Why Whole Life Insurance Is a Bad Investment

why whole life insurance is a bad investment

I recently wrote about the mistakes I initially made when purchasing life insurance policies for me and my wife. One of the things I mentioned was that at the very least I was relieved we had avoided being sold whole life insurance. A fellow blogger, my friend Edward Antrobus, responded with the following comment:

General consensus is that you shouldn’t view insurance as an investment. But nobody has ever been able to make a case for WHY.

It’s a great question. There are a lot of personal finance topics out there where you hear many people repeat the same mantra over and over again without any explanation as to why. Whole life insurance is one of those topics that often gets a bad rap without much detail. So today I’d like to detail the reasons why whole life insurance is a bad investment.

Some background on whole life insurance

I’ve written before about the importance of life insurance, how to determine your life insurance needs, and what type of life insurance to buy. I think life insurance is a crucial part of any family’s financial security.

When you buy life insurance, there are essentially two types: term and permanent. Term life insurance is very simple. You pay a (typically) small premium for financial protection that lasts a specific amount of time, typically 10-30 years. It is pure insurance. The only potential benefit is the payout upon death. In my opinion, this is the only type of life insurance that most young parents should consider, as the financial protection provided by the death benefit is the whole purpose of life insurance.

Permanent insurance comes in many different flavors, but the primary one is whole life. That is what we’ll be discussing here today, though the principles below apply to almost any form of permanent insurance. Whole life insurance does not have a term. It has a death benefit that lasts until you die, whenever that occurs. It also has a cash value component that grows over time, similar to a savings or investment account.

From a pure insurance standpoint, whole life is not useful for the vast majority of young people. It is MUCH more expensive than term (we’re talking like 10 times more expensive). Most people don’t need coverage for their entire life, as the primary purpose is to ensure that your children have the financial resources to get to independence. So as a pure insurance product, except for in a minority of cases that are the subject of another discussion, it doesn’t make a lot of sense.

But how it’s often sold to young people is as an investment. The benefits of the cash value component are made to sound very attractive, particularly as a retirement planning tool. It is this purpose of whole life insurance that I would like to deconstruct today.

So without further ado, here are 8 reasons why whole life insurance is a bad investment.

Reason #1: Whole life insurance is undiversified

Diversification is the practice of spreading your money out over many different types of types of investments and different types of companies. It’s the single tool you have that allows you to decrease your investment risk without decreasing your expected return. Unless you’re Warren Buffet, this isn’t something you should part with lightly.

Whole life insurance is by definition undiversified. You are investing a large amount of money with a single company and relying entirely on their goodwill to give you good returns. The insurance company will make their own investments and then decide what portion of their returns they would like to pass on to their policyholders. You are completely at their whim. If that one company goes bankrupt, has some bad years, or simply changes their outlook on paying out to customers, your return will suffer.

Putting a large amount of your eggs in this single basket exposes you to a large amount of risk from a single company and sacrifices the basic principle of diversification. This isn’t something that should be done without compensation in the form of large expected returns, and even then the risk would have to be very carefully evaluated.

Reason #2: Whole life returns are not guaranteed

Life insurance salesmen like to talk about the returns on their policies as if they are guaranteed. They are not. Neither are the returns from stocks or bonds, but don’t be misled into thinking that whole life insurance returns are somehow on a different level. The illustrations they present showing beautiful long-term growth are simply projections, and rosy ones at that since the company is trying to sell you. There is plenty of risk that the actual performance will be worse than what is shown during the sales process.

With that said, there is actually a small guaranteed return on these policies, but even this is incredibly misleading. In the policy that was attempted to be sold to me, the “guaranteed return” was stated as 4%. But when I actually ran the numbers, using their own growth chart for the guaranteed portion of my cash value, after 40 years the annual return only amounted to 0.74%. There are a number of explanations for this difference, including fees and the way in which the interest rate is applied. In any case, do not take that guaranteed return at face value. It is incredibly deceptive. Run the numbers for yourself and see if you’re happy with the result. The reality is that you can get better guaranteed returns from a CD that locks up your money for a shorter period of time and is FDIC insured.

Reason #3: Positive returns take a long time to appear

In the rosy illustrations, beyond the guaranteed portion mentioned above, a policy that’s held for 40 years or so will show a return of around 4%. That’s not bad, although 10-year Treasury Bonds have historically returned 5.4%. The problem is that it takes a long time for the returns to reach that level. There will be many years at the start of the policy where your return will be negative, and many more years where the return will be only slightly positive. If you stick with it for a long time, you eventually get into a reasonable range of returns, but if at any point before that you decide you want to do something different, you will have spent many years and a lot of money getting very poor returns.

Keep in mind that this is very different from the possibility of poor returns from stocks and bonds. While stocks and bonds guarantee nothing and certainly might show poor performance over certain periods, whole life is almost guaranteed to have very poor performance for at least a decade and often upwards of two decades.

This is not the possibility of bad returns. It is the promise of it.

Reason #4: Whole life insurance is illiquid

Investopedia defines liquidity as:

The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

Liquidity is important because it gives you options. While you hope to never have to touch your long-term savings, the reality is that life happens and the more options you have the more financially secure you can be. Having access to your money gives you options.

Whole life insurance is illiquid for several reasons:

  1. For the first decade or so, you are almost guaranteed to have negative returns. This means you can’t even expect to get back the amount of money you put in.
  2. Many policies have a surrender charge, which is essentially a fee you have to pay if you decide to cancel the policy and withdraw the cash value. If you surrender, there will also be income tax consequences on any earnings.
  3. Most policies will allow you to borrow against the cash value, but you have to pay interest. This is true even if you are borrowing only the amount of money you have put in, not what it has earned above that.

All of these factors make it difficult to get to your money if you need it. In theory, you should be compensated for this difficulty in the form of higher returns, but as we saw above this is not the case.

I have seen it argued that retirement accounts are also illiquid because of the penalties associated with early withdrawals, and this is certainly true to some extent. But I have several counters to this argument:

  1. A traditional 401(k) or IRA, with the penalties for early withdrawal, is indeed illiquid. But they have many other advantages over whole life, namely the ability to choose your investments, true tax deferral, higher transparency in fees, and cash flow flexibility, which I will talk about below.
  2. With a Roth IRA, you can withdraw your contibutions at any time without penalty. You should never do this except in true emergency situations, but it’s an available option.
  3. Regular old taxable accounts have no inherent liquidity issues, give you the full range of investment options, and can be used in a tax-efficient manner.

Reason #5: Less cash flow flexibility

A corollary to the liquidity issue is the concept of flexibility of your contributions. Even with a traditional 401(k) or IRA, where you can’t access your money without penalty, you can always choose to stop contributing for a period of time if you need that money for other purposes. In the meantime, your account stays intact, steadily earning tax-deferred returns on the money you’ve already put in.

With whole life insurance, you can’t just decide to stop paying premiums. Well, you can, but if you do then the policy lapses and you’re forced to withdraw the cash value, which will subject you to taxes and possibly a surrender charge. And if you haven’t had the policy in place for multiple decades, you will also be left with meager, if not negative, returns. Are you ready to commit to paying that huge premium year after year, no matter what happens in your life? Of course we all want to keep our retirement contributions steady, and even see them increase, but life happens and there are many instances in which having options is incredibly helpful. Those options are much more limited once whole life is introduced.

Reason #6: The claim of “tax-free” withdrawals is misleading

One of the big selling points of whole life is the “tax-free” retirement income. What they’re describing is your ability to take out loans against your policy, which are not taxed. This can indeed be an attractive feature of the policy, but it comes with several warnings.

Although there are no taxes, there is interest. When you borrow from your policy, interest starts accruing from day 1 and keeps accruing until you pay back the loan. If you’re using it for retirement purposes, are you going to pay back the loan? No, of course not. So the interest keeps accruing. And the interest applies to all money withdrawn, including your contributions, which were already taxed. These loans also reduce the death benefit of the policy, which may or may not be important to you. So no, there aren’t “taxes” applied those to loans, but there is a similar cost.

Furthermore, you can run into complications when you withdraw too much from the policy and there’s no longer a big enough cash value to support the premium payments. When this happens, you either need to put more money into the policy (likely not part of your retirement budget) or the policy will lapse and then you will face tax consequences. These policies are fraught with complications like this that the salesmen never tell you about.

Reason #7: Lack of transparency in fees. Complicated terms and conditions.

Whole life policies include many fees that are never laid out for you. There is the commission to the salesman. There are administrative costs. There is the cost of the insurance. I challenge you to find an example of a whole life illustration that lays out these costs for you, similar to the way a mutual fund has to tell you the expense ratio, sales commissions, and other fees. They just aren’t transparent, which makes it impossible to understand what you’re truly paying for. And these costs can change over time, again without you knowing, and those changes can affect the return you receive.

There are many other terms and conditions that make these policies very complicated. One such example is the issue described above where borrowing too much from your policy can cause it to lapse. Another is the “guaranteed” interest rate that’s actually much lower than what they state. Even the salesmen selling them often don’t understand how it all works. One salesman, after I asked a number of questions he didn’t know the answer to, compared it to buying a watch. He showed me his watch and said that he didn’t know how it worked, he just knew that it worked. Whole life, he said, was the same way. Needless to say, I did not give him any business.

Reason #8: There are plenty of other options available

Whole life insurance might be more attractive as an investment if there weren’t so many other good options available. Many people have a 401(k) or other retirement plan with their employer. Everyone has the option of an IRA. Then there are regular taxable accounts. All of these options allow you to choose your investments, control your costs (though employer plans will be more limited here), diversify, and avoid the downsides of whole life insurance we’ve just gone over.

If you’re worried about some day wanting the permanent life insurance coverage, know that any good term insurance policy will allow you to convert some or all of it to whole life at any point during the life of the policy. This means that you can save money now by buying term, but still have the option open to get some permanent coverage later. There is no need to lock yourself in now.

Conclusions

There are certain instances where whole life can be useful. If you have a genuine need for a permanent death benefit, such as having a disabled child, it can serve a valuable purpose. If you have a large amount of money, have already maxed out all of your tax-deferred savings, and you can afford to front-load your policy with large payments in the first several years, it can provide better returns than was discussed above. It is a useful product in a limited number of cases.

But the majority of people to whom whole life is sold do not fit these criteria. The majority of us do not need a permanent death benefit and do not have the large amounts of money on hand to make these policies a reasonable investment. For us, there are many reasons why whole life should be avoided. There are too many other good investment options out there to let yourself get stuck with this expensive and poorly performing product.

Do you have a whole life insurance policy that you would like reviewed? Click here to tell me about your situation and I’ll see if I can help.

GET THE ROAD MAP
Secure your family’s financial future with the resource I wish I had when I was starting my family. It’s free!

 

Photo courtesy of Steve Jurvetson

Share on FacebookShare on Twitter+1Pin it on Pinterest
Share this post

159 comments… add one

  • Not every day that somebody writes an entire post based on your comment, thanks!
    If anyone ever tries to sell me on a whole life policy again, I’ll take a much closer look at those “guaranteed” returns.

    • Matt @ momanddadmoney June 19, 2013

      No problem! Thanks for asking a good question. Definitely approach any whole life sale skeptically. There are situations where it might make sense, but not for the majority of us.

  • DC @ Young Adult Money June 19, 2013

    Insurance and investments are totally different! Insurance should
    protect your investments/assets (i.e. your health, your car, your house,
    your stocks, etc.). I will be shopping for a term life insurance plan
    sometime soon here and I definitely am thankful for so many articles out
    there that explain why whole life insurance is a bad idea. The right
    salesman can make it sound like a great deal, but in the end it’s best
    to keep the two separate. You definitely give a thorough argument as to why we should not choose whole.

    • Matt @ momanddadmoney June 19, 2013

      I definitely agree that they’re best kept separate. They serve very different purposes. Luckily the internet makes it easier to get information on all of this stuff, though it can still be pretty confusing to sort through it all.

  • Andrew June 19, 2013

    The first years premiums goes to the insurance agent who sold you the policy…and I’m sure there are plenty of other hidden fees in there. I almost went with whole life insurance as a friend was working as an insurance agent and I had just graduated college. I decided against it though. Read a book that said that I should instead buy term and invest the difference. Another problem with whole life insurance is that the premiums are much more expensive than term life insurance…if someone chooses whole life, they will likely choose a lesser coverage and might be underinsured if something unfortunate were to occurr.

    • Matt @ momanddadmoney June 19, 2013

      It’s a great point about the cost causing people to be underinsured. I have no idea if there are any statistics on that, but intuitively it would seem to make sense. It’s a shame if someone with a real need for life insurance is under-protected because a salesman could make a bigger commission off the more expensive product. But I’m sure it happens.

      • Holly Johnson June 20, 2013

        A lot of life insurance salesman are commission-only….so of course they make a big commission. They aren’t paid a salary so I wouldn’t fault them for that.

        • Matt @ momanddadmoney June 20, 2013

          I don’t fault the salesman for wanting/needing a commission for their work. It’s their livelihood. But understanding where your money is going is an important part of making smart decisions as a consumer. In the same way I wouldn’t intentionally overpay for a toothbrush just so that the toothbrush company could make some money, I’m not going to intentionally overpay for insurance purely for the salesman’s sake. There are plenty of circumstances where paying a commission is worth it for the value of the product. And there are plenty of circumstances where it is not. Understanding the difference is important.

  • Matt @ momanddadmoney June 19, 2013

    It’s a very misleading statement. Technically true, but not as good as it sounds. It always pays to be skeptical when you’re dealing with a salesman.

    • DrO February 19, 2014

      Keep in mind though that the interest rate on these insurance loans are among the best rates you can get anywhere for access to money like prime plus 1 or 2 percent, and your principal is untouched and continues to grow. Who would you rather borrow from? Yourself/insurance co at prime plus 1% or 2% or from the bank at prime plus 6%+ So I think it is more misleading to harp on the minimal interest rate your paying on a fraction of the value of the cash value…which again is growing at the rate of the dividends.

      • Matt @ momanddadmoney February 20, 2014

        Well, I would rather not borrow from anybody. I would rather just have the money to use as I please.

        With that said, yes the interest rates are good, but it’s not really appropriate to compare the interest rate on a whole life loan to interest rates from other sources. With whole life, you’re borrowing YOUR OWN money that you already contributed after-tax. That’s very different from borrowing from a bank, where the money was never yours. It’s much more appropriate to compare the long-term, cumulative interest rate to the long-term after-tax returns you could get from other investments. That comparison looks very different and often much less beneficial for whole life.

        Also, it depends on the policy, but for many policies out there the principal does not remain untouched while you have a loan out against the policy. A loan will actually decrease the dividends, and therefore the return, you receive, because you have less equity in the policy. Some policies work differently, but you definitely shouldn’t assume that the policy will continue to grow unchecked while you have an outstanding loan against it.

        • Emmanuel March 12, 2015

          Whole/universal/index life insurances are all terrible and should never ever be sold. It is LEGAL robery. These policies benefit a TINY percentage of the polulation.
          There are SO many flaws to these policies, that it’s heartbreaking that they are still sold and marketed to the ignorant. They pull on their heartstrings, loon at them in the eye and say “this IS the best thing for you and your family”. and when they finally need the money, it’s no where to be found.

          It’s called a whole life policy because your money goes into a “hole” and never comes out.

          • Matt Becker March 16, 2015

            I can understand your feelings here and I definitely agree that there are many cases where these products are inappropriately sold, often to people who can’t afford to make this kind of mistake. It’s a shame and it makes me just as angry as you.

            With that said, there are some instances where these policies make sense. They’re rare, and the vast majority of people will never have a need, but I wouldn’t go so far as to say they should never be sold. I just wish that they were sold with more care than they are currently.

  • Rachel@Mobilligy June 19, 2013

    Thanks so much for the great article! My husband has a whole life insurance plan that was set up for him by his dad when he was a teenager, so he’s always had it. It’s expensive, though, and we’ve often talked about discontinuing it because it’s so pricey. Still not sure what the best route to take is, but I appreciate the very informative article!

    • Matt @ momanddadmoney June 20, 2013

      Evaluating a policy that’s in place, and especially one that’s been in place as long as your husband’s, is much different than deciding whether or not to purchase a new policy. It might be that at this point, with all of the money already put in, it’s actually a good investment despite the ongoing cost. It’s hard to evaluate though, so if you’re really considering what to do I would think about talking to a professional. Ideally you should be able to find a financial planner who will charge you a flat rate to help evaluate the policy, without trying to sell you anything else. A planner who belongs either to NAPFA (http://www.napfa.org/) or the Garrett Planning Network (http://garrettplanningnetwork.com/) would probably be your best bet. Good luck!

      • Rachel@Mobilligy June 21, 2013

        Thanks so much for the response, Matt! I do think we could really benefit from meeting with a financial planner, even if just to better understand the policy. Thanks again!

  • Holly Johnson June 20, 2013

    I agree that it isn’t a good investment. However, that doesn’t make whole life a bad insurance policy. As I mentioned before, I realized a lot of things in my years working for a mortuary. First, the vast majority of life insurance policies that we filed were whole life (I would guess 80-90%). Why? Because people who are in their 70’s, 80’s, and 90’s don’t have term policies anymore. And I’ve seen all kinds of things happen to people who have planned well financially. Getting old and having to go into a nursing home generally means depleting one’s assets. With nursing homes in my area costing $5000 per month (and more in some areas), it may not take long to go through someone’s savings. Once they go through all of their assets, Medicaid will pick up the tab for the nursing home bill. Having whole life leaves money at the end regardless of what unforeseen circumstances happen. I’ve seen it happen hundreds of times….I’m guessing that those families didn’t think it was such a bad deal.

    • Matt @ momanddadmoney June 20, 2013

      This article was 100% devoted to the investment component, but I do agree that there are circumstances where the insurance component can be very valuable. I was actually recently thinking about your previous comment, which was along the same lines as this one. I haven’t run the numbers, as it’s very difficult, if not impossible to find online quotes for whole life insurance where you don’t have to give out your contact information. But if you’re truly worried about having money available for funeral expenses, I wonder if it would be more cost efficient to set up an irrevocable trust with terms that the money in the trust could only be used for funeral expenses. Anything left over could go to the estate. I have a hunch that the one-time cost involved there would in most cases be less than the ongoing cost of a whole life policy. Like I said, I haven’t run the numbers to be sure, but it would certainly be worth considering. This is actually something I could find out pretty easily with a couple of emails. Sounds like a future post!

      • Holly Johnson June 20, 2013

        That is the other option. A lot of people prepay for their funeral in a funeral trust. Either option works!
        But as far as life insurance goes, I am truly a believer that the best policy is the one that actually pays. Of course, buying a term policy ends up being a great deal if you die during your 20 or 30 year term…but who wants to do that?
        I personally have term life insurance. However, I would consider buying a small whole life policy in the future.

        • Matt @ momanddadmoney June 20, 2013

          I disagree that an insurance policy has to pay for it to be valuable. Its purpose is to provide you with protection from scenarios you couldn’t otherwise handle, not to pay you money no matter what. Is your emergency fund worthless if you never have an emergency? Would you pay extra for an auto insurance policy that guaranteed you money for a brand new car (at the cost of the new car, not the value of your old on) once yours is done? Even if was more cost-efficient to save the money yourself? Again, I do agree that there are situations where the insurance component of a whole life policy can be valuable. I will never argue that it is a worthless product. I just think that many times it is sold to people who have options for meeting their needs in better ways. That doesn’t make it evil, just inefficient for many circumstances.

          • Holly Johnson June 21, 2013

            I certainly don’t think that an insurance policy has to pay out to be valuable and that isn’t necessarily what I meant. We have term insurance now and I certainly find value in it even though it (hopefully) will never pay. What I meant was that the value to other family members is immeasurable. I can’t tell you how many times that I’ve seen a whole life policy swoop in and save the day when family members were struggling to cover the cost of a $10,000 or more funeral. I’ve just seen it happen too many times. Nobody thinks their 90 year old mom whose been in a nursing home for ten years would have life insurance and trust me when I say that people are pleasantly surprised when they find out that that’s the case.
            Of course, it’s always more efficient to just save the money themselves. However, many people don’t and people often want to make sure that the money will be there when they are old and can no longer make decisions for themselves. Whole life is one way to do that. We chose term because it made more sense for us and it was so cheap since we were young when we bought. However, I’m just presenting the alternate viewpoint coming from someone who has filed many, many whole life policies on behalf of grateful families.

          • Matt @ momanddadmoney June 21, 2013

            It’s a very fair point, especially coming from someone with so much first-hand experience. Your earlier point about long-term care diminishing assets, even if you’ve saved for those expenses, is a good one too. Thanks for the input. I’m going to do some digging on the cost of a trust vs. the cost of whole life. I definitely think it’s important to make sure you don’t leave your family members with a huge bill when you die.

  • Walt@ My Wealth Desire June 20, 2013

    This is eye opener for me. Luckily I have only term life insurance. I have to pay for 4 years and I am coverage within 7 years.

    Yes I agree that whole life insurance is not investment and not also practical. Next time if i need life insurance i will see to it that it is a term insurance only.

    • Matt @ momanddadmoney June 20, 2013

      There are situations where whole life is practical, but those mostly involve unique needs for insurance. The value as an investment is very rare. I think that a good, long term policy is the right way to go for most families.

      • trucker June 15, 2015

        When do you think whole life is a good idea? We are early 60s and deciding if we should invest in whole life with a chronic illness rider, or some sort of hybrid policy to cover long term care and/or leave a death benefit.

        • Matt Becker June 16, 2015

          I’ll be up front that I am not an expert on life insurance and long term care for people in your situation and therefore don’t have a great answer for you. I have heard good things about certain hybrid policies like you’re describing, but I would be very careful about who you’re buying it from and how exactly the policy works. If you would like a referral to a fee-only financial planner who specializes in this kind of decision, just let me know and I would be happy to help.

  • Greg June 20, 2013

    I have a small policy that my parents set up for me years ago. It’s not terribly expensive, so I keep up with the payments. From there, I would only by a term policy. I don’t have kids yet, so I don’t have it set up outside of the default that work has. I agree that I would not expect any insurance to be a viable investment.

    I view insurance and what is right for each person as a gauge of their risk tolerance and what they need to be able to sleep at night.

    • Matt @ momanddadmoney June 20, 2013

      A policy that’s been in place for a while can often have a lot more promise as an investment going forward than a brand new policy. So it can often make sense to do what you’re doing. If you ever want advice on it, a really good place to ask is http://www.bogleheads.org/forum/index.php.

  • Pauline June 20, 2013

    Congrats on the thorough post! I don’t have life insurance because nobody depends on me. But would consider taking it if I had children, just the minimum to make sure they have a replacement income until they turn 18 then they can administrate my estate or start their lives! Whole life insurance sounds like a very bad deal.

    • Matt @ momanddadmoney June 20, 2013

      It’s just not very good as an investment, which is primarily how it’s sold to young people. I agree that you typically don’t need life insurance without children.

  • Liran Hirschkorn June 21, 2013

    As a life insurance agent I actually agree with you. 30% of people cancel their whole life within the first 10 years – not only do they fail to get a good return, they actually take a big loss. As you said there are times when whole life is a good fit, but for the majority of people cheap term life is the way to go.

    • Matt @ momanddadmoney June 21, 2013

      Thanks for bringing the perspective of a professional. Always helpful to hear from that side as well.

  • H G Stern, LUTCF, CBC August 7, 2013

    Cavalcade of Risk #189: What in the world edition is live, and your post is in it:

    http://www.weissins.com/blog/entryid/3627/cavalcade-of-risk-189-whats-going-on-in-the-world-of-risk

    Please let your readers know.

  • Nick August 12, 2013

    Be careful… Whole life insurance is not an investment by definition. Also, be careful not to bash whole life if you cannot distinguish between STOCK companies and MUTUAL companies and their products.
    I also found the following comment quite contradictory… “Of course we all want to keep our retirement contributions steady, and even see them increase, but life happens and there are many instances in which having options is incredibly helpful. Those options are much more limited once whole life is introduced.”
    The reason you gave for not having whole life is the exact reason to have it. Comedic. The reason to have whole life is because, well, life happens. Whole life has incredible benefits to protect against life events, I.e. disability, premature death, and need for liquidity (yes I said liquidity).
    Disability- what happens to your retirement plan contributions if you want to work but can’t? Your employer can’t even contribute for you… It’s illegal. Oh, a life insurance company will pay the premium for you along with any additional money that you scheduled to dump in… And continue to contribute forever if your remain disabled (if done right). That is called a “self-completing retirement plan.”

    Just take what you read with a grain of salt. There is no ultimate solution to financial success. In a vacuum financial planning would be easy and uniform.

    • Matt @ momanddadmoney August 13, 2013

      Hi Nick. Thanks for your input. Here are my responses.

      Your very first sentence stating that “Whole life insurance is not an investment by definition” seems to agree with the entire premise of this article. Glad we’re on the same page there. Unfortunately, it is often sold as an investment to many people who don’t know better. Hopefully now a few more of them do.

      I chose not to discuss the difference between stock and mutual companies here because I don’t think it’s very relevant to the conversation. You aren’t clear why you think it’s important, but my best guess is that you think your returns are more guaranteed with a mutual company. I would agree that you’re better off with a mutual company, but you’re still hinging a large amount of money on the prospects and policies of a single company. It is still undiversified and still exposes you to a lot of unnecessary risk. If you have a different reason for bringing up this distinction I would be interested to hear it.

      “Whole life has incredible benefits to protect against life events, I.e. disability…” This is what long-term disability insurance is for. A disability policy will cover all of your living expenses not just your life insurance premiums. It can even cover contributions to an IRA or other retirement savings vehicle. It’s much better and more cost effective true disability protection.

      And if you want protection from premature death, then you get term life insurance. Very few people have a need for life insurance protection throughout their entire lives. And if you do end up needing it, you can convert your term policy at any time. So no, whole life is not a good option for this kind of protection for the vast majority of people.

      You also say its good for liquidity but do not give any examples as to how. I have given my reasons why I think it is illiquid. If you have specific responses I would love to hear them.

      I do agree with you that “there is no ultimate solution to financial success”. Each person has to find their own way. But there are certain basic principles that most people would be better off for understanding. That whole life insurance is rarely a useful product, particularly when viewed as an investment, is one of them.

  • Julian September 4, 2013

    I love this post. You must be the most uneducated person on life insurance ever.

    Literally everything you say is wrong. I hope no one takes the time to fight against this because you would basically have to rewrite the entire article. It’s as if you have never studied anything relating to this topic ever.

    If you are reading this article, and you believe it without doing some research of your own, then you are a fool. This article is written by someone who is going to make money off of you not doing what is best for you.

    I understand if you don’t like life insurance, but you don’t have to lie.

    • Matt @ momanddadmoney September 4, 2013

      Hi Julian. Thanks for the comment. I would be interested to hear your specific counterpoints to my arguments. Facts and substance are two things that are always welcome around here, so feel free to use them with abundance.

    • Ben_Luthi October 8, 2013

      Julian, having been an insurance agent and knowing quite a bit about whole life in particular, Matt has pretty well hit the nail on the head on a lot of things. Whole life isn’t a bad product per se, but it’s not a great investment on its own.

  • Ben_Luthi October 8, 2013

    If people are looking at whole life insurance strictly as an investment, I agree. It’s a horrible investment when you’re looking at it that way. It just can’t compete. There are some good features, though, and it’s a product that only a few companies are really good at. It all depends on what your goals and your priorities are.

    • Matt @ momanddadmoney October 10, 2013

      Thanks for the input Ben. I will agree that there are specific features that are very helpful for a small minority of people. But as you say, when viewed as an investment for the majority of people, it really can’t stack up to the other options out there.

      • Jeremy Benson November 2, 2013

        Hi Matt, I’m a Life Insurance agent and Advisor and I work for New York Life. Some of your points make sense but saying that whole life is bad is a little off. It is good for savings toward your retirement and will do a lot more than a savings account, money market or cd will ever do. So to agree with you to a certain extent I’ll explain what I do for younger individuals, I’ll sell a whole life policy and later it with term insurance. Basically the whole life will build a cash value with guaranteed returns and the term insurance is in the event of an untimely death. $1,000,000 of term can be as low as $50 a month. Also NY Life has never guaranteed dividends but has paid them out for 159 years, even during the Great Depression. Our company is backed by a $180 billion general account and a $19 billion surplus. So yeah, we guarantee your returns. And we don’t just sell life insurance, that’s why our agents like myself have life, series 6,7,63,66,65 licenses, if our clients, not customers want more than life, we diversify for them into brokerage or anything else they want. Just puttin my 2 cents in.

        • Jeremy Benson November 2, 2013

          Meant to say layer with term insurance

        • Matt @ momanddadmoney November 2, 2013

          Hi Jeremy,

          Thank you for taking the time to respond. I appreciate your viewpoint as a life insurance professional but I will respectfully disagree with your key points.

          First, you compare whole life as a retirement vehicle to a savings account or CD. I’ll get to whether or not it’s actually better than those vehicles next, but regardless that’s an improper comparison. When people save for retirement, they generally do so with things like stocks, bonds and real estate. Savings accounts and CDs are not very good long-term investment tools. So whether it’s better than those things for retirement or not, the point is irrelevant.

          Second, I would say that it’s debatable whether whole life insurance is actually better than a savings account or CD, in terms of a savings vehicle. You mention the guaranteed return. Well, as I mention in the post, my policy had a “4% guaranteed return”, but when I ran the numbers it only actually amounted to 0.74% event after 40 years. It was less before that. And this was from one of the top mutual life insurers in the country. Not only is that incredibly misleading (and that’s being kind), I can get a better guaranteed rate than that right now from an online savings account, even though interest rates are at an all-time low. And my online savings account doesn’t have any of the other huge drawbacks that are also mentioned in the article.

          Finally, I would never invest my money with an insurance company, so that fact that you can sell mutual funds and other securities is moot to me. There are far better options than the high-cost products offered by insurance companies and other similar investment sales companies, which I’ve talked about many times on here. Feel free to see one example here: http://momanddadmoney.com/how-to-beat-80-percent-of-investors-with-1-percent-of-the-effort/.

          When I was purchasing life insurance, I was pushed the same thing you’re suggesting here: a small amount of whole and the rest in term. The fact that it’s a smaller amount being bought doesn’t mean it’s any better of a product.

          • Jeremy Benson November 3, 2013

            Question Matt, what are your credentials? On the subject of finance and securities, do you hold any of the licenses I mentioned in my response earlier? Are you in the industry, or were you just sold by an agent and didn’t know what you were buying and now you are having buyers remorse looking at an illustration that was shown to you and figuring how you may have gotten a little less than you bargained for by using a calculator? Because dealing with some of our top clients who are in a tax bracket that you nor I will ever see, they are happy with the level of service we provide and the products we offer, maybe you just had a bad agent that needed to close a deal before the month’ s end and made you a customer and it was very transactional as opposed to assessing your need and making you a client. If you couldn’t afford the policy he should have given you a term policy that you could later convert. People with the money prefer not to “rent” as in a term policy, and people that can afford it get permanent insurance. Some people want their wealth to be managed properly and leave a legacy behind for future generations, that is done through life insurance and the other products we offer.

          • Matt @ momanddadmoney November 3, 2013

            Ahh, the old character assassination route once you feel the facts are no longer on your side. I’m surprised we got there so quickly in this conversation. I would prefer to discuss the facts, as those are what actually matter. But if you must know, my credentials are in my author box above for all to see. My opinions are based on a broad understanding of both insurance and investments. My personal experience is used for illustrative purposes. And as an FYI, I have no buyer’s remorse because I did not purchase any whole life insurance. I have no bitterness, just a desire to help people avoid a product that is wrong for them.

            Your “rent” analogy is a classic one used by life insurance salesmen when selling whole life, but it is a poor analogy. After all, insurance has nothing to do with renting vs. owning. Would you say that most people are simply “renting” auto insurance? Do you think people should buy auto insurance policies that will pay them the full price of a new car whenever their car dies, even if they drive it into the ground? Because that’s essentially what whole life insurance is. The main purpose of life insurance is to provide financially for dependents in the case that you die early, just as the main purpose of car insurance (beyond the liability portion) is to provide the financial value of your car in case it dies early. Once that financial protection is no longer needed, the insurance need is gone. Term insurance protects you while you need it and goes away once you don’t. It is insurance in the purest sense of the word and is by far the more effective way to go about it for the vast majority of the population.

            You do write that “some of our top clients who are in a tax bracket that you nor I will ever see” enjoy the benefits of whole life. As I say in the post, there is a small percent of the population with a very large amount of money that can benefit from whole life. That is not who I’m writing for here. For 98% of the population, it is not a useful tool.

            You also write that some people want to “leave a legacy behind for future generations”. That’s a fine objective and if you have a very large amount of money then whole life can be a good way to do that. But again, that’s the top 1-2% of the population and not who I’m writing for here.

            If you would like to bring more facts into this discussion, I would be happy to continue.

          • Jeremy Benson November 3, 2013

            Actually I’m satisfied with your response. Because it makes sense, people without the money shouldn’t purchase whole life. We only tell our clients if they can afford it to purchase it. That’s common sense. And if you need something that will take care of your expenses when you are gone and don’t have a lot of money, then term is the way to go. If you have the money whole life is a good tool for tax diversification. But there is too much to talk about that those of us that are in the industry and are actually licensed to help people in these areas and it would take up too much space. We’d be having this discussion for months. But you make valid points, but to say whole life is a bad investment just seems wrong, because of the percentage of people that can use it, it works perfect. I have a friend who makes $80,000 a month who recently came into oil and was discouraged by blogs like this. After I explained to her how ridiculous blogs like this are for her situation she was actually calm and more receptive. I appreciate you informing the public. And in our jobs we do that well enough, I think instead of trying to be Dave Ramsey, you should just title it, “Why Whole Life is a Bad investment for the average Joe or 98% of the population.

          • Matt @ momanddadmoney November 3, 2013

            Thanks for your input Jeremy. I hope you stick to selling only to the people for whom it is truly helpful. My experience has shown that many of your colleagues, all of whom are properly licensed, do otherwise. It is a shame.

          • Jeremy Benson November 3, 2013

            And I agree with you Matt. People that just try to make a buck on someone else’s loss or something they truly can’t afford is despicable to me. And I apologize for my “are you licensed?” Comment. Your actually doing a noble thing as a father and informing people that need to hold on to what they can or invest it correctly in this economy. I have a lot of business owners and high end clients and I sell them whole life for a ton of reasons. But for my blue collar average joe or even white collar for that matter, I just wanna take care of them and their families. They’re not my customers their my clients. And that’s drilled into us by New York Life, I hope you have continued success in your Financial Planning career. God bless you.

  • Torie November 3, 2013

    Hi, Matt. My parents are actually talking to an agent to get the whole life insurance and their premium monthly is about $1000 so which makes them to pay $120000 (since it’s the 10 yr plan) and the agent presented that the guaranteed value will be $250000. I have very little knowledge about the whole life insurance plan but wouldn’t it be easier for them to just get it and be insured with that guaranteed value if they are not the type to find where to invest and all that? or is it something that they shouldn’t relay on.. they are doing it for more their retirement and asked me for help but i am very confused about this whole life plan. Thanks!

    • Matt @ momanddadmoney November 3, 2013

      Hi Torie,

      I cannot give you specific advice with regards to your parents’ situation, but I can give you some things to think about:

      1. There is a big difference between investing and insurance. I cannot be certain, but that $250,000 is likely the amount of insurance, which will only pay out upon death. There is a separate investment component that would need to be understood. Please see the note in the post about the investment “guarantees” with these policies.

      2. I would not recommend relying on a life insurance salesman to recommend whether whole life insurance is good for your parents. They are paid to sell their products, not to provide objective advice. It may or may not be a good decision for them, but the insurance salesman is not the source of that information. Which brings me to…

      3. I would recommend that they talk to a fee-only financial planner before they make any decisions. This is someone who would be paid only to give them advice, not to sell them a product, and should therefore be able to be more objective. They should be able to find one who would be willing to work with them for a one-time flat fee (others will try to take over managing their assets for a regular fee. They can evaluate whether that’s something they want on their own, but know that the option for a one-time flat fee is available, and is likely all they need at this point).

      Two organizations they can look to for a fee-only planner like this are Garrett Planning Network (http://garrettplanningnetwork.com/) and NAPFA (http://napfa.org/).

      Another great place to ask this question and get a lot of feedback from a lot of smart people is the Bogleheads community forum (http://www.bogleheads.org/forum/).

      Remember that there’s likely no need to rush this decision, so take the time to do the research and come to a conclusion you are all comfortable with. That policy is not going anywhere, and there are plenty of other options as well.

      If you would like any more assistance with this, please don’t hesitate to contact me directly. You can use the “Contact” link in the menu at the top of the page, or you can email me directly at matt (at) momanddadmoney (dot) com.

      Best of luck to you and your parents.

  • Roman November 7, 2013

    If you rely on it as your sole investment, sure. But that’s like saying GIC’s are a bad investment – but not everyone likes a white knuckle ride.

    I’m curious what is considered pricey? I have a whole life policy and my premium is $80 a month.

    • Matt @ momanddadmoney November 7, 2013

      I wouldn’t really compare whole life insurance to a GIC. Whole life insurance has many qualities that make it unfavorable that have nothing to do with a modest expected investment return.

      Whether something should be considered pricey all depends on what you’re getting for the price. What are you getting for your $80 per month?

  • Christine November 28, 2013

    I bought a whole life insurance policy for my daughter when she was 4! What a mistake to make! Now that the policy is 21 years old, I am undecided whether to continue paying the annual premium or surrender the policy.I have paid $25,126 over the years, and will walk away with $36,250 if I surrender it now. The policy covers has a $100,000 coverage and the annual premium is now $1179. I would appreciate your advice!

    • Matt @ momanddadmoney November 29, 2013

      I bought a whole life insurance policy for my daughter when she was 4! What a mistake to make! Now that the policy is 21 years old, I am undecided whether to continue paying the annual premium or surrender the policy.I have paid $25,126 over the years, and will walk away with $36,250 if I surrender it now. The policy covers has a $100,000 coverage and the annual premium is now $1179. I would appreciate your advice!

      ——-

      Hi Christine. First of all, thank your for stopping by. Second of all, please don’t beat yourself up over this. Life insurance salesmen are trained to make these policies sound REALLY attractive and their arguments can be quite persuasive. I actually found myself feeling close to convinced about one of these policies a few years ago before coming to my senses.

      So I’ll start by saying that evaluating a policy that’s been in place for a while, like yours has, is different from evaluating a new policy. It’s possible that at this point keeping the policy may actually be a good idea, but you will need more information from your insurance company before making the decision. Here are some questions you’d want to have the answers to:

      1. Is it truly whole life or is it some other type like universal or variable life?

      2. Does that $36,250 include any surrender charges? If not, make sure you understand the net amount you would receive upon surrender, less ALL fees and charges.

      3. Ask for a full in-force illustration, which is simply a projection of how the cash value will grow from this point on if you keep paying the premium.

      4. Ask for a projection on when the policy will become self-funding. That is, when the cash value will have built to a point where you no longer have to pay premiums. Ask for a full illustration of that scenario as well.

      Getting all of this information will help you better evaluate whether keeping this policy is a good idea compared to your other options. I’m happy to talk this through further with you if you’d like. You can reach me directly through the contact form in the menu above.

      • Jim January 21, 2014

        So you’ve secured a $100,000 tax free asset for $25,000? You’ve also guaranteed your child’s health and future insurability?And you’ve also created a place where cash can earn a wage? And you gave your child possible preferential treatment with respect to financial aid? Sounds horrible. Get rid of that instrument.

        • Matt @ momanddadmoney January 22, 2014

          Hi Jim. A couple of corrections. She’s actually secured a $36,250 asset for $25,000, as that’s what she would walk away with today if she decided to stop paying the premiums. And it would not be tax-free if she surrendered the policy today. Yes she could take tax-free withdrawals from the $36,250 today, but as I discuss above they would be subject to interest which is essentially the same effect as taxation.

          If you’re going to call it a $100,000 tax-free asset, then you have to factor in the ongoing premiums that must be paid until death that will make it cost more than the $25,000 that’s already been paid in. And then you need to compare it to a term policy which would accomplish largely the same objective for a fraction of the cost.

          FInally, as for your other claims, if we actually took the numbers and compared the whole life investment to buying term and investing the difference, it’s possible but very unlikely that whole life would come out ahead. Especially if the other options include tax-preferred retirement or college savings accounts.

          With all of that said, there may very well be good reasons to keep this policy in place now that it’s been paid into for so long. That’s exactly why I suggested she find out more information and be very careful before making any decisions.

          • Jim January 22, 2014

            Therein lies the problem. The asset you are securing is not the cash and too many people sell it that way and then the client views it that way. The asset is the death benefit. I know of no other asset where you can essentially secure a million dollar tax free asset at a 60% discount with about 2% down. The cash value build up is a an added bonus as I see it which provides great liquidity later on and also provides for quite a bit of optionality. With respect to term insurance, most people outlive their term so I would argue term is more expensive. I own both, but when I look at my term, if I pay premiums and outlive my term, I will have sunken about 250,000 into the contract and will have gotten zero for it. My permanent insurance will be paid to a beneficiary no matter what. Also people die including children. We need to take a cold look at what would happen if ine of our children died. How do you pay for the funeral? Do you need counseling? Will you go back to work immediately? Would you want to give it to charity or start one in your child’s name? I bought them for each of my kids. They are my favorite asset because I guaranteed their insurability. I have a few friends who have children with diabetes. Most carriers will not insure diabetics. My friends thankfully bought their children policies before they were diagnosed. I would agree permanent insurance is not for everyone, but more people should use at least a small piece of it S part of their plan. I also think they are extremely valuable when a person has the capacity to shrink down the insurance and load it with cash, as you mentioned above. Anytime the IRS puts limits on a vehicle as they do on permanent vehicles or any vehicle for that matter, I tend to think that is a good asset or vehicle for your money.

          • Matt @ momanddadmoney January 22, 2014

            Jim, first of all I’ll just say that I’m glad you found a solution that works for you and your family. That is really the only goal here so the fact that you’ve been able to do that is great.

            However, I’ll simply say that I would do things differently for my family. Some of that is simply a difference of opinion, which happens all of the time with money and doesn’t mean one way is necessarily better than the other. But some if it is also a disagreement with some of the logic here. I’ll try to address both.

            First of all, it’s important to understand that while the death benefit is certainly valuable, it is not technically an “asset”. The asset that you can include on your balance sheet with a whole life policy is the cash value. The only way you get the death benefit is by dying, so it is not an asset you can actually use today. Again, that doesn’t mean it’s worthless, it’s just not correct to compare it to money in a savings or investment account.

            Of course, the other way to get that death benefit is with term insurance. Look, if you want to make sure your children receive money no matter what and you don’t want to save the money yourself, then whole life insurance could be a good option. But you can get term insurance with a 30 year term that should be more than able to cover your children during the period of their life when they depend on you financially. If you go all 30 years and don’t die, you didn’t “get nothing” as you say. You protected your children and any other beneficiaries for that entire period of time. That is very much something. Any argument otherwise is a misunderstanding of how insurance is supposed to work.

            At the end of the term you very likely have no more need for insurance. You may have a desire to pass on money, but again I would argue that that can be better achieved in other ways (buy term and invest the difference, as the saying goes). I think the numbers are pretty strongly in favor of those other ways.

            As for actually wanting coverage in case of the death of a child, I would say that the choice is here slightly more personal preference. You are of course correct that children can die and that there would be costs involved. Whole life insurance can help with that. I would personally prefer to insure against these unlikely scenarios with regular savings and investments because I think it’s less costly and also gives you more options for what to do with the money.

            And yes, it is nice for children who develop chronic illnesses to have some amount of life insurance, potentially. But is the amount you purchase going to be enough? Yes they will have that amount but in most cases if they want more their health will still cause it to either be more expensive or unobtainable. So it isn’t exactly guaranteed insurability for life for whatever needs they have. It’s mostly limited to the amount you purchased, which is probably helpful but also probably wouldn’t meet their full needs. And again I would argue that you could buy term to cover their needs for a number of years while additionally saving in other ways if you really want to give them money they can use in the event of a chronic illness. Having it in accessible accounts would actually give them more options in that situation rather than having to wait till death.

            Again, I want to reiterate that you’ve clearly done the most important thing here, which is provide for your families needs. The fact that I would do things differently doesn’t mean I think you’ve done things incorrectly. I would just advise other people to look towards other avenues to accomplish these goals.

            All the best.

          • Jim January 22, 2014

            Your point is valid in that everyone has different risk tolerances objectives etc. so what is good for me is not good for someone else. As for, is the insurance enough for my children; I added an additional purchase benefit where they can add ten times as much coverage no matter what health issues they have. They don’t have to go through a medical. So of they develop juvenile diabetes and they want to add more coverage when they are 18, the company still looks at them in perfect health. They don’t need a medical exam when they add more coverage.
            As far as buying term and investing the difference the company I bought from has produced far better risk adjusted returns when compared to my analysis over the last twenty years of buying term and investing the difference in the S&P. I don’t mean to say we should not invest but I view my permanent policy as a great place to take some risk off the table and also to have some long term safe dollars. I agree that unless you die early, this is not a good short term idea. Also the fact that is not considered an asset as you mention, gives it very favorable treatment. I asked myself, if I were a beneficiary would I want to inherit a portfolio worth 2.5 million a house worth a million or a 3.5 million tax free check. For me, it was the latter. For high net worth people I would argue it is better than a muni allocation. I don’t view the discussion as one or the other invest and buy term or just buy whole life but rather as a synergy of assets that can produce a great value. As you say, it’s all quite subjective. Is whole life your best “investment”? No, but I do think it is a fantastic tool.

          • Matt @ momanddadmoney January 23, 2014

            Thanks for all the input Jim. Once again I’m glad you found something that works for you and your family and I agree that it can be useful for certain high net worth individuals. For 98-99% of the population though, it is not something I would personally recommend.

            All the best to you and your family going forward.

          • Rob February 5, 2014

            Can you expand how it is helpful for that 1-2%?

          • Matt @ momanddadmoney February 5, 2014

            Hi Rob. There are two main ways it can be useful for people with substantial wealth.

            1. It can help with estate taxes. As of 2014, married couples can pass on up to $10.68 million to their heirs without any estate taxes due (there are some nuances, but they’re besides the point here). An individual can pass on $5.34 million estate tax-free. For people who will be passing on more that those amounts, they could be facing significant estate taxes that would leave their heirs with less money. Permanent life insurance can be a good way to provide the funds to pay those taxes and allow their heirs to receive the full amount of the inheritance.

            2. For people who have already maxed out all of their tax-deferred space and have a sizable investment portfolio built up, permanent insurance can potentially offer some diversification along with some benefits of tax-deferral. These people could invest in a permanent insurance product specifically designed to maximize the investment opportunity, which would include significant up-front contributions and a few other bells and whistles. These are not the run-of-the-mill whole life insurance policies sold by your local agent, and they are generally not right for people who don’t already have significant wealth.

            I hope that helps answer your question. Let me know if you’d like any more information.

  • namerequired2 January 23, 2014

    What if you don’t qualify for term life insurance? What isn’t mentioned in this analysis in any fashion is the limitations imposed by your eligibility to purchase various insurance products. If Term is not an option, does IRA always trump WholeLife insurance?

    • Matt @ momanddadmoney January 23, 2014

      Are you asking about people with terminal illnesses? If so, then I’ll admit that my knowledge in that particular area is limited. But my understanding is that a term policy would be very difficult if not impossible to find and there are some special kind of whole life policies you may be able to get. If that’s the situation you’re asking about, then it’s really not a whole life vs. IRA decision. It’s a decision on whether you should invest or whether you should insure. That’s a very different question than what’s being discussed in this article.

      If I’ve misunderstood your question please feel free to clarify.

  • Ben January 30, 2014

    I’m 25 and just started a whole life policy a few months ago and pay 460 per month. Would you recommend getting out of the policy and putting that money into a 401k or IRA? I don’t think it would cost me much to get out of the plan since I haven’t put much in. Let me know what you think.

    • Matt @ momanddadmoney January 30, 2014

      Hi Ben. First off, thanks for stopping by and asking your question. So I will say that I can’t give you any specific personal advice, as I simply don’t have enough information and it really wouldn’t be ethical. But I can give you a couple general points to consider.

      First, anything you’ve done to this point is irrelevant. It’s all a sunk cost, meaning it can’t be recovered, and should therefore be ignored.

      Second, what that means is that your decision should be based solely on how you expect each option to perform going forward. You can evaluate what you expect to get from the whole life policy going forward vs. what you might expect from other options, and then decide which options give you the best chance of achieving your personal goals. I can’t honestly answer that question for you, but I hope some of the information in this article and others throughout the site do give you a sense of your options.

      Best of luck!

  • dcbrown February 25, 2014

    If you have paid a lot more than the payout amount on the policy why won’t the insurance company refund the over payment to you?

    • Matt @ momanddadmoney February 26, 2014

      I’m honestly not 100% sure about this, but I haven’t heard of someone paying more in premiums than they get in death benefit. With a whole life policy, there will typically there will be a point at which the cash value is sufficient to pay the premiums itself, though when that might occur is a big question market. Also, in the illustrations I’ve seen the death benefit itself will also increase as the cash value increases.

      In other words, there are plenty of things to worry about with whole life but I do not think this is one of them.

  • "Dan" March 5, 2014

    Matt,

    I really wish you would have stated more clearly the difference between the typical whole life plans with zero overfunding and a participating overfunded whole life policy. But I agree with you: What’s the point of not overfunding? Those policies have such a low cash component that they typically are just a ploy to make money by the agent and it seems as if that was your point all along. Which you should have clarified. Why minimum whole life insurances plans are a scam, especially when sold as a main investment vehicle. But then a little drama drives traffic right?

    That being said there are merits to the latter, which should really be sold as “cash building” tools for people that want to diversify their tax exposure, that’s it. But like you said most agents have no clue about real financial planning. Which would obviously include some degree of IRA’s, 401K’s, ROTH’s, Taxable accounts, hard assets, etc. Like you stated earlier. But have you considered an overfunded cash value policy as a way to diversify within your cash bucket assuming you believe in asset allocation, max 10-20% of total investment? More as an alternative cash bucket? But then that comes to income and the type of individual. I probably recommend them more than most, working with business owners and corporate managers. But for them they need more future tax diversification if taxes are headed north in the future. And the company I use which sadly I’m not going to talk about since I don’t even want anyone to know I wrote this “compliance would massacre me”. But those can be used by a business owner to leverage their cash and actually write off interest paid while said cash is still earning 100% dividend treatment, but of course only a few of those types of companies out there.

    So that being said I agree and disagree. They have some incredible merits when done right and for the right people. But you focused 95% of you article on the limitations and only 5% on their merits.

    But a question for you. Do you have clients that have had an overfunded life policy when markets are tanking and can use that cash to float their business and still earn money while their money is loaned out? Talk about a winner. I have a lot of clients that are in business today because of their policies (and the people still employed). Especially when the interest can be written off. But then again some super conservative clients love them. I guess I’m just bummed you didn’t go any further but I am on a site not geared for my clientele. So here is another free post to build up the conversation and the controversy so you can cash in on the traffic.

    Cheers

    • Matt @ momanddadmoney March 6, 2014

      First of all, thank you for the detailed and balanced comment. I think it adds a lot to the discussion.

      To be completely honest, I didn’t go into more detail about the things you talk about here because I don’t personally believe it’s relevant for the vast majority of the population, and certainly not for my audience. I am aware that if you have a certain level of income and net worth, an overfunded policy may be a good decision for you, which is why I even mention it at all. But for most people, even an overfunded policy would represent far too big a percentage of their overall asset allocation to make sense. You’d get into the lack of diversification issue, so it’s just not worth it.

      I realize that there’s no one-size-fits-all approach, but in general I prefer to use different types of assets for my client’s planning needs. There are exceptions, but I think the benefits of whole life are often overblown and the potential problems understated by the people advocating for them.

  • Jesse Fernandez March 11, 2014

    Life insurance is very important to have but how do you know which one is right for you?

    I have worked in the Banking Business for over 7 years. After years of working for a company/corporation, I decided to start my own business in the same business field. I am now a Financial specialist with New York Life Insurance Company for almost 2 years. I get to do the same thing as before but now I’m running my own business. Trust is everything and I make it my mission to earn my clients trust.

    Whole Life can get very confusing but it doesn’t have to be. It does have A LOT of advantages and yes it does create a TAX FREE income when you retire.

    I have to say that Whole Life is not for everyone but neither is Term. The only way to truly find out is to which one is right for you is to….

    1. Sit down with a financial planner/professional/specialist and do a financial analyst of your current financial situation.
    2. Go over your financial goals and needs for the future.
    3. The Specialist will then create a plan that fits your financial goals and needs.
    4. Go over the plan that was created for you, ask a lot of questions until you know it (don’t be timid) and then decide if it’s a plan that with help you reach financial success.

    You should never have to be sold into buying something your not sure of. You should know everything there is to know about what you’re getting and feel 110% satisfied of the service that you are provided.

    Knowledge is power…(do your research)…. but if you don’t do anything about it, then you’re powerless.

    I hope this helps.

    • Matt @ momanddadmoney March 11, 2014

      I definitely agree that it can be beneficial to talk things over with a financial professional who can take a look at your situation as a whole and help you make the right personal choice. I also really like your point that “You should never have to be sold into buying something your not sure of.” I couldn’t agree more.

      But I think most people will be better off with a professional who isn’t tied to a financial institution like a bank, an insurance company or a brokerage firm. An independent advisor, who isn’t incented to sell you any particular product from any particular company, is most likely to be able to give you objective advice.

      One other point. You emphasize the “tax free” nature of whole life here. I feel like I was pretty clear about that in the post and would be interested to hear your thoughts. Just blindly calling it “tax free” ignores the presence of interest (on your own money, by the way) which over extended periods of time can actually be more detrimental than taxes.

  • Phil March 18, 2014

    Matt,

    Thanks for the insightful article. I agree with the general statement that, in a vacuum, it is better to “buy term and invest the difference.” However, I’m interested to hear your thoughts on using whole life insurance as an investment vehicle in the context of the infinite banking model (assuming you are familiar with the concept). From what I understand, it sounds like a good way to achieve predictable and guarenteed growth on a compounded basis while allowing you to borrow money from your own policy and pay yourself the interest, all while always having access to the funds. I think it might be wise for people, like myself, are looking for guaranteed growth with little risk.

    • Matt @ momanddadmoney March 19, 2014

      Thank you Phil. One thing to keep in mind with any investment strategy, whole life or otherwise, is that the word “guaranteed” needs to be treated with a huge amount of skepticism. There’s very rarely anything that’s truly guaranteed, and whatever really is guaranteed is often much smaller than you think. I would look again at the “results are not guaranteed” part of this article.

      As for the specifics of the infinite banking model, I’ll admit that I don’t know a lot of details. It’s always seemed to me to mostly be a clever marketing ploy more than anything else, but if you want a more informed opinion I would check out this article here: http://www.mypersonalfinancejourney.com/2013/04/infinite-banking-concept-whole-life-insurance.html.

      In general, there are ways that you can overfund a whole life policy to make it more attractive than the default, but I still don’t see any reason to even think about it unless you’ve already maxed out all of your tax-deferred space. And even there, there are other ways to get conservative returns without all of the pitfalls of whole life.

  • Kevin Wenke March 27, 2014

    Actually, you can easily “surrender” the money from a whole life contract and not pay tax. Life insurance is treated “First in; First Out” for accounting and tax purposes. You can easily surrender the cash value that is considered growth too. However, if this is done, then the policy owner would be taxed. The “loan” is a way for the insurance company to give your money to you and the income tax free death benefit can pay the “loan” back. Yes, there is interest charged however, most of the time it is the same amount that the policy continues to earn because remember, the money is still in the policy. This is known as a “wash loan”.

    Your statement that money isn’t there to earn interest dividends isn’t true in every case. Direct participation companies continue paying dividends on the Cash Value. As interest rates have fallen over the past 30 years, this has caused an arbitrage allowing a policy owner to earn a return above the amount of interest being charged.

    To say a life insurance company is not a diversified portfolio is a hard statement to agree with. Life insurance companies own 18% of the corporate bonds issued in the United States. These a multi-billion dollar diversified portfolio’s of fixed income securities WITH NO INTEREST RATE Risk. It is true that it takes time to accumulate cash value, however, there isn’t a passive investment strategy that doesn’t take time to create wealth.

    The commissions a life insurance agent earns selling a whole life policy is tiny compared to the ongoing commission a fee based asset manager charges to manage a portfolio. These asset managers use bonds to manage stock market volatility. A consumer who hires one of these managers is paying 1-2% annual fee’s for someone to add an asset that reduces long term stock returns and has the potential to drop 20% or more when interest rates rise. It takes 10 minutes to set an allocation and if an investor can stomach the volatility, they need to let it do its thing. More on this in a minute.

    Underfunded whole life insurance may have only performed 4%. However, designed with additional premiums they have actually earned closer to 7% in the 30 years from 1984-2013. Even during the period between 1977 and 1982 where interest rates shot through the roof and bond holders didn’t recapture their losses for several years, over funder whole life returned 35% after the cost of insurance is considered.

    Your comment on liquidity and guaranteed returns is tough to agree with too. Life insurance returns have continued to decrease since interest rates have decreased from all time highs to all time lows. Life insurance is a long term fixed income asset. There are both guaranteed returns and maximum charges in both Universal Life and Whole life. These are lower than the “current illustrations” but the are guaranteed to never fall below those points. This can not be said about any other fixed income investment other than short term treasury notes. This is why banks hold 10-15% of their deposits in cash value life insurance…billions of dollars I might add. It is a tax free fixed income asset that they do not need to “mark to market.”

    I mentioned investment allocations earlier. There are other ways to get stock market returns with Whole life insurance as well. I am not talking about “Variable Life Insurance” either. Those who purchase these policies loose the benefit of having an insurance company retain some of their investment risk. To obtain market returns, a person simply invests in long call options on the broad market. In doing this, an investor earns stock market returns but transfers their downside risk to the owner of the index (SPY or SPX). The options will be worthless or appreciate (sometimes 500%). Coupled with the guarantees of the over funded cash value life policy, their portfolios will not decrease below a certain point in any given time but they can destroy the market in up years. This all takes 10 minutes to manage and about $20 in cost (compared to an asset manager charging a percentage,) Because life insurance is guaranteed to maintain its value, it protects the remaining money that is not tied up when directly invested in stocks and is available to that an investor can be “greedy when others are fearful” (Warren Buffet) or “buy low while others are selling”.

    Add to this, when a younger person owns whole life (or cash value fixed universal life) they have the life insurance coverage they need, are building a tax free bond portfolio for the future (which as most people realize is what older investors shift into as the age) but also have a accumulation vehicle that can “self complete” if they become disabled. 401k’s can’t provide this…they don’t even match the long term return of the do nothing stock markets because of the fee’s they charge. That is to say…there is no “alpha”

    Any person who uses permanent insurance should be out of debt and have the discipline to maintain a long term approach. There aren’t any get rich quick schemes and any plan can work as long as an investor looks to get the maximum value for the money they pay. Cash Value Life insurance provides values that promises you or I can’t keep unless we partner with one of these companies.

    Finally, everyone who accumulates assets will have a life insurance policy of one type or another. Social Security currently is “a life insurance policy”. Will it be around in 30 years? Who knows…who knows what will be there. All I know is that a good plan will have a guaranteed income source that they can not outlive. Many people with assets take Social Security before age 70 because they want to be sure to get something out of it…this is a life insurance decision. They reduce their life time income by taking payment early. If they owned a permanent life policy, they could reduce their investment risk by spending assets and leverage the insurance policy to replace the assets they use while they delay taking income from SS and the increased payment the benefit provides can increase their life style, pay the premium and create a legacy for their children, grand children or favorite charity. Life insurance “loans” are not income. They are loans. So if a person planned ahead, they could receive 10’s of thousands of dollars from the cash value of their policy (and ROTH IRA money) and not pay a dime of income tax on the social security benefit. If inflation happens and interest rates and taxes increase, the SS benefits will increase and this person will have increasing income that won’t be consumed by an increase in taxes as all their income would be tax free.

    Your article is incomplete.

    • StanfordCardinal93 April 3, 2014

      Wow…what a way to bash a product.

      This is like going to Home Depot and saying their handsaw, drill or other piece of equipment sucks for 98% of the people who visit the store, and reminds me of the saying “a fool with a tool is still a fool”.

      Permanent insurance (specifically maximum funded participating Whole Life and Indexed Universal Life) is the most versatile product that I have ever analyzed, but it needs to be designed to optimize cash accumulation if you’re going to be going in that direction. If not designed optimally from a short list of insurers, then yes…it’ll probably suck as a place to put money and earn a decent rate of return.

      My current blended Whole Life policy breaks even with premium paid in year 5, and together with my Indexed Universal Life policies, my permanent insurance policies constitute my entire fixed income allocation. No need for bonds, as these policies give me a decent long-term growth of between 4.5-6% that is virtually risk free, tax free and dummy proof…and provides a giant tax free death benefit upon my passing.

      I already have a ton of equities exposure in my 401k (in fact, 100% stock allocation), so my high cash value permanent insurance policies provide the fixed income exposure while providing a large death benefit.

      I have a ton of term insurance too, but they will slowly drop off when my permanent insurance grows.

      In any case, once when I was younger, I used to think like the author, that you can overcome your risk tolerance and become a better investor if only you can control yourself and learn to love the equities roller coaster ride…now that I am in my mid-40s, I realize that I’m old school and conservative. I am happy with 5-6% return that is tax free risk free and doesn’t involve me making any decisions except how much I want to save this year.

      I wish you all the best, and hope that one day your mind can be opened to what the product (when it is well designed) can do and not focus on how it had been sold.

      • Matt @ momanddadmoney April 4, 2014

        I’m glad you’ve found an approach that meets your needs. That’s what this whole investing thing is really all about.

        I will say that I do have a conservative part of my own portfolio. It’s not all stocks, as you seem to assume here. I just choose to invest that conservative portion in something other than whole life for all of the reasons listed above. Nothing wrong with a more conservative approach. I would just do it differently myself.

        I’ll also say that I would be careful about using the words “risk free” when it comes to any kind of investment. It’s typically when people start thinking they’ve eliminated risk that they tend to get themselves in the most trouble. Risk isn’t bad, but misunderstanding it is.

  • John Smith April 8, 2014

    I didn’t see the one thing that really is bad, and that is the fact that when you die, the insurance company keeps your cash value. It doesn’t go to your beneficiary.

  • Frank June 12, 2014

    For SOME people, whole life insurance is a phenomenal investment. Let me give you an example.

    A 30-year-old attorney who makes $200,000 and maxes out his 401(k).

    Why is whole life insurance a great investment for him?

    1) He cannot contribute any more money into his 401(k) but needs to save additional income for retirement since he has such a high earning potential. He needs to look into other tax-favored vehicles.

    2) He outqualifies a Roth IRA because he makes too much money (and even if he didn’t, he’d be capped at $5,500). There is only one other “tax free” vehicle he can turn to: life insurance.

    3) Whole life insurance is a fixed investment that gets returns EVERY YEAR. In the distribution phase of retirement, you want to pull from fixed accounts when the market has experienced “down years” in order to mitigate your losses. This importance of this aspect is VASTLY underestimated.

    4) Tax diversification. To mitigate tax consequences in retirement, you will want to be taking distributions from vehicles that are taxed differently. A diversification of these tax treated products is very important. 401(k) gets taxed as income, investment accounts pay capital gains tax, and life insurance is distributed tax free. A mixture of these three mitigate your tax consequences.

    *Furthermore, a properly funded (i.e. OVERfunded) policy will see a very good internal rate of return over it’s life (usually 4-6% IRR).

    To write an article like this is irresponsible as it is a blanket statement that does NOT apply to all people and all situations.

    • Matt Becker June 13, 2014

      Hi Frank. Thanks for the input. Here are some responses.

      1 + 2. He could actually look into a backdoor Roth IRA, which would be a much better use of the money. I would also say that regular old taxable accounts used properly will often be a better option.

      3. You can use other asset classes to achieve this same thing. Such as CDs. Or Treasury bonds. It’s not a question of whole life insurance vs. a 100% stock portfolio. That kind of argument is far oversimplifying things.

      4. I agree that tax diversification can be important. But again, there are other ways to achieve this, such as the backdoor Roth IRA mentioned above.

      I agree that if you are insistent on purchasing a whole life insurance policy as part of your investment strategy, then overfunding it is the way to go in most cases.

      Finally, I never wrote that this article applies to all people in all situations, as you conclude. The final section of the post starts with “There are certain instances where whole life can be useful”, and goes on to quickly list several of those circumstances. But for 98-99% of the population, yes it is perfectly accurate.

  • Frank June 13, 2014

    Backdoor Roths – 1) These vehicles are still capped at $5,500 on an annual basis (LI has no restrictions on contribution amounts.) 2) Roth IRAs are still exposed to market risk and can experience losses in account value (whole life policies are not and cannot). 3) Doing a backdoor conversion year after year is an administrative pain in the ass and will have tax implications if you hold a traditional IRA.

    P.S. To say that backdoor Roths are a “much better use of the money” is “far oversimplifying things” with no information backing it up.

    CDs/Treasury Bonds – Find me a CD or Treasury Bond that pays 4-6% IRR, and I will find you Peter Pan riding a unicorn. Not to mention that these are taxable investments.

    To reiterate: Whole Life policies are one of two vehicles that offer both 1) tax free distributions and 2) fixed returns. The only other options are municipal bonds which are currently paying peanuts.

    When the market experiences “down years” you will want to used a fixed investment to take your distributions in order to give your market-exposed vehicles time to recoup losses. This is one of the best pieces I have seen regarding “Taming a Bear Market” where one uses whole life insurance to supplement 401(k) distributions in bad years: http://www.becausewearewomen.com/documents/LEGACY10-RETIREMENTSUPP.pdf

    And oh yea, on top of a) tax deferred growth, b) a good fixed return, and c) tax free distributions, at your death, someone you love gets a whole heap of money tax free. Icing on the cake.

    • Matt Becker June 14, 2014

      Yes, backdoor Roths are capped at $5,500 per year. Still, I think they’re a better first option than whole life for all of the reasons mentioned in the post. Exposure to market risk is not an inherent problem, and is also not a characteristic of Roth IRAs. A Roth IRA is just a type of account within which the individual can invest however they want. If they want to be exposed to market risk (something that many people deem desirable), they can be. If not, they don’t have to be. It’s up to them.

      It is not a valid argument to me to say that the “administrative pain in the ass” is a reason to ignore the tactic. It’s a pretty simple procedure and certainly not worth paying all the extra costs of a whole life approach just to avoid. Yes, you have to be careful if you have Traditional IRAs, but there are ways around that too. No, it’s not for everyone, but I would much rather try to make the backdoor Roth work first than immediately jump to whole life.

      When you compare the return of a CD or Treasury bond to whole life, you also have to factor in all of the other variables. I do this in the post and won’t rehash it all here, but when you only look at returns you are oversimplifying things and making an incomplete comparison.

      You mention the “tax-free” nature of whole life policies, which again is something I addressed in the posts. I’ll simply refer you to that section to see my thoughts.

      The “fixed returns” you talk about from whole life are not the 4-6% you mention in multiple places. Again, as I said in the post, the guaranteed returns are much closer to 1% or less. Yes you might get better returns depending on the dividends the insurance company decides to pay, but that’s not “fixed” or guaranteed. It changes every year. And yes, you can improve those refunds if you vastly overfund the policy in the early years, which again is something I already mentioned in the post. But for 98-99% of the population that really isn’t a viable strategy.

      As for your point about market down years, I simply believe that it’s better to use other approaches in almost every case. The reasons why are all explained in the post.

  • Frank June 14, 2014

    Matt,

    Unfortunately I think you are just vastly underinformed about whole life policies. You talk about the “guaranteed rates” but all 4 major mutual companies have paid dividends since their inceptions. In fact, the average declared dividend of all four of them over the last 30 years is just under 9%.

    To compare whole life policies with CDs and Treasury Bonds using the “guaranteed rates” is irresponsible given that it is historically not even close to what actually occurred.

    And the 4-6% (or higher) internal rate of return is net of both policy fees and taxes (because taxes don’t apply). If you open a Roth that is holding only fixed assets, you will certainly not get those types of returns in today’s interest rate environment.

    Finally, by rereading #6, you don’t truly understand the tax-free nature of withdrawals. You are correct in the fact that there are interest rates on the loans, but 1) the dividends will usually pay the interest on an annual basis (with the remainder of the dividend going to the cash value), and 2) the loan will be repayed upon death with the remainder of the death benefit going to loved ones tax free.

    Also, I did not find anywhere where you addressed using your fixed investments in market down years to let your market exposed investments recoup losses. And did you even look at the “Taming a Bear Market” piece?

    • Matt Becker June 14, 2014

      Frank,

      I’m not sure what good a continued back-and-forth will do, as my responses to all of these points are all already either in the body of the post or in previous responses. At this point I’ll simply agree to disagree and wish you the best of luck.

    • Charles Pedley July 14, 2014

      Frank
      Your “dividends” are not dividends. They are overpayments of insurance.

  • Mary Anne July 5, 2014

    Just have a question…My mom took out a whole life insurance policy with Prudential in 1951. She passed away in 2012 and I have found out I am a beneficiary on her policy along with my brother. Does that type of policy earn dividends or interest after all these years? Thank you…..

    • Matt Becker July 6, 2014

      Hi Mary Anne. You and your brother should have simply received the face amount of the life insurance policy. If it has already paid out, then no it will not continue to earn dividends because the policy will be complete. If you have not yet received the life insurance proceeds then you should be contacting the company to understand why.

  • Charles Pedley July 14, 2014

    Did you mention anywhere that the cash value of “permanent” insurance is owned by the insurance company? Did you mention that you don’t own it; the insurance oompany does. Did you mention that the only way the client ever gets the cash value is to cancel his policy? If the client dies, then the cash value is taken to pay off part of the face value of the insurance.
    That is why you have to pay interest to “borrow” it. You seem to be lumping in Universal Life as well which is somewhat different also a problem. That seems to be the type of cash value that you are talking about here. It makes term insurance a lot more expensive.

    • Matt Becker July 15, 2014

      It’s very true that you don’t own the cash value in anywhere near the same way that you own your other investments. You can only access it in certain circumstances, and even then there are big conditions like surrender charges and interest. And you’re also correct that you can’t get the cash value AND the insurance proceeds. It’s either/or. All good points.

      I’ll also agree that universal life insurance has some different characteristics, though most of the points are true for most universal policies as well. But I’m specifically addressing whole life insurance here, so an evaluation of other types of policies would need a slightly different analysis.

  • Kay Harris August 8, 2014

    I’m 71 and just going to signup for $4,000 coverage, paying $28.25 a month. The form says the monthly amount will never change and even if I die in 2 years (in good health) my family would still get the $4,000.
    This is offered through my Credit Union, “TruStrage Insurance Agency”

    S0, is Whole Life Ins. good for us older people?

    Or should I just make sure I have $4,000 in my savings? (I’m a good saver.)

    Thanks
    Kay

    • Matt Becker August 9, 2014

      Hi Kay. I can’t give you a direct answer without knowing more about your financial situation and what you’re trying to achieve, but I would ask yourself the following questions:

      1. What is your end goal here? What is it that you’re trying to achieve with either $4,000 in savings or in life insurance?

      2. Do you actually need the life insurance? If you passed away tomorrow, would the $4,000 be meaningful for your family?

      3. If no, then why pay the extra costs to do this through life insurance as opposed to just saving it?

      4. If yes, have you looked into other options that might be cheaper like guaranteed no-lapse universal life insurance?

      5. If you could easily save the $4,000 on your own (which it seems like you could), why pay the extra costs of buying insurance?

      6. If you’re doing it purely as an investment, have you run a comparison of the projected cash value against what you might expect by investing that money elsewhere?

      Please feel free to reach out to me directly if you have any specific questions. My email is matt@momanddadmoney.com.

      Good luck!

  • Mike August 10, 2014

    Hi Matt, I have a question for you. I was sold a whole life policy by a friend 4.5 years ago (before I was married) with the promise that it is a good investment tool. I’ve learned a lot about investing since then. The accumulation value is $6700 the surrender value is about $2700. I’m wondering if I should get out now and take the $2700 and run, or wait until I can pull out what I’ve paid into it which I hear is 10 years.

    By the way, my monthly premium is $192 and the monthly charges are $94. I’m not sure if this is normal or not. Also, the total premium applied since policy began is $10,800…not sure how this relates to the $6700 accumulation value.
    Thanks for any help you can give me. I definitely regret buying this policy.

    • Matt Becker August 11, 2014

      Hi Mike. Sorry to hear all this. I can’t give you a direct answer without working with you a little more closely and looking at an in-force illustration, but here’s the way I would approach it. Since the surrender value is $2,700, that’s the number that matters. So you have a choice:

      1. Invest the $2,700 into the whole life insurance policy (that is, just keep the policy in place), or
      2. Invest the $2,700 elsewhere (surrender the policy and put the money to use somewhere else)

      So the way to decide which is right for you is to look at the expected return in each scenario, and weigh that against the other characteristics that I talk about in this post. Does that make sense?

      If you would like a more personalized answer, feel free to email me directly at matt@momanddadmoney.com. Good luck!

    • Alla August 15, 2014

      First there is no such thing as surrender value in WL – you were sold a Universal Life policy – In WL you value is your value. If you are in year 5 take a look at your annual premium and your annual increase in Cash Value – I’m betting they are close and only getting higher. Where can you get that?

      • Matt Becker August 17, 2014

        First, yes there is a surrender value. It’s right there in any illustration you look at. Second, it takes much longer than 5 years for what you’re talking about to happen, excluding the premium paid in. In fact, it usually isn’t until about year 6-7 where the cash value starts increasing by even as much as the premium paid. Before then, every premium payment is losing you money.

  • Jen August 14, 2014

    So if I got duped into a whole life policy in December/January, is my best bet to cancel and walk away? The death benefit is $100K and the current cash value is about $4 (whoopee…).

    I’m assuming I can cancel now and just call it a wash (I was paying under $100 a month). I’ll just pretend it was a crappy, overpriced term policy 😛

    • Matt Becker August 14, 2014

      Hi Jen. I can’t say for sure without reviewing the policy myself and understanding more about your specific situation, but if you bought it purely as an investment then I would say there’s a good chance that your assumption is right.

      • Jen August 14, 2014

        Yup. Well, our “guy” basically said I should get life insurance, and ‘why throw your money away for a term policy when you can pay the same and have all these savings guaranteed for retirement???’

        Now I see this is a bunch of bologna, and he was in it for the commission/fees.

        Thanks!

        • Matt Becker August 14, 2014

          Classic sales pitch. Love your mindset though! Nothing you can do but call it like you see it and move on. Best of luck!

  • Allan August 15, 2014

    It’s always amazing to me when uneducated people like yourself spew false claims about whole life insurance. I need to ask you a few questions.

    1. Take a look at your bank’s annual report – what’s that at about the 3rd to 5th largest assest holding? Why yes whole life insurance cash vaules! It’s considered a Tier 1 asset – I’m assuming you can google that!

    2. How come you don’t mention that the GUARANTEED Cash Value on most WL polices increase GREATER that the premium in about year 5-8 depending on product? And typically that begins with a 5% cash to cash return increasing to double digits quite quickly. Why? Because all the insurance costs are up front. And yes you lose if you get out in 1-5 years – It’s insurance and that needs to be accounted for.

    3. Why don’t you mention the 4-5% ROR on CV to premium? You state it’s a bad investment – it’s not it’s life insurance. But what bond does 4-5% now? And did you know the pubic’s ACTUAL ROR in the market is less than 4%? Look it up – google will work – try “Why Investors May be Fooling Themselves” – from the Wall Street Journal – I think they know what they speak!!!

    4. How could you NOT want life insurance as you age? I want it at retirement because having the DB protecting my assets allows me to spend my wealth as I know the db with come in an provide for my spouse, kids and grandkids

    5. And you adise on how much someone should have? Please!!!! If you have a house and it’s worth $500k you insure to for that. If you make $100k/year at age 35 and the insurance company will cover you for $2.5 million then that’s what you are worth and that is what you should own. And if an agent doesn’t show a client that amount and the client dies they will be sued for malpractice for not showing the client their full replacement value.

    I can go on and on and I’m rather sure you won’t read nor reply. I’d love to take you on in an open forum but you won’t. You will hide behind your laptop and pretend to know what you are speaking about.

    You, Suze and Ramsey disgust me!!!

    • Matt Becker August 17, 2014

      Thanks for stopping by Allan! Here are my responses:

      1. I don’t really care about what a bank invests in. They have very different asset levels and very different goals than I do. It’s just not relevant.

      2. These numbers just aren’t accurate based on the many policies I’ve seen, especially when you’re talking about the “guaranteed” portion of the cash value.

      3. I do understand that most investors are earning significantly less than what the market actually returns. That’s from behavioral errors and I don’t have any reason to believe that those errors disappear when you invest in a whole life insurance policy. In fact, my experience seems to show that whole life insurance tends to make the underperforance even worse, as it often takes 1-3 years before someone realizes just how poorly the product is performing. At that point, they’re even further behind than when they started.

      4. If you end up wanting permanent life insurance when you get older, you have plenty of options other than buying whole life insurance as an investment when you’re young. You could convert a term policy. You could buy guaranteed no-lapse universal life. There are plenty of options that don’t require you lock yourself into a poorly-performing policy at a young age when that cash flow would be better used elsewhere.

      5. I don’t trust the insurance company to tell me how much life insurance I “should” buy any more than I trust a bank to tell me how much house I “can” afford. Each situation is different, and I tend to think it’s unethical to tell someone to buy the max (and hand over the maximum premium/commission) if they have good reasons not to need it.

      Best of luck!

  • TopLifereviews August 27, 2014

    Great article Matt. You provide 8 great reasons as to why whole life insurance isn’t the best option for the majority of people. As you noted, there are times when it is advisable such as if you have a disabled child (also a no-lapse universal life policy is another alternative in this instance), but for most term life insurance and investing the rest is the way to go.

  • Winston September 4, 2014

    Great read (http://momanddadmoney.com/insurance-and-investing-dont-play-well-together/ as well). Really taught me a lot. I’m a growing professional and a ‘friend’ tried to sell me a whole life participating life insurance. Like I believe you mention several times, all the ‘pros’ sounded really attractive. It actually made it sound stupid not to buy it. However, this alone made me hesitate as we all know what usually happens when something is too good to believe. I did a number of searches and read a few articles before stumbling on to yours. Excellently written providing a comprehensive explanation in terms that even a layman (i.e. me) could understand. Thank you as you just saved me from making a very big mistake. I hope others are lucky enough like me to happen upon your article before they make their decisions.

    • Matt Becker September 5, 2014

      Thanks for the kind words Winston! And you’re absolutely right that the way they describe it almost makes you feel stupid if you say no. It’s a really good sales pitch. I’m glad you were able to find some better information before taking the plunge. Feel free to reach back out any time if there’s ever anything else I can help with!

  • Mini September 10, 2014

    To echo what everyone else has said, great article! My wife and I were pitched this idea earlier today and I thought it sounded great until she made me read this article. I then returned to the paperwork they had given me to find it riddled with “these values are not guaranteed”. The footnotes even went as far as to say these projections were based on their dividend schedule for 2014 and that future years could be “higher or lower” and the went on to recommend looking at a hypothetical lower schedule illustration available upon request. My question for you is in regards to your conclusion. I’m self employed and put 30k into a sep-Ira and also utilize a tIRA->Roth conversion for my wife. You said this might be worth it if it was ossicle to front load the plan, the one I was presented with called for 15k/yr. are you saying it would be worth hit if I could put say 30-45k into each of the first few years? I’d still be a little skeptical after reading the brochure where it says the dividends are essentially at the discretion of he carrier

    • Matt Becker September 11, 2014

      Yep, there’s a lot that isn’t guaranteed with these policies, just like with anything you might invest in. The problem I see is that those returns are presented as if they’re guaranteed. I think it can be very misleading.

      As for your question, let me first say that I can’t give you a yes/no answer without knowing more about your situation. If you would like a more personalized answer, you can go here to set up a time to talk.

      With that said, here are some general thoughts:

      1. Nice work contributing to those other accounts! It sounds like you’ve got a great start no matter what.

      2. Whether it’s whole life insurance or anything else, I would always caution against investing in something that you don’t understand. Even if the investment is good one in a vacuum, that is still usually a recipe for trouble.

      3. Overfunding a life insurance policy means that you pay more in premiums over the first 7 years that you do over the rest of it. There are rules around this, which you can read more about here, but that’s generally how it’s done. So it’s more about the design of the policy than the amount you’re actually contribution.

      4. Do you still have room to contribute to your SEP? That might be a good place to look first.

      5. There are reasons why it might be beneficial to put your money in a regular taxable account, flexibility among them. Just make sure you’re working with someone who is helping you evaluate all options based on your specific circumstances, not someone who just keeps pushing a single product.

  • Roy September 15, 2014

    hi..any idea about how to work out a whole life insurance considering the inflation effect..
    the cover amount I buy today will be irrelevant in 20 years..

    • Matt Becker September 17, 2014

      Good question. My first response is that if you’re looking for pure life insurance protection, it’s likely that term insurance will be a better product for you than whole life. It can depend on exactly what kind of protection you need, but that’s generally the case. Second, I have an entire series on life insurance that will help you figure out how much you need, and it does factor in inflation. Here’s the link: New Parent’s Guide to Life Insurance.

  • anthony October 17, 2014

    Not sure how you think term insurance is better you will always get your money back guaranteed with term insurance you usually outlive the policy and you end up paying all that money in and getting nothing in return. I only sell term insurance as a last resort or if its to cover a mortgage for family protection and funeral expenses the whole of life policy is always the best policy

  • Amy October 20, 2014

    Thank you for all your articles…very insightful. My husband and I had a very similar situation as you and your wife when you first met with a “financial planner” (aka insurance salesman). Now, we look at having paid 8 years of adjustable comp life for our policies plus policies for both of our children (5 and 2). We feel like we made a mistake and, as you know, were swayed by the talk of retirement investment and “throwing money away”. So now, we wonder…should we go paid up on our policies, which would drop them both down substantially, but we no longer would have to pay into them (and get more term to cover the difference) and cancel our kids policies?

    • Matt Becker October 20, 2014

      Hey Amy. Great questions! I’m going to follow-up with an email so I can get a little more detail about your specific situation.

      • Amy October 20, 2014

        Thank you.

  • Kevin October 23, 2014

    I think this is a good article/cautionary tale for young parents in the middle class, however if you have a good financial planner all of these reasons should already be laid out for the clients.

    Heads up: I am a young professional without kids that does fairly well financially.

    1) All permanent life insurance policies are not equal. Choosing a company that can back up their promise is obviously important. (some insurance companies have financial ratings that are the same/ better than the US Governments rating–which is why their ratings changed in 2011, because no company should have better ratings than the US.

    Also, a planner that is telling you to put all of your money into a whole life policy is obviously not planning for you. But this doesn’t mean putting some of you disposable income into a permanent policy would be a bad idea–especially those individuals maxing out 401(k)s. (young attorneys with high incomes and low expenses?)

    2) Returns are not guaranteed, but like everything, looking into the company history and seeing how they have performed through the years and more importantly recessions is a good idea.

    3) Positive returns take a long time to appear–probably because the insurance company is taking on the face amount risk of you dying. In the first years you will pay in a little and the insurance company is on the hook for a lot.

    4) Whole life is illiquid? Why would you want to buy and sell insurance policies frequently ? But if you’re talking about the cash value being illiquid I have had no problems recieving money from my policy.

    5) Less cash flow flexibility– I agree but a good advisor/planner will make sure you are not overextending yourself financially. I think this should be common sense, and you should be weary of insurance agents that are telling you the amount to purchase without consulting you first and asking about what you needs are.

    6) Tax-free withdraws misleading–financial planners should already have expalined this to clients before even accepting the policy. But again this is the interest rate-dividend rate, if the insurance company is a mutual company.

    7)Lack of transparency/ fees, you can see the companies with the least amount of fees. Also, the financial planner should always be straight forward with how he gets compensated. Even fee based planners get commission on top of what they get hourly.

    8) Plenty of other options out there–I agree, but these options should be in force at the same time complimenting each other to create the whole financial plan.

    Why I bought?

    I know that what I am putting in to my permanent policy is not overextending my budget and is after I put a specific amount into my 401(k) and investments each month.

    I also know that I want to give back to my family when I pass, or at least take care of the insane estate taxes so that my family can decide what to do with my assets.

    Additionally, this can be a great way to compliment a financial plan that is linked to the markets performance. When I am in my 60’s nearing retirement and have a good amount of cash value in my policy–I will not be terribly worried about the market performance (401(k)s/mutual funds/ IRA/ stocks). I know that flucuations in the market will occur and if a recession happens when I am 62, I will use my cash and policy cash value to hold me over until the markets recover. Again, my aim is not to buy high and sell low, it is to buy low and sell high.

    But again, this is a topic that is very specific for each individial/family.

  • Mark F October 26, 2014

    Hey Matt,
    Great article! My wife and I are in a similar life stage to you. 3 young kids 6 & under. Like many others, we’ve been pitched repeatedly for Whole and Universal Life. This article is a very clear articulation of the reasons it’s a bad investment. Thank you for writing it!
    Another reason occurred to me as I was reviewing the sales pitch from our agent. Maybe others have mentioned this in the comments, I haven’t read them all. Basically, it’s lack of flexibility, and the fact that you have to “marry” your life insurance policy for it to work the way it’s intended. This is similar to Point #1 but from a different angle. Obviously Whole Life / Universal policies get “better” over time (supposedly)…usually after decades. Even the agents would mostly agree you need to keep it for life for it to work.
    As a 31-year-old, I think about how many changes I’ve made over the past 10 years as I’ve grown wiser (or just changed my mind). Whether it’s mutual funds, investment companies, credit cards I’ve added or removed, banks, stocks/bonds, heck even jobs and location! The only things I want to be tied to at age 65 are my wife and kids. To think you can purchase a product like this and still feel you want to stick with that policy and company in 30+ years is insane. Do I really still want to be with whatever insurance company I purchased the policy with? Even if my Roth IRA gets no better returns, I like the peace of mind that I can move those funds around between brokerages, mutual funds, and so on. Even a term policy you can cancel or get a different one (assuming you still are in good health) with no dire consequences. I can’t think of any other product in finance or elsewhere that you’re supposed to stick with the same one for life.

    • Matt Becker October 27, 2014

      Hey Mark. Thanks for the kind words and you make a great point! That’s a big reason for #5 in the article. With the speed at which life can change, locking yourself into paying those premiums for decades is just so limiting. And you go even further than that here with simply wanting to invest the money you’ve already put in differently, and I couldn’t agree with you more. It adds a lot of inflexibility to your planning which can make figuring out the other pieces a lot more difficult.

  • Ramiro November 13, 2014

    I have whole life that I’m not understanding . I’m under the understanding I pay $401 for 7 years I’m done paying on a &135,000 policy that they tell me the more I borrow from the more it grows.But I’m starting to question if the interested charged doesn’t go back to me how it’s it growing. I’m very confused suopose to sit down with agent so he can explain it better. But from talking to other insurance people like my house and car insurance agent he says this is not possible about it growing. HELP

    • Matt Becker November 17, 2014

      These policies can definitely be confusing. If you’d like to talk things over, and hopefully get a better understanding of what’s going on, I would be happy to try and help. You can pick a time that works for you here: http://momanddadmoney.com/consult/. Hope to talk to you soon!

  • vRico December 16, 2014

    This is a very helpful example of why WL insurance IS a good investment: http://www.mypersonalfinancejourney.com/2013/04/infinite-banking-concept-whole-life-insurance.html. Also, Paradigm Life has several very good models to show how WL policies can out pace “buy term and invest the difference” products long term. One size does not fit all. I have Term Life insurance supplementing my WL policies right now, but they are all convertible. So I will be able to lump in money later and convert them into permanent policies with all of the borrowing and tax sheltered benefits.

    • Matt Becker December 29, 2014

      I think that post does a good job of showing how the illustrated (non-guaranteed) return from a whole life insurance policy is comparable to one of the most conservative types of traditional investments you can make IF you end up keeping the policy for 30 years. Of course, that conservative traditional investment doesn’t have most of the other downsides discussed here AND doesn’t require you to hold it for 30 years to see a reasonable return. And, of course, you are allowed to put your money into other, less conservative investments outside of a life insurance policy, some of which may even have special tax advantages (401(k), IRA, HSA, 529, etc.).

  • Hugh December 19, 2014

    Hi Matt, Enjoyed the article. I agree with a lot of what I have seen up here, both by you and other commenters. I believe that a lot of the typical Dave Ramsey advice applies to the vast majority of the population, who can’t afford to pay $500 month premiums w/$500 month overfunds. Yeah, if you’re in a position where that amount is no more than 20% of your savings, wow & congrats, and it could possibly be a good idea. But that’s like 50% of mine. As someone who is new to investing and just a year out of school, I recently sat down with a guy from one of the more respectable companies in the WLI market. I truly believe it would have been a good deal for a very select group of individuals, but for me, there were two main turn-offs. First, I simply couldn’t commit to send such a large portion of my savings for the next 10, 20, or 30 years. But secondly, I just didn’t fully understand the policy. From other comments, I think others are in the same boat. These things are confusing, I asked lots of questions but still it just didn’t make sense what was going on with every level. I’ve done my research on saving/investing, and gotten a pretty good grasp so far of my strategy, but my mind still just hasn’t fully grasped WLI. So I backed off. And I’d encourage everyone to do the same – if you don’t know exactly what it is that you’re doing and can’t understand or explain it, then don’t get in to it.

    • Matt Becker December 23, 2014

      That last point you made is really important. If you can’t understand something well enough to explain it clearly to someone else, it’s probably a good idea to stay away.

  • Abram December 23, 2014

    This is totally wrong!!! Please read the book, Becoming Your Own Banker by R. Nelson Nash Whole Life is worth it, anyone who says different doesn’t now what they are talking about. You have Cash value, dividends (use Dividend Paid UP option to increase the death benefit and cash value of the policy) and interest all working for you; TAX FREE!!!

    • Matt Becker December 26, 2014

      I would encourage you to run the actual numbers yourself and compare them to the alternatives available to you to make sure you’re getting the deal you think you are. The way it’s presented is often very misleading.

  • Gary January 20, 2015

    Hi Matt. Read your posts and comments on Whole Life and the overfunding options available. I have a different situation involving a policy with Prudential called Variable Appreciable Life. I am looking for a safe haven for some available cash with a minimum return of 4%. Agent/Financial Planner has suggested I overfund the balance of that VAL policy. Yes, I am quite conservative but have enough invested in 401k, Stocks, Funds etc. Policy is 50K and issued in 1990. Wife and I are in mid seventies and looking to have 30-40K of available liquid cash. Can add/withdraw the overfunding $ at any time. Interest guarantee is 4.0%.
    This is not a MEC nor will it ever be. All interest is non-taxable. Good idea or not? Thanks

    • Matt Becker January 21, 2015

      Thanks for the question Gary. So I’ll be completely honest about 2 things:

      1. I’ve never heard of “variable appreciable life”, so I can’t honestly give an opinion on it.

      2. If a client came to me with this question, I would enlist the help of a company that specializes in life insurance to help me understand your options. If you would ever like some more assistance, you’re welcome to reach out any time and I can help connect you with them.

  • Jordan January 21, 2015

    I, 22 year old male, can pay ~$13,000 into a universal life policy throughout the next 20 years (~$650/yr, ~55/mo), never touch it again, and that will provide a death benefit of $100,000 until I’m at least 75 years old (I will put more money in of course since I plan on living past 75). That’s also a flexible premium policy with one of the most financially stable companies, so I would say that’s a good investment for my future children/grandchildren. Maybe not for myself, but at least my premiums won’t be more than $100/month when I’m old, assuming I still have excellent health and am insurable. With term I can get it insanely cheap now, but what about when I’m 50-60 and closing in on retirement? My premiums would hopefully be under $200/mo. at that point assuming I have excellent health or guaranteed insurability.

    • Matt Becker January 21, 2015

      Will you need life insurance when you’re 50-60? I’m assuming that the $13,000 per year you could put into universal life is on top of maxing out a 401(k), IRA and HSA, since those are very likely to be better savings avenues. If so, considering that you’re 22, I would imagine that you will be well on your way to financial independence by 50-60 and will have little, if any, need for life insurance at that point.

      I’m making a lot of assumptions here based on very little information, but I would seriously question whether the appeal of saving $100/mo on life insurance you may not need 30-40 years from now is really worth it.

      • jordan January 21, 2015

        I won’t, but my children may. And that $13000 is spread out through 20 years. That’s $50/month for the next 20 years in order to provide my dependents the opportunity to not live on the streets if and when I die.

        • Matt Becker January 22, 2015

          Hey Jordan. I was a little dismissive in my last reply, and I want to apologize for that. You’re absolutely right that the main reason for getting life insurance is often to make sure that your kids would have enough money even if you weren’t around, and it’s honestly great that you’re already thinking that far ahead. It bodes well for you and your family.

          So here’s what I meant to say, and hopefully this time I can say it a little more eloquently. For the most part, life insurance is a useful tool if you meet BOTH of the following conditions:

          1. You have people who are financially dependent on you, AND
          2. You don’t already have enough money in savings to provide for them.

          By the time you’re 50-60, either of those may no longer be the case. Either your kids may be old enough to provide for themselves (i.e. out of college), and/or you may already have enough money in your various savings accounts to handle whatever needs they have. That second one seems especially likely given that you’re 22 and already focused on making good financial decisions.

          When you are actually starting your family, life insurance will be an incredibly useful tool. But at that point you will likely need much more than $100,000 in coverage (see here), and you’ll be able to get it much cheaper with term insurance.

          I don’t know all the specifics of your situation, so I don’t mean to say definitively that this universal life policy is a bad decision. But I hope this gives you something helpful to think about.

          Best of luck and feel free to reach back out any time!

  • Cesar January 24, 2015

    Hi There I was reading the comments and thought Id chime in. For the purpose of full disclosure Im an agent. That being said I have always been for doing the right thing for people and so I try to do as much due diligence in the products I offer, if I dont feel comfortable I do not sell it. Alot of times there are pressures for us agents to sell a particular product but I always approach everything with skepticism. Ive ran the numbers on whole life and there are a some companies that offer superior whole life policies. After running the numbers I beleive that having a small whole life policy is not a bad deal.

    First, there are your regular whole life policies that are non-{articipating and then there are those that are Participating. Participating policices earn dividends which is called a “return of premium” however with that dividend it purchases more insurance and the coverage keeps going on as long as a dividend is paid, the more coverage the more dividend, the more dividend the more coverage etc. After 25-30 years a person can stop paying for the policy and take reduced paid up insurance and keep the insurance enforced for the rest of their lives without paying a single cent. This is one of the features I absolutely love about participating whole life.

    Another feature is if you pay extra it will go towards adding extra coverage, basically making the coverage grow every year.

    Example a 30 year male old non-smoker can purchase a small 25,000 policy for 34.97 a month, by adding an additional 10 a month or paying 44.97 a month he will have after the 1st year $25,649 death benefit, this will increase every year. After 20 years he will have $41,492 death benefit non guaranteed death benefit or a $32,258 guaranteed death benefit. The difference in death benefit is the non guaranteed assumes dividends. This company has been around for over 100 years and every year has declared a dividend, which is important to note despite not being guaranteed there is a high probability the person will end up better off than the guaranteed. After 30 years the death benefit will be $52,008 at this point (or any point whatsoever) the person can decide to take reduced paid up insurance,at this 30 year mark if they take RPU they can keep 45,485 of insurance for the rest of their lives, this amount will keep going up as long as the company keeps issuing a dividend. i think this is so cool. The person has paid $16,200 over those 30 years and the coverage is way more than that, a few cents on the dollar.

    I find whole life as a way to guarantee some form of money will be there when its needed or maybe even as a gift. For such a low amount paid it would give me peace of mind and joy to know im buying future dollars at a discounted price. With that being said, life insurance should not be used as an investment because it was not meant to be used as an investment, You CAN use it as a Savings account for the LOOOONG term 30+ years if overfunded then rolled over to an annuity however by no means should it be your retirement account. I wish I could explain this concept more but I feel like ive typed quite a bit.

    • Matt Becker February 9, 2015

      Cesar, first of all thanks for your level-headed response. I really appreciate it. And you make some good points, but here are my thoughts.

      Your point about eventually not having to pay premiums is a common one used by agents, and in some cases that does happen. But in many cases it doesn’t, or at least it doesn’t happen as early as is illustrated and the policyholder is left paying premiums for longer than they had anticipated. The point is that this is not a guarantee, and it’s important for people to understand that.

      You also mention the point about buying additional coverage. I would simply ask why you don’t buy all the coverage you need up front with a cheaper term policy?

      Then your example of paying $16,200 for $45,585 in coverage is interesting for a few reasons. First, I just want people to understand that again these numbers are simply illustrations, NOT guarantees. Second, using the site term4sale.com I see that a 40 year old male can purchase a $50,000, 30-year term policy right now for $135 per year, or $4,050 for the full 30 years. That’s 1/4 of what you quote for whole life, and the extra money is then available for whatever else that person might want to do, like investing, saving for college, or maybe even leaving a gift as you mention.

      In the end, I just don’t think that whole life is a good idea for the vast majority of people. There just isn’t often a need for the coverage, and the savings component leaves a lot to be desired, even over long time periods.

      • Cesar February 9, 2015

        Matt, the illustration does have a guaranteed element to it, the guaranteed keeps going up every year whether the company issues a dividend or not, obviously the guarantees are less. Like I said the purpose of this type of life insurance is not to “invest” its to have something that you wont other wise have. with 30 year term, the term is guaranteed to expire in 30 years. anyhow I wont debate you on that as I can see where you are coming from. I understand that when a person gets into a plan to pay off debt and invest heavily they will have “no need” for life insurance after they’ve paid debt and their children have grown. I’m more conservative therefore I like to make sure I have something despite having debt paid for etc.. I’d like to leave an article for you to read, its an actual case study of a gentlemen who opened a small 29000 participating whole life policy back in the mid 60’s. in 2013 he now had $166,424 in Coverage and had only paid $26,186. Anywho not bad for the guy. heres the article for anyone interested in reading the case study.
        http://assurity.com/Pdfs/WholeLife_Miller.pdf

        • Matt Becker February 12, 2015

          You’re right, there is a guaranteed portion of these policies. And like I say in the post, that guaranteed portion is nowhere near the illustrated return and is much less attractive than how it’s presented (e.g. a 4% “guaranteed” return is not actually anywhere near 4%). So to say that there’s a guarantee and somehow equate that to the numbers you presented earlier is, in my mind, misleading.

          Also, the case study you reference is interesting for several reasons. First of all, it’s a single example out of what I assume are millions, and there’s therefore no real way to determine whether it’s actually representative for anyone else. Second, they actually ask whether it would have been better to buy term and invest the difference, and the proceed to say it’s not worth evaluating. Funny!

          So let’s do a quick comparison. Let’s take that $527 annual premium and invest it instead. From 1963 to 2013, the US stock market earned a 10.22% annual return (source), but let’s assume that this person also put some money into bonds (smart) and earned a more conservative 8% annual return. Over those 50 years, at that 8% return, that money would have grown to $327,231. I don’t know about you, but I would rather have my money that way than locked inside a whole life insurance policy.

  • paul February 7, 2015

    Your comment on term insurance allowing you to convert at anytime is inaccurate. You must read the conversion language as it is designed to protect the insurance company. Met life for example states ” During the conversion period shown in the policy schedule you can convert this policy, while it is in force with all premiums paid, to a new policy–On a plan of permanent insurance, with a level face amount, available on the policy date of the new policy.”. Some term plans won’t let you convert after 10 years or if your over age 65. Imagine having a 20year $1,000,000 term plan and getting cancer in the 19th year. You want to convert but find out the conversion period ended in the 10th year. Also, the company typically determines which plan you can convert to. Maybe its just 2 plans out of the 8 they offer. What is the likelyhood of those being the best 2 plans available? Alas, no one reads the contract or the prospectus for that matter. My dad always said “the big print givith and the small print taketh away.”

    • Matt Becker February 9, 2015

      Thanks Paul. I 100% agree that it’s important to read the fine print and know the terms of your contract before signing on. Convertibility is an option that most quality term policies will have, but you should understand the specifics ahead of time. So I don’t think my statement was inaccurate, as much as you made the smart added comment to “read the fine print”. Thanks for the input!

  • Brandon March 18, 2015

    What you are telling people in this post is irresponsible and bad advice. You are correct that term is a lot cheaper than whole life, but you are leaving out the problems with term insurance that whole life policy can fix at any age. Did you know only 2% of term policies are ever paid a death benefit on? You can buy a 20 year term at age 30 but what happens when you turn 51? Buy more term at your current health at 51? What if you get cancer or other health problems that cause you to become uninsurable? Would you rather pay $100 a month for a $100,000 permanent policy and earn cash value, or would you rather pay $40 a month for 20 years on the same policy and then have to buy a new term policy at age 51 that will be $200-$300 a month and even then if you don’t die during that term then what do you have when your 80? Nothing, because no one is going to sale you life insurance at age 80. I don’t think buying term at a young age is a bad idea, but the longer you wait to transfer some of that to permanent insurance you are digging yourself and your family a deeper hole when you live past that term policy and have nothing to leave them with.

    • Matt Becker March 18, 2015

      The idea that life insurance has to pay out to be valuable is incorrect. Here’s a post that explains exactly why: No One Wears a Bulletproof Vest Hoping to Get Shot.

      Also, if you follow the rest of the advice on this site, you won’t have any need for life insurance when you’re 80 because you’ll already be financially independent. So except for rare exceptions, term life insurance for the period you need protection is all you’ll ever need.

  • Donna Mapp March 19, 2015

    Hi Matt,
    I have a joint term life insurance policy with my husband and a universal life insuranc for my self. The term life face value is $100,000 and the uni is $25,000. The latter cash value is $761.00 apparently they were taking the monthly premiumout of it without my knowledge. They asked me if I would like to close it out and take the closed out value of $700.00. I need advice on what to do. I am paying $135.00 a month for the joint policy and I also have a whole life insurance on my 22 years old child in college. I pay $50.00 a month for that. I think the term life is too expensive and I am concerned that with my husband an I whom are in our fifties that we may need to die just before we reach 80 so that our child can have some financial stability times are tough and we are poor people. Poor people take out insurance to cover their death and to leave something for their children. There just aren’t enough money to invest in stocks and bonds or other things and the little retirement money is needed to live off.

  • Ally March 31, 2015

    I had a meeting with a friend/part-time insurance salesman and his upper level salesman yesterday. Prior to the meeting I Googled “Is whole life insurance a good investment?” and read all the articles on the first page of results in their entirety both pro and con. This particular article stuck out for me and I read it twice and feel it has helped me in the process of making an informed decision about the product presented. Today, I read the article once again and all of the above posts and I thank you for taking the time to help the lay-person in their important financial life decisions.

    When I was at the meeting yesterday with my parents also present, I was really impressed at the product, which was basically a variation of whole life insurance called FFIUL. I was also impressed with the upper level salesman and the presentation. I saw the simulation that was shown and the resulting table of yearly returns looked impressive at first. I left the meeting with a smile on my face and was really thinking about making the investment especially considering that my friend (an accountant whose house I was at) said that he had invested in the same product.

    Then, when I was excitedly presenting what I saw at the meeting to my skeptical wife at home in front of my two babies, I began to remember what I learned from my reading all the stuff I googled earlier in the day especially the part about comparing this investment to other types of tax advantaged investments. And all of a sudden the excitement began to die down.

    I noted that the returns on the simulations were set at 8%, which was the average for this product from a respected company. In real life, the return for this product is variable guaranteed at minimum 0.75% with a 15% cap. However, I thought about the simulation result tables presented and from my memory it did not seem like money was going up by the promised compounded 8% every year. As a matter of fact, the first few years, there appeared to be negative returns and even at the 20 year mark the return did not appear from my memory to be 8% higher compared to the prior year. Where did the money go? I believe it was commission and fees, which were not mentioned during the meeting. So compared to other investment options out there, it did not seem like such a good deal after all.

    One thing to point out is the product presented was a very interesting variation of whole life insurance. It varied so much that the presenting salesman did not even call it whole life insurance and kind of was dismissive of whole life insurance compared to the product he was telling me about. The key points of this product were:

    1. The premiums (quoted at about 400/month for $1,000,000 coverage in one simulation) only needed to be paid for a certain period of time over 15 – 25 years to be safe, but covered the person for essentially his whole life. In actuality, I believe the premiums after 15 – 25 years came out of the accumulated investment results.

    2. The salesman said that you can quit paying the premiums at any time after which you would continue to be covered until you zeroed out your investemnt account. As mentioned above, you minimize the risk of zeroing out your account if you pay your premiums for 15 – 25 years and don’t withdraw too much.

    3. Withdrawing (borrowing) money from your account was seemingly easy with a 0.75 % interest rate in the first 10 years and 0% interest after the first 10 years.

    4. The guaranteed dividend or return rate was 0.75% and the last time the company had to resort to this rate was in 2008. In 2013 and 2014 the return was 12%. The average return was 8% and the return was capped at 15%. This average return seemed better than whole life policies that I had read about. Your money was invested similar to any other moderate risk investment account and this was different from the conservative approach that I thought most whole life policies took.

    5. The life insurance payout at death would be 1,000,000 plus whatever accumulated in the investment to that point.

    6. Borrowing the money is tax free and you can borrow up to 90% of what is in the account. You just have to make sure that, in the event you have stopped paying your premiums, you have enough in the account to cover your premiums. Otherwise, the policy would lapse.

    7. The withdrawals you took out in the (distant) future was marketed as a tax free alternative to a 401k or 529 payout for retirement or college or for any expense really. And at 0% interest (after 10 years), you don’t really have to pay back the loan. It can basically be used as your personal piggy bank. The salesman said that the advantage over 401k/IRA was that you did not have to wait for a certain age. The advantage over 529 was that, if your kid got a scholarship, then the money in your FFIUL would not cause any conflicts in receiving the scholarship money similar to a 529 where the government would tell you to spend the money in the 529 first before cashing in the scholarship.

    For all of the above advantages, I believe the actual returns seen were far less then the 8% a year on the simulation. The reason was probably fees similar to Reason#2 in the above article. I wish I had the tables that were presented so I could verify this (I have asked my friend for the tables). At any rate, after my reading, I am leaning toward not purchasing this product because it seems to give weaker results (after fees) compared to other tax advantaged and non tax advantaged investment accounts which I have barely begun to invest in. It may be useful in some cases if all the better investments have been maximized and one is looking for a tax free long term low yield conservative investment account that allows one to withdraw tax and interest free and provides a life insurance payout in the event of death.

    The bottom line is that I feel that the insurance industry has adapted to the negative stigma attached to whole life insurance polices and are introducing some variants that do not look at all like the whole life insurance that is described in the above article. They have found ways to counter some of the Reasons not to invest in whole life insurance mentioned in the article above (such as the interest rate). I read about another variant called EIULs and I think there are many other similar products out there. But they can not counter all of the Reasons mentioned in the article above. So buyer beware and do your due diligence!

    • Matt Becker April 1, 2015

      Wow, thanks for such a thorough write-up of your experience! This is really an incredibly addition to the conversation and I think will help a lot of people who go through a similar sales pitch.

      And your conclusion at the end is spot on: the insurance industry ABSOLUTELY knows about the negative stigma associated with these kinds of products and is ALWAYS looking for new ways to package things to make them sound attractive. Whether it’s variable life, universal life, equity-indexed universal life, or whatever this new thing is that they were trying to sell to you (I’ve honestly never heard of FFIUL), there’s always a new angle and the sales pitch is always going to sound good.

      But I love how you talk about it here, being excited by the sales pitch before grounding yourself in some of the things you had read prior to the meeting. Whether it’s insurance, investing, buying a car or anything else, all of us get excited in the moment when we’re being presented with a new opportunity. The real challenge is in doing exactly what you were able to do so successfully: stepping back from the moment and reflecting on your real goals here, what you really set out to do, and then analyzing the facts objectively. You did a terrific job there and in the end were able to make the best decision for you and your family.

      Thanks again for sharing and I wish you the best of luck!

      • Ally April 10, 2015

        Thank you Matt. I have had more time to evaluate this product (as a lay person) and would like to make some corrections/clarifications to my above post. Over the last week I looked over the tables that were presented at the meeting as well as reading their FFIUL brochure cover to cover.

        First, I learned that your money is not actually invested on your behalf. You just get credited on a yearly basis with interest equivalent to the results of a formula that takes into account the percentage growth of the S&P500/EURO STOXX 50/Hang Seng Index. You are guaranteed a minimum 0.75% interest with a 15% cap.

        Of course the fees are applied to your principle and interest, which drags the value of your account down to painful levels. The simulation that the salesman ran for me was based on the assumption that the value of the account would grow 8% compounded every year. The results of this simulations looked really cool at first because the salesman focused on the long term results and the steady increase in death benefit. But when I looked at the numbers more closely, it was sobering. The investment produced negative interest in the first 7 years (as high as -37.51% in the first year) after which it turned the corner and then began to return 6-8% after year 11.

        The fees included a Premium Expense Charge, Index Account Monthly charge, Cost of insurance, Monthly expense charges, Monthly policy charges, Additional rider charges. The Premium Expense Charge mentioned above came right out of the premium and was 4% in year 1, 6% in years 2-10, and falls to 2% in years 11+ (may change but guaranteed not to exceed 6%). With these types of fees, it is no wonder the actual investment results are way lower than the 8% per year compounded that formed the basis of the simulation. After 20 years of paying ~$400 monthly premiums, the 30 year value of your investment (assuming no withdrawals) resulted in a gain of $251,000. If you managed to invest somewhere with the same $400 monthly premiums for 20 years in an investment where you could actually get 8% compounded per year without any fees, the result after 30 years would be a gain of $422,225.

        Now imagine if the major indices did not achieve 8% in a year, but had a negative year. Your interest would be guaranteed to be a minimum 0.75% but can you imagine what your account value would be after fees.

        Finally, the loan that I mentioned in my above post as interest free and tax free after the 11th year are a little more complicated than a “free loan”. First, the rate may increase in the future (at the discretion of the management) to a max 0.25% so that over time would add up if you took out a loan for retirement and had no intention of paying it back. Also, the loan balance is actually transferred to a loan reserve account where interest is charged at 2%, but at the same time the money in the loan reserve account earns interest of 2% which is credited to the Policy Value. So this is how they achieve an “interest and tax free” loan. I actually did not understand the specifics of this transaction or any IRS consequences that you could potentially have.

        Anyway, there are many complexities to the whole life insurance variant plan that I was presented with, which make it unattractive to me as an investment option. I would suggest that anyone who is looking at whole life insurance as an option take a close look at the investment results and compare them to other options available on the market. Also take a close look at the fees and the structure of the loans that you will take out in the future. My conclusion is that, I would like to get a term life policy for now and maximize my other tax advantaged investments first prior to delving into the world of whole life insurance. And, by the time I actually get around to maximizing my other investments, I probably will be much older and not get a favorable premium any more.

        • Matt Becker April 11, 2015

          Wow, thanks for another detailed and insightful comment! I really can’t say enough about how impressed I am with all of your work and analysis here, and how appreciative I am that you’ve taken the time to share it all.

          So I should have guessed that this was some form of equity-indexed universal life, both because of the “IUL” in the acronym and because they are all the rage right now with insurance salesmen. They claim to provide stock-market returns without the risk, which is of course impossible. You did an excellent job here of laying out exactly why that minimum 0.75% return is nowhere near as attractive as it sounds, and one of the other big issues with many of these policies is that they don’t count dividends as part of the formula that determines your return, which is a pretty significant thing to leave out!

          In the end, while it’s impossible for me to know for sure it sounds like you are making the right call by avoiding this. Thanks again for sharing all of your thoughts and analysis, and I wish you the best of luck going forward!

        • Aaron April 20, 2015

          Ally or Matt, Can I ask what you used(formula?) to calculate their colorful presentation of the long term growth plan? I was recently presented with this Whole life idea from a Salesman or “Wealth Planner” and he made it sound really good but deep down inside, I don’t feel right, i felt the need to research more because i know there’s more to it than pretty graphs and colorful numbers…until i found this article which explains A LOT so thanks Matt:)

          Like you said, I’m sure it’s a good option if you have a lot of cash lying around but we don’t and the idea of getting your money locked in for that insane of amount of time before seeing any returns is crazy so i’m thinking about just getting Term life instead and invest elsewhere where I have more control

          • Matt Becker April 21, 2015

            Great question Aaron. If you go the easy route and assume you pay the premium once per year at the start of the year, you can just use the IRR function in excel, which you can learn more about here.

            You can enter the policy year in one column of your excel, and the corresponding cash flow in the column right next to it. Your cash flow on each line (up until the last one) is simply your premium payment entered as a negative number (because it’s money flowing out).

            Then, for whatever year you want to calculate the return for, you enter the projected cash surrender value on that date as the cash flow on that line (as a positive number). Keep in mind that your projected cash value at the start of year 10 is actually the cash value they show on the year 9 row (that’s the projected cash value at the END of year 9, which is equivalent to the start of year 10).

            Once those numbers re all entered, you can calculate the annualized return using the IRR function.

            I realize this might be a little complicated if you’re not familiar with excel, so I made a quick example for you. You can see the sample illustration I used here, and you can see how I calculated the annualized return after 10 years for both the guaranteed and non-guaranteed cash value in excel here.

            I hope that helps! Let me know if you have any more questions.

  • Aaron April 22, 2015

    Thanks Matt! that explains a lot, Had to read your response a few times to get it:) The spreadsheet really helps.

    by the look of this, i can just invest in a ROTH IRA and start collecting dividends on year one.

    The “Guaranteed” is what the insurance company is promising you, is that correct?

    • Matt Becker April 22, 2015

      No problem! Glad it was helpful.

      A Roth IRA certainly gives you a lot more investment options, with the added benefit of not starting with an account balance of essentially $0. It’s important to understand though that there are always risks involved with investing, and you could lose money within a Roth IRA too. Still, while I don’t know the specifics of your situation it will generally be a good idea to go with something like a Roth IRA before considering any kind of life insurance.

      For some additional help here, this post serves as a good starting point for how you might invest within a Roth IRA or any other type of account: The Only 7 Investment Decisions That Matter.

      And yes, the “guaranteed” cash value is the minimum growth that the insurance company is promising. When they tell you that there is a guaranteed interest rate, this cash value is the result of that guaranteed interest rate. The non-guaranteed cash value is their projection based on their expected returns, which as the name suggests are not guaranteed.

  • Sean May 5, 2015

    What is your opinion on ROP term life insurance?

    • Matt Becker May 5, 2015

      I don’t think there’s one absolutely answer here, but in general I’m not a fan. The main purpose of insurance is to provide protection against worst-case scenarios, not to make sure you get your premiums back. So to me, the extra cost of ROP life insurance just isn’t worth it.

      You can see some more thoughts along these lines here: No One Wears a Bulletproof Vest Hoping to Get Shot.

  • James May 8, 2015

    We have talked to a financial “guy” who is trying to convince me that since I have a pension (that will be my primary retirement), I need whole life so that I won’t have to take the spousal benefit when I retire. We are in our early 30’s and my wife contributes to a Roth.

    He claims that anyone with a pension needs whole life and I cannot understand why this would be. I can see why this person would need some kind of life insurance or the spousal benefit if the pension is the only retirement for both spouses (bc it will be gone if the pension spouse dies first) but wouldn’t we not need this if we invest in Roths?

    • Matt Becker May 11, 2015

      Hi James. Sorry for the late reply! So I’ll be honest that I’m not an expert on this exact strategy, but my understanding is that it’s generally something you might look to implement later in life, closer to when you’re actually making the decision about what type of pension payout you want. That’s simply because there are a lot of variables involved that could make it either more or less advantageous, and if you’re in your early 30s it’s just hard to know what all of those variables will look like 30 years down the line.

      So yes, I am generally a proponent of putting your money into something like a Roth IRA at this point over life insurance as an investment.

  • Simmie May 11, 2015

    Who ever said anything about only having whole life insurance as an investment? Savings, The Market and Insurance (a mix of whole and term) is the best way to plan and protect one’s retirement. Plus once your premiums are paid up, the need to repay the loan is not true. (as long as you don’t go into the death benefit). What the real issues is people are tapping into loans while they are making premiumpayments and they aren’t receiving the proper assessment.

  • Debbie June 10, 2015

    Hi Matt,
    I recently reviewed my mother’s life insurance policy. Someone sold her a whole life policy with a 35K death benefit for $197.00 per month. She was 71 years old when she bought it! She brought it to my attention last month after being diagnosed with lung cancer, explaining she could no longer afford the payments. She requested I review/change the policy to pay less so she would have lower payments. Of course, no one will insure her now! My mother does not have a lot of money and I think the guy that sold it to her is a jerk as she already had a term policy – which she cancelled after buying this one. Is there an ethical recourse?
    Thanks for letting me vent!
    Debbie

    • Matt Becker June 10, 2015

      Sorry to hear that Debbie! Unfortunately this kind of story is all too common, and I really feel for your mom.

      So let me ask, does she have a need for life insurance? That is, what would the insurance proceeds actually be used for? It may be that she no longer has a need and could simply unload the policy. If that’s the case, I have heard of people having some luck selling these policies to a third party. It’s not something I have experience with, but I could ask around for you if you’d like.

      If she still needs the insurance, then you’re right that she may just be stuck between a rock and a hard place. I have some independent insurance experts that I work with and could potentially run it by them just to see what the options might be. If you’d like to talk things over in more detail, please feel free to email me directly at matt@momanddadmoney.com, or you can call me at 850-426-4034.

  • Tonya June 12, 2015

    Hello Matt,
    My parents had a whole life insurance policy with Colonial Penn since the late 80’s. My father was handling my mother and his financial affairs until he was diagnosed with Alzheimer’s. Little did I know his policy lapsed. I contacted the company to find out how much in the rear they were. Well, I was told that my dad could be reinstated if the payments were brought up to date but I would have to fill out a health questionnaire for my mom. Unfortunately my mom was recently diagnosed with stage 4 lung cancer so I’m quite sure they will not accept her again. At this point neither has any life insurance. I honestly do not know what else to do. Can a policy that has lapse be paid out? Do you have any suggestions? Is there anything that I can do?
    Thanks!!
    Tonya

    • Matt Becker June 14, 2015

      Hi Tonya. I’m sorry to hear you’re in such a tough spot. To be completely honest with you there are a lot of variables here so I’m going to reach out to you directly. I’ll be in touch soon.

  • Bonnie Bellhalliburton June 21, 2015

    I bought a whole life policy in 1998 at the age of 50. It is has a face value of 150k with double iindemnity, living needs and disability waivers. This policy has been a lifesaver for me over the years, especially when I became disabled, I am so happy that the salesperson gave me what I said I wanted “a plan that would help me live as well as leave something for my children.” He gave me whole life
    …I am so grateful

    • Matt Becker June 23, 2015

      I’m glad you found something that works for your situation!

I’d love to hear from you, please leave a comment