when you need money. I hope to never borrow money again. I’d prefer to just take it out of a bank account or liquidate an investment.

          I’m glad you’re pleased with the performance of your whole life policy.

          • Mr. Whie coat. you have completely changed the topic, and either ignored or are unable to response to points I have made in favor of whole life insurance.

            “I find it interesting that you seem to think having a high FICO score somehow indicates your success as an investor. I’m also unclear as to why you need unsecured loans given your apparent investing success.”

            High FICO score doesn’t mean that you are successfull, but it does indicate lower default risk. Even then, it was (and for most people still is) just about impossible to get unsecured loan. But, I dont have that propblem because I can tap into my whole life insurance. I made a killing due to economic turndown b/ I could access funds. I hate to say it, b/ I know so many good/hard working people were ruined, but I mad more money from 2008 – 2011 then I did in my entire life.

            Sucessful investing rule number one: Use other people money when ever possible. Many benefits to it, including assett protection and tax deductions (I dont have time to go into them all). ***To my fellow physicians, never ever sign unlimeited personal gaurentee when taking out loans for levered investments such as apartment building. Bankruptcy laws wont protect you. If you do, then make sure all or most of your assetts are in IRA/401 and whole life. 529 doesnt offer protection from creditors outside of bankruptcy, and SEP protection from collectors is still open to legal interpertation. Look into homstead exepmtion laws in your state as well. Many people can declare bankruptcy, but it doesnt workout well for physicians, because even after bankruptcy we will earn high income, so courts and crditors take you to the cleaner and make you pay large amount of your income over 5 – 7 years depending on terms of bankrkuptcy. You better comply, or they will garnish your wages.

            Concering your second statement, fine, dont take out loans.

  275. Believers in whole life seem to share one commonality: the ability to distort and ignore basic principles and facts in order to remain faithful to the idea that whole life is a good “investment.” It’s been shown time and time again over the course of this thread that whole life is, in most cases, a bad idea for most people. Anyone arguing against this basic fact is either selling insurance or appears to be grossly exaggerating investment returns and basic future “risk versus reward” scenarios. When pressed for data and proof, it’s never available; when asked for sound reasoning, there truly is none.

    “In reality, those who repudiate a theory that they had once proposed, or a theory that they had accepted enthusiastically and with which they had identified themselves, are very rare. The great majority of them shut their ears so as not to hear the crying facts, and shut their eyes so as not to see the glaring facts, in order to remain faithful to their theories in spite of all and everything.” – Maurice Arthus

    • Pey

      “It’s been shown time and time again over the course of this thread that whole life is, in most cases, a bad idea for most people”

      You are right, it is bad fro most people. But not bad for all. If you make around 150K or more anually, then whole life is wonderfull way to diversify and a powerfull tool that gets better as you age. Look lets say you are 80 – 20 stock/bond investor in your 30’s and expect to make annual return of 8.5%. Now you have accumilated alot of wealth, you are in you mid sixties, do you feel you will still have assett allocationof 80 – 20 or more like 30 – 70%. Whole life returns will outpace 50 – 50 portfolio returns most of the time (most but not all the time). But when markeet corrects, you gonna thank your lucky stars that you have whole life insurnce. Please read my earlier post for real life examples. Whole life insurnce is powerfull instrument in right hands.

      • I disagree that whole life is likely to outperform a 50/50 portfolio of low-cost index funds. I also disagree that an income of $150K or more annually somehow turns whole life insurance into a good tool.

        • Yesterday, I rebalance my portfolio, sold about 4% stocks and bought bonds. New money for now will go to bonds and commodities. Every expert is saying dont by bonds, they are in bubble. Yes, they are, and they are correctiong, now is exactly the time to stick with your assett allocation. This forces you to buy low and sell high.

          If stocks correct by 10%, then I will SLOWLY rebalance and by stocks (be aggressive when rebalancing out of stocks, and be slow when rebalacing back into them, and you will never go wrong). However, if stocks go down hard, 25 – 40% correction, then I will tap into my whole life insurance and by as dummies sell b/ their papaer gains have evaporated overnight and have no liquidity. Whole life to rescue agian!

          • I’m not sure why you seem to think that whole life insurance is so much better than bonds to use to rebalance after a stock market correction. Perhaps you could explain. It seems a lot easier to me to use bonds and save the costs of the insurance and the interest costs resulting from borrowing from your policy.

            Regarding your above comment, it also isn’t clear to me what points you’ve made about whole life that I haven’t responded to either directly or in the original post or hundreds of comments below the OP. Perhaps you could be more specific.

            I’m also unclear on why it is so difficult for you to get unsecured loans, especially with your reportedly high credit score. I get offers on a weekly basis for 0% interest unsecured loans, usually with a 3-4% transfer fee. Even if I went to my brokerage to get a margin loan, the rates are 6-8.5%.

            Other people’s money is a nice phrase, but the risks and costs of leveraged investing are well-known. I hardly think that using leverage is “rule # 1” of investing. In fact, many investors prefer Warren Buffett’s “rule # 1” – Don’t Lose Money, something that leverage isn’t really known for doing.

            And speaking of not staying on topic, your most recent comment bounces around from real estate investing to asset protection. If you’d like to discuss whole life insurance, please do so. Perhaps it would be interesting to readers to have you post the details of the policy you bought in the 1980s that you’re so happy with. Annual premiums, current cash value, current death benefit, loan rate etc.

          • I finally see the issue. I believe we have different life experiences and are at different stages of life, and wealth acumilation cycles. I invet in equities, bond, startup, private held LLC’s, business (both medical and non medical) and real esate. Retirement accouts can only shelter small amount of my revenue.

            1. For most part I rebalance my equities portfolio by either selling stocks or bonds, “However, if stocks go down hard, 25 – 40% correction, then I will tap into my whole life insurance”. Most of my bonds are in retirement accouts, and during large corrections I have no choice but to rebalance in taxable accounts. Anyway, I could keep large chunck of cash in saving accounts, but for me that would be stupid due to low inrest, and 48% tax I would have to pay on intrest(fed/state). Whole life is ideal place to park large cash, receive dividend, tax advantage, assett protecion, death beneft should I die and ability to access large sum of monies when opportunity knocks.

            2/3. Again, I AM not talking about 25 – 35K credit card offers. I am talking about higher monetery values. I would never borrow money to buy socks. I borrow money (other people money) to invest in busineses or by propertie.

            Again, I believe we are at different phases of life cycle.

            • Have you heard of municipal bonds? Vanguard’s muni funds yield up to 2.17%, which given your apparent 48% marginal tax rate, would be the equivalent of a taxable bond yielding 4.54%.

              I disagree that whole life is ideal place to park “large cash”, but I’m glad that you’re happy with your purchase. It sounds to me that given your income and apparent vast sums of wealth that it really doesn’t matter one way or another what you do with your money. You could probably stick it all under the mattress and do just fine. If you like whole life, go for it. Unfortunately, most doctors aren’t in your situation and are far closer to the middle class. Congratulations on your success. Are you going to post the specifics of your policy or not?

          • “Have you heard of municipal bonds? Vanguard’s muni funds yield up to 2.17%, which given your apparent 48% marginal tax rate, would be the equivalent of a taxable bond yielding 4.54%.”

            Can you do a taxable equivalent analysis for close to 5% dividend I received last year in my Whole life insurance?

            Municipal bonds at time are good investment. But not now. Too low of yield, and much riskier then whole life. Additionally not ALL muncipal bonds income is exempt from taxes(AMT tax issues). You also should take into acccount new taxes (Obama care and recent tax deal in january). You also need to know that you WILL PAY either short or long term capital gains taxes on muncipal bonds if they appreciate and you sell them.

            Also, if a young doctor with two kids has put money away in IRA/401 and 529, has term life, and