My Life Insurance Mistake

My Life Insurance Mistake

Photo courtesy of Hamed Saber

Just about two years ago, my wife and I found out that we were pregnant with our first child. After a few weeks of pure excitement, we got down to the business of planning. Finances were of course at the forefront of my mind.

One of the first big things I knew we needed was life insurance. While I had a decent understanding of the general principles of life insurance, it was not something I had ever bought before and I felt a little uncertain as to how to go about it the right way. This uncertainty, combined with an anxiety to get things done quickly, led me to make some classic mistakes.

I had a guy

A little while back, I had been doing some volunteering and met a guy in the financial business. He worked for a company that provides financial advisory services, but they were affiliated with one of the major life insurance companies. He was an extremely nice and personable guy and I had enjoyed our short conversations together.

When confronted with my life insurance need, my first reaction was to call this guy. Honestly, it was the easy way out of having to do research on my own, although I rationalized it in my head as simply using a professional that I liked to help me with an important process. My wife and I set up a meeting with him, and off we were into the confusing world of a life insurance salesman.

The process

In our initial meeting, this guy positioned himself very convincingly as a financial advisor who just happened to be able to sell life insurance. He reviewed our budget. He asked about our assets. He reviewed our existing insurance, including our auto and renter’s policies. He found some low-hanging fruit and gave us some advice that was legitimately very helpful, much of which we still use today. He also helped us fill out insurance applications and promised to get back to us when they had been reviewed and we could discuss our options.

A few weeks later we had a second meeting. He had entered our information into his company’s financial planning software that presented us with some cool graphics detailing our situation and highlighted our financial strengths and weaknesses. Not surprisingly, life insurance was an area of weakness. Interestingly, so was “tax-deferred retirement savings”. Supposedly this was because neither of us had retirement plans through our employers and so we were relying primarily on our IRAs.

At this point we started to get into some recommendations. We had both qualified for a large amount of life insurance at their highest health rating. Our guy recommended that we each get the maximum amount we had qualified for, the logic being that we were young and in good health and would likely want more soon if we didn’t get it now.

While he was able to sell us life insurance from almost any insurer working within Massachusetts, his recommended insurer was the one affiliated with his company. His reasoning was that they were consistently rated as one of the top life insurers in the country in terms of financial strength. I liked that as well, so we didn’t question his recommendation.

It was also recommended that some part of this insurance be bought in the form of whole life insurance, with the rest as term. I’ve talked before about the differences between the two, but this guy was very convincing about the whole life aspect. He had a variety of charts and statistics about the benefits of using whole life as a retirement vehicle, and I have to say that his arguments were pretty persuasive.

We left his office after that second meeting with some serious things to consider.

Our initial decisions

When my wife and I went back home and started talking things over, the biggest point of contention was whether we needed any amount of whole life insurance. I had gone into this process with a big bias against whole life insurance, but our conversations left me with some doubts. Lucky for me, I have some friends in the financial planning business who I was able to reach out to and ask for advice. They were extremely persuasive that whole life was a poor investment and that I was much better off getting term and investing the rest.  So that one bullet was dodged.

But in the end, after a couple of more meetings with our guy in which he tried harder to persuade us of the value of whole life, we ended up buying two term policies for the maximum amount of insurance, with the company he represented. With our life insurance needs covered, we were free to focus on other, more fun, baby planning adventures.

The doubts

Even at the time, I had some doubts that we were really doing the right thing. I didn’t feel like we were doing anything tragically wrong, but something about the whole process just didn’t feel quite right. Over a long period of time, I came to realize a few specific things about the whole process that really left me uneasy and sealed the deal in my mind that this guys was purely a life insurance salesman, not a true financial advisor.

Though he had asked us to complete a budget, we never once reviewed it with him.

Though he was recommending whole life as part of our retirement planning, he never once asked us about our current investments or our retirement plans so that he could understand how whole life may or may not fit in. He never talked about alternative ways to beef up retirement savings, such as simply saving in regular old taxable accounts.

When he talked about term insurance, he compared it to “throwing money away”. This demonstrated a complete lack of understanding of the function of insurance. Insurance is not meant to make you money. It’s meant to protect you from the devastation of rare, worst-case scenarios. This protection is what you’re buying, even if you never need it.

We never did a real needs analysis to get any kind of understanding of the amount of life insurance we actually needed. He simply sold us the highest amount that he was allowed.

Assuming we were 100% in the term insurance camp, there are plenty of good companies offering insurance at a much cheaper rate than the company he worked for.

These doubts and more built in my mind to the point that finally, about six months ago, I got off my lazy butt and decided to take matters into my own hands.

Doing life insurance my way

The first order of business was to do a full-on needs analysis. I didn’t want to rely on a rule of thumb like 10x income, and I found most online calculators to be lacking or too generic. I legitimately couldn’t find a single source that laid out step-by-step everything I needed to consider. So I borrowed from the best sources I could find and made my own process to determine our true life insurance need. Our need was still high, but it was less than the original amount we had purchased, which was going to save us money.

I did some further research to make a decision once and for all whether whole life needed to be a part of our plans. What I found was that whole life is a very poor retirement vehicle except under certain rare circumstances. It’s value primarily comes as an estate planning tool, or as a way to leave money to your children. What’s great is that any good term policy will allow you to convert all or part of it to whole life at any time during the term. This meant that I could pay the cheaper price of term now, and if at some point later I decided that I needed some amount of whole life, I could simply convert. There was no need to lock myself into an expensive contract now when I had that option.

Finally, I shopped around for an insurer that could offer me a competitive price and a strong financial rating. My favorite site for doing this is term4sale.com. I found the insurer SBLI, a company that has been around for 100 years and has strong financials. Not to mention the fact that they quoted me the lowest rate of anyone else. We went through the application process and purchased new policies that saved us over $1000 per year and kept us covered at the level we needed.

Lesson learned

I was lucky in that I didn’t get sucked into the black financial hole of whole life insurance. But I did fall victim to trusting the financial advice of a guy I barely knew based almost entirely on his good personality. I want to be clear that I do not think he was a bad guy, just someone doing a job that wasn’t particularly aligned with my needs at the time. As a result, from the time we began our initial policies to the time we replaced them, we paid about $1600 extra in premiums.

Finances can be difficult and confusing, and when we’re presented with an unfamiliar situation we often look for the quick and easy solution. That’s exactly what I did here and it cost us. But it doesn’t help anyone to dwell on the mistake. Instead, learn from it and make a better decision the next time. Now I have the right insurance for us, and I’m able to share my experience in the hopes that others can do things right the first time.

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59 Comments... Read them below or add one of your own
  • Jules@knsfinancial.com June 3, 2013

    Glad you found out the truth. It is scary to know there are people like that. We must always be our best advocate. It’s easy to fall into those traps,especially if we don’t have an understanding of how some things work. Glad you got beyond that.

    • Matt @ momanddadmoney June 3, 2013

      I agree, very easy to fall into these traps when the topic is unknown and the need feels urgent. I think one of the main lessens is that you need to be wary of anyone who has an incentive to sell you something. It doesn’t mean they can’t be trusted, but a good amount of skepticism is healthy.

  • Holly Johnson June 3, 2013

    I have mixed feelings about whole life. I personally have term but working in a mortuary made me realize that whole life has its place. For people who are worried about having money to pay for their funeral, whole life can be beneficial since it never expires. I can’t tell you how many people came to pay for their parent’s funerals only to realize that their policy just expired last year or then year before. Then those families were left scrambling to come up with the cost.

    • Matt @ momanddadmoney June 3, 2013

      If whole life is the only way you can commit to having the money around, then it might be a good choice. But it’s hard to find a situation where buying a life insurance policy is a better value than saving the money yourself. You have so many years to save and really the cost of a funeral is not much when you spread it out over that time. Whole life can be helpful in certain situations if you’ve made the mistake of not saving money through other avenues, but it’s typically much better to just save through other avenues.

      • Holly Johnson June 3, 2013

        The problem is that many people are unable to save the money throughout their lifetime. Or, they are worried that their children will mismanage their money at the end. It’s easy to say that people should just save for their funeral throughout the lifetime but the fact is that they rarely do. I have seen firsthand how these things have happened and how whole life came through to save the day. People just aren’t as responsible as they should be.

        • Matt @ momanddadmoney June 3, 2013

          I definitely understand your point and I think it’s a good one. Real world perspectives are an important reminder that all of our discussion of the theoretically optimal path can quickly be rendered moot by the actual actions of real people. The whole life thing in particular hits a nerve with me because almost every explanation I’ve heard of its benefit involves covering up for a mistake somewhere else (there are exceptions for older people with estate planning needs and so forth). So I definitely get how it can serve that purpose, but in my view it’s unfortunate that you would need such an expensive safety net when the alternative is right in front of you.

          As a quick example, a little while back I responded to a guest post somewhere from a “financial advisor” who said that everyone in their 20s should buy whole life. I challenged him on it and we eventually ended up having a phone conversation. In the end, his biggest plug for whole life came from a personal story where the college savings for his kids tanked with the big market crash in 2007-08, which coincided with when his kids were starting school. Basically, rather than selling at a huge loss, he borrowed from his whole life policy to pay tuition. While I understood how that was helpful given his circumstances, the big lesson from that story should be DON’T HAVE SHORT-TERM NEEDS IN RISKY ASSETS!!!!!!!!!!!!!!! I literally wanted to scream this at him and send a huge warning letter to all of his clients telling them to get out now. I mean really, he needed the money in the coming year and he had it in stocks and high-yield bonds? I’m sorry that his savings got hit so hard but he had it coming. And the lesson he learned from that was that he needed to push expensive whole life policies? And this guy gets paid to manage people’s money? Give me a fucking break.

          Anyways, I agree with you that actual human behavior always needs to be taken into account, and if forced savings through whole life is really the only way some people will save for important needs, then so be it. But I do want people to know that in most cases, the alternatives to whole life would be better for them.

  • DC @ Young Adult Money June 3, 2013

    I finally found your site! Your livefyre profile did not have it listed and I asked a few time in a comment reply but you must not have seen them 😉

    I am looking into life insurance soon, so this post had great timing. In particular I liked this:

    “When he talked about term insurance, he compared it to “throwing money away”. This demonstrated a complete lack of understanding of the function of insurance. Insurance is not meant to make you money. It’s meant to protect you from the devastation of rare, worst-case scenarios. This protection is what you’re buying, even if you never need it.”

    I work in health insurance and so many times people misunderstand what insurance is truly meant for!

    • Matt @ momanddadmoney June 3, 2013

      Just updated my livefyre profile. Thanks for the heads up. Sorry I missed the replies. That’s why I like a comment system that automatically notifies you of replies! Anyways, glad you find my site eventually.

      I definitely agree that many people have a misunderstanding of the purpose of insurance, but I blame that largely on the insurance industry. In an effort to sell more products, they’ve come out with new uses of insurance that really don’t fit the true purpose. Health insurance is even weirder than most.

  • Kim@Eyesonthedollar June 3, 2013

    I think there could potentially be a place for whole life in some circumstances, but for your purposes term life was certainly the best option. I too fell victim to an agent the first time I bought life insurance. I didn’t know any better, but now I shop around for every type of insurance and you can save tons of money by doing that.

    • Matt @ momanddadmoney June 3, 2013

      It’s totally worth it to educate yourself and really understand your options. I think a good independent agent could be really helpful as well, but that’s not a route I’ve ever gone. I’m still hesitant to really shop around for car/home insurance, just because the insurer I have has been so good any time I’ve needed it. I have looked a little bit and seen that I could save money, but to this point I’ve chosen not to simply because I don’t know that I’ll get the same service. Price is important but so is knowing that you’ll actually get what you need when you need it.

  • Grayson @ Debt Roundup June 3, 2013

    I have been working through life insurance for some time. I want to find the right information, but there are so many sources touting term versus whole. I like to look through everything before I make a decision, but I need to make one soon.

    • Matt @ momanddadmoney June 3, 2013

      Shameless plug here: back before anyone was coming to my site, I wrote a pretty detailed series on life insurance. The last post of the series is here, http://momanddadmoney.com/2013/04/how-to-buy-life-insurance.html, and it has links back to the previous posts. Might be helpful. I’ve had a hard time finding really good, detailed information on life insurance myself, which is a big reason I wanted to write my own guide.

  • John S @ Frugal Rules June 3, 2013

    Goo post Matt! Having worked in the life insurance industry for five years, it’s crazy how often people are sold whole or universal life as an investment product. I think they have their place, but not to the extent they’re pushed. I think term is suitable for many, but it really comes down to knowing what your need is and going with someone independent.

    • Matt @ momanddadmoney June 3, 2013

      I didn’t know you had worked in the insurance industry as well. You’ve really traveled around the financial world! Figuring out how much you need is one of the most difficult parts. I really haven’t found a great detailed resource on how to do it. There are so many rules of thumb out there, but those are so general. I think the result is probably that many people are underinsured because they haven’t done a real needs assessment.

      • Juan Fierro September 10, 2016

        Hi Matt! Great read and I absolutely agree with your advice. I’m in the life insurance industry with a firm who only distributes Term-life insurance and one of the strategies we use to calculate how much protection a family needs is called the D.I.M.E. method. It’s a simple calculation that an average person can do. Always keep in mind that a family’s needs can change over time and that coverage can be adjusted (though for more protection you meed to go through medical exams again). I’ll be happy to help anyone in the TX area with questions.

  • DJ Wetzel June 3, 2013

    Good read. My wife and I also got sucked into life insurance by a friend of ours. Of course we needed a $1.6 million policy between the two of us. My intent was not to create a trust fund baby should my wife and I ever die together, but that is what we ended up doing. Mistakes have been corrected, but I learned a lot from that first experience.

    • Matt @ momanddadmoney June 3, 2013

      That’s an interesting point about creating a trust fund baby. If both my wife and I died, there would much more in life insurance proceeds than what would be needed to care for our son. But we determined our needs based on if just one of died, what would the other spouse need. And honestly that answer was much higher than we had anticipated, though not as high as our original amounts. When you have young kids, there are just so many expenses to come that it really adds up fast.

  • Pauline June 3, 2013

    I don’t really think I would take life insurance for many years, maybe the first 10 years or so of the kid, then set up a trust and rely on net worth to provide a replacement income. I have life insurance with my bank that is included in the card/bank account thing and covers the basics but at least it is free.

    • Matt @ momanddadmoney June 3, 2013

      If you have the net worth to be able to do that, that would be great. I don’t think many people really get to that point though. I would rather take out a longer time, which guarantees my premium over that term, and simply cancel it early if needed. It’s not that much more expensive and it would give me the option. I wouldn’t want to get into a situation where 10 years down the line I still needed the insurance, but my health had declined and now I either wasn’t able to get it or it would be much more expensive.

  • Shannon Ryan June 3, 2013

    I have to admit that I started smiling when I came to your “I had a guy line”. So many stories I’ve heard start with that line. 🙂 To be upfront I am a financial advisor and I do sell life insurance. I think it’s one of the most overlooked and misunderstood products out there. It gets a bad rap because of the stereotypical sleazy life insurance salesman and the fact people don’t like confronting their own mortality. But it such a critical component of your financial life. The actual amount of a policy should be determined not by how much you can get but how much you need to cover the expenses you wish to cover in the event of your untimely death – and that differs for everyone. I’m glad you were able to sort things through and figure out what worked best for you.

    • Matt @ momanddadmoney June 3, 2013

      Glad I could make you laugh! There’s absolutely nothing wrong with selling life insurance. It’s a great product when used correctly. But like so many financial products, it’s sold inappropriately in so many cases. Our fault for working with someone tied to a specific product, not our financial goals.

  • Tie the Money Knot June 3, 2013

    Very good that you were able to step back and take a critical look at your needs, and got things turned around to where it fit your situation. Sometimes we might feel out of our comfort zone on certain things, and end up trusting people that might not be giving advice that’s at all best for us, even if possibly well-meaning.

    • Matt @ momanddadmoney June 3, 2013

      Thanks! Discomfort is definitely a quick route to making quick and poor decisions. As uncomfortable as it can be to face the unknown, just a little education can lead to much better decisions.

  • General consensus is that you shouldn’t view insurance as an investment. But nobody has ever been able to make a case for WHY. When I was shopping (we ultimately never got any life insurance beyond the basic amount included in my wife’s benefits because my income is just too unstable), we were also getting sold a whole life policy and the rates it offered were hirer than what my IRA is earning.

    • Matt @ momanddadmoney June 4, 2013

      There are many reasons that I can’t possibly do justice in a comment. This is really a whole post, which I’ll definitely do. But here are some quick thoughts:

      1) It’s undiversified. You are relying on returns from a single company.

      2) The returns are not guaranteed. Those illustrations might look nice but they do not represent actual performance. They are simply projections.

      3) Unless you put a ton of money in at the start, your “investment” will have a negative return for many years and an incredibly low positive return for even longer. It takes a LONG time for the return to materialize.

      4) It is illiquid. If you decide you want your money for another purpose, you can either surrender the policy, possibly at an extra cost, or borrow against it and pay interest. Or you might not actually be allowed to do either, especially in the early years before there’s been any real accumulation.

      5) No flexibility. Money going into your IRA, 401(k) or regular old brokerage account can be redirected for another purpose at any time. You can stop putting money into your IRA and start putting those savings towards a house instead, leaving your IRA or whatever intact. But if you stop paying your whole life premiums, the insurance contract goes away.

      6) An IRA is not an investment. It is merely an account. But you can choose a diversified portfolio of stocks and bonds that history tells us will perform much better than a whole life policy over the long term. Short-term returns are unpredictable, but long-term returns are what you’re after.

      Hope this helps. Feel free to contact me directly if you’d like to talk about this more. My email is matt [at] momanddadmoney [dot] com.

      • Andrew June 4, 2013

        Great explanation! People don’t mix auto or home insurance with investing, I don’t know why life insurance has to be combined. I think one big issue for me for not wanting whole life insurance is that there are a lot of hidden fees and commissions to the agent that we don’t see. With other investments, I think the fees and expenses are more transparent. I also used terms4sale to do a search and its is a very useful resource.

        • Matt @ momanddadmoney June 4, 2013

          Thanks Andrew. Your point about hidden fees is a really good one. Even many of the agents don’t really understand what’s actually happening there. Transparency always makes decision-making much easier, and honestly the lack of transparency brings up an automatic distrust for me. If there wasn’t anything to hide, wouldn’t they come right out and say it?

        • Maybe not home insurance and investing, but people sure do treat their homes as an investment, which I believe to be a big mistake.

          • Matt @ momanddadmoney June 6, 2013

            Fully agree that a home is not an investment in the traditional sense of earning you money through appreciation. Over a long period of time owning can save you money over renting, so in that sense it could be an investment. But so many people buy homes thinking they’ll make money on the appreciation and that just doesn’t bear out over time. Housing prices basically just track inflation over the long-term.

      • The plan I was going to pick had guaranteed returns. Not as large as the guaranteed returns, but on par with what I can manage in my IRA for my risk tolerance.
        In terms of liquidity, those same issues apply to a tax-deferred retirement account as well.
        The plan I was going to buy had two prices, actually. One was just for the insurance and the other was additional payments to help grow the cash value faster.

        • Matt @ momanddadmoney June 6, 2013

          Be careful with the quoted guaranteed returns. As I said in another comment, I was working with one of the top mutual life insurance companies in the country and they quoted me 4% as the guaranteed interest rate. But when I actually did the math, after 39 years the guaranteed portion had only grown at a 0.6% rate. I think it has a lot to do with the fees they charge, so just make sure to understand what they’re actually giving not, not what they say they’re giving you.

          As far as liquidity, with a Roth you can take out your basis at any time. And don’t forget the flexibility you have with ongoing contributions. With a retirement account, you can decide to stop contributing for a period and use that money elsewhere. Your retirement account stays intact and keeps earning you money. But you can’t just decide to stop paying your whole life premiums. If you do the contract eventually just lapses and is lost. That’s a huge part of the liquidity issue.

          It sounds like you were possibly looking at a Universal life insurance policy. Those can be just as complicated and fraught with problems as regular whole life. I would run any kind of permanent policy by an impartial expert before committing to it, because truly understanding what it’s delivering and how it compares to your alternatives is really hard. I definitely had to ask for help when I was reviewing my offer.

    • Matt @ momanddadmoney June 4, 2013

      For an incredibly in-depth discussion on the topic, you can look here: http://www.bogleheads.org/forum/viewtopic.php?t=8844&postdays=0&postorder=asc&start=0

  • Greg June 4, 2013

    Don’t you wish in these situations that you could just go to the first person and trust they have you’re best interest at heart and have done a thorough analysis. I am similar that my first reaction is to want to go the easy route. Then responsibility kicks in and you know you have to go that extra mile like you did.

    Great perspective on life and insurance and an approach to financial decisions overall.

    • Matt @ momanddadmoney June 4, 2013

      It would be great if the first and easiest option was always the best! Avoidance is one of those things I’m constantly battling, and sometimes it takes me longer than others.

  • Laurie @thefrugalfarmer June 4, 2013

    Wow, eye opening stuff here, Matt. Life insurance can be a scary subject, especially for those with kids who are eager to make sure their children are protected. Thanks for the great info here.

    • Matt @ momanddadmoney June 4, 2013

      It can definitely be daunting, and it really feels like there’s a lack of good information out there on the topic. The urgency to “get it taken care of” can add to the likelihood of making poor decisions too.

  • Sorry to hear about the bad experience you had with your buddy. I am a fan of whole life but I also work in the industry (although I don’t sell). Just some thoughts on your response to why you don’t like it:

    1) It’s undiversified. You are relying on returns from a single company.

    – But their returns are not reliant on one source. For example MassMutual owns Oppenhiemer funds, while New York Life and Guardian own their own funds (bringing in revenue). Mass owns multiple hotels.

    2) The returns are not guaranteed. Those illustrations might look
    nice but they do not represent actual performance. They are simply
    projections.
    – There are 100% guaranteed returns. The better part of the illustration is obviously not the guarantees (just like if looking at a mutual fund prospectus). That is unless he was showing you a non-guaranteed Universal Life but sounds like you have the terms right.

    3) Unless you put a ton of money in at the start, your “investment”
    will have a negative return for many years and an incredibly low
    positive return for even longer. It takes a LONG time for the return to
    materialize.
    – As far as the investment part, you are correct.

    4) It is illiquid. If you decide you want your money for another
    purpose, you can either surrender the policy, possibly at an extra cost,
    or borrow against it and pay interest. Or you might not actually be
    allowed to do either, especially in the early years before there’s been
    any real accumulation.
    – Illiquid? As compared to what? Cash, or a stock portfolio you are right, but compared to B or C shares (if you are investing in load mutual funds which I am NO where near advocating if one can handle their own investments).

    5) No flexibility. Money going into your IRA, 401(k) or regular old
    brokerage account can be redirected for another purpose at any time. You
    can stop putting money into your IRA and start putting those savings
    towards a house instead, leaving your IRA or whatever intact. But if you
    stop paying your whole life premiums, the insurance contract goes away.
    – Yes and No. Eventually the dividends on the policy may be able to actually pay for the insurance so you could stop paying and the policy is self completing.

    6) An IRA is not an investment. It is merely an account. But you can
    choose a diversified portfolio of stocks and bonds that history tells us
    will perform much better than a whole life policy over the long term.
    Short-term returns are unpredictable, but long-term returns are what
    you’re after.

    – If you create a diversified portfolio of stocks and bonds you are probably correct, but if you are choosing JUST bonds then you are wrong as the Internal rate of return of a policy is about the same (3 to 5%) as a bond portfolio over the long term.

    Not trying to convince you, I have no vested interest in doing so just wanted to share some of my thoughts.

    • Matt @ momanddadmoney June 4, 2013

      Thanks for the feedback Evan. Always helpful to hear other viewpoints. Here’s my response to your repsonse!

      1. The payment of a whole life dividend is 100% reliant on a single company’s ability AND desire to do so, however their investments perform. That is pretty much the definition of undiversified.

      2. The guaranteed returns are typically miniscule. Similar to a savings account with one of the large brick and mortar banks. If this is what you want to rely on for retirement savings then you’re in a lot of trouble. As you say, the “better part” of the illustration (or as I’ll say, pretty much the entire thing), is very much not guaranteed.

      3. Glad we agree!

      4. I would never, ever recommend someone get involved with B or C shares. There are far too many great no-load funds. Even if you’re paying someone to manage your money you can still use no-load funds. So yes, compared to the many good alternatives out there, a whole life policy is very illiquid.

      5. The key word in your sentence is “may”. It’s POSSIBLE that EVENTUALLY the dividends MIGHT be able to pay your premiums, but again that’s relying on those very un-guaranteed dividend payments. And even if they’re paid as illustrated, it still takes many years to get to that point. I don’t want to have to wait a couple of decades before I even have the choice to do something different with those monthly payments. And if you do use that strategy, the dividends are no longer being used to build capital and so your whole life as an investment strategy takes a big hit.

      6. I’d love to know where that 3-5% IRR number for whole life comes from. Is there a database tracking all of these policies that supports that as an actual historical figure? I’ve never seen that before, but it would be really interesting. But if that’s just what illustrations are showing today, then it’s not a real comparison. And anyways, for all the same undiversified and illiquid reasons mentioned above, any rational investor would require a higher return from a whole life policy to compensate you for those disadvantages as compared to bonds. So if they have the same return, bonds still come out as a better investment because they don’t have those negative characteristics.

      I’d be very interested to hear your reasons why a young person should consider purchasing whole life. I have heard many explanations but none that have been convincing. Thanks for taking the time to share your views!

      • 1. The payment of a whole life dividend is 100% reliant on a single company’s ability AND desire to do so, however their investments perform. That is pretty much the definition of undiversified.
        – It isn’t like you would put all disposable cash in a whole life policy?

        2. The guaranteed returns are typically miniscule. Similar to a savings account with one of the large brick and mortar banks. If this is what you want to rely on for retirement savings then you’re in a lot of trouble. As you say, the “better part” of the illustration (or as I’ll say, pretty much the entire thing), is very much not guaranteed.
        – In New York I think most minimums show a dividend of 4%…not very minuscule. Where I work (company is irrelevant) the company had to stop letting people dump TONS of cash into their policies because of the dividend knowing they’d pull the cash out a few years later.

        3. Glad we agree!

        4. I would never, ever recommend someone get involved with B or C shares. There are far too many great no-load funds. Even if you’re paying someone to manage your money you can still use no-load funds. So yes, compared to the many good alternatives out there, a whole life policy is very illiquid.
        – I just don’t get the illiquid discussion. You can call up a company and have cash in a few days either up to basis or loan (or if you want to invade but no reason most would do this).

        5. The key word in your sentence is “may”. It’s POSSIBLE that EVENTUALLY the dividends MIGHT be able to pay your premiums, but again that’s relying on those very un-guaranteed dividend payments. And even if they’re paid as illustrated, it still takes many years to get to that point. I don’t want to have to wait a couple of decades before I even have the choice to do something different with those monthly payments. And if you do use that strategy, the dividends are no longer being used to build capital and so your whole life as an investment strategy takes a big hit.
        – Of course we are talking about “mays” but there are no guarantees on your “invest the difference” fund. Just like if you had start investing in 2005 you are just getting now, 8 years later seeing a gain (luckily, I started in 2008 so right now I look like an animal but i know its mostly luck lol)

        6. I’d love to know where that 3-5% IRR number for whole life comes from. Is there a database tracking all of these policies that supports that as an actual historical figure? I’ve never seen that before, but it would be really interesting. But if that’s just what illustrations are showing today, then it’s not a real comparison. And anyways, for all the same undiversified and illiquid reasons mentioned above, any rational investor would require a higher return from a whole life policy to compensate you for those disadvantages as compared to bonds. So if they have the same return, bonds still come out as a better investment because they don’t have those negative characteristics.

        – It is on every illustration if you ask your buddy.

        “I’d be very interested to hear your reasons why a young person should consider purchasing whole life. I have heard many explanations but none that have been convincing. Thanks for taking the time to share your views!”

        – I read this as: Why do I own some life insurance? and Why Will I buy more in the future?

        1) Guaranteed Insurability. I received best rating from multiple companies (how that every happened I have no idea) as such insurance for me will literally never be cheaper without a change in mortality expenses. Should I get sick or fatter in the future I can put money into those policies for death benefit purposes.

        2) I think you and I are a little too young but I live in this world so I see it every day – I want to know I leaving *something* behind even if I spend all my assets down.

        3) I really do look at it as a future income stream, and I even wrote about it a few years ago:

        http://www.myjourneytomillions.com/articles/create-your-own-pension-using-whole-life-insurance/

        • Matt @ momanddadmoney June 5, 2013

          Once again, thanks for the input. I hope the back and forth is helpful for other readers. So let’s have another go!

          1. No you wouldn’t put all of your disposable cash, but even if you bought a ridiculously tiny amount of whole life insurance, say $10,000, which is fairly absurd, that’s essentially one bond taking up $10,000 of your portfolio. Many people barely have $10,000 in investments, let alone enough to make that a reasonable amount to have in a single bond. At a more normal amount of whole life, say $100,000 or $250,000, as has been attempted to be sold to me, the lack of diversification is enormous.

          2. That 4% is an incredibly misleading number. That’s actually the same guaranteed rate I was quoted when I was looking at insurance, but when I actually did the calculations using the guaranteed numbers in my illustration, the IRR after 39 years (once I got to 65) was 0.6%. And this was from one of the biggest, most well-respected mutual life insurance companies in the country. So that 4% must be before the incredibly high fees that are applied, which of course were not detailed in the materials provided. I really hope that’s not the return you would quote someone, as that’s very far from what they actually receive.

          4. Straight withdrawals are fraught with potential complications, such as decreased death benefits, increase in premiums, policy lapse, and even taxes. Every situation will be different but those are all real possibilities. Loans are an option but this is where I think the “tax-free” slogan is so misleading. No you don’t pay taxes, but you do pay interest. Even when borrowing against your basis. So while it’s technically tax-free, there’s still a cost. And with a loan you still have to be careful about all of the same risks as with a withdrawal. All of these potential pitfalls make it less liquid than typical investments. As does the fact that you’re pretty much GUARANTEED to have less money available to you than you’ve put in for about a decade.

          5. I’m not sure where your numbers are coming from, but if you invested $10,000 in Vanguard’s total stock market fund at the start of 2005 (12/29/2004 to be exact), you’d have $16,722.64 today. That’s a 6.3% annual return through the teeth of a recession. And you would have broken $10,000 back in November of 2010. So no there are no guarantees anywhere, but please use accurate facts. And one of my big issues with whole life is that it’s often presented as if it is a guarantee, which it’s not.

          6. The fact that current illustrations show a 3-5% return does not make it a historical figure that can be compared to bond returns. That’s like someone projecting oil futures returns for the next 30 yaers and then comparing their projection to historical stock market returns. It’s totally irrelevant.

          As for your last points, you can get guaranteed insurability from a term policy with the option to convert any time during the life of the term. That keeps your options open in case many years down the road you decide you want to leave some assets behind no matter what. It’s not worth paying the decades of extra premiums when you have no idea if that’s something you’ll actually want to do and there’s a good alternative that leaves you the option later.

          As for the future income stream, that’s what my investments are for. I can easily make a projection using conservative historical returns that shows a simple stock/bond allocation performing much better for the individual than what’s shown in your article, especially if I’m using the 15 year retirement from your example.

          • Going to focus on one point now and will come back when I have a bit more time later for the insurance conversation.

            I was not being disingenuous just didn’t feel the need to do all that much research when I thought my point was made. Using the Vanguard World ETF (VTI) if I used 6-2007 (instead of 05) you are up 8% or 1.3% before commissions. Start that same in 09 you are up 73%.

  • Pretired Nick June 4, 2013

    I love how you just thought about this and realized what a scam whole life is. We have term and now I think we have more than we need but better than putting so much money against a whole life plan.

    • Matt @ momanddadmoney June 4, 2013

      Well, in terms of avoiding whole life I was lucky to know some people who were able to help me make a good decision. I can’t take all the credit there. We have a large amount of term insurance as well, but I’d much rather me over than underprotected. I’d say what we have now is well within reason, though aiming towards the higher side.

  • Funancials June 4, 2013

    It’s definitely a red flag if a financial adviser doesn’t ask about your investments.

    I actually got married a month ago, so I need to begin having a life insurance conversation. I used to sell it (technically still licensed) so I hope I’ll be able to make a good decision 🙂

    • Matt @ momanddadmoney June 5, 2013

      Most people don’t have a real need for life insurance until they have children. Unless one spouse is financially supporting the other, beyond the cost of a funeral, which can be handled in other ways, then there typically isn’t much need. Good luck figuring things out!

  • Richard Jonas October 9, 2013

    Hey Matt,

    This is an excellent article. As a life insurance guy, I completely agree with your observations about the distinction between a financial adviser and independent life insurance agents. Many financial advisers have no time or interest in really learning about life insurance so they memorize a few bullet points and leave it at that. The growing role of brokerage general agencies can be directly attributed to the fact that term life insurance is increasingly viewed as a commodity.

    On a more general note, I’m also bothered by the lack of honesty and integrity one often finds in the life insurance sales process. The fact that many people put life insurance salesmen in the same category as used car salesmen is 100% the fault of the life insurance industry. After all, life insurance is obviously a very good thing that really helps people. The problem is with the corporate life insurance culture and the way life insurance is sold.

    As a matter of fact, I’ve published two articles on my blog called Why People Don’t Like Insurance Agents. I get it.

    • Matt @ momanddadmoney October 10, 2013

      My problem was that I ran into a life insurance salesman who held himself out as a financial advisor. Looking back, it was very clever how he positioned himself that way even though he clearly wasn’t doing any of the real work that a true financial planning would do.

      And I agree wholeheartedly that it’s unfortunate that these types of ploys give life insurance a bad name. I think life insurance is an absolutely essential product for almost everyone with children, and it’s severely under-owned. It would be nice to see it sold in a much more positive way. One can dream…

  • Pretired Nick December 28, 2013

    We also avoided the whole life scam. For the most part, it’s just a way to avoid estate taxes as far as I can tell. But we bought a bit more term than we needed, I think. Less than they were pushing us to buy, though. I think we did OK, but if I did it over again, I’d probably only buy $200,000 each or so.

    • Evan@MyJourneytoMillions December 30, 2013

      Literally has nothing to do with avoiding estate taxes

    • Matt @ momanddadmoney December 30, 2013

      We actually have much more than $200,000 on each of us, but we’re further away from financial independence than you which definitely makes a difference. I think a lot of people have less life insurance than is probably ideal.

  • Matt @ momanddadmoney December 30, 2013

    Whole life insurance is used both to pass on wealth while avoiding estate taxes through an ILIT, as Nick has pointed out, and to provide the cash to pay for estate taxes that would otherwise have to be paid from other assets. So yes, whole life insurance is quite often used to handle estate taxes.

    • Evan@MyJourneytoMillions December 30, 2013

      An ilit can be funded with term insurance, variable universal life, indexed UL, or whole life (any hybrid product in between). The ILIT is the key not the product owned therein (permanent of any kind is obviously the key for estate planning).

      Most often what is used is a survivor universal life policy since cash value doesn’t matter and the death benefit is needed upon the second death.

      What the ILIT does is allow for liquid cash to buy assets from the estate providing liquidity when liquidity is needed most since the US Gov’t doesn’t want anything else. An ILIT if drafted properly is not included in your estate for estate tax purposes.

      Whether you are for or against whole life is independent the use of Irrevocable Life Insurance Trust.

      • Matt @ momanddadmoney December 31, 2013

        Evan, I agree with you that the the word “avoid” probably wasn’t the ideal choice of words, but I’m not sure there’s a huge point to arguing semantics vs. substance. The substance of the comment is generally correct, which is that whole/permanent insurance is most often useful as an estate planning tool to deal with estate taxes.

        No, it does not help you “avoid” estate taxes on other assets. But it does help you pay them. And it is possible to pass on wealth while avoiding estate taxes as well, again through use of an ILIT. Yes, you are correct that the ILIT is what lets you do that, not the insurance, but it’s pretty pointless without the permanent insurance there as well. So again, we’re really talking semantics, not substance.

        With that said, thank you for the explanation for how permanent life insurance can help with estate planning. That can be a very useful tool for people with enough wealth to need it.

        • Evan@MyJourneytoMillions December 31, 2013

          Happy to let it go, but I do not think this is a semantics vs substance issue. The original comment was,

          “For the most part, it’s just a way to avoid estate taxes as far as I can tell.”

          That is not semantically wrong in terms of a conversation of permanent vs term (which is where the convo went and is great for your readers). It is just wrong. Whole life insurance has nothing to do with avoiding estate taxes. When used with an ILIT by a talented and well educated drafter who should often use a SLAT as well (Spousal Lifetime Access Provision) it becomes a way remove it from your estate so it isn’t included under IRC 2042.

          That same trust (although it likely be a GRAT, FIT or IDIT) could be gifted/sold a building. You would not say that owning a building is a great way to “avoid” estate taxes.

          • Matt @ momanddadmoney December 31, 2013

            Once again, I think the main issue is with the word “avoid”. If something like “handle” had been used instead, I doubt we’d be having this conversation. I agree with you that “avoid” is for the most part the wrong word. But I also agree with the general sentiment that whole life insurance is more useful as an estate planning tool than it is as an investment.

  • Wayne odesnik October 13, 2015

    In regards to whole life Insruance for young people I feel that it is not appropriate for everyone. However, here are just a few reasons why it may be appropriate for some

    1. Northwestern Mutual has payed out a dividend every single year of a minimum of 5.6% throughout the life of the policy over the last 158 years. Although I agree that cash value life insurance is not an investment, it does have investment like qualities.
    2. For young people that earn too much money to contribute to a Roth IRA, cash value life insurance will do the same thing defer taxes and if “structured probably” allow tax free growth and tax free withdrawals.
    3. Cash value life insurance is also one of the key components in order to build the foundation of your financial portfolio. You cannot build a house without first having the foundation in place.
    4. Cash value life insurance should not replace a 401k, IRA, or any other retirement option but when used correctly and in correlation to those other investments it can definitely add value.
    5. In 20-30 yrs from now taxes may be significantly higher than they are today and if the market is down cash value life Insruance is a great alternative to save “safe dollars” in an area that is not tied to the stock market.

    Again, cash value life insurance should be a segment of a segment in the defensive portion of one’s portfolio. If used and structured correctly, with the right company, it can definitely add value.

    Would love to hear your responses.

    Thank you

  • BJ Bell February 26, 2016

    Thanks for sharing your story Matt. I have been in the business for 10 years and I have two major shortcomings of cash value policies. Often overlooked is the erosion of the policy value due to inflation. I had a client who was sold a whopping (at the time) $25K whole life policy in 1976, and told it would adequately cover his needs for his ‘whole’ life. If he lives until 85, it will only be worth about $4,000 in today’s dollars. That won’t pay for a funeral, let alone estate taxes or financial support for his wife. Additionally premiums on a whole life policy are 5x more than a 30-year term. That commitment is much harder to maintain in tough financial times. Better to buy term and invest the difference; if times get tough you simply scale back on the savings until things get better and you haven’t jeopardized your coverage.

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