A Whole Life Insurance Success Story – The Friday Q&A Series

Some of the most popular posts on this blog are about whole life insurance (WL).  For better or for worse, nearly every reader of this blog is approached by an insurance agent recommending whole life insurance at some point in his life.  I generally recommend you don’t mix insurance and investing.  Most people don’t need a permanent death benefit and should buy a 20-30 year level premium term insurance policy.  Those few who do need (or desire) a permanent death benefit should get a type of universal life insurance policy called a guaranteed no-lapse policy.  Those buying a whole life insurance policy at this time should expect a return of 2-5% over the long run, with a negative return for the first 10-20 years.

The Question

I recently had an email correspondence with a reader who had read through the posts on the blog about WL.  He calculated out his return on his whole life policy and found it to be 7% after just 29 years.  His initial email was asking me to show him where his error was because he was sure after what he had read that his return couldn’t really be 7%.  I quickly confirmed that, indeed, his return was 7%.  He then said he wished he’d put more money into his life insurance policy instead of into the stock market, as his stock market return was closer to 3%.  At this point, I figured we’d better get into the details to explain how this might be.  As you might expect, he was comparing apples and oranges.

The Details

The Northwestern Mutual Whole Life policy was purchased in April 1983.  A student of US financial history will recall that the early 1980s were a period of very high interest rates, and that market returns for both stocks and bonds were absolutely spectacular over the next ~20 years for stocks and ~ 30 years for bonds.  He was comparing the return he got on the WL with a stock market investment that he made in mid 2000.  Again, the student of financial history will recall that 2000 was the height of the tech stock bubble, and a particularly bad time to purchase stocks.

In order to compare apples to apples, you’d need to compare that whole life insurance policy with investments available in April 1983.  So what was available then?  Well, you could purchase a 30 year treasury that month with a yield of 10.48%, over 3% better than the return he earned.  Even better, he could have sold that treasury at any point in the next 30 years at quite a premium.  It’s relatively easy to see what kinds of returns stocks and bonds have made over the last 29 years.  Just to keep it easy, let’s look at the Vanguard 500 fund and the Vanguard Long-Term Treasuries fund returns since inception (1976 for the 500 fund and 1986 for the treasuries fund.)  Their returns were 10.51% and 8.6% respectively.  I’d argue that if you used 1983 as a start date, the returns would be even higher, since treasury yields from 1983 to 1986 fell from 10.5% to 7.50 and the S&P 500 had returns of 22%, 6%, 31%, and 19% from 1983 to 1986.

So you could have invested in ANY combination of stocks and bonds in 1983 and had a better return than the whole life policy, by at least 1.5%.   This isn’t surprising when you consider what an insurance company does.  It takes your money, pays the commissions, pays its business expenses including the insurance component, pays its profits (unless it’s a mutual company), and then invests the rest.  Since it doesn’t have any magic investments, it can’t get any better return than you can get without the insurance company, therefore your return MUST be less than what is available in the markets over the years the policy is in effect.  It’s a mathematical certainty.

I also found it interesting to look at the original policy projections from 1983.  He bought the policy at age 20, and at age 60, the policy guaranteed him a cash value of $23,548, after 40 payments of $514.  I thought that was pretty pathetic, a return of 0.65%, way below inflation.  NML certainly wasn’t taking much risk with this policy.  The projected return was much higher, of course, projecting a cash value of $145,978 and a return of 8.06% by the time he hit age 60.  After 29 years he isn’t getting the 8% return that was projected, but he’s doing a lot better than the guaranteed return!

A Success Story

All told, I consider this a success story compared to the experience of most investors in whole life.  He did just a few things right (used the dividends to buy paid up additions, paid his premiums annually rather than monthly, didn’t cash out for nearly 3 decades, and kept the amount of insurance purchased relatively small to ensure he could afford to make the premiums) and thus has earned a return that is at least 3% better than inflation.  Could he have done better just investing in the markets?  Sure.  But it certainly wasn’t an investing disaster.  The reader expressed a desire to have bought a $500K policy instead of a $50K policy.  While I agree he would be better off with a $500K policy than a $50K policy, he would have been even better off just buying a 30 year treasury every year for the next 29 years instead of buying any policy at all.

Keep in mind that buying whole life insurance today may yield a very different experience than that had by this investor, especially given current interest rates.  I looked at a recent policy for a 30 year old.  It guaranteed a return of 2.18% after 29 years and projected a return of 4.81%.  That doesn’t seem like much of a reward for tying up your money for 3 decades.  Permanent life insurance is still unattractive when compared to a reasonable portfolio of stock and bond index funds unless you either need or desire a permanent death benefit, especially if you aren’t already maximizing your available retirement accounts.  It is most reasonable as an investment for money you plan to leave to your heirs, although even then, it fails to outperform typical stock/bond portfolios.


A Whole Life Insurance Success Story – The Friday Q&A Series — 77 Comments

  1. Great post.

    You touched on the real problem, of people not comparing apples to apples and thinking they had great success. I’m sure there’s probably 30-50 people that had rotten results for every one person that did this less bad (can’t call it good in my book).

    We got torched on a WL policy and our former insurance agent lied through his teeth when promising up we could take our cash value and walk at any time. After it built up 2k in cash value (during residency), we decided to close it out. To our shock and disgust, there was a $2,000 surrender fee. This was buried in the stack of docs that is and inch thick. The agent flatly lied about it. Can’t win an argument over a spoken word. I’ll never communicate over details like that unless it’s in an email now, so I at least have a chance to put their feet to the fire.

    Thanks for finding the time to show the real, unbiased truth in this situation.

  2. outsider:
    From my own personal experience, i highly also recommend you have written documentation and witnesses when dealing with agents on such issues. As you have found sales people can get away with a lot and these companies already have lawyers on the books so it would be expensive to even try and go after your money. Now with that said, you most likely have some form of UL and not whole life. Still a bad purchase but its probably a different form of permanent insurance.

    In regard to numbers of happy vs unhappy. Looking at the LIMRA and society of Actuaries data, it appears less than 20% keep a policy in force until death so maybe 1 out of 5 or 6 is “happy”.

    For the person who wrote WCI the email, hopefully he/she keeps it in force until death at this point. If he/she needs some money from the policy, then id take loans very late in life if possible and leave the rest to my heirs. This assumes the email writer wants a death benefit. The return on these products is always in the death benefit.

  3. At birth, my father-in-law purchased WL for my wife. That was 25+ years ago. It’s rate of return is 3.5%. Horrible investment.

  4. Perhaps for people who are well-off, Whole Life can be a convenient option to insure a business partner or loan, bequeath a charity, pay estate taxes, or leave a legacy to heirs.

    But that is not most people. the typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection. If you are in this category and aren’t insured, get insured now!

    Advantages of Term Life Insurance are: totally affordable, up to 8 times more insurance for the same premium, and ideal for younger families when the need for protection is greatest.

    Choose Term Life Insurance for covering specific needs that will disappear with time, such as: Income replacement, Financial security for dependents, Mortgage protection, College funding, Final/burial expenses

    Use a free online quote engine to compare term rates from many top-rated companies to see how affordable it is. One of the best is Quality Term Life, you can see quotes without having to give away your contact info, first.

  5. Dear WCI, I really enjoy reading your blogs and they have been quite informative to me as I am a new investor. Unfortunately, however, I wish I would have read these blogs prior to purchasing whole life insurance for myself. I was sold on the “investment” aspect on it. I’ve been paying into it for 3years now with a ridiculous premium of around 18,000 a year. At this point, im obviously too invested to stop paying. Luckily, I can easily afford these premiums. My question is, at this point what do I do? I “break even” around 12 years into the policy. At this point, would it be better to cash out and use that money to invest or to go ahead and keep it in the policy since this is when the benefits of the policy are suppose to be beneficial??? Your opinion would be greatly appreciated. Thanks. And keep up the good work!

    • I cashed mine out after 7 years. If you don’t want it and you’re only 3 years into it, you’re probably better off getting out now. You’ll get some of your money back and it’ll be tax free. Be sure you have sufficient term life in place prior to surrendering the policy. You may wish to get a current illustration or even have someone evaluate your policy, but after only 3 years, you’re almost surely going to want to get out if this is your typical whole life policy. You’ve paid in $54K, how much can you surrender it for now?

      • Thanks for the timely reply. I have paid 52,656 into the policy. If I were to cash out now, I would get aroud 28,000. Thats roughly a loss of 25,000. I wouldn’t say I totally am for getting out of it. I’m just trying to think what would make the most financial sense. It does provide me life insurance (which is beside the point) and i can easily afford the premiums even after maxing out my tax-sheltered retirement accounts as well as putting money into my taxed accounts. So I guess the question is…..1. Would it make more sense to pay the premiums and keep the policy at this point? or 2. Pay the premiums until I break even in year 12 and then cash out? or 3. Cash out now and suck up the loss of 25,000. Invest the 28,000 and hope the 28,000 can accrue to more than 25,000of which I loss in 9 years which is the “breaking even” point. At this point, it seems to make sense going with option 1. or option 2. Needless to say, I should have never bought the policy in the first place. I was naive and fresh out of residency looking for financial guidance and was referred to this CFP by a long time high school friends who I am still close with. Moral of the story is to realize the only person you should trust your money with is yourself.

        • granted, i understand, also in option 3. the yearly premiums will be added along with the 28,000 accruing interest over the 9 years. but even so, will it be beneficial and is it worth the risk that it will make up for the 25,000 lost?

          • David, you need to run the numbers here and you’ll quickly see that you are likely to do far better surrendering now than surrendering in 9 more years. Your decision should be surrender now or keep until you die. It sounds like you don’t want the policy and wouldn’t buy it now. After 10-20 years, I can see a case for keeping a policy to death. After 3? No way. You’re saying that after 12 years you “break even.” That means the policy will be worth $18,000*12 or 216,000. What would happen if you took your $28K and invested it and another $18,000 a year into a reasonable portfolio making 8% a year? How much are you likely to have 9 years from now? The answer can be found using Excel’s future value (FV) calculation. The answer is $281K. What if you don’t get 8%? What if you only get 5%? Then you will only have $242K. It turns out that as long as your investments earn at least 2.7% per year then you’ll come out ahead surrendering the policy now. There are no guarantees obviously. Yes, it sucks that you lost $25K. But it’s a “sunk cost”, essentially water under the bridge. Holding on to the policy isn’t going to change that. Consider it tuition in the school of hard knocks. I lost far less on my tiny policy I bought as a med student, but it motivated me to learn about this “finance stuff” so I’d quit getting ripped off by financial professionals. Also keep in mind that whole life insurance illustrations show both a guaranteed value and a projected value. Is breaking even in 9 more years guaranteed or projected? You might find you need an even lower return to beat the guaranteed return.

  6. WCI you forget to consider the tax advantages of the WL policy. This guy’s saving something in the neighborhood of 30%-40% on his cash withdrawals from the policy. Your outside investments would be taxed as ordinary income. Good luck finding a guaranteed 6%-7% return elsewhere that would be comparable to the WL returns after taxes. This is the safe money in my portfolio. If you are in an upper tax bracket you are crazy not to have WL.

    • Absolutely disagree. Just being in an upper tax bracket is NOT an adequate reason to buy a whole life policy. A whole life policy is NOT the simple equivalent of a Roth IRA. Withdrawals are not tax free. Loans are tax-free. They are not, however, interest free. Outside investments do not have to be taxed as ordinary income. It is easy to ensure a taxable account is taxed at no higher than your capital gains rate. If you tax loss harvest and donate shares for your charitable contributions, it’s quite possible to have a taxable investing account LOWER your tax bill, rather than raise it.

      Last, the guaranteed returns on a WL policy bought today and held to your life expectancy are about 2%. If you’re paying taxes at 15%, you only need a return of > 2.3% to beat that. That doesn’t seem that high of a hurdle to overcome. I’m glad you’re happy with your policy, but it is my opinion that using whole life as an additional retirement investing account is probably a bad move for the vast majority of people, including physicians.

  7. If you tax loss harvest and donate shares to charity? So in other words, if you give your profits to someone other than Uncle Sam then you can easily beat the WL returns? No comment.

    The loans are offset by dividend payments on the loaned amount. If I’m avoiding jumping to the next tax bracket by borrowing from my WL, then the loan interest rate is pretty meaningless anyways.

    The guaranteed return has been beaten for the past hundreds of years. It is guaranteed that you will make more than the guaranteed return.

    • Obviously donating shares to charity only helps your bottom line if the alternative is giving cash to charity. It certainly is NOT guaranteed that you will make more than the guaranteed return, especially in these low interest rate times. I’m not sure why you think interest is meaningless. If you’re paying 8% a year in interest instead of less than 15% in taxes (since when you sell stock some of the money you get back is principal) it doesn’t take very many years before the interest is a far bigger expense than the taxes. Not all policies are non-direct recognition and make dividend payments on the loaned amount. The dividend payments also may be lower than the interest rate. But if you prefer to invest in whole life insurance policies instead of more traditional investments, knock yourself out. There are plenty of dumber things to do with your money, like give it to some dumb charity. :)

      • You refer to whole life as an alternative to “traditional investments.” I would argue that whole life insurance IS THE traditional “investment.” I use quotation marks because yes, insurance isn’t an investment in the sense that it isn’t a security registered with the SEC. Then again, neither is real estate, but how many people have a problem referring to a property as an investment property? Or how about someone who starts their own small business? Is this not an investment because it’s not registered with the SEC? Tell the business owner that and see how they respond. What about higher education? Is college not an investment? My point here is who really cares? Investment inshmestment, it’s just a word. All that matters is whether or not you can make money with it. This type of financial instrument has existed far longer than the stock market has, originating in the 1700’s, whereas the first stocks of the DJIA began trading in 1896. I find it hilarious that the anti-insurance propaganda positions whole life insurance as something new. 401k’s and IRA’s have only existed since the 1980’s, and I’m fairly certain that Americans have been able to retire successfully for many, many years before they came along.

        • While the Dow Jones hasn’t been around for long, a cursory review of history indicates that the stock of companies has been bought and sold at least since the development of the Dutch East India Company in 1601, predating the establishment of the first life insurance company (which didn’t really offer whole life insurance, more of an escalating premium term policy) by over 100 years.

          At any rate, I agree that if you expect something to make you money it is an investment. I simply use the word “traditional investment” to refer to stocks, bonds, and real estate as opposed to whole life insurance. If you have a better term for me to use, please share.

          I’m also unclear as to why there would need to be “anti-insurance propaganda.” I find that when people actually understand how a product like whole life insurance actually works and what their returns on it are likely to be, they become much more interested in getting out of their whole life “investment” than in buying more of it. Explaining something the agent who sold it to them should have explained isn’t exactly “propaganda.”

          • That would be the stock of a company not many companies. I, too, know how to use Wikipedia.

            I think my issue with many of the write ups about whole life insurance is that the folks speaking against its use in a financial plan often do not know how it works, themselves. I should also offer that there are a great many insurance agents that do not understand it either. As is the case with any profession, one bad apple can spoil the whole bunch.

            In reality, a participating whole life insurance policy, with a top rated mutual insurance carrier, designed for maximum cash value can be an excellent place to save cash. There are many carriers that have continuously made premium payments for decades and decades and decades.

            A simple glance at the rate of return is an incomplete view of this picture. The opportunity to collateralize cash value and leverage the borrowing power in order to capitalize on investment opportunities as they arise can work wonders. I appreciate that people might balk at an 8% loan interest rate, even when the math still works out in favor of borrowing simply because of the lofty number, but what about a more realistic figure of 4%. If I were a realtor, and stumbled across a simple fix and flip opportunity that could earn me an easy 20% (I’m not advocating fix and flips, just citing an example), would it make more sense to use my own cash and forfeit the ability to earn interest until the property is sold, or use my leverage to borrow the money I need so that my money continues to earn uninterrupted compounding interest? Here’s where the stock jockey usually brings up a margin account. Except what happens if the market drops while I’m renovating and there’s a margin call? Where do I get the money from to ensure I’m meeting my margin requirement? It sure isn’t liquid while it’s in the house. Wouldn’t it be nice not to have to worry about this?

            Here’s what I mean by anti-insurance propaganda. If I have a substantial amount of liquidity in the cash value of my life insurance, that I’ve built over time with a company that has consistently paid 6%+ dividends (yes, they exist), whenever I want or need money for something, I don’t need the bank anymore except to store enough cash for my regular monthly expenses. And there goes their profit margins. So they certainly don’t want me using insurance as a savings vehicle. That’s for their use, not mine. In fact, if you do a little homework, the largest banks in this country have billions (with a b) of dollars in cash value life insurance policies. There’s an entire industry based on this; it’s called BOLI or bank owned life insurance. An insurance company I used to work for, not selling life insurance at all BTW, had a division dedicated to this, and it was among the largest divisions in the company. Back to the propaganda point though, this cash value can be accessed in a completely tax free fashion. Mind you, I said accessed, not withdrawn. Who hates it when I can access money above the amount that I deposited without having to pay taxes on it? I don’t think I need to fill in the blanks there at all. So along comes the sacred cow of the investment world, the qualified plan. Section 401k of the Internal Revenue Code was passed in the late 70’s and wasn’t even about retirement savings; it was for individuals who made income just above a tax threshold. They could defer some of that income until age 60 and be taxed today at a lower rate. It wasn’t until several years later that a pension consultant named Ted Benna came along and realized it could be used as an investment account. Once this gained traction, money pours into these plans and the stock market takes off, making Wall Street money hand over fist, and setting up a future income stream in the form of massive deferred tax accounts that the IRS gets to tap into at a later date. So, my point ought to be clear about the propaganda. The Federal Government, banks and Wall Street do not want me to use life insurance as a savings vehicle because they can’t get their hands on my money that way.

            Hope that helps.

            • I’ve written before about the whole “bank on yourself”/”infinite banking” concept. It’s covered as one of the “myths” put forward by insurance agents selling whole life in this series:


              and has its own post here:


              I’m not going to repeat the arguments for or against this strategy once or twice a week when a new insurance agent discovers my blog for the first time and starts posting comments longer than many blog posts themselves (which all say about the same thing as your post, by the way.) Suffice to say, banking on yourself probably isn’t the worst financial mistake anyone ever made, but it isn’t a method for getting rich. That requires a high income, a decent savings rate, and a reasonable rate of return on investments. Bank on yourself is far more useful as a method to sell whole life insurance than as a method to become a millionaire. How do I know? I’m 38, I’m a millionaire, and I did it without whole life insurance. Whole life insurance is optional, at best, to a good financial plan, and that’s being very charitable. At any rate, if you want to comment further about banking on yourself, feel free, but please do so on the relevant post.

  8. Me again. About the only thing accurate in this analysis is that investing in the stock market and SAVING money in a Whole Life Policy is apples & oranges. You cannot invest in a whole life insurance policy (unless you are in the life settlement business) b/c it’s not an investment. Assuming one can go out and purchase individual bonds, treasuries and recieve the same rate a couple billion dollar insurance company can is naive. They are buying the same investments at a much higher yield than an individual investor can not to mention they have a little bit better understanding of the market place. Most of them have only been doing it for 150 years. How long has Vanguard been in business? Basic economics will tell you if a business is not good in providing it’s service to the market place than it will not be in business long. You assume that the only service the life insurance industry is providing is commissions to agents. I guess that cannot be so. [Rude comment deleted.] For those using WL for the purposes of IBC they are having policies designed to create cash value earlier than anything depecited in your discussion above. These policies are meant to be warehouses for their wealth not prisons. Their wealth will be built in their businesses and business ventures. They will need several policies over the years to store the wealth they will accumulate using this process properly. [Rude comment deleted.]

  9. WCI, regarding David’s original post. Would another option be to reduce his WL policy coverage down to an acceptable premium, for example drop from say $750,000 down to $50,000 (provided there is another source of insurance, i.e. term)? Would this offset the $25,000 loss that would be incurred from cancelling the WL policy all together? In this scenario, does this keep the money you’ve already paid into the policy working for some (smaller) amount of WL? Wondering if this would be a preferable option to just taking the $25,000 loss?

    P.S. — my husband and I are in the exact same situation as David!

    • That might be a great option, reducing it to whatever amount you can get as “paid up” insurance. Otherwise, you just reduce the necessary premium. You then hold the policy for the rest of your life. Another option might be to sell the policy to the insurance company.

  10. Hello WCI,

    I came across your site recently and have found your posts on Life Insurance and the hundreds of comments very interesting to comb through. I’m sure you’re very excited to see yet another comment on an old thread that has been quite for months ;-)

    The reason I decided to comment on this particular post is that I’ve been very interested in comparing the actual returns of old policies to the alternatives, which is exactly what you’ve done here. I think you’ve left out a couple important pieces, so I’m hoping perhaps you still have access to the data from this policy. Here’s what I’m interested in seeing:

    1. More exact IRR for the policy. You say 7%, but obviously there is a big difference between 6.8% and 7.2%
    2. Initial Illustrated Guaranteed and Projected Death Benefit and Cash Value in year 29
    3. Actual Death Benefit and Cash Value thru 29 years

    You list both these figures for Year 40, which makes it hard for me to create an actual comparison to instead putting the premiums into stocks or bonds.

    I haven’t yet done a stock market comparison, but I put together a spreadsheet to find out what the IRR would have been had the $514 yearly premium been invested in 30yr treasuries.
    I used the US 30yr Bond interest rate in April of each year from 1983 to 2012, assuming $514 was invested each year for 29 years, with interest payments each year reinvested as well. Based on my calculations, the IRR for this period would be 7.87%.
    Actually, I just remembered that I should deduct the cost of a 30yr term policy for the $50k to replace the WL coverage. A $50k policy of this type for the best risk class would cost $108 today (based on term4sale.com), but a large part of that cost is simply the policy fee, so I used $50/yr in my spreadsheet. Thus the client would have spent $50/yr for the term, and $464 would go to the bond fund.

    Using these assumptions, the IRR drops to 7.31%. Note that I didn’t assumed no fees whatsoever for purchasing the bonds each year. This return is very close to the 7% the client got, but he currently has the additional benefit that his death benefit has increased above the initial $50k policy, while in the bond example, his 30yr term is about to expire.

    You didn’t mention anything about the type of policy the client got, so I’m assuming it was issued as a standard policy with none of the premium initially assigned to PUAs. Thus, I would argue that this standard policy performed just as well as the bond alternative, and could have looked even better if it had been implemented to maximize cash.

    If you are interested, I’ll be happy to send you a copy of my spreadsheet so you can check my work.

    • I wish I had time to redo the post as you wish it done. I have a dozen posts waiting completion unfortunately.

      I’m not sure why you’re surprised to see that a whole life policy had long term returns similar to bonds. That’s about what I would expect. Just as I would expect that long-term returns for a policy going forward today should be similar to what bond yields are today. Of course, bond yields 30 years ago are very different from bond yields today.

  11. It’s great to see WCI show that someone did well with whole life insurance.

    When it comes to his analysis, it’s funny that, despite the individual doing well, he just can’t get over the fact that it’s whole life insurance…and because of that, it gets a back-handed compliment.

  12. Not sure why it’s so funny.<<>>This type of outcome is far less common than this one:
    where the poster had a return of 2% per year…..after 26 years “investing.” Basically a loss after inflation despite sticking with it for nearly 3 decades. In four years of blogging, this post represents the ONLY success story that has been sent to me, despite hearing at least weekly about someone who is very unhappy with the policy they were sold.


    This is a very simple explanation for that: confirmation bias. People who benefit from whole life aren’t likely to stop by your blog and look for validation or inquiry, especially not with titles like “8 reasons whole life is a bad investment.” They already know it works for them. They’re not interested in a dissenting opinion.

    The fallout you get are from people who were sold policies by dishonest or ignorant agents. You know, there are a lot of ignorant mutual fund salesmen out there too. You probably don’t hear from a lot of people who got ripped off because they’re not stopping by your blog. They don’t want to hear what you have to say.

    I will bet you anything that if you sent me any of the complainers that email you, and I reverse engineer the policy, and disclose the costs embedded in those policies, I will find a policy that wasn’t blended with term, or wasn’t set up to do what the agent said it would.

    That doesn’t make whole life bad. That makes the agent bad. And, unfortunately, there are a lot of bad agents just as there are a lot of bad doctors, bad contractors, bad mechanics…

    • Yup. For some reason my website is a magnet for “good agents” or at least they all claim to be. I just can’t seem to figure out who keeps selling all these bad policies inappropriately when every agent I meet says they’re a “good guy.”

      My favorite part is that every insurance agent thinks their favorite type of insurance (WL, IUL, VUL) is awesome and all the rest of them suck. Well, any logical person is going to conclude from that that they probably all suck. I agree that a better designed policy is better than a poorly designed policy. I mean…7% vs 2% in the examples we’re talking about here. That’s quite a difference. But the truth is that all these products are completely optional (at best) for the vast majority of people. I’d rather spend my money on something else.

  13. WCI, you sound a little jaded. I don’t think *all* the “good agents” come to your site. I think I subset of agents out there who feel threatened about their particular approach come to your site. Maybe some of the good guys do, and they get shut down so they don’t say much. Some people get really defensive, and I think those people get pretty noisy on your blog.

    If you hang out on insurance forums, guess what? You see an interesting phenomenon. All the “good guys” in the brokerage world show up to defend managed mutual funds. When someone points out that their client pays hundreds of thousands of dollars in fees over a lifetime, and that the rep’s ROI numbers are dubious, a battle ensues.

    Again, I think that’s confirmation bias. Both you, and the insurance agents, are looking for things that confirm your worldview. When you run into something that doesn’t, it’s “an anomaly.”

    And, I don’t think statistics are necessarily indicative of the validity of an idea. So, for example, I’m sure you’re familiar with DALBAR’s QAIB which consistently shows that (according to their calculations), the average investor who does “buy and hold” in the market (well, a mix of stocks and bonds) made about 2.xx% annually over the last 20 years. That’s very different from your numbers which suggest people should have made north of 7 percent.

    Does that mean buy and hold is a terrible investment strategy? A lot of people use that statistic to argue that it is – you have to know that.

    But, I think you also know that buy and hold is not a terrible idea, despite the fact that the average (i.e. most) investors don’t do very well following that advice.

    Speaking of spending your money on something else, I also think you place way too much importance on the interest rates for investments and the market and don’t give enough consideration to how debts and other expenses impact rate of return and total savings after 30, 40, etc. years.

    I’ve run numerous calculations comparing debt payoff to increasing investment rate of return. Every single time, I find that increasing volume of savings is more significant than trying to improve ROI, even when you hypothesize a doubling of ROI in realistic situations (e.g. doubling from 8% to 16% or 5% to 10% or 6% to 12%). Actually, I think “realistic” going forward (at least according to Warren Buffett) is 6-7%.

    This introduces a problem to a compartmentalized view of financial planning…namely that, when you isolate investment returns, I do agree with you that a 2 percent IRR on whole life stinks.

    At the same time, if you look at a wider context, when you bump up the IRR to 5, 6, or 7 percent, and then start cycling money through the policy (you’ve written something about “Bank on yourself”so I’m sure you’re at least somewhat familiar with it, or perhaps you’ve heard of “Infinite banking”, and similar ideas), I think life insurance makes sense, not just for some people but for most people so long as the policy is set to minimize expenses, and this can be done by reverse-engineering the policy and funding it appropriately using term blending (I believe Glenn Daily has written at great length about this).

    I also don’t think that investing and buying life insurance are mutually exclusive. One method is a clever way to save money and pay off debts through a volumetric approach and one is investing. And you can do both without trashing your weighted average return or future total savings.

    P.S. Can I address something you said about type of insurances? Maybe I’m being a little nit-picky, but there are not really different “types” of life insurance, not in the sense of it being a unique policy. There are different ways that an insurer uses level premium funding to build a policy contract, but they’re all – all of them – built on the 1 year annual renewable term chassis. Every life insurance policy is a term policy at heart, even when the term policy is embedded in the contract and inseparable from the policy’s cash value reserve. The only real difference is the agent’s commission and how the insurer chooses to assess mortality charges, the former being completely negotiable through policy design.

    And…when you say that all of these policies are optional at best, I completely disagree. I think that if you are alive, and if you have values worth protecting, you need life insurance. It doesn’t matter whether you’re 20 or 80. Even at $50 per thousand of coverage (not that I’m suggesting you buy coverage at this price), it’s a better way to protect your most important values in life than paying $1 for $1 (i.e. savings) because you’re paying for the insurer’s savings at a discounted rate vs “self-insuring” where you bear all of the cost yourself. In other words, even at the worst rate offered by the insurer, it’s cheaper than your own “in-house” rate.

    • I know you think you’re different and that I’m jaded. But you’re also not the one running a website where 2 or 3 times a week for the last 3-4 years I have a new insurance agent show up, post a 600-2000 word comment after a 1000 word blog post talking about how awesome life insurance is, how I’m so wrong about it, bla bla bla bla. Seriously. I’m got THOUSANDS of comments written by insurance agents after these posts. THOUSANDS. Literally. THOUSANDS. Just reading them, much less responding to them, could eat up all of the productive time I have to put into this project and several others. As I’ve told all the others, if you think whole life insurance is awesome, buy as much as you like. Start a great whole life website for doctors and preach on and on ad nauseum about its merits. I’m sure it will be super successful. I really don’t care.

      However, I disagree with you that most people ought to own permanent insurance policies. Don’t you find it a little odd that the vast majority of people who believe that sell insurance for a living?

      And don’t worry about those brokers selling crappy loaded mutual funds. I’m no easier on them than on insurance agents peddling cash value life insurance inappropriately.

  14. ***
    Don’t you find it a little odd that the vast majority of people who believe that sell insurance for a living?

    No, I don’t. That’s to be expected. You see the same thing from EVERY INDUSTRY, especially industries where information is obscure, it’s a technical subject, or where the consumer crowd isn’t very motivated to learn more about it. Ex: The vast majority of people touting mutual funds sell mutual funds, not stock options. The vast majority of people touting forex sell a forex platform, a black box algo, a system of some kind, or a training course, or are an affiliate for any one of said things, not mutual funds – they won’t even recommend Vanguard.

    And, you’re talking about a few thousand agents. You are literally talking about 0.70 percent of the job market (assuming there are no reposts/followups by the same agents). Talk about statistical insignificance.

    I get that you don’t agree. At the same time, I can prove that it’s beneficial. I do own permanent life insurance. I did the analysis on it before I purchased it. The cost was $5,000 *cheaper* than BTID with a Vanguard fund @ .18 percent expense ratio and a 30 year term policy. I’m not talking about the cost surrender index or net payment…I’m not talking about IRR. I’m talking about reverse engineering the policy, separating the premium from the cash value, and assessing the cost for the pure insurance – verified the calculations with a CPA. I’ve owned other investments in the past though, and will in the future.

    So, I’m not blowing smoke at you, and I don’t use insurance as an investment – more of a cash reserve for other activities. Nothing you’ve said so far in any of your articles precludes the use of whole life for that purpose. In fact, it’s small admissions, such as in this article, that support its use for this purpose.

    I will bet that every single person who complains about their whole life policy had an agent that didn’t know what he or she was doing. But, instead of throwing it out, why not fix it?

    I know you’ve said you disagree, and I know you think the crappiness lies in potential low rates of return. But, this is not my argument for it. And, it’s something you’ve never addressed, so is there any particular reason why you disagree with my reasoning for most people owning permanent life insurance?

    • No, there are THOUSANDS of individual investors who advocate investing in stocks, bonds, and mutual funds that don’t sell them. You can find a few of them here: http://bogleheads.org. Nice try though. Those who sell them advocate loaded mutual funds. But there are no internet forums out there where investors convince each other to buy crappy loaded mutual funds. Just like there are no internet forums out there where investors convince each other to buy crappy whole life policies. These things are designed to be sold, not bought.

      I’m sure you did come up with some bizarre scenario where whole life outperformed buying a mutual fund. It probably involved carrying term insurance until you were 90. Those comparisons are pretty easy to see through. And you’re hardly the first to tell me you “prove” how awesome whole life is. You’re also not the first to say you’re not “blowing smoke.” The problem is, you are. And if this “conversation” persists, that will be easily seen. Then, if you’re like most of the agents, you’ll lapse into ad hominem attacks about your fourth or fifth post. Then you’ll switch identities and start sock puppeting and it will finally end with me blocking your IP address. Then the emails will begin and I’ll have to block those. I know you think you’re unique, but I’ve been down this road a few dozen times. I know where it goes.

      The cash reserve argument is bogus, as I’ve shown before. Let’s say I want some cash reserves. So I buy a whole life policy. Except now I’ve got far less cash reserves than I had before buying it. If it’s like most policies I see people buying, my borrowable cash value won’t even equal my premiums paid for a decade. (Save your counterargument about bank on yourself, I’ve already heard it a few dozen times.)

      I agree that most whole life agents don’t know what they’re doing. If they did, they’d be honest about what they’re peddling and eventually end up in another line of work. Come to think of it, most of them have.

      If you find the returns of whole life insurance meet the financial needs of you and your clients, feel free to buy and sell as much of it as you can. But before you continue to use your valuable time to post comments on this website, carefully consider your purpose. If your purpose is to convince me, you’re wasting your time. If your purpose is to convince others, bear in mind that very few will ever read this far into the comments section.

      • Hey WCI,

        I’ve been licensed as an agent for 2.5 years, but haven’t tried to sell a policy yet as I’ve been focused on learning as much as I can about the policies. My main issue with Whole Life policies is that the companies make them too rigid, so its not always possible to make them as efficient as they could be. This is one reason I haven’t decided to try selling them yet.

        With a well designed policy, your borrowable cash value should equal your cash value around the 5th year, even the 4th year if you are young and get a preferred rating. By the time you’ve had the policy for 10yrs, the IRR using current dividend rates is estimated at about 4% over the entire period.

        This is a solid cash reserve. But there are downsides. One is that you need to be able to place at least a few thousand a year initially in order to be able to maximize efficiency. Considering you want to max out your IRAs and 401k before doing this, it requires that you have a good income.

        • Perhaps you can explain why most doctors I run into do not have a “well-designed policy” (using your definition.) I assume it is because the agents are instead selling them a policy designed to maximize their commission. What do you think?

          I agree that is easier to make a larger policy more efficient than a smaller policy. Paying on an annual basis and using PUAs also helps. But for some reason those aren’t the policies that doctors are being sold.

          • WCI,

            As you’ve stated many times, most agents want to maximize their commission. I’ve found that even agents that say they do infinite banking end up not setting up their policies as well as they could. Part of he issue is the complexity. I’ve spent at least a hundred hours playing around with illustration software from the companies I’m contracted with and still don’t feel like I fully understand all the ways I can set up a policy.
            Lucky for me I make my money in other ways, so I don’t have to try to sell LI with a poor understanding. To my knowledge, you need to do the following to maximize short and long term IRR of a policy:
            1. Load it with PUAs
            2. Pay more into it the first few years (in PUAs. This make you break even cash value wise more quickly)
            3. Only pay on an annual basis. Otherwise you end up putting in 7-15% more.
            4. Make sure you’re using a company with a solid dividend history (Lafayette for one really sucks compared to the other companies I’ve seen, yet it’s a favorite of the infinite banking crowd).

            Overall, I do think that LI could make a great part of a portfolio, but you really need to find someone that understands it really well and wants to minimize their commission. So it’s pretty clear why most doctors don’t get that treatment.

            • Sad but true. You’re right though. Once you’ve decided that you really do want whole life insurance for whatever reason (and BOY/IB is a reasonable use for the right person) there are ways to design the product better….most of which reduce the commission paid.

  15. To WCI, what about the scenario of just considering your whole life portion of your portfolio as your “conservative” portion? Ie 80/20 – 80%aggressive (stocks,etc) 20%whole life. That way it’s basically the same rate or return as bonds , CDs without as much risk if from a reputable company. And , you are getting life insurance as just an added benefit.

    • How do you plan to rebalance? Will you buy more policies as you go along?

      Why are you looking for a use for whole life? It’s a product looking for a buyer, rather than a product a buyer is looking for. Can you imagine someone going…..”Boy, if there were just some financial product out there where I would be underwater for 5-15 years, and my long term returns would be similar to bonds, and it also came with a death benefit, and I’d have to pay interest to get my own money in retirement, and I’d have to be healthy with no dangerous hobbies to use it, I would be super excited.” No one said that….ever. Instead, they take this product that pays massive commissions and they try to come up with as many different ways to sell it as possible. “It’s like bonds!” “You can bank on yourself!” “It doesn’t go on the FAFSA!” “It’s protected from creditors!”

      Seriously though, if you love whole life insurance, and want to use it for your bond allocation, then go right ahead. I’m not going to do it, but it’s a free country and no skin off my nose if you choose to. Certainly many people who have bought a whole life policy and later realized the error of their ways have decided to keep it as part of their conservative allocation (different decision to keep than it is to buy originally of course due to the terrible returns being heavily front-loaded.)

  16. You say you are charged interest on it when taking money out in retirement? Can’t you just take it out and be taxed at your current tax bracket ? And, an added benefit is that it is tax sheltered. As all my other tax sheltered vehicles have been maxed out. And yes, you are correct. I have bought into it and am stuck and am more or less trying to justify it in my head. Haha. And so I’m using it basically as my conservative piece of portfolio. Thus, when I rebalance, I use my other bond funds to make it back to my risk tolerance. not really trying to support whole life here, just curious of your thoughts on this approach.

    • Remember that the decision to keep a whole life policy is very different from the decision to buy it. Keeping it is often the right decision because the poor returns/commissions etc are all water under the bridge. So yea, if you’ve already got it, and the in-force illustration seems reasonable to you, then keep it as part of your conservative/bond allocation.

      As far as taking money out in retirement, the best thing to do is usually to do a partial surrender up to the basis, that’s tax-free and interest-free but lowers your death benefit; then borrow from the policy, which is tax-free but not interest-free. If you’re lucky, and have a well-designed policy, the interest may not be too bad. But just wholesale surrendering it means all gains are taxed at your regular marginal tax bracket- not your lower LTCG rates.

      Don’t beat yourself up over it. As much as I rail on it, it’s hardly the stupidest financial decision you can make if you’re already maxing out all your retirement accounts. Buying a boat is far dumber financially speaking, but it’s also a heck of a lot more fun.

  17. WCI, I think you have some unfair assumptions, but you’re entitled to that on your home turf, I guess.

    [Ad hominem attack deleted.]

    You’re also mistaken about the CV build up. It could take 10 years but that’s unusual. Mine builds in the first year, and premiums equal CV after 4 years. The cost for the insurance + CV benefit averages about $5.5 for the first 20 years. That’s about what it costs to invest in low cost mutual funds and hold a decent term policy for a healthy person my age.

    Except that I can use that money in my policy to buy things. You know…people don’t just sit on savings their whole life ( <— you see what I did there?).

    They buy things. And if you're buying things like computers or cars or homes, you're either paying cash and dragging down your weighted average return or you're financing it and dragging down your weighted average return even more.

    Save the investment argument. I don't use it to invest. I think whole life is useful for saving and financing things in my life.

    …which you've never addressed. Have you written about the impact of buying stuff and debts in general on rate of return?

    No, it's not a bizzare scenario when it works out. It's fairly easy to reproduce if you know what you're doing.

    Since you ignored my question about values and whole life, I assume you don't have a reason or an answer you want to share (weird, because I'm willing to listen).

    [Ad hominem attack deleted. That didn’t take long.]

    • Oh….one of my favorites. “I’m not investing with whole life. I’m saving.” That is supposed to console the investor about the low rates of return he’s seeing. Except that those selling the policies are often selling it as a great investment – “You can use it for retirement income!” etc.

      It’s like a Hydra- you chop off one head and two more take it’s place.

      “It’s a great investment,” says the agent.

      “But the returns are low.”

      “You’re saving, not investing,” says the agent.

      “I only need so much savings, and I feel fine keeping that in the bank. Everything else I invest.”

      “But it can take the place of bonds in your portfolio, says the agent.”

      “I’m okay with bonds. I’ve got munis and I bonds in taxable, and treasuries and corporates in my retirement accounts.”

      “But it doesn’t show up on the FAFSA, so you can use it for college savings,” says the agent.

      “My 529 seems to be working fine, and has positive returns in the first decade to boot!”

      “But whole life insurance companies have access to special investments you can’t buy on your own,” says the agent.

      “I don’t know, their portfolio seems to be corporates and treasuries and a little bit of real estate and stocks. I’ve already got that.”

      “But you need a permanent death benefit,” says the agent.

      “No, I don’t. Once I’m financially independent I have no need for insurance.”

      “Well, you can use it for income protection before you retire,” says the agent.

      “Yes, at ten times the cost.”

      “But you’re sure to die and don’t you want to leave something to your heirs whenever that is?,” says the agent.

      “I’m more likely to leave them more money with traditional investments at my life expectancy.”

      “But you can use it for estate planning,” says the agent.

      “I won’t even owe estate taxes.”

      “But it provides asset protection, says the agent.”

      “Not in my state.” Or if so, “It’s very rare for doctors to be sued for more than their malpractice or umbrella limits. Besides, retirement accounts provide as much or more protection.”

      “But you shouldn’t trust the banks,” says the agent.

      “They seem just as trustworthy as the insurance companies.”

      “But insurance companies remained solvent in the Great Depression,” says the agent.

      “No, they didn’t if you actually look it up. Some of them failed to pay out just as much as the banks.”

      “But banks buy permanent life insurance,” says the agent.

      “I thought we hated banks. Why are we doing what they do? Besides, how a bank invests is irrelevant to how I invest.”

      “You can save on taxes with whole life- just think- tax-free withdrawals in retirement,” says the agent.

      “Yes, tax-free but not interest-free.”

      “Sure, you don’t need whole life, but don’t you want it? It’s like a luxury item that rich people have,” says the agent.

      “Seems like a boat would be more fun if I’m looking for a luxury item.”

      “But it’s so flexible, especially in retirement,” says the agent.

      “Except if I want all my money back within the first few years of owning it. Or if I want to stop making payments. Even later in the policy when the dividends/cash value can support the premiums due that dramatically decreases my return.”

      “Don’t you want to pass your assets to your heirs income tax-free?” says the agent.

      “Have you never heard of the step-up in basis?”

      “Are you really going to let Uncle Sam tax your investments as they grow? Tax rates are sure to go up,” says the agent.

      “Have you never heard of the lower dividend/LTCG rates? How about tax-loss harvesting? Donation of appreciated shares? Tax-efficient index funds?”

      It just goes on and on and on. It’s Hydra. Until the client gets up and walks out of the office, the agent is winning. The argument cannot be won. The agent will never say, “You’re right, this is a lousy product that I would never recommend to you if it didn’t involve a massive commission for me. It certainly isn’t right for you. Sorry I brought it up.” They won’t says that because not only does their income depend on it (and you know what Upton Sinclair says about that) but because they actually believe that whole life is awesome. They truly do. Somewhere, somehow, they have been convinced or convinced themselves it is. It’s almost cult-like. And they’ve been trained to keep bringing up all this stuff over and over again until you give in and buy the policy. Then, a few months or years later, you realize what you’ve done. The commission is long since spent and the client is stuck with the unsavory decision of either keeping a policy he doesn’t really want that he will have to continually feed just to get bond like returns at best while always remembering what a sucker he was, or surrendering it at a loss.

  18. WCI, YIKES! I’m not saying any of that. Be honest, am I bringing any of these arguments to you?

    You’ve got it in your head that I’m somehow up to something and yet the only thing I’ve actually said about whole life (and the only things I really ever say about it) are:

    1) It has tax benefits
    2) It’s the best, most cost-efficient, way to insure lifelong and important values you want to protect
    3) It’s a clever way to save money

    Buying whole life and investing (or doing any of the other things you’re talking about) aren’t mutually exclusive. So, it’s not like I’m here telling you “I don’t invest, I save.” You said that, not me. I don’t hate banks. I love them actually. I don’t hate investing. I don’t think insurance is an alternative to investing. You’re overblowing insurance company failures during the Great Depression. These are all strawman arguments. Sorry…what I mean to say is that these are not arguments I’m making. You’re making them.

    Commissions: The agent can’t make a lot in commissions and do this, because you have to blend in quite a lot of term insurance, and use paid up additions, which don’t pay a lot –which is why a lot of agents won’t do this. So, I don’t buy the idea that agents doing this sit and argue with clients because “their paycheck depends on it” as though they’re getting rich off the idea. I don’t have a problem with agents and reps making a lot of money, but I know for a fact they’re not making a lot by maximizing cash values for clients. Not happening.

    I mean, when 70-85% of the premium is available in the CV in the *first year*, and in some cases 90 percent, there’s simply no room for a high-commission. The rest of the deficit is insurance charges which bottom out in about the 3rd year. No agent is going to battle it out with a client for 4 hours for $200 or less. That doesn’t make any sense. It also doesn’t make sense that a client would look at an illustration, see multiple years of “$0” in the cash value column and think “oh wow, this is a great deal” and then regret it later.

    Clients sign an illustration before they receive a policy. So, the agent is either doing a switcheroo or the client isn’t reading what he’s buying. Either scenario doesn’t point to a fundamental problem with a product.

    All these other issues of flexibility and the policy loan rate going negative are really non-starters for the most part. My policy is exceptionally flexible since most of it consists of non-contractual premium payments. And, if, for some reason, I couldn’t make a premium payment, not a big deal. Automatic premium loan and I’ll repay it later for a net cost of $0.

    The only time I’ve seen the loan interest rate flip (and the only time it really would do so in the future) is when there is an inverted yield curve.

    How often does that happen — really? And, when it did happen, I think mutuals like Mass Mutual (which has a non-direct recognition loan option) saw inverted loan:dividend for a short time. But, that time is over.

    Is it a risk? Yes. Is it a serious risk you should be concerned about over 30 years? I don’t think so.

    People drag their feet on life insurance because they’re avoiding an unpleasant discussion about their mortality. In that sense, people have to be “sold” insurance. But, when you ask people whether they want to protect their most important values, the answer is almost always “yes.” People don’t fight you on that. In that sense, it’s not sold at all. If you, and your readers, have lifelong values you want to protect, I maintain that permanent life insurance is the most efficient way to do that. And, that’s not a gimmick.

    You’re never going to be able to “self-insure” for less money. It’s not possible. Self-insurance is always $1 for $1. Whole life is always multiples of that. Always. Even if it were $2 for $1 in premium, it’s still cheaper to buy insurance than to self-insure.

    Frankly, I think it’s incredible that there are agents out there, some of whom are my friends, some of whom are actuaries that design these products, that took the time to learn how to make them work under an unfriendly regulatory environment.

    …most people just spit on the product and don’t really understand it, or don’t want to.

    • Another day, another 800 word comment on my site from an insurance agent. Seriously, if you really want to continue this conversation, I think it is only fair that you have to first read everything I’ve written about whole life insurance on the site, including the comments. That’s approximately 20 hours of reading.

      However, since you’ve brought up another argument that is relatively easy to shoot down, we might as well do so, although I’m confident two heads will grow to take its place.

      You say you’re never going to be able to “self-insure” for less money and whole life is multiples of that. That is incorrect. It is always cheaper to self-insure if you can afford to do so. The only time insurance is worth buying is when you cannot afford the consequences of self-insuring. Of course on average it costs more to pay someone else to take that risk for you. They have business expenses and also hope to make a profit AND have to cover your expected loss.

      I don’t need whole life insurance to protect my lifelong values. Term will do just fine until I’m financially independent and then my portfolio can protect my lifelong values.

      I’m not spitting on your product. I get it. But I don’t have 1/10th of the enthusiasm for it that you do because I get emails every day from people who realize they were sold a pig in a poke. The email today is from a doc who was sold a $1600 a month policy by an agent who told him he could not contribute to a Roth IRA. This “advisor” has never heard of the backdoor Roth IRA and gave this doc terrible advice. Not to mention paying down 6-8% student loans. It was a totally inappropriate sale, just like the vast majority of them out there. That’s why 80% of policies are surrendered prior to death. 80%! I’m sure all your clients are thrilled with the awesome policies you’ve sold them, but the statistics don’t lie. 80%! Somebody out there is selling tons of cruddy policies that people don’t want and eventually surrender. All your salesmanship cannot get past that fact. You’re selling something that 80% of those who buy it eventually regret purchasing.

  19. WCI, it’s not cheaper to self-insure. When you self-insure, you have to save $1 for every $1 of self-insurance. When you buy life insurance, you pay $1 and get more than $1 of insurance. You say that’s not how it works.

    No really, that’s how it works. You want me to read 20 hours of your posts? I want you to read 60 hours of actuarial textbooks. How is it cheaper to self-insure?

    [Ad hominem attack removed.]

    Lapse rates: You’re way off. The SOA does this study regularly to monitor lapse rates and persistency. The lapse rates in the first year for whole life is something like 13 to 14 percent. Overall lapse rates for whole life are more like 3 percent. Term lapse rates? 6.4 percent. People who hold their whole life policy for at least 10 years are less likely to drop their policy than term life holders. Monthly premium payments reduce lapse rates whereas quarterly and annual premiums increase lapse rates slightly.

    If you think about this on a common sense level, an 80 percent lapse rate doesn’t make sense. A company couldn’t be profitable if 80 percent of its products were being surrendered. The liquidity trap it would create would have brought the market down by now.

    Why can’t you at least be civil? I suppose you’re used to agents showing up and making all sorts of wild claims…

    …but so far, you’ve dodged my honest questions, made material/factual misstatements, and have generally been rude and nasty to me.

    You’ve made up a hydra that you knocked down multiple times, and yet you’re still not willing to really examine what I’m saying. I even sent you a cordial email, complete with an olive branch, and offered to open up a rational, meaningful discussion with you.

    Nada. Maybe you’re angry with agents that have lied to you, your readers. Maybe you’re tired of agents who make bogus claims. I’m not one of those agents. If you can’t see that from what I’ve written, you’re not reading what I’ve written.

    • What is your motivation for posting here? Are you hoping to convince me that whole life insurance is a good idea? Are you hoping to convince someone else? Are you just looking for an argument?

      I find it odd that I have to explain to an insurance agent how insurance works. It’s not the first time. Insurance is the pooling of risks. Consider fire insurance. 1000 homeowners buy an insurance policy. 2 houses burn down. The 1000 premium payments are pooled together. They are used to pay the expenses of the insurance company, perhaps some profit, and then the remainder is used to build the two unlucky home owners new houses. The sum of the premiums paid is greater than the sum of the benefits paid out. Surely any logical reader agrees with this. Thus, it is cheaper NOT to buy insurance if you do not need the insurance because on average, you will lose less money. This is the reason I do not buy insurance I do not need. I can afford to replace my iPhone, so I don’t insure it. Just like after 50 my family can afford to live without my income, thus I don’t insure my life after that age. I have no need for a permanent death benefit. Your explanation of “more than $1 of benefit” ignores the time value of money and the opportunity cost of that money. It doesn’t take a great level of financial sophistication to see past that sales technique.

      I’m not off on the lapse rates. I’m quoting the SOAs. I’m surprised you didn’t know this. I would think if this were my professional field that I would be quite aware of what seems to be a rather important fact. Here’s a post about it:

      Besides, even if the number is 40% and not 80%…..I draw the same conclusion.

      You suggest I’m not being civil, yet I’ve had to remove ad hominem attacks from your last 3 comments. You sent me an email suggesting I send my readers to your website. If that’s your idea of an olive branch, I’ll pass. I’m not sure why you think I’m interested in spending my valuable time corresponding with an insurance agent. Perhaps you misunderstand the purpose of this website. It has three purposes: 1) To help doctors avoid falling for tricks like yours, 2) To make me some money, 3) To connect doctors and other high income earners with the good guys in the financial services field. (i.e. not those that sell them whole life insurance inappropriately.) As you believe that most people, not to mention most doctors, ought to buy whole life insurance, I put you squarely in the “bad guys” category. Perhaps that’s why you sense a hostile tone. The whole purpose of this website is to expose the way people like you sell your products. I don’t write these posts for insurance agents. I don’t care what insurance agents think about me. I don’t care what they think about what I write. I don’t care to have extended discussions or arguments with them in the comments section or via email, and certainly not by phone or in person. I have far better uses of my time. The only reason I bother engaging comments such as yours is so that readers can see that all these sales techniques have readily apparent answers/counters. Sending my readers to your website defeats the purpose of the site. The last thing I want them doing is hanging out with someone trying to sell them something they don’t need. In the rare situation a doc really understands how whole life works and still wants to buy it, he will have no difficulty finding someone willing to sell it to him and to tell him all the “good points” about it. There are thousands of agents willing to do so.

      As I’ve said dozens of times- if you love whole life and think it’s an awesome deal, buy as much as you like. If you think it’s great for your clients, sell as much of it as you can. But don’t be surprised when an impartial observer points out to them why it’s perhaps not quite as good of an idea as their salesman thinks it is or told them it is.

    • Click on his name. Why do you think he’s posting here? To get links from a site that people actually read. He just doesn’t realize how few people are following this thread (you’re one of 7 aside from me) and how few people actually read this far in to the comments section (a tiny percentage, most of whom are working a boring night shift and simply looking for entertainment i.e. watching me argue with insurance agents.)

      What you will find is a site advertising his business and a blog consisting of a single post. Enjoy.

      • Sorry, force of habit to include the website name. Link*s*? Be honest WCI. I included a single link in one comment to my new site.

        • Honest about what? What is your motivation to posting all these comments? Not enough business? If you had enough business, I assume you’d be doing business on Monday morning instead of posting on my site.

  20. WCI, initially I was posting here because I thought it was great you were acknowledging a success story. But, you also introduce a lot of non-sequiturs.

    Fire insurance: You’re right. If you don’t need insurance, it’s a waste of money. I argue most people need life insurance and when you need it, it’s cheaper to have it than not. With fire insurance, the “peril” is your house catching fire. It may or may not happen. With life insurance it’s death. With medical science where it is right now, it’s going to happen. You have a choice as to how you pay for it: with your money, or with the insurers. If you make bad financial decisions (i.e. lapse your policy), that’s your fault, not the product’s (or the insurer’s).

    …and payouts with low lapse rates only become a problem with lapse-supported pricing — a model that’s very common with term insurance and UL products, not with whole life.

    Yes, statistically, insurers make money. But, statistics aren’t very meaningful on an individual level. Take mortality rates. Statistically, there’s a “mortality age”. But, that doesn’t mean you can predict when someone will die.

    Likewise, statistically, insurers collect more in premium than they pay out. On an individual basis, no one really knows who will be the ones who pay in more and who will receive a payout. Most term insurance policyholders don’t get a payout. They outlive the term. The odds are great for the insurer that this will happen. If people hold onto their whole life policy, it will pay out. Set aside, for a moment, which financial strategy you think is better. The fact of the matter is, if someone keeps the contract in force, it will pay out. Period.

    I was talking about lapse rates for any given year. Perhaps a miscommunication there. We were reading the same report. You chose to be very “creative” with how you presented the data. So be it.

    The more important question is: why do lapse rates matter? And, I think where you’re going with this is: “because whole life has a high cumulative lapse rate, it’s a crappy product. People don’t like it.”

    But that’s not what that suggests at all. That’s purely your opinion, which I think is wrong and unprovable. In fact, if you look at savings rates, this phenomenon isn’t unique to life insurance. Average 401(k) balance is less than $100,000, despite the fact that 80+ percent of employees contribute to their 401(k), contributing at least 5 percent of their income, and they’re investing in investments which should, according to many, be providing them with stable or relatively predictable long-term returns. Even with employer matching, their savings isn’t really all that impressive.

    Meanwhile the employers get to hold a carrot over the employees’ heads (the match bonus), which they have to budget for for the year due to non-discrimination rules and employee expectations which really means it’s part of the employees’ salary (deferred and conditional). Talk about a gimmick. Just give the employees their match as full salary and let them contribute to an IRA if they want. Or not, if tax rates are the same or lower in the future, they’re not any better off deferring the tax until later.

    Look at the stats for people living on Social Security. Something like 40 percent rely on SS for a significant portion of their retirement income and their personal savings is less than $100,000, and in many cases it’s less than $50,000. So, whatever they’re doing, it’s not working.

    That’s a psychological/behavioral problem. It’s not a product/401(k) problem. They’re not saving enough. It wouldn’t matter if they bought whole life insurance, term insurance and mutual funds, or invested in tangerines. They’d still be poor.

    If you want to argue that there’s something fundamentally wrong with whole life as a product, you should focus on showing some kind of inherent defect in how a contract is written, not how people use it, how it’s sold, interest rates on some whole life products, dividend payouts, or anything else. Those are all red herrings.

    That you have a whole life success story belies the idea that whole life is inherently a bad product. You’re the one who posted this post, not me.

    • I disagree with you that most financially independent people need life insurance. They don’t. That’s the whole point of buying term and investing the difference. I guess if you’re never going to be financially independent, or you won’t until 70 or 80, then a case can be made for a permanent insurance product, although that product is probably GUL.

      Who cares about the one year lapse rate? There are two reasonably good outcomes with whole life. The first is to never need it and never buy it. The second is to buy a policy appropriate for your needs/desires and hold it your entire life. Surrendering it always works out poorly compared to the first and often compared to the second (especially after the first decade or two.) I don’t find that creative. I find it to be the statistic that is actually relevant. And it’s a terrible indictment of the industry. I occasionally have an agent come on here and say they’ve never had a policy surrendered. They may just be a new agent. They may also be lying. But assuming they’ve been doing this for decades and that it is actually true, I think that’s actually a sign of a really good agent.

      If lapse rates were lower, that would probably mean lower dividend payments for those who kept the product of course, so a two-edged sword there.

      I agree that the 401(k) system would be better if it were divorced from the employers- just like health insurance.

      I also agree that too many people save too little. But that issue is compounded by low investment returns. Most of the whole life policies I’ve seen being sold now for healthy 30 year old guarantee a long-term (3-7 decades) return of 2% nominal and project a return of 5% nominal. Let’s call that -1% real and 2% real. It’s a little better than tangerines, but not by much. At 2% real, what percentage of his income would an investor need to save? Have you thought about that? You might be surprised just how high a percentage of your income you must save if your returns are that low. Low returns have very real consequences on how much you have to save and how long you have to work. Let’s say you want your portfolio to provide 50% of your preretirement income and you plan to work for 25 years and you’re going to return 2% real a year. We’ll use a salary of $100K just for ease of math. So after 25 years you need a portfolio of $50K*25=$1.25M. How much do you need to save at 2% real? Well, the PMT function will show us: $38,260 per year- basically >38% of your income. Are you saving that much for retirement? I’m not. Neither are the vast majority of investors. It’s worse at -1% real- you have to save 57% of your income. Contrast that to 5% real- now you only have to save 25% of your income- a figure that is actually doable for the high income earners who read this blog. That’s why rate ofreturn matters.

      And yes, I believe that whole life is an inherently bad product for the vast majority of the reasons for which it is sold. My problem isn’t with the product, but with the people selling it inappropriately. Since you believe the vast majority of people should own said product, and I feel that vast majority should not, I think you are selling it inappropriately. That’s why I posted this post (over two years ago.)

  21. Whole life operates on the BTID principle, since the insurance component is literally a 1 year ART embedded into the contract and the cash value is the reserve set aside by the insurer.

    You’re back to talking about the effectiveness of one strategy over another and perhaps your personal preference. That’s not a fundamental flaw with the product.

    I do agree surrendering a policy is nearly always a bad move. I disagree that the lapse rate is the fault of the insurance industry. That’s like saying people aren’t responsible for their decisions or choices. You wouldn’t say that, if 40+ percent of people cash out their 401(k)s every few years when they lose or change jobs, that that’s the administrator’s fault. People need to make better financial decisions, grow up, and take responsibility for themselves.

    Insurers that can’t make good on their death benefit promises because they relied too heavily on lapse-supported pricing are the shameful insurers. That’s mostly a potential problem with ULs and term policies, especially UL with secondary guarantees, e.g. the GUL you like. I don’t think that’s responsible industry conduct. Insurers should adopt funding schemes where they can make good on promises when policyholders hold their policies to term.

    Let’s set aside, for just a moment, whether you believe that someone can achieve a particular result with whole life insurance. You’re telling me a financially independent person is better off with a million dollars and no insurance instead of a million dollars plus maybe $100,00-$300,000 in paid up death benefit at retirement? (the cash value reducing the net amount at risk/pure term coverage in whole life)

    I completely disagree with that. That insurance lets one do more with one’s savings. With the self-insured option, you’re dividing your savings into insurance + savings and hoping you have enough left over for whatever qualitative values you want to protect or contribute to when it’s time to take a dirt nap.

    • Sorry, I’m not a fan of GUL either. But if someone actually needs a permanent death benefit of a fixed amount, that’s the cheapest way to get it- half the price of a whole life policy. If you’re saying insurance companies are unlikely to be able to fulfill their guarantees, well, I guess that’s one more good reason not to buy insurance you don’t absolutely need.

      What kind of a weird straw man argument is this? Of course someone is better off with a million bucks plus a death benefit than just a million bucks. However, the real question is if someone is better off with a million bucks and a $300K death benefit or $2 Million. I would argue two million. That’s why “investing” in whole life is such a bad idea.

  22. WCI, not sure if you’ve ever addresses this scenario: since Im invested already and am using myWL policy as my “conservative” portion of my portfolio. Let’s say in 20 years, the markets are extremely bearish like the 2000s. At this point , 1. The money I put into the WL policy is in fact, my money as the early commission years of the policy are under the bridge. 2. I’m nearing retirement , so my portfolio is becoming more conservative. So at this point, wouldn’t it be smarter to overfund my WL policy with any excess cash for investing after my tax sheltered accts are maxed out??? And even if the the market isn’t bearish , but the fact that I’m nearing retirement and want to minimize risk , isn’t it a good thing to have a guaranteed return by overfunding the whole life policy at that point??? Aren’t those advantages I wouldn’t have had , had I not bought the policy? Or am I missing something? just trying to learn more. Thanks.

    • Well, the truth of the matter is that if you’ve decided to buy a whole life policy, your return is likely to be better if you overfund it right from the beginning, rather than waiting until later in life to do so. But yea, that’s reasonable to do some overfunding/PUAs instead of buying some bonds.

  23. My father was a business owner with a pretty successful business over his career. He bought a WL policy from Northwestern Mutual as well back in the late 70’s or so, very soon after college. I know he bought a few more (his agent approached me during my residency), all from NM. Over the last three years our family has been reviewing all of his financial documents and preparing for him needing to go into skilled nursing due to a stroke. One conversation matter was his life insurance portfolio. My dad has over $2 million dollars of life insurance, just a hair over $1.2 million is whole life. He had a $750,000 level 20 year term with Jefferson Pilot – and an annual premium of $2,170. He is in this 19th year and he does have the option to renew- at age 64. The premium will go to a minimum of $9,180 in the 21st year, and $11,400 in the 22nd year! And it’s only guaranteed for 5 more years, which I hope my father lives past. If we continue to pay this- we will pay almost $95,000 including the $40,000 my dad has already paid. And if he doesn’t die, we will never see that money again.

    Now out of the 1.2 million or so in whole life, my father has over $560,000 of cash value- much of which we may use to pay for his care. His agent did a projection of us withdrawing $35,000 a year (probably via loans)- but if he dies 10 years from now- there is still over $500,000 in death benefit for my mother.

    The craziest part- I don’t know how Northwestern can survive; but when he had his stroke in 2012 they waived his annual premiums. They were scheduled to be ‘fully paid’ by age 65- but he hasn’t paid a premium since. And his death benefit and cash value keeps growing.

    I have NEVER heard of a term policy doing that. I think this is a success story- regardless of returns. We now have options- thanks to his whole life. If all he had was term, we would either have to drop it because of affordability or hope he died soon to collect. Term is ONLY for temporary needs.

    I have bought $2 million of life insurance, and I own $250,000 of whole life and then term. I will always have whole life, as I don’t care if I only average 1% above inflation- the fact is my money is safe, it’s guaranteed to grow, and I can use it for whatever I want. And when I turn 65 (if I don’t die first)- my policy is fully paid, like a 30 year mortgage. From my experience I think whole life is a great policy to own. I’m not too sure about GUL or the variable life, but I want guarantees with my money and I know whole life will do that for me and my family.

    • Glad you’re happy with it and that your family has this resource. It sounds like the waiver of premium feature was also pretty valuable for you.

      It’s not clear to me if he still has a need for life insurance at this point. Is there no portfolio or pension at all above and beyond the $560K in the whole life policy? I’m also not clear on whether he would have $2M instead of $560K if he had used a more traditional investment.

      • He certainly still needs life insurance. His skilled-nursing care costs will be around $65,000/year and with even modest inflation will add up over time.

        His financial planner recommended a few options; start taking withdrawals from his 401k (my mom is 61, healthy and still working as a PA at a university/hospital). Which means withdrawal $100,000 to net $65,000. He only has $700,000 in 401k plus some in a stock account, we can see how fast the skilled-nursing would eat that up. Two- sell the business (at a fire sell mind you); with no guaranteed buyer. Or three- take withdrawals of tax-free return of premium basis and tax-free loans plus his social security to pay for the care. No increase in taxable income for them, as well as leaving the 401k to compound until they’re 70 1/2 and have to start taking money out.

        The insurance advisor modeled taking these withdrawals (basis and loans) for 15 years- and using the dividend to pay loan interest? And principal I think? He did run it at 1% lower than their current dividend rate (I’m glad he did this)- he could pull out all of his premiums, plus more- and still have $650k of death benefit at age 100. He won’t live that long- so yes, there is a life insurance need. His skilled-nursing will eat up assets, he has no LTC insurance. That life insurance will refund more than enough, and take care of some of the costs today.

        Would he have had more in a ‘traditional investment’. Maybe? Who knows? Rate of Return is irrelevant in a family crisis. Options are key and that Whole Life Insurance provides many options. I love investing and I love saving 20% a year-but I see the value in this product. Sometimes boring gets the job done.

        • So he put half his net worth in cash value life insurance? Interesting portfolio. It seems to me like those whole life insurance premiums would have been better used to make a larger nest egg and/or LTC insurance to me. This seems more like making lemonade out of lemons rather than what I would call a “success story.” A success story is like the guy this post is written about- he wanted a 7% return out of his investment and he got it over 30 or 40 years.

          As far as options, there are lots of options with whole life for sure. There are also lots of options when you have two or three times as much money. Buyer’s choice.

          • Drew,

            How long has your dad owned the Whole Life policy, and how much have the annual premiums been?


            Your point regarding the fact that the gentleman could have had 2-3 times more money had it been in the stock market is generally accurate, and certainly true in his case, starting in the late 1970s when market valuations were very low (The Shiller PE was around 10 at the time).
            The investor today is facing a different situation. With the Shiller PE currently above 26 (http://www.multpl.com/shiller-pe/), the likely average return over the next 10 years is 0-2%/year, rather than the 10% the market averages over the long run.

            Assuming the market averages 2%/yr for 10 years, then does 10%/yr for the next 10, the average over 20 years would be about 6%/yr, or about the same as a well-designed whole life policy (on someone under 35), assuming interest rates move up again one day…otherwise the return would be closer to 5%.

            You might argue that the stock market return is still better, but I would counter that the person with the growing cash value will be positioned to buy stocks cheaply when they drop, while the person already invested will only be able to hope they move back up before he needs to sell.

            John Hussman has a very good principle that most of us have forgotten:
            “Valuations control long-term returns. The higher the price you pay today for each dollar you expect to receive in the future, the lower the long-term return you should expect from your investment. Don’t take current earnings at face value, because profit margins are not permanent. Historically, the most reliable indicators of market valuation are driven by revenues, not earnings.”

            • I agree today’s investor is facing a different situation, but that is the same whether he is looking at stocks and bonds or whole life insurance. The guaranteed return on a pretty good whole life insurance policy bought today and held for the long term is 2%, with a 5% projected return. In the 70s, that was much higher.

              Valuations have some predictive power, but not nearly as much as advocates of valuation based techniques would lead you to believe. But if you think you’ll get the same returns over the next 20 years out of a whole life policy as a diversified portfolio of stocks, bonds, and real estate…no one is preventing you from buying it. But I wouldn’t bet that way.

            • Aurelien- the total annual premiums were a total of $5,200/year- he bought a policy in 1979 and another in 1983. His total premiums paid in by my math was $192,400. And today he has $560,000. And I know he borrowed from it in the past and paid it back- that may have affected the net value?

              I agree with your analysis of the markets. A Vanguard or Blue Chip portfolio- with the extra $5k a year would probably be worth more. We would have all been doing well had we bought, reinvested dividends, and held our holdings from the late 70’s through the 90’s. I agree the market is very inflated today (especially biotech, healthcare sectors), our World is globally connected and information is available so much faster today than it was in the 80’s. Investing is not the same.

              WCI- investing sounds simple when you look backwards, but also when he was starting his portfolio mutual funds weren’t as accessible or popular in the 70’s and 80’s. He bought individual shares of stock in US companies- that’s what brokers sold. I do know he once owned Montgomery Ward and we all know that DID NOT return 8% every year, until today. Even though it did do well for a good period of time.

              • Drew,
                Thanks for the info on the policy. For simplicity sake, I assumed that your dad bought both policies in 1979, so he paid $5,200 a year from 1979 through 2012. He’s since not paid due to his waiver of premium rider.
                Based on a $560k cash value today, his overall IRR on cash value for this policy has been 5.4%/yr.

                I’m guessing that this policy was not set up with cash value in mind. Is that accurate? I’d also be interested to find out how much the cash value has gone up each of the last few years, since your dad stopped making payments.

          • Take a history lesson- do you remember what tax rates were in the late 70’s and 80’s? In 1982 the top Federal tax rate was 70%!! Yes T-Bills and CD’s payed good yield back then, but would you want to pay more than half your interest-yield in taxes? Whole Life (back then) was a good place for tax-deferred growth, with similar interest yields. (Do some homework on the IRS’ ruling of Modified Endowment Contracts in 1986). Secondly- term insurance was not a popular insurance vehicle- nor was universal life around yet. The options were limited to what we have today. His agent who sold him these policies said as a business owner it provided a source of collateral if he needed it for expansion.

            I agree I wish he had LTC Insurance- but I think we would both agree he is uninsurable now. And again, “He could have a larger nest egg”- yea and you could have bought Apple on it’s IPO and held it until today and would probably be on a tropical beach, but you’re not. Hindsight is 20-20. No one talks about the mistakes they made in the market, it’s easy to boast and say you’ll get 10% every year.

            When you’re a hammer everything you see if a nail. I’ve learned people tend to disregard and reject things they do not understand. Whole Life and life insurance in general is very complicated. Before I bought my policies I researched, studied, talked to advisors for months before I made a decision. I learned a great deal and have a better understanding of how they work- I wanted to be informed and feel good in my decision

            • Do I remember it? Nope, but it’s pretty easy to look up. The top federal bracket in the 1970s was 70%. In 1970, that started at a taxable income of $200K the equivalent today of $1.2 Million, about 6 times the average physician income, more if you count deductions. The typical bracket for a doc was pretty similar then to what it is now. That’s a bit of scare tactic if you ask me. The interest yields certainly were not “similar.” In 1970, NML paid a dividend of just over 4%. T Bills paid 7.87% that year.

              Glad your policy meets your needs.

  24. My biggest problem with the narrative around investments is that most people only discuss one half of the equation. You see, there’s two phases to investments, accumulation and distribution. And while stock market based products tend to outperform insurance products when it comes to accumulation, they are absolutely awful at distribution. Consider this, given today’s interest rate environment (noting that the situation changes when interest rates rise):

    A whole life policy will accumulate at a net IROR in the vicinity of 4% (net of costs, fees and taxes) depending on the insured. A market based product will be something more like 7% (net of costs, fees and taxes). So when all you’re talking about is building the nest egg, sure, market based products look superior. However, market based products can only distribute about 3-3.5% of the nest egg per year over a roughly 25 year time frame (retirement). Whole life can distribute more like 6-7% of the nest egg over that same time frame.

    So, the reality is not that market based products are superior because they accumulate a higher balance. It is actually that they HAVE TO accumulate a higher balance to replicate the same retirement cash flow.

    Put a different way, a $600,000 whole life policy will last approximately as long as a $1 million investment portfolio when the same lifestyle expenditures are required. This is because policy loans don’t effect the accumulating dividend, and because there is no risk of a significant pullback in the account value at any given point in time like there is with market based products.

    I ran an analysis of this for a 45 year old client. I analyzed retirement cash flow, NOT retirement account balance. In order to create the same retirement cash flow as the insurance product, his investments would have had to return north of 11% net of costs, fees and taxes over the next 15 years. Sadly, his prior financial advisor had only earned about 6.5% between 2003 and 2014, a period of 11 positive years and only 1 negative year.

    It’s because of this that pension plans are largely funded with life insurance. Yes, they may also hold equities, but not nearly as much.

    WCI, I’d be interested to hear your take on this. Let’s try not to argue facts, though. Ultimately, if I believe something is a fact, and you don’t, we’ll never come to an agreement anyway.

    And let me add that I don’t just sell life insurance, I also sell traditional investments, but it all comes down to specific situations.

    • If you’d use correct facts, I wouldn’t have to argue them.

      I’ll give you 4% for whole life in the long run. I think 7% is a little low for a market based, but I’d buy 8% so I think you’re in the right ballpark. However, your 3-3.5% is a little nutty. The 4% rule is quite easy to understand, and most of the time, a retiree can withdraw quite a bit more. So let’s call it 4.5%. Lower volatility does allow for higher withdrawals of course, and a “market investor” can get that using SPIAs during the withdrawal phase without ever buying cash value life insurance, but let’s ignore that. Let’s give you a 6% withdrawal rate on 4% growth and I’ll take a 4.5% withdrawal rate on 8% growth. Let’s assume $50K a year for 30 years. By my calculations, the market guy gets to spend $275K a year without the SPIA (more if he bought them) and the whole life guy gets to spend $175K a year. Garbage in/garbage out on any calculation.

      I guess I’d rather use the “best” accumulation vehicle, then turn around and use the “best” distribution vehicle. In my book, that’s traditional investments for accumulation, and a combination of SPIAs + traditional investments for distribution. Still no role for whole life there, which is inferior in both phases to the best vehicles.

  25. Here comes the argument, I guess. You think your facts are right. I think mine are right. I have to disagree with you because I think your assumptions are flawed and your math is wrong. Let’s start with the withdrawal rate.

    A 4.5% withdrawal rate from a 60/40 portfolio (this is about as optimal as it gets during the withdrawal phase) fails approximately 15% of the time over a 30 year period according to this calculator…


    Maybe you’re okay with that, but I’m not. That means that about 1 out of every 7 people who listens to you will run out of money before they die.

    Furthermore, we are near an all time stock market high, so let’s assume that in the first year of retirement, someone’s portfolio drops 10% on top of their 4.5% withdrawal. Now, there’s better than a 20% chance that their nest egg won’t last their lifetime. Not good.

    A 3.5% withdrawal rate is sustainable for a 30 year period approximately 97% of the time. That’s a lot smarter than trying to squeeze out much more.

    Now let’s talk rate of return. I don’t think 8% is achievable when you’re talking net of fees, costs AND taxes. Granted, most people don’t pay the taxes on their investments out of the investment account, they pay them out of their income, but if we’re to keep the comparisons fair, the market based investment needs to be balanced out. This is why I use 7%, because if you gross it up for a 15% capital gains rate (which isn’t likely to last forever), the gross rate after expenses is more like 8.25%, still net of fees and expenses. If we don’t adjust the rate of return to deal with taxes, we have to adjust the contribution amount or the net withdrawal amount to deal with the tax that has to be paid at some point. That 1% difference in rate of return equates to approximately $1.06 million at age 65, which is statistically significant. My point is that your 8% assumption is awfully aggressive and makes a really, really big difference.

    I ran an illustration on whole life using your scenario, 30 years funding at $50k/year. I used a 35 year old male and only a standard health rating. The cash accumulates to a little over $3 million, with a rate of return on the cash of 4.21% at age 65. It approaches 4.5% with better health ratings. My point here is that my 4% is conservative.

    But let’s get to business on this. The individual who contributes to whole life for 30 years can access just about $180k per year for a 30 year period with a standard rating, and just over $210k per year with the highest health rating.

    If you earn a NET of 8% (which I think is extremely unlikely after costs AND taxes) you are likely to accomplish this (99% probability of $180k income lasting, and 96% of $212k lasting). If you earn a NET of 7% (a lot more likely) you have a good chance of it happening still (96% chance of $180k income, 91% chance of $212k income), but 1 or 2 out of every 20 will fail. If you attempt to withdraw much more, you’re talking about 2, 3, or 4 out of every 20 failing.

    What I haven’t mentioned yet is that the whole life policy still has between $1.5 million and $1.9 million of death benefit left after the 30 years of income! If you don’t want the death benefit, you can probably sell it to an investor for cash right now, probably upwards of 50% or more of the face value of the insurance for someone in their 90’s, or another $750k to $1 million.

    So when it’s all said and done, odds are that the sustainable income is fairly similar, but the life insurance leaves something for beneficiaries (or a marketable asset to an investor) that ends up blowing a traditional investment away. Really, it’s not even close.

    • I disagree that a sustainable income is similar. You may use whatever numbers you wish of course, as may anyone else who wishes to run a calculation like this. The fact remains that over 50 years or so, the guaranteed return on a whole life policy is on the order of 2% with a projected return in the 4-5% range, perhaps extending a little over 5% if you run the numbers on the death benefit instead of the cash value. If you think your return with whole life is similar to your return, after taxes, costs, fees etc with whatever traditional investments you’re looking at is very similar, then go ahead and buy it.

      But what the purchaser must realize is there isn’t some magic in the policy that somehow makes additional money appear after retirement. That money must come from somewhere. If you choose to take more money out, there will be less at the end and the possibility of running out of money becomes higher. If your goal is to spend as much money as possible, then your best bet is to invest in the asset most likely to grow the fastest throughout accumulation, then purchase a single premium immediate annuity. When you die, you will have spent as much as possible and leave nothing behind. If your goal is to leave as much money as possible behind, your best bet is traditional investments (stock index funds, real estate etc) which benefit from the step-up in basis at death.

      This idea that you can safely take out 6 or 7% a year out of a whole life policy and expect to leave just as much behind, on average, as with a higher returning investment is folly. Insurance agents love to jump on the bandwagon of all these folks who are paranoid and talk about 2%, 3%, 3.5% etc withdrawal rates What they don’t like people to realize about withdrawal rate studies is what happens in a typical situation. The focus is on the “success rate” not on the typical results, which is far more interesting. It turns out that most of the time, it’s fine to take out 5%, 6%, even 7% of your portfolio value. It’s only in the really bad periods that you’re limited to 4%. An adjust as you go strategy is the preferred method for most retirees and works very well. In a typical situation, if a retiree retires with $1M and only takes out 4% a year, he ends up with much more than he started with. Kitces showed that over 115 rolling periods, in only 12 of them did the retiree end up with less than he started with, much less run out of money. 2/3rds finish with more than twice as much as they started. The median is 2.8X what they started with. So half of the retirees have even MORE! So while 4% is the “safe withdrawal rate,” the average withdrawal rate that worked is over 6%.

      The other sleight of hand here is that this 6-7% withdrawal rate that the whole life folks like to talk about is not the same % as discussed in the SWR studies, which is 4% adjusted up each year with inflation. It’s just 6-7%. After a few years, 6-7% of the original portfolio is less than 4% of the original portfolio adjusted for inflation. The devil is in the details.

      Agents also like to say that high returns are very unlikely for the individual investor (so they should take what they can get from the insurance company) but don’t mention that the insurance company has to invest in the same environment as the investor. They don’t get a different stock, bond, and real estate market to invest in. If returns are low for the individual investor, they’re low for the insurance company too.



      But as I’ve said many times, if someone understands how these sorts of policies work, and really wants them for some relatively small portion of their portfolio, then it’s no skin off my nose. I have no dog in this fight.

      If you’re not okay with something that looks like it works 85%, 90%, 95%, 98% etc and adjusting as you go, then I think your solution ought to be a SPIA, not a whole life policy.

  26. I don’t think we’re going to come to an agreement on this, but I feel obligated to share a few last words, even though I know you’ve heard it all before. Clearly, you’ve been battling people in this area for some time, but for some reason continue to ignore the same things over and over again as though they don’t matter and seem to think that insurance advocates are intentionally deceiving people.

    -You often talk about whole life having a guaranteed return of only 2% as though it’s a bad thing. The guaranteed return on a market based investment is -100%. You can lose everything. Of course, history shows that neither of these situations is likely, but let’s be fair about it instead of comparing market history to insurance worst case scenarios. That’s like saying a Chevy is a higher quality car than a BMW because they TYPICALLY run well for a long period of time, and somebody you know ONCE bought a BMW that had a defect. Let’s be fair about our comparisons.

    -Projected returns on whole life are in the 4-5% range in TODAY’S interest rate environment, with dividend rates around 6% gross. Dividend rates with many companies were north of 8% in the last 15 years, and north of 11% further back than that. This would create a substantially higher projected rate of return which, of course, can be both good and bad depending on how people’s expectations are managed. Meanwhile, the market has averaged somewhere in the neighborhood of 10%, BEFORE expenses and taxes, with the vast majority of investments (80-90% depending where you look) underperforming the market in general. Yes, market returns are typically higher, but it isn’t as important as you think.

    -Rates of return on death benefits are well more than 5%, by the way. For the scenario we’ve been discussing, it’s between 7.5% and 8%, depending on the health rating. This number, of course, is net of all costs and taxes.

    -Also, what’s going to happen to the stock market given the demographic issues we have today? As baby boomers retire and are spending their money, it’s rather likely that the sale of securities will drive stock prices down. And when some retirees begin to run out of money, government benefits will become more and more necessary. And where will the money come from to pay for these things? There are only two places it can come from, the government can tax it or they can borrow it. Well, guess what, when they tax it, cash values in life insurance are protected, but investments aren’t. Wave bye-bye to the capital gains rate and hello to higher income taxes on people who can actually afford to save and invest. And when they borrow it, the insurance company will lend it to them at interest, creating profit for policyholders, not stock market investors.

    -It’s clear to me you’re a sharp guy, but somehow something hasn’t clicked as it relates to insurance, even though you’ve been brow beaten with it many times before. The “magic” is not about what’s in the policy, but rather comes from what’s attached to the policy. I know you know this, but you don’t seem to think it’s important, when it absolutely is. The reason the money can last is that you aren’t withdrawing it. You’re using the guaranteed line of credit that the insurer extends to you as part of the deal. The line of credit collateralizes the death benefit, not the cash value, so your compounding interest continues on the entire balance, with no adjustment for the “withdrawal” (unlike almost every other financial product in existence). This is incredibly significant, mathematically. Look no further than above when we talked about the difference between earning 7% and 8% over a long period of time. It added up to a 7-figure difference before, so is earning a spread on your borrowing instead of forfeiting the ability to compound interest by withdrawing insignificant now because it doesn’t support your argument? This is why the money lasts longer. This is the “magic.” Let me know when someone is willing to collateralize the future value of your investment account, and then we can have an entirely different conversation. I know that the general account of an insurance company isn’t all that much different than an investment portfolio, except that many of them are still holding bonds that are 20+ years old and paying really strong dividend rates, but that isn’t what’s important.

    -You’re right about an adjust as you go strategy, it’s much more effective than just withdrawing and crossing your fingers. This is why it’s good to have an asset that isn’t correlated to the market that you can access when your market based investments suffer, so you don’t kick your portfolio when it’s already down. If all you have are market based investments, the only adjustments you can make are to your allocation and your lifestyle choices. This, of course, is the basis for Kitces research. People should only inflate their spending if they can afford to based on their investment performance. Well, I hate to say it, but very few people are going to have the luxury of being in this position. Most people will have to budget their retirement income to what they need, and that just might cause them to have to spend money faster even when they can’t afford to. When people retire and begin accessing their savings is critical. Flip a coin each year for the first 5 of retirement, and the whim of the stock market dictates your likelihood of success. Also, he seems to believe that we should rely more heavily on the extremely long term history of the market instead of the more recent bubble phenomenon which is quite obviously orchestrated by financial institutions and Wall Street in the first place. This is not a man I can place much faith in. If you choose to, go right ahead.

    -SWR studies typically use 3% as a rate of inflation. Do you know how long it takes a 4% withdrawal rate to catch up to a 6% withdrawal rate with a 3% rate of inflation? 14 years!!! Hardly “just a few.” As you said, “the devil is in the details.”

    -SPIA rates for a 30 year period certain for a 65 year old are less than 6% today, without an inflation adjustment, BTW.

    -I know you’ll probably have a well thought out response to this and I don’t blame you. After all, this is your blog, and I’m just a visitor. I’ll stop squawking now, but appreciate the back and forth; it’s always enjoyable.

    • I haven’t seen a recent policy illustration that came up with a projected return of 7-8% on the death benefit. I’m seeing 5-6% at life expectancy.

      As noted on this post, you could buy a policy in the 80s and get 7% out of it over the next 30 years or so. But you could have done even better just buying long treasuries.

      I disagree on the demographic issues. But if market returns are poor due to demographics, they’ll be poor for both you and the insurance company. The government can also inflate the money supply (aside from borrow and tax), which will really hurt low return investing solutions like whole life insurance.

      Borrowing against a policy isn’t nearly as unique as most assume it is. You can borrow against lots of things completely tax-free, including real estate investments, your home, and even your stock portfolio. The terms obviously matter and the devil is in the details. But keep in mind that in many ways, these other loans are even better than borrowing against your life insurance cash value (which is what you borrow against, not your death benefit-if you don’t believe me try borrowing a big chunk of your death benefit in year one of the policy) since they are not only tax-free, but the interest is tax-deductible to many.

      SWR studies do not typically use 3%. Do you actually read them? It’s not called a 4% rule for nothing.

      The fact that most people don’t save enough for retirement is a terrible argument for them to buy an investment with very low returns. That just means they have even less. That’s Dave Ramsey’s big beef with it and why he likes to call Whole Life “Payday loans for the middle class.”

      Seriously though. This is the 8th comment left TODAY by a life insurance advocate (usually an agent). This happens every single day on this website. I can’t repeat the same thing every day to all of you who think you have some new angle showing why whole life insurance is the cat’s meow. If you think it’s awesome, buy as much as you like. I don’t really care. But you can give up convincing me it is a good idea for the vast majority. It isn’t.

      • Wow, long thread. I’m one of those “crappy” insurance agents you reference. I’m 50 and on myself have lots of term and lots of permanent coverage. My client that bought a WL policy 18 months ago in his 40’s and died 3 months later – his family experienced a 5200% ROR. Do you think she cared what type of policy it was? Ask a 73 year old client if he/she still would like to have life insurance and most will say “YES” – regardless of what they were taught (buy term/invest diff, you’ll be self insurance in 2008 and things like that). I’ve never put a UL, indexed UL, VUL etc in place and likely never will. But, WL has its place in just about everyone’s world. Our firm is 30 years old this year and we have a lot of happy clients with a lot of cash values, a lot of investments, a lot of good auto coverage, a lot of good ‘stuff’ to protect what they’ve worked hard to achieve. Try – for one day – to respect the good that some of us “crappy agents” do for the world :)

        • I disagree that most should own whole life for various reasons discussed ad nauseum in many areas of this website. If your client had used all that money he spent on whole life on term, his wife would have been much better off. Did you ask here if she was glad to have $1M when she could have had $5-10M?

          I do respect what the good agents do for the world. I disagree that an agent who feels most of her clients need whole life is one of the good ones.

          • The client had plenty of term and a small part of WL for many reasons. And, you’ll be happy to know that I didn’t even get a commission on the product as he went through another carrier – I advocated more coverage. Period. The “plenty of term” is now what she will live a rather comfortable life on; thank you insurance industry. We are agnostic – be it stocks, annuities, mutual funds, life insurance, whatever, whatever. No one product nor methodology rules supreme. Thanks for the ending bash :) I could say the same for an advisor who advocates 100% term that is thrown away dollars when the client is older and alive and wishes they had coverage. I tend to like term AND whole life and wish it were better explained to people in our world.

            • I find the vast majority of people, including docs, don’t need whole life. That’s why 80% of it is surrendered prior to death. My email box is filled with people who wish they hadn’t bought their whole life policies.

              If you think most people need it, we have a fundamental disagreement.

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