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.

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A Whole Life Insurance Success Story – The Friday Q&A Series — 39 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.

  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.

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